IDT Corp (IDT) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your IDT Corporation conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Jim Courter. Sir, the floor is yours.

Good evening, and welcome to IDT Corporation's earnings call for the third quarter of our fiscal year 2005 which ended on April 30. I am Jim Courter, CEO and Vice Chairman of IDT.

Before we begin, I must caution all those listening today about any forward-looking statements that you may hear during the course of the conference call. During both the prepared remarks and the question answer and period that follows, we may make forward-looking statements, either general or specific in nature. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those results that we anticipate. These risks and uncertainties include, but are not certainly limited to, the sensitivity of our telecommunications businesses to declining prices; our reliance on success in the prepaid calling card market; our ability to obtain cost-effective termination capacity worldwide; our reliance on the financial health of other telecommunications companies that are our customers; the impact of the changes to U.S. and foreign regulations; increases in competition in the consumer phone service market; our ability to integrate and manage acquisitions; our ability to effectively develop, produce end market animated films; and our ability to protect our proprietary rights; general economic conditions in the global telecommunications market; the general conditions of the economy in the United States and internationally; and any of the other specific risks or uncertainties discussed in our reports filed with the SEC.

We assume, as you know, no obligation to update any forward-looking statements that we've made or may make, or to update you on the factors that may cause actual results to differ materially from those forecasted. And now to our most recently completed fiscal quarter.

In the third quarter of fiscal 2005 we continued to deliver solid performances across all of our business lines. Through the first nine months of the fiscal year, our revenues are up 15%, and we have shown a substantial improvement in adjusted EBITDA. We continue to maintain our strong balance sheet, which gives us the financial flexibility to invest in our existing businesses, while also considering attractively priced complementary acquisitions.

Our telecom businesses continue to grow. We continue to build a world-class profitable entertainment company. We have turned as the corner in minimizing losses from Winstar, shutting down most of its operations, and refocusing on its valuable spectrum assets.

Now more on telecom. IDT Telecom remains on track to deliver another fiscal year of double-digit topline growth, with revenues for the first nine months of fiscal 2005 up 15% from last year. Our calling cards business remains strong. While others in the industry and in the telecom market in general have suffered from deflationary pricing caused by over capacity and the availability of substitute products, our business has been able to grow its sales and maintain its profit margins. Our calling cards gross margin was higher in the current quarter that it was two years ago.

We have maintained our performance through aggressive cost management and international expansion where the opportunity exists for higher margins. We have made a number of international investments throughout Europe, South America and Asia. And these regions, while still a relatively small percentage of our telecom business, are proving to be high-growth markets for IDT.

As part of this strategy, we announced during this quarter the acquisition of Belgacom's prepaid phone card business. Belgacom, as you know, is the leading telecom provider in Belgium. And this acquisition will strengthen IDT's leading position in Europe. We anticipate some of the same results from this acquisition as those we experienced when we acquired the Global One calling cards business from France Telecom in January 2003. That acquisition helped IDT Telecom establish a beach head in several markets in Europe such as Scandinavia, from which point we have continued to grow in Europe.

Our consumer phone service business in the United States saw another modest decline in customers, since we scaled back our marketing efforts in mid-December, while working to negotiate a long-term commercial arrangement with the RBOCs. Meanwhile, our international consumer phone service business continues to expand.

Our Toucan offering in the United Kingdom and the UK saw its customer base grow by 20% to 138,000 customers. We will soon be offering a full suite of services in addition to our telephone service. We recently introduced dial up and broadband Internet access. And we will offer Toucan branded cellular service later this year through our agreement with T-Mobile. In Toucan we are building a powerful brand in Europe, which we plan to expand to other European markets, such as Belgium and the Netherlands, during the first half of fiscal 2006.

Also, on the telecom side, we signed an agreement with a major network operator in the United States to provide us with access to their cellular network. We plan a full launch of our prepaid wireless business in fiscal 2006, focused primarily on the Hispanic market, where we will be selling services under the IDT brand name acting as a mobile virtual network operator (inaudible).

