IDT Corp (IDT) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Sandra, and I will be your conference facilitator today. At this time, I would like to welcome everyone to your IDT fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Mr. Jim Courter. Sir, you may begin your conference.

Good afternoon and welcome to IDT Corporation's earnings call for fiscal year 2005 and our fourth quarter, which ended on July 31st. I am Jim Courter, CEO and Vice Chairman of IDT Corporation.

Before we begin, I must caution all those listening today regarding any forward-looking statements that you may hear during the course of the conference call. During both the prepared remarks and the question-and-answer 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 limited to the sensitivity of our telecommunications businesses to declining prices; our reliance on success in the pre-paid 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 telecommunications 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; 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 that we file with the SEC.

We assume, as you know, no obligation to update any forward-looking statements that we have made or may make or to update you on the factors that may cause actual results to differ materially from those forecasted at all.

Before we get to discussing our results, I would like to thank Bill Weld, a colleague and a friend for his service to IDT. Bill served as a member of our Board and as Chairman of our corporate governance committee, as we moved ahead of the packet in instituting standards and controls in our diverse operations. Bill was a stalwart proponent for good governance, and we wish the very best of luck in all his future endeavors.

Now I'd like to discuss some highlights from our financial results during the year and mention some significant and exciting developments at IDT. In fiscal 2005, we made progress I believe across all of our business lines. We were able to achieve double-digit revenue growth to record levels, even with the loss of revenue due to the winding down of the Winstar business. Notably, we improved adjusted EBITDA by more than 40%. We've combined our conservative investment strategy with the stringent evaluation process for developing businesses to maintain a strong balance sheet, while investing in a variety of new ventures to complement our existing operations.

Our investment mode, which will last a few quarters, may exert pressure on current earnings and cash flows. But it is the only way to maintain a vibrant and growing company. We invest in new initiatives that are related to or synergistic with our existing operations and make prompt decisions as to which show early promise of becoming significant businesses. By incubating several promising new operations at once, we are seeking to always be there to participate in the next break-out industry. At the same time, certain of our more established businesses are obtaining financing that does not rely on the parent Company's credit in order to obtain the validation and cash that independent lenders provide, while maintaining our strong balance sheet.

We expect to start reaping the benefits of certain of our investments in fiscal years 2006 and 2007 and beyond.

Our telecom businesses continue to grow. Our entertainment company, which has just completed its third year of operation, is already profitable. In addition, IDT Spectrum, which plans to provide cellular back haul and other fixed wireless services using Spectrum and other assets carved out of Winstar, has filed with the SEC a registration statement for its initial public offering. IDT Spectrum is currently in the SEC comment process. For information on IDT Spectrum, please refer to their registration statement.

Now to telecom. Our calling card business remains strong, showing high-single digit revenue growth, while improving gross margins through aggressive cost management and a more stable pricing environment. Calling card gross profit dollars increased 9% for the year to an all-time record, and gross margins hit an all-time high of 24.9% in the fourth quarter. IDT is now a household name among new immigrants to the United States. We plan to offer other services to this community of new Americans.

Additionally, we continue our plan for international expansion in markets where there are often opportunities for higher margins than in the United States. We offer a variety of services in Europe and Asia and South America and Africa. These operations still represent only a small portion of the telecommunications business, but they show significant promise. And I expect to have more to say about them in future calls.

As you know, in the United States, our bundled block of long distance consumer product hit a road bump when the SEC ended the Unity (ph) price-controlled program. As we alluded to in prior calls, we've recently signed a deal with Verizon and are getting back on track with this product. We are speaking with other RBOCs to expand the geographic scope of this offering.

In the UK, we continue to expand the customer base and product offerings of our Toucan business. Our Toucan consumer voice product had about 147,000 consumers as of the end of fiscal 2005. In addition to the local and long distance service, Toucan now offers dial-up and broadband Internet access under the name of ToucanSurf, a wireless phone service called ToucanMobile. ToucanMobile is our first ever, postpaid mobile phone product, and we're in the process of developing a similar product in the United States.

Fourth-quarter Toucan revenues were almost five times the year-ago level, and gross profits expanded to almost ten times last year's. We plan to expand the Toucan brand to other European markets, such as Belgium and The Netherlands during fiscal year 2006.

Another successful international enterprise for IDT Telecom has been our Russian subsidiary, Corbina Telecom. We acquired Corbina in late 2000 for about $9 million. Corbina owns its own fiber optic telecommunications network in Moscow and is expanding it exponentially, allowing it to offer customers fixed line telephony, Voice over IP, lease line service, wholesale carrier service, Internet access and virtual private networks. It is also the only Envieno (ph) in Russia, selling under its own brand the service of the second-largest cellular operator in Russia.

Corbina generated more than 60 million of revenues for us in fiscal 2005 with strong profit margins. This has been a great acquisition. I just want to say that Motti Lichtenstein and his entire team has done a great job with Corbina.

We have been very excited about the upcoming launch of our recently announced TuYo pre-paid wireless product. This product has been designed from the ground up to address the mobile communications needs of our Hispanic customers. TuYo Mobile will utilize the network of a major GSM carrier and offer new handsets directly from Nokia and Motorola. TuYo will leverage IDT's expertise, experience and infrastructure in the pre-paid telecom environment as well as our unmatched distribution channel in the urban market. This has been a long time in the gestation mode. Soon, it will generate real results.