Now to entertainment. We continued production on our first animated feature film, Yankee Irving, and we anticipate its completion in 2006. We are in the early stages of production on two additional feature films. We expect to make an announcement regarding theatrical distribution in the very near future.

We also closed on a $15 million credit facility led by JP Morgan, which will be used to fund production of our live-action and animated feature films, as well as the purchase of additional titles for home video distribution.

Last quarter I spoke to you about the plan for our live-action division, New Arc Entertainment. In this quarter we are already seeing the success of its first two small budget films, The Fallen Ones and All Souls Day. The TV rights to these properties were sold to Sci-Fi Channel. And The Fallen Ones already premiered as the highest-rated show on Sci-Fi that week. New Arc also sold the North American TV rights to its Masters of Horror anthology to the Showtime cable network. In addition to licensing these properties domestically, our IDT Entertainment sales division successfully sold the international rights to these properties and others at the Cannes Film Festival to distributors in market such as the UK, Japan, France, Italy and Germany.

This success is early evidence that we were correct in believing that there is demand for well-produced content made at a reasonable cost. During the quarter IDT Entertainment continued its strong financial performance, improving both sales and profitability. This performance was mainly driven by its home video distribution business, which has released a number of new titles into the market, including several from our TV series on DVD. During the next few months IDT Entertainment will be releasing a number of well-known titles into the retail market, including 3rd Rock from the Sun, Roseanne, and one of my favorites, Mr. Rogers Neighborhood.

We are excited about the prospects of our entertainment business as it moves ever closer toward its goal of being a fully integrated entertainment company capable of creating, producing and distributing content worldwide.

Thank you very much. And I would like to turn the call over to our Chief Financial Officer, Steve Brown.

Overall the most positive takeouts of our financial performance this past quarter is the continued and consistent strong performance of our core business, our telecommunications businesses, as well as a slightly better than expected performance from our fast-growing entertainment business. As a matter-of-fact, if you would look at IDT as a whole, eliminating the financial results for Winstar which is a business that we're winding down, and NetraPhone (ph), a separate publicly traded company, our income from operations would be net income positive for the nine months ended April 30, 2005.

Now for this quarter, our telecom operations continued to be rock solid. On the revenue side, wholesale revenues improved 7.9% to $139 million quarter to quarter. Calling cards revenues decreased 3.9% quarter to quarter, but revenue per day was consistent quarter to quarter. Consumer phone services revenues decreased as expected due to the decision to scale back advertising in the U.S. in the wake of the change of the UNE-P rules, which took effect March 11.

The actual attrition of domestic consumer phone services was 12.6% to $70.3 million this quarter, which was offset by a 23.1% increase in international consumer phone service revenues to $12.8 million, which are marketed aggressively under the Toucan label.

This shift of revenue this quarter also impacted our telecom gross margins, causing a 120 basis point decline to 23.6%, mostly due to the aforementioned change in mix of revenues. Wholesale gross profits remained flat at 9.4%. Calling cards margins decreased 40 basis points to 23.6%. And consumer phone services margins dipped 170 basis points. And again this is due to the shift of a higher percentage of lower margin international revenues. This trend will continue until we reach agreements with the ILECs and start remarketing our domestic businesses.

Also, contributing to the lower CPS margin this quarter is the fact that the change in the UNE-P rules took effect this quarter on March 11, allowing ILECs to increase their rate that they charge us.

Telecom SG&A was 16.4% of gross revenues, which is fairly consistent with last quarter, adjusted for unusual items. Telecom EBITDA was a robust $38.5 million this quarter. And after charges of $3.7 million for non-cash compensation expenses and $22.7 million for depreciation amortization charges, net income from telecom operations were $12.1 million for this quarter. We continue to invest in our telecom future, especially in international expansion, acquisitions of small calling cards businesses, and we continue to develop our prepaid wireless business.