Now to entertainment. Looking back on the year, our most significant long-term accomplishment has been the operational management team we have assembled. We have recruited a good number of industry's veterans to supplement our strong executive team. Janet Healy, Jerry Davis, Neil Braun, Nick Foster, Robert Taylor, Frank Gladstone.

Let me start with Janet Healy. We brought on Janet Healy as our President of Animation. Janet's credits include Shark Tale, Dinosaur, Tarzan, Jurassic Park, Terminator 2, and Casper. And Janet is a pro at building multi-location animation organizations.

Jerry Davis. Our new Chief Creative Officer came from Blue Sky Studios, the animation arm of Twentieth Century Fox, where he was a producer on Robots and a production supervisor on Ice Age. Jerry will be heading up our search for and development of creative content and talent for all of our animation features.

Neil Braun. Neil has been named as President of Feature Films and Television. Neil has significant industry experience, including having served as President of the NBC Television Network and Chairman and CEO of Viacom Entertainment. He will be the lead financial architect for our entertainment transactions and be responsible for the Company's aggressive expansion of its feature film and television production offerings.

During the fiscal year, we also added Nick Foster as Chief Technology Officer; Robert Taylor as Vice President of Production Finance; and Frank Gladstone as Vice President, Artistic Development and Recruiting.

These executives bring years of industry experience at such firms as Pixar, DreamWorks and Disney. We now have one of the most talented and experienced teams in the industry with the capability to identify product, develop stories, finance production and produce top-quality content in a fiscally conservative and efficient manner. We have seen some of their product already and are eagerly waiting the diverse projects that are underway. We are currently working on animated projects for theatrical, television and direct-to-video-and-DVD release as well as live-action content for television.

During the year, we announced our distribution deal with Twentieth Century Fox. Fox is one of the most successful CG-animated distributors in the business, and they will distribute our animated feature films. The broad reach and industry-marketing expertise of Fox will serve us well as we release our first film Yankee Irving and the feature films that will follow Yankee Irving.

As we have been developing the production side of the business, our home entertainment distribution business remains strong. We are leveraging our leading position in anime, horror and children's genre to broaden our scope and become the leading name in the industry. During the year, IDT Entertainment increased revenues significantly and moved from a modest operating loss into a small profit during its third year in full operation.

As you know, our home video distribution business is at this point the largest contributor to both revenue and profits. It is worth noting that Anchor Bay's organic growth exceeded 15% for the year. During the next few months, we will release a Harry Connick, Jr. Christmas special called The Happy Elf, which will air on NBC as a primetime holiday special and quite a few other direct-to-DVD projects.

We are also developing early stage businesses, which may break out in our IDT Capital division. One to watch this year is IDT Energy. IDT Energy is in an industry that is deregulating, and we have experienced an exploding deregulating markets. As we move IDT into becoming a name brand in entertainment and telecommunications, we must always remain mindful of the importance of maintaining our standards and business practices.

In a separate matter, in completing our fiscal 2005 audit, we have discovered an overstatement of our accrual for income taxes related to the first quarter of fiscal 2004. Accordingly, we have corrected the adjustment in the proper period. And as a result, recorded a $36.8 million decrease in our deferred tax liability on our balance sheet as of the first quarter fiscal 2004 with a corresponding increase in benefit from income taxes. As a results, reported net loss for the year ending July 31, 2004 decreased from 95.7 million to 58.9 million.

I would like to turn the call now over to our CFO, Steve Brown.

Thank you, Jim. I'm pleased to review the financial highlights of our fourth quarter and fiscal year 2005, which ended July 31, 2005. As Jim mentioned, our consolidated revenues grew over 11% to nearly $2.5 billion for this year. This growth was driven primarily by strong performance in our telecom and entertainment divisions. Gross profits increased by more than 16% to $625.4 million, as gross margins improved by 100 basis points, mostly due to improved margins at both our retail telecom and our entertainment segments, as well as a shift in revenue mix towards these higher margin businesses.

SG&A expenses increased 14.5% to $563.6 million due to increased headcount and higher advertising expenses, as we may continue to make investments across all our businesses. The increase in SG&A was also due in part to increased legal and professional fees associated both with the Sarbanes-Oxley requirement and also the cost of litigation around various lawsuits. Loss from operations decreased to $115.8 million for fiscal year 2005, which is a 5% improvement versus fiscal year 2004.

Please note, there were a number of non-recurring items that affected net income fiscal 2005, including but not limited to, the settlement of our lawsuit against Telefonica for which we received $44 million in Q4 and also an impairment charge of $16 million taken against the goodwill for the decline in the value of IDT stake in Net2Phone shares. We continue to maintain our strong balance sheet with over $950 million of cash, cash equivalents and the like. And also, this includes $98 million held by Net2Phone.

During the fiscal year of 2005, we made capital expenditures of $112 million, with the majority of these expenditures focused on expanding the scope of our telecom businesses internationally and adding capacity to our calling card infrastructure to handle future growth. We also made investments to support our cable telephony initiatives. And of course, we made investments to enhance the capabilities of our entertainment businesses.