Entertainment this quarter had another strong performance with revenues of $46 million, and income from operations of $3.1 million. Approximately three-quarters of entertainment's revenues were from the retail distribution business. During this quarter IDT Entertainment secured a bank facility with JP Morgan, the premier lender to the film community, to finance its lower budget live-action animated projects. While this business is still in its early stage, IDT Entertainment has sold two of these projects already for U.S. broadcast rights for $800,000. And has commitments for other properties' U.S. broadcast rights and foreign theatrical broadcast DVD and theatrical rights in excess of $10 million. Of course, Anchor Bay retains the DVD rights in the U.S., Canada and the UK.

IDT Capital's revenues increased to $11.1 million, mainly due to new revenue streams from its startup businesses. Its net loss from operations remained stable at $3.3 million this quarter. Winstar continued its wind down phase. And the costs incurred in servicing the GSA contracts continued to cost the Company close to $5 million on a quarterly basis. Winstar's loss from operations this quarter was $8.8 million.

Net2Phone contributed $17.1 million in revenues, and its loss from operations was $11.5 million this quarter. Net, net IDT as a consolidated company recorded $606 million in revenue this quarter with a gross margin of 25.2%, and incurred a loss from operations of $23.8 million, and net loss of $14.3 million.

Regarding IDT's cash flow. IDT continues to invest in new businesses and acquisitions in a cautiously, but aggressive manner. As a discipline, IDT will often have these businesses financed using an instrument that is nonrecourse to the parent IDT Corporation. Net cash used for operating activities for the nine months ended April 30, 2005 was $29.5 million, all due to funding Winstar's losses. In addition, we have invested in this period approximately $30 million for our CGI and New Arc film productions, and $13 million for telecom's acquisitions of small businesses. But net net, our balance sheet remains one of the strongest in the industry.

At this point I would like to turn the call over for questions and answers.

(OPERATOR INSTRUCTIONS). Donna Jaegers of Janco Partners.

Just two quick questions. On the commercial agreement with Verizon on the consumer business, can you give us -- I know you guys had been negotiating that and I have seen Verizon sign other companies. Can you just talk a little more about the details and what you are -- what sort of economics that you are demanding in the business?

This is Jim Courter. I'm going to have someone else, Norm Rosenberg, the CFO of IDT Telecom talk about it. There is not a lot he can go into about it because there is nothing there yet, but we anticipate something will be there very soon. But before we get going, Sam Abramson is joining me, CFO of IDT Entertainment; Steve Brown, CFO of IDT Corp is here; Bill Perez (ph), CFO of Winstar is here. I mentioned Norm. Ira is here on the phone. He's not here physically. Morris Berger, CEO of Entertainment is here. Marcella Fisher, Controller and Chief Accounting Officer of IDT Corp is here, and David Greenblat walked in, and he is the President of IDT Capital. Go ahead.

It is Norm. As far as the Verizon thing is concerned, to echo what Jim had mentioned, we have not signed an agreement with them or with the other ILECs. Suffice it to say that we are extremely close to the point where economic terms have, I would say, have been agreed upon. And I think the only thing that is holding us up right now are a couple of points that are legal in nature, and a lot of it is just sort of a matter of going back and forth on some of those deals.

In terms of the economics they are not very much different from what we might have mentioned in the past. Obviously they involve an increase from the level that we were at, but a point where we believe we can get our appropriate return on investment. So I think it is really a matter of a short period of time before we will be able to say something and we will be able to continue to grow that business.

Okay. And it looks like your churn in that business is still around 4% on the consumer America Unlimited business. Is that a pretty good (multiple speakers)?

Yes, although it is not an absolute number. When we had to put it into a little bit of a harvest mode, if you will, while we were waiting any kind of new interconnect agreement with Verizon or the others, we had made certain projections as to where that business was going to go. We were pleasantly surprised by a relatively low churn number for the first few months, starting in mid December or late December.

It has picked up a little bit. I think it is really a matter of -- it is almost like interest rate curb curves. It is not easy to predict a churn curve or the slope. But we're still at a point where we have a good sized customer base, and so that any day now when we are able to sort of turn the spigot on once again and bring in new customers, we have a pretty good business to build off.

One other question to 00 probably for Steve Brown. On the Winstar agreement you mentioned that you guys are -- the GSA contract is costing you about 5 million a quarter. What is the timing as far as exiting that contract, because I know you have to be careful as far as exiting it, plus you want to be able to resell into the government business for spectrum leases?

This is Jim Courter. Let me take a stab at that. I have been to Washington two or three times, spoken to GSA. They have been very, very helpful, particularly in the past 30 maybe 45 days. And as you know, the contract could conceivably going on for an additional four years. But we have reached verbally an agreement with them, such that we can terminate the existing contracts and also keep our reputation intact as a good service provider, and keep our status as a GSA and government contractor intact.

So nothing yet is completed. It has really been delayed right now because it looks like there's another communications company that may be very interested in taking over our government GSA business. So that would be assistance to the federal government. They would be able to transition very quickly. So things are in the process of being negotiated. I think we're probably -- it is hard for me to say, but another 60, 90, 30 days away. So another quarter I think and we will probably out of the GSA business.

Andy Baker of Cafe Financial.

A couple of questions for Steve Brown. Could you just go back over the numbers you said about the sales for the TV rights in the foreign markets, etc.? And when do you think that will hit the P&L and the balance sheet?

This quarter we recognized $800,000 as we delivered two properties to the Sci-Fi Channel; one that premiered in May, one that is actually preparing this Saturday night. We have commitments of additional -- somewhere between 10 to $11 million both from U.S. broadcast rights and for foreign rights. And as we deliver the films to those markets then we will be recognizing it into revenue probably over the next -- a good portion of that probably will come in over the next two to three quarters.

And that 10 million includes the Showtime Masters of Horror as well as international?

That's correct.

And just a question on your current cash flow. Obviously it has continued to trickle down a little bit -- Net2Phone is 844. Two questions. One, is there something seasonal about it this quarter? I know it goes down out, and there seems to be an increase in receivables. And two, just how much of that was due to the Belgacom acquisition?

All total telecom acquisitions were $13 million, and that is mostly in the last quarter. A large part is from the financing of our low-budget and our CGI animated film. We did draw down $25 million of our $50 million facility. We expect going forward that the additional productions that we do will come from the remainder on that facility. So I don't think you'll see the same type of cash burn that you saw this quarter in future quarters.

Yes, this is Norm Rosenberg. The only thing I will add as far as the Belgacom acquisition, particularly it was actually a very low-cost deal in terms of cash. It is mostly a matter of us picking up the unused balances on the cards that are out there, and a little bit of a revenue sharing for the next several months. So that wasn't an enormous item.

In terms of working capital, I guess of all the groups, telecom due to its size relatives to the rest of the Company has the biggest impact on working capital changes, things like AR and AP, a lot of that is timing wise. As you know, when you run your estimates for a lot of companies, people -- analysts tend to get working capital to a point where it evens out after awhile. So it is not so much that Q3 is seasonally a tough working capital quarter, it is just timing-wise that is the way it ended out. And I think a lot of that stuff will end up being reversed in that fourth quarter. A lot of it is timing, as you know.

Just to -- not to beat a horse to death, but our DSOs this quarter was unusually high, not because of the aging -- sort of the timing. And a lot of that is being actually corrected in the current month.

Lastly, can you give us just some indication of -- not on the capital expense line, but on the operating expense line, how much of your SG&A at telecom went to new initiatives versus your sort of ongoing businesses? And any update you can give us on obviously the wire transfer as well.

I would estimate that we're spending now roughly -- and again this is kind of a rough number -- but I would estimate that we're spending roughly maybe 1 million to 2 million a quarter in terms of development expenses and another headcount expenses related to some of our newer businesses. It is a bit tough to break out because I'm thinking in terms of the P&Ls, if you will, for those relatively small operations. And on top of that you have business development activities taking place within the established business lines, so you can probably add a couple of bucks there.