During the year, we acquired approximately $15 million worth of our common and Class B stock, which was approximately 1.2 million shares. As the strategy going forward, we plan to continue to finance the growth of our divisions independent of fundings by the IDT parent, where it is prudent to do so, as we have done mostly with IDT Entertainment. We will continue to evaluate alternatives to realize value for our shareholders from our portfolio of businesses, as we are doing with our IDT Spectrum.

Regarding our main operating segments, IDT Telecom's revenues increased 11.4% to $2.2 billion for the year, and Q4 was a sixteenth consecutive quarter of year-over-year revenue growth. Gross profits were $515.9 million in fiscal year 2005 and $125.3 million in the fourth quarter of fiscal 2005, representing an increase of 15.7% for the year and a decrease of 1% for the fourth quarter versus the year-ago quarter.

Gross margins for fiscal year 2005 was 23.9%, an increase of 90 basis points from the 23% achieved in fiscal 2004. The increase in gross margin was due to both a slight shift in our revenue mix toward retail and a 120-basis point increase in retail gross margin, which more than offset a 130-basis point decline in wholesale gross margin, as retail revenues accounted for approximately 75% of total telecom revenues. Retail gross margins improved due to the increase in relatively higher gross margin consumer phone service revenues in the revenue mix.

SG&A expenses for IDT Telecom were a $372.2 million in the fiscal year and a $91.8 million in the fourth quarter versus $294 million in fiscal year 2004 and $89.1 million in the fourth quarter of fiscal year 2004. The increases in SG&A were primarily driven by increased advertising expenditures related to our consumer phone services business in the U.S. during the first half of the fiscal year and the UK throughout the fiscal year and also expenditures incurred in the development of new businesses, which also led to increased headcount, resulting primarily from ongoing geographic expansion.

IDT Telecom's income from operations was $49.4 million in the fiscal year and $80.4 million in the fourth quarter, representing a 37% and 49.4% decline respectively when compared to the prior period. The decrease in operating earnings is due to higher SG&A expenses in our retail businesses as well as our 21% increase in depreciation charges -- were reflected in the ongoing expansion of our worldwide telecommunications network.

IDT Telecom's minutes of use for the fourth quarter of fiscal 2005 increased 4.3% year over year to 6.1 billion minutes from 5.8 billion minutes. For fiscal 2005, the minutes of use increased 15.2% to 23.6 billion minutes from 20.5 billion minutes. Retail minutes of use increased for fiscal 2005 by 10.8% to 17.3 billion, while wholesale minutes of use advanced 29.5% to 6.3 billion.

Highlights from our retail telecom division include -- calling card revenues increased 8% versus fiscal year 2004, gross profits for calling cards increased 9.6% for the fiscal year, and those in the fourth quarter increased 3.5% year over year as gross margin on calling cards improved by 40-basis points for the fiscal year. For the fourth quarter, gross margin improved 120-basis points versus the year-ago period.

Consumer phone services revenues increased 48.3% versus fiscal year 2004. However, in the fourth quarter of fiscal 2005, consumer phone service revenues were 4.7% lower than those recorded in the year-ago period and 10% lower sequentially. The customer base for America Unlimited, the IDT calling card which features unlimited local and long distance calling within the United States for a fixed monthly rate, was approximately 220,000 as of July 31, 2005. In addition, we had approximately 325,000 long distance-only customers at July 31, 2005.

The 10.9 decrease in our combined customer base since April 30, 2005 occurred of course because we delayed the resumption of advertising for our America Unlimited plan until we signed a long-term services agreement for local phone services with Verizon Communications, which became effective August 1.

Consumer phone services gross margin declined 180-basis points year over year, primarily due to the suspension of marketing of America Unlimited, which has higher gross margin than our UK-based consumer phone service offering during the portion of the period. For fiscal year 2005, wholesale telecom revenues increased 3.3% to $541.7 million. For the fourth quarter, they increased 11.6% year over year to $143.8 million. Wholesale telecom's loss from operations increased 5.3% in fiscal year 2005 to $18.5 million. However, its loss from operations for the fourth quarter was $4.5 million, a 9.1% decline year over year and a 2.3% decline from the third quarter.

Wholesale telecom gross margins were at 9.5% for the year and 9.2% in the fourth quarter, down from 9.4% in the third quarter and 10.3% in last year's fourth quarter. The reduction in margin was a result of a decline in permitted price realizations, arising from a strategic decision undertaken during the year to temporarily sacrifice margin in order to drive volumes and market share.

Now for entertainment. Revenues for IDT Entertainment grew 75% during the year to $187.2 million, while posting income from operations of $7.5 million, up from a loss of $0.6 million in fiscal year 2004. The increase in income from operations versus the prior year of course is due to the inclusion of all our acquisitions for a full year.

In the fourth quarter of fiscal year 2005, IDT Entertainment recorded revenues of $39.8 million compared to $30.7 million in the year-ago quarter. In Q4 of fiscal year 2005, IDT Entertainment lost $2.2 million from operations versus a loss from operations of $1.2 million in the year-ago period. The fourth-quarter loss from operations is due to the fact that both our video distribution and our production services businesses experienced seasonal fluctuations, and the fourth quarter is typically the weakest for each of these two businesses. In addition, in the fourth quarter, our video distribution business experienced unusually higher returns.