As far as financial services are concerned, we continued with the development of different products that we're working on. One of which is a product that we have developed in house. Another one is a product that we are currently selling on a small scale that is actually someone else's product that we have an exclusive on. So there is not much P&L impact, or at least topline impact and gross profit line impact, but we continued to hit a couple milestones from a technology perspective, so we're moving along.

(OPERATOR INSTRUCTIONS). John Hornor of Goldman Sachs.

Given your large cash balance and where the stock is trading, in terms of I am guessing it looks like it is about 3.5 year loads, have you guys considered even deploying a small amount of the large cash balance you have towards share purchase, especially given all the good things that appear to be on the come?

The answer is yes. We're thinking about it every day. The Board gave us authorization to do that some time ago. So it is very much in our plans.

So you are planning on repurchasing stock?

Yes.

Andrew Rittenbery (ph) of Jamison Associates.

Can you talk about the film distribution deal a little bit for the CGI animated films, and just elaborate a little bit on maybe what the hold up is on getting a distribution deal done? And then as a secondary question, just to follow-up on that, kind of what the thought process is now about the financing conduit, and where you are in that process of doing something on that front as well?

This is Morris Berger. On the first part of the question, there really is no delay. We hope to make an announcement over the next few days regarding the studio and the theatrical distribution that we are contemplating. So if you bear with us for the next few days, I am sure you will be very pleasantly surprised by the partner that we have chosen.

As far as the second question, I am going to send that over to Sam to speak about the vehicles.

The slate (ph) financing deal that we're in the middle of putting together is going to come on the heels of the financing program which we just put place which finances -- gives us a $50 million facility, which we put in place secured by the Anchor Bay Manga (ph) New Arc operations. That facility is nonrecourse to the rest of IDT Entertainment or to IDT Corp. That one provides us with financing for our activities. Broadly it gives us the ability to increase purchases in investments and licenses, the Masters as well as to develop smaller films for our New Arc or live-action product.

What we are working on now is to do the larger facility, which is secured specifically by this slate of pictures, that facility will also be nonrecourse to IDT Entertainment or to IDT Corp for that matter. And we hope to have something on that within the next four to six months.

We don't want to give you any real indication, but when we purchased Anchor Bay there were plenty of banks that were willing to lend us based on their financial performance. The fact that we chose JP Morgan is because they are the leading financier to the entertainment industry. And both they and we want a much broader relationship. I will leave it at that.

(OPERATOR INSTRUCTIONS). Kevin Preloger of Perkins Wolf.

A couple of questions. First of all, back on the share repurchase plan, can you just refresh my memory of what has been authorized, and have you exercised any of that to date?

With regard to whether we have done anything, we have not the past quarter, but in this quarter there has been a small amount purchased. The authorization is 20 million.

And that is for the Class B shares?

That is for I think a combination of both.

It is 50 million plus 85 million (multiple speakers).

And also on these -- whatever we're going to do, we're going to do it logically and rationally and proportionately and according to market conditions. So it is a type of thing you can't definitively say when it is going to happen.

And plus subject to government regulations, which are pretty severe.

And then on another topic, I had to step out during your opening remarks, but you might have addressed it, so I apologize if you have. But in terms of the universal service fee any update there? It seems like the FCC wants to move forward there with some of the other companies, and if you could give us an update?

There is nothing really new right now. As we have addressed this issue two or three times before in conference calls, we think we are in a very strong position. We pay universal service where we think it is appropriate and where the regulations call for it. We don't where we think we don't have to. And we're dealing with the regulators on this particular issue. It is going to be something we will be talking to them quite -- for quite a period of time. It is not going to be -- I don't think it is going to be resolved right away. So I can't promise you that in a month or a week or 90 days or something this issue is going to be behind us. We're confident that that which we are doing is appropriate and justified.