During fiscal year 2005 and prior fiscal years, our video distribution business has been entirely based on selling third-party license properties. Starting in 2006, most significantly starting in the second quarter, there will be a shift of the revenues from third-party license properties to our own proprietary projects, of which we have started investing in 2005 and continue to invest going forward. We invested about $60 million for the full fiscal year and to capitalize production costs for our feature films and other productions as well as inquiring content licenses for our distribution businesses. And as I mentioned a second ago, we expect this to begin recognizing revenue from our proprietary projects starting in Q2 of fiscal year 2006.

We believe that with the management team we have now in place along with the support and resources of IDT Corporate, IDT Entertainment is well-positioned to become a fully-integrated independent studio.

With that, we will now be happy to take questions.

(OPERATOR INSTRUCTIONS). Donna Jaegers, Janco Partners.

Just three quick questions. On the investment gain that you guys reported for the quarter, I'm assuming that is the 44 million from Telefonica. It was a 51 million gain though, so can you fill in the blanks of what else was included there?

Steve is going to answer that question. But before, let me just tell you who is here in the room. Norm Rosenberg, CFO of IDT Telecom; Ira Greenstein, our President is here; Steve Brown, of course, he is going to answer that question, our CFO of IDT Corp.; Bill Pereira is here, the CFO of Winstar; Morris Berger, CEO of Entertainment; and David Greenblat. I think I mentioned David. Go ahead, Steve.

In our cash equivalent number that we give, there are investments into some securities that are not as liquid. And when these investments are terminated, then we recognize gain or loss. It goes in the investment line. So these are just basically gains realized on the termination of some of our less liquid investments.

The whole 51 million or--?

No, no, the $44 million of Telefonica, and the rest --

And then the rest.

Right. Correct.

And then on the share buyback program, congratulations on getting moving a little on that program. I was just curious if you are restricted because of the Net2Phone offer and because of the IDT Spectrum registration.

We are continuing with it, but that is all I can say at the present time.

Andy Baker, Cathay Financial.

Just a couple of quick questions. On telecom, one, the revenues on the calling cards were a little bit weak this quarter after I think four straight quarters of double-digit gains. Was this something fundamentally in the business? Or was this just the trade-off of this is your harvest mode, where you sort of raise your prices and you get your margins up but then people stop buying as much?

And second of all, on the -- can you break out for us about how much money you are spending on all of your new initiatives -- be it the European Toucan and the NBNOs (ph) as well as the other initiatives here -- the money transferring? Because I think there seems to be a lot of money you are investing there, which is sort of making the EBITDA that you report from telecom lower than it actually is -- or lower than it is at the operating businesses anyway.

Sure this is Norm Rosenberg, Andy, I will take those questions in turn. Your first question about the somewhat weaker-than-in-the-past calling card revenues, your second assumption was right on target. It is more of a function of the way we priced our cards and the things we've done in the business. Steve Brown earlier in the call mentioned about how on the wholesale side, we have been aggressive in terms of trying to go out and get some minutes and get market share. That has been done because we have been able to pull back on some of the minutes that we've done on the calling cards in the U.S. So we're sort of interplaying the relationship between our wholesale minutes and our retail minutes.

One thing that I will note is that when I look at our debit card revenue per minute, we actually had a higher revenue per minute in the fourth quarter than we did throughout the year. And in fact, as I look at that number for the first time that I can recall this happening, we actually had four straight quarters of sequential increases in our revenue per minute. So if you look at Q1 of fiscal '05, that was our low point in revenue per minute for debit cards worldwide. And then it ticked up in each month -- in each quarter as we went through the year.

And as we start Q1 of '06, we are somewhat in that kind of mode. But as you point out, when you do that, you only get to do that for a little and eventually you have to start to turn things around a little bit and pick up some revenue. But that is what happened on that front.

As far as putting a number on some of the investments or concerns, I will tell you that clearly that is a big number within our overall SG&A. So some of which is due to general headcount increases, which are not easy to necessarily attribute to any specific business line. But what I can tell you is that from an SG&A perspective for example, our wireless business, which we really believe in and which we think is going to be our next big business and another leg of our business, it was probably a business that costs us about $5 million or so over the course of the fiscal year -- pretty evenly divided by quarter as we ramp it up. And we tried to get the infrastructure, the human resource infrastructure and otherwise in place for us to move forward.

So that was about $5 million. I would say that we spent conservatively on some of the financial services businesses. I would guess that would be at least another $2 million that we put into development, that we put into some of the personnel that we brought onboard. And if I had to on top of that, put another -- we talked about an English as a second language business. I would say that that costs us also in the area of $2 million as we started to sell that particular product. And then there's maybe another couple of million bucks here and there spread among a few different categories. So if I would add all that up for you quickly, so we are talking about maybe $11 million over the course of the year directly out of SG&A that was an investment into some of these new businesses. That is not meant to be an all-inclusive number, but it's probably the best I can give you off the top of my head.