The only thing I will add to that, and we did mention on the last call, is that there is a notice of proposed rule making as far as the USF regime (ph) is concerned in the first place. And so just to note for the outsiders to looking in on this, the USF regime is going to change. We don't know whether that is going to a positive change or a negative change, but it is clearly in need of an overhaul. And it is clearly going to change coming forward.

Any timetable on maybe what you have upcoming (ph) with the FCC regarding this issue? Because obviously with the fund driver (ph) to to fill it whatever way they can, and probably sooner rather than later.

Just so everybody understands the process, we file quarterly with the SEC as do all telecom companies. And we also filed again at the end of the year. So that is constantly under review. It is really a fluid situation that has been going on since we have been filing these forms on USF (ph) since our inception as a telecom company.

As far as the timing of when any changes would actually be made to the regime, from past experience I'm not hopeful that changes happen quickly. I know that is on their table, but that is really a matter of what the FCC is going to be busy doing over the next, 6 12, or 18 months.

Not only that, I know that Congress is interested in the whole issue as well. And you had Senator Ted Stevens, that has a personal interest in USF. He would like to actually broaden the types of services that would be exposed to it. So you have the FCC, you have Congress, things like that take a long period of time.

Jim Tiller (ph) of Tiller Winthrop (ph).

I wanted to ask a question about the share repurchase as well. But I would take a little bit different angle since that question has been asked a couple of times. It has to do with the shares outstanding. Over the past couple of years as you have built some of these businesses and rewarded the employees -- at the Company shares outstanding has gone up significantly at a time when the stock price has gone down.

So if you could give some color on what the expectations on future increases in the shares outstanding, I would appreciate it. And then getting back to earlier an comment about doing the share repurchase in an intelligent manner based on market conditions, I guess my comments would be, this is not rocket science. You have a $13 stock. Current market conditions aren't valuing the business much more than the cash on the balance sheet. And quite frankly, I expected you to come to this conference call with an announcement that you are going to do something more significant than just what you have said on this call.

Basically two issues, once again, nothing definitive on the repurchase of shares. You really can't be. You have to be very careful about this stuff. If I said something definitive, everybody would know about it. And people jump in the market and take advantage of it and the stock would go up and the stock would go back down again. So obviously, we have to -- we have announced that we're going to do it. We're going to play this very, very close to the vest and do it in a rational way.

The second part of your question has to do with dilution. I know over the years there has been significant dilution. We have a little over more than 100 million shares outstanding. And it is something that we have been trying to control over the past couple of years. We're doing a better job. Unless there is new shares that are issued for an acquisition, a major acquisition, there is not going to be more than additional, let's say, 2.5 million shares issued at the end of each year for purposes of rewarding equity-wise employees at IDT Corporation.

And that 2.5 will be a combination of restricted shares and stock options.

That is correct.

We do have time for one last question. And it comes from Peter Gorg (ph) of Hardcap (ph).

Congratulations on the quarter. If you could just comment on the one breakout you've made on IDT Capital and what is that?

Go ahead, David Greenblat.

IDT Capital is primarily incubating businesses that we feel have a future to be associated with our two main lines, with our telecom, with our entertainment products. So we are incubating businesses. I guess I'm free to tell you that, for example, we have started in the energy area what is called retail energy, which has started off very similar to telecom where they are deregulating in the energy industry. And we have started to resell energy to retail consumers.

We see that given our current retail customer base, selling them energy is not much different than selling them telecom services. And we would be able to synergistically piggy back on that and increase that business and grow that business. We also see that just as the telecom, for example, we were able -- we started off early on top of other companies. We then built our own switches. We built our own networks. We built alternative services. We will be able to do the same kind of thing in energy. So we are incubating that business today in Capital, as well as a host of other businesses. We do them conservatively and carefully. And we look forward to value coming for the Company from those.

Thanks.

You are certainly welcome, and we will talk to you in -- about the quarter. Take care.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and had a wonderful day.