And then you're still running losses at Toucan, they certainly are still spending to build out The Netherlands and even in the UK, I imagine?

That is correct. The UK is currently where we are doing the business. The Netherlands is a separate project, which I hope would begin in the first half of the fiscal year. A lot of that is going to have to do with the relative success we have in the UK because we don't want to be out that much money at the same time. But obviously, the beauty of any kind of customer base like business like Toucan, which is something we experienced in the U.S., is that you do get to a point where you can start throwing off a lot of cash from that business.

And it truly is discretionary spending that you do there. Because at any given point, if you decided that you needed to, you could always pull back and you could pull some money in. But yes, the consumer phone Toucan probably was about $40 million in SG&A in its own right. Not all that was pure investment because some of it was straight overhead. But it's obviously a big piece of the pie.

Steve Balog, Cedar Creek Management.

I have got to say one of the frustrations about being an IDT shareholder over the last couple of years has been the way that you treat your stock. It is nice to hear that you're doing a share buyback, but I also read that you're offering stock in exchange for Net2Phone at a price that by all rights looks like a ridiculous bargain. Why on earth are using your stock to make acquisitions like this? Why are using your stock for anything? Why aren't you reducing your share count aggressively at this price?

Steve, I think the best way to answer the question is just to stay tuned, and the events will reveal our strategy.

Why shouldn't we take the message from this though that you think your stock is more expensive than cash, otherwise you would cash?

We still think our stock is undervalued. We have said that before; I say it again. We started to buy back, as you know. We talked about that a little bit earlier on the conference call. But I really cannot go into the specifics of the nature of your question. I think the events as they unfold during the next number of weeks will reveal our strategy.

I hate to be a pest. But conceptionally, you're telling me the stock is cheap and you want to buy it back. And at the same time, you're talking about issuing much larger amounts than you are buying back in order to buy an asset that is producing losses. I don't get it.

Well, Steve, as I mentioned before, we can go on the whole conference call going back and forth. Our strategy will be revealed and obvious as the weeks go by. I do not want to be more specific than that. It will become patently obvious within the next number of weeks.

Keith Tronner (ph), Fair Homes (ph) Capital Management.

I would like somebody to give me an update on the Winstar business -- what that is still costing and whether there has been any developments in off-floating those losses. And I would also like somebody to address, if you could, the last 3 years has been almost 300 million in operating losses. And there has been roughly I guess about 75 million in non-cash compensation. And I'd like you to tell me if you have altered policies; it doesn't appear to be so in fiscal '05. But particularly given your stance that you believe the stock is undervalued, does it not make sense to alter the compensation formulas such that you are no longer issuing shares but rather providing some other form of compensation that is less dilutive?

Bill Pereira, do you want to mention specifically the Winstar question?

Sure. The Winstar business, we updated the following. We have terminated all commercial customers off of the network. The only customers remaining on the network is the U.S. government via our contracts with the GSA. We are simultaneously in negotiations with the GSA and with the commercial enterprise, who has interested in acquiring this business from IDT. We have been in these negotiations I would say over the last 3 months. And we would expect that sometime during the next quarter, we will be able to consummate some sort of transaction that will completely eliminate our position within Winstar.

In terms of what it is costing us right now, I would say over the last quarter, we spent anywhere from 1 million to 1.5 million a month to maintain the government.

Thank you, Bill. Let me also mention that, Winstar, obviously we've spent a lot of money over the past 3 years, 3 years and a little bit. We are getting out of the business. But I might also want to say that we have filed I think it is an S-1 with the SEC with regard to IDT Spectrum. We think the value is in the spectrum. And we have hopes of monetizing that spectrum as we go forward in the next 2 months.

I appreciate that. It is a little I think a little disingenuous to talk about the cost of the spectrum being only 5 million, given the operating losses at Winstar. But I'm hoping you can get First Avenue's price -- absolutely.

As far as the second question, could you have somebody address that?

What was the second question? I'm sorry.

Well, given the amount of operating losses and given the amount of non-cash compensation--?

Okay. Steve Brown will answer that question.

Just to answer your question, 100%, we are moving away from the non-cash compensation. And I'm trying to work out performance-based bonuses in cash. I think a lot of the activity this year was really driven by the changes in the accounting regs in how you deal with options. But I think going forward, the non-cash compensation expenses will go down significantly.

So are you saying that your intention at this point not to issue as many options?

That's correct. That is absolutely correct.

And if you do not mind a brief follow-up, I appreciate that you guys have a lot of interesting things in the hopper. Obviously, I think that the card business seems to be overall just a terrific business. And in telecom, you really have done a great job, given what has transpired in that world. But it does seem that there are a number of fairly significant cash drains in some of the venture portfolios and other areas. Have there been any efforts to rationalize some of that spending and really to kind of make some hard choices on some of the things that are costing cash?

Yes, we have. David Greenblat, do you want to mention perhaps a couple of things that we've done that are quite substantive to reduce the cash burn? We do have a lot of very interesting things in the hopper, as you say. But we do, we have regular meetings, David Greenblat is a CEO of IDT Capital, which is everything else outside of telecom and entertainment, and he has been very forceful. When there is new types of businesses that we don't think will grow properly or we think we're spending too much money, we absolutely terminate them. David, do you want to mention a couple, if you would?

Yes, I mean we've reduced -- we had a radio network, which we completely sold off efficiently. We have reduced -- that was a company by a radio station. We have cut that burn from close to $8 million a year; that should be breakeven in May. We are selling off our software division. We have a very, very what would the word be? We have a very critical eye on each of the businesses here. They either have to be breakout businesses with 2-year windows to breakout, or they have to be clear cash flow contributors to the bottom line. Otherwise, they will not exist in IDT. That is our policy, and that wasn't always the case. But we are now driving that way. And I think that you are going to see that effect on the bottom line.

Peter Durowth (ph), Account Management.

I think you just may have alluded to it, Jim, on the spectrum offering. I was curious as to any timetable you might have. You mentioned something about a couple of months, is that correct?

It is going to be a short period of time -- within 2 months, yes. We anticipate it will be happening in about 2 months.

Donna Jaegers, Janco Partners.

I was wondering if you could give us any update on the SEC's docket on whether calling cards are information services or would have to pay into the Universal Service Fund?

We address that fairly specifically at the last call. Our point basically is the fact that we do things different than a lot of other companies. And where we think that we should pay Universal Service, we do. Where we don't think we have to, we don't. I cannot really go beyond that right now. But we think it is nonmaterial, and that we have every confidence in the fact that we will be able to address this issue with more specificity at the next call. But to us, it is business as usual. We do things differently than others.

Any timing as far as when you think the SEC is going to have a ruling on this?

I think it is -- probably will come in the next -- easily within the next quarter, next 3, maybe 4 months.

Donna, this is Norm Rosenberg. Are you referring to the general overall ruling where any kind of changes that the SEC would make to the Universal Services (multiple speakers)--?

No, that's a much more political hot potato. But just this small notice of proposed rulemaking that they did on the calling card side just to sort of clarify whether the AT&T ruling should go for everybody, just whether they should define calling cards as information services or as telecom services?

Okay, Donna. Honestly, it has been very quite on that particular front. And what we found in the past is that things tend to move from the SEC's front burner to its back burner pretty quickly.

Yes, hurricanes tend to lend that to (multiple speakers) --

Yes, they tend to do that too. But I don't know if that is the only reason. But it has been very quiet on that front.

Andy Baker, Cathay Financial.

I guess a question for Morris. Can you give an update on the current development plans and rollout plans for the CG-animated businesses? I saw something on I think it was Box Office Mojo, which has an August 25, 2006 launch for -- or release date for Yankee Irving. I don't know if it's just preliminary, or if that's actually what Fox put out there as being true. And where you are with new projects two and three?

Sure. We have actually slated the end of August 3. We have not solidified the date. But somewhere around that date will be an accurate date for Yankee Irving.

(multiple speakers) Is it just due to its development slowdown? Or just the timing that Fox wants to put it in their schedule?

It is actually us coordinating together with Fox to look for the right spots for this ohm (ph). The reason we went into the deal with Fox is to leverage their marketing expertise, so it's a joint decision.

As far as the developments, there are -- Jerry Davis has joined us as Chief Creative Officer. There is a slate of properties that are in development now. Obviously, I cannot go into details on them. But I would assume by the next call, next quarter, we will have some updated notes for you on that.

Is the target still going forward two to three releases per year?

Correct. The target is right now two releases per year, correct.

Craig Kemplar (ph), Perkins, Wolf.

This is Kevin Preloger at Perkins, Wolf. Just some more clarification on the share repurchase, please. How much is currently authorized, if there is a number?

Hold on just 1 second; I want to refresh my recollection.

Note, we have authorized 20 million shares.

Pardon?

20 million shares have been authorized.

20 million shares are authorized? Okay. And for fiscal year '05, what is the options -- I guess how many shares come out due to options?

How many shares were exercised?

How many shares were exercised?

Yes, just what is the resulting dilution, how many shares? So is this 20 million and it has authorized, is that enough to mop up any option dilution?

Yes, it is more than enough.

If we're looking at 1.2 million and I know Jim, you talked about your strategy will be revealed. We are waiting for the strategy to be revealed has resulted in a lot of shareholder destruction of value. And given the 950 million of cash that you've got and you talk about these energy investments and that, go back to your bread and butter, the core business of the calling card, which provides plenty of cash. Use it to buy back stock. And I think your shareholders will be a lot happier.

I think the shareholders will be happier in this next fiscal year. Norm wants to add something. Our calling card business is a great business. We are doing other things as well but go ahead, Norm.

Kevin, this might seem strange coming from someone at the telecom level. But to be honest, as much of a great business as the calling card business is and as much of a workhorse business as it has been for us, I recall we are at an inflection point strategically about a couple of years ago where we were really happy with what we were throwing off out of telecom. It seemed relatively easy to be able to turn things around through awful lot of cash. But then the problem that we ran into is looking out beyond the horizon. We realize that the calling card business is a pretty difficult business. You're still year over year selling your product for a little bit less money than you did the year before. And granted, we have been successful and a bit fortunate to be able to lower our costs -- at least the same rates. So we been able to throw off some money. But even within telecom, I don't think that we would do the shareholders much service by just allowing that business to run its course.

Well, have you looked at the stock lately? Obviously, the most recent decisions have not been of net benefit to shareholders.

Right, understood. And I'm not going to get into a discussion of how quickly a benefit to the Company or potential value is reflected in the share price because we could be here all afternoon. But the fact of the matter is that even coming at it from a telecom perspective -- and look, I love nothing better than to be the only person who mattered in the building -- but the fact of the matter is that I think whether it is within telecom or outside of telecom, we would not have a great long-term future if we were relying on that kind of business.

So I think that by playing this portfolio game, if you will, whereby, we use telecom or the core parts of telecom to throw off cash to enable us to spend money on either a) other parts of telecom or b) other non-telecom businesses, I think we do things pretty well. I think that we are just at a point right now where you see the expenses, but we haven't seen the benefits to it. And our scorecard will ultimately be a reflection of how well we do at that. And yes, I do think that at some point that should show up in the share price.

Well, I guess those investments in other areas in that game you might play clearly has not been perceived to be a positive by the market. We discuss these things about an energy portfolio -- I have no idea where your energy investment is at; I have no idea what that is. Maybe you can go into further detail there (multiple speakers). Just what some of these other businesses you are talking about that you perceive that will unlock shareholder value at some point.

I think the energy portfolio is probably a mischaracterization. The energy is going to through the same deregulation that telecom went through some 20 years ago. And just as IDT was built on a wholesale model, a retail model, alternative route support and all the other things that make money in a telecom business, that is today beginning in the energy business. And this is -- it's not so much a portfolio play -- and certainly that's not the domain of our group -- it is an operating opportunity to build another retail business that could one day contribute quite effectively to IDT. That includes a retail opportunity in energy, wholesale opportunity, alternative energies.

Certainly, one only has to go to the gas station today to realize that there are going to be opportunities in this business for the merchants that are providing these kinds of services. So it is not a portfolio. But it is building a business that is very parallel to us through probably the same customer base or similar, an overlap customer base that we have in our telecom business. So I think that is the thought on energy. And we hope that our shareholders will ultimately see that. And that the value will one day be reflected properly in our stock price.

This is Craig Kemplar with Perkins. How far along are you in building out this energy business? And how much capital is it going to cost?

How much capital have you invested so far?

And how much more is there to invest? And what sort of hurdle rates are you using to calculate return on capital as you look at this from an investment standpoint?

You asked a bunch of questions. It's very early in the life of that business. We've --

Start with the first one. How much have we invested already in this business?

Probably around $5 million total was the number, and that included the acquisition of a $40 million opportunity in upstate New York. So probably $5 million would be a fair number to date. As I said earlier, we are being very miserly. The main investment in this business and because it is the acquisition of customers, we physically have to pay some number to acquire customers. And to us, if it wouldn't be for GAAP and if we could distribute this a little over the life of the customer, this business would be profitable very early in its life. So the main expense is the acquisition of customers and the acquisition of revenue that we are booking in current years that will be reflected in future year's growth.

So we are treading softly this past fiscal year and will in the next year. But we are talking about topline revenues in the areas of $100 plus million we are budgeting for in this coming year and black bottom lines of a very young business that has tremendous opportunity.

And as far as how much potential capital you are going to continue to invest in it, and how many customers do you have right now and what you think you are going to have at the end of the year?

It's early on the customer; it's probably -- we have both gas and electric customers in excess of 50,000. I would say -- how much we plan to put in in this next year probably would be -- we are hoping for a black bottom line, but it might -- over the year, there may be a cash flow of 10 to 15 million that will have to go into the energy business in this coming fiscal year.

And what were your assumptions when you looked at this business regarding your hurdle rates in order to make money in this business, to cover your cost of capital?

The assumption is -- and I think we are looking at all our new businesses that way -- that we need a 2 to 3-year window to start showing a return on any business that we start. This business we are doing with literally the sweat of our brow and our own hard work, we have learned how to run retail businesses effectively and efficiently. The D in Discount Telecom is because we were able to do things more effectively and more efficiently than some of our competitors, and that contributed to our survival. And we are just copying that to another business.

But I think a 2 to 3-year horizon is the hurdle. You will have to put some money until then. But then, we will start to show a nice bottom line. And eventually to grow this, God willing, to a 0.5 billion and even ultimately to $1 billion plus --

As a percent -- as a percent of your cost of capital, what's that rate? What do you have to make on the money invested in order to -- what is your weighted average cost of capital you're assuming under here?

Let me turn it over. I would say 10% to (multiple speakers) --

10 to 12% range.

10 to 12%.

I would also that there are synergies between the telecommunications business and the energy business. We found that if someone is an energy customer, in order to get them to be an IDT local long distance customer, the acquisition is about 50% and vice versa. If they are now telecom customers, it's a lot easier for them to be energy customers because they are familiar with IDT. So there are synergies there as well.

It seems to me that doing these little adventures in different areas, it might seem similar to your core business and what you've had previous experience with, instead of experimenting in these areas, why not focus on one thing, such as getting the entertainment business profitable, or looking to -- I know you are making more investments there but at least dealing with the competition on the calling card side and really focusing in on getting the entertainment side maybe in the black and then buying back stock?

Or profitable (multiple speakers)?

Or profitable?

I know what you're saying, but let me correct that. The entertainment division is in the black.

Right (multiple speakers). But even more so, given that the amount of money that I know you have put into that, the talent that -- and I know granted that some of the talent is relatively new. But when are we going to start to see the benefits of those investments?

I think the new initiatives that we're talking about, the history of IDT is never to be happy where we are, to always plan for the future. We have an investment for the future. Net2Phone spawned out of IDT. It was 1 of about 10 or 12 businesses that we are working on. That was the one that we -- we decided that we would pass through the incubation process sort of to green light it. We continue to do that. We continue to be very modest in our spending. We are very -- we budget carefully. We are not major risk takers.

But on the other hand, we're always trying to build the next business. This is exactly how IDT Entertainment came from.

Now to say that the resources that we're putting into IDT Capital is in anyway affecting the management's focus on telecom and entertainment is incorrect. I think the corporate management significantly most of their time is spent besides corporate governance matters on these two businesses. And each of these businesses has their own management infrastructure totally dedicated to their businesses.

So I don't think trying to develop new businesses has any effect on the overall performance of our core businesses. But we do carefully monitor and at any point of time that we think the risk of investing more money is not worth it, we are very quick to pull -- we have no problem pulling that plug.

One thing is very interesting. I remember conference calls going back about 18 months ago, people were saying, you're a telecom company, why are you getting into entertainment? And now people are saying, why don't you focus on entertainment? So things have changed. I think --

Well, I guess the stock price has changed too. And I think that is --

Yes, I know it creates some friction but if we --

(multiple speakers) This may be on shareholder value and unlocking shareholder value that we would I guess as shareholders go along with these investments you're making in energy and other areas that aren't core to the telecommunications and entertainment businesses.

It's only dedicated to try to do everything necessary in this Company to unleash the shareholder value and appreciate our shareholders, who have been for the long ride. And we're very confident if they continue to support us, they will be well rewarded.

Any other questions?

Kevin Preloger That's it.

Donna Jaegers, Janco Partners.

Does the electric business that you're talking about, the retail, electric and gas -- that's a scale business. And your telecom, your consumer telecom business, can you give us more confidence there? Because by looking at the numbers, you're showing 5% churn in your retail, in the America Unlimited business. And granted you have not advertised, but then your churn should actually be better than that because your churn among retail customers is usually higher at the very start. So can you give us more confidence on what you are looking at that emboldens you to go off on some of these other retail distribution businesses?

Norm Rosenberg. Let me address the consumer phone services businesses and how that fits into (technical difficulty). First of all, one thing that we have found is that although your assumption is one that we had shared -- that when you're adding to your customer base, your churn is higher -- in fact, we find that that is not necessarily the case. Meaning when we are not advertising, we find that there's really not as much of an incentive for our customer to stick around. We have found out via our market research and some feedback that we've gotten and our work on retaining customers, which is equally important to obviously were more important than being able to bring in new customers is that customers who are existing customers, identify with the advertising, and it does make them less likely to leave.

Frankly, I wouldn't say that we went into a situation of radio silence, but for a while without doing any advertising, I think there were a lot of people who wondered if we were still in business, if we're still looking for new business, or if we were in fact harvesting business, which is what we were doing for a while.

So I think that the churn numbers are a concern. They always will be a concern. We will always focus on it. I think the difference is that rather than in the past when we focused just on bring in new customers and we figured we would make up for those who were leaving through one door by bringing in other customers through a different door, we are going to focus on retention and on the relative value of each customer and deciding what it would mean to us to either keep the customer or attract the customer.

As far as the lessons that we've learned from that business and the scale business and the scale-type business and how that applies to something like energy, we found out something very, very nice about our consumer phone services business; although frankly looking back, it's something that I wish we never had to be in a position to find out. When we harvested this business, we found that we threw off a tremendous amount of cash. And granted, there was some churn in the business. But we saw that by managing the churn, by changing that curve or by keeping that curve as flat as we could, it's a business that throws off a tremendous amount of cash flow in a short period of time.

So, this is truly a business that can be built to be harvested. And the nice thing about this business, much as would be the case with an energy business is that if you do it as a resell business, there's not a big fixed-cost structure, there's not a big commitment or any kind of contingent liabilities that you have. So it's purely a success-based business -- very neat, very clean, what you see is what you get. You bring a customer in for x number of dollars, and that customer stays around for a certain period of time and gives you a certain amount of value per month and you can through the model and it's very neat and clean and you know exactly where it is that you've gone wrong, if in fact you do go wrong.

The energy business that we're talking about is very much the same thing. We are not building a power plant necessarily. We're just going out and looking to attract customers and a relatively low-margin business but so is the calling card business. It is a volume business and a business that we think we can succeed at.

At this time, we have no more time for questions. I would like to turn the floor back to the speakers and management for any closing remarks.

We have no closing remarks. Thank you very much. We will see you next quarter for another conference call. Everybody have a good week. Thank you.

Thank you. This concludes today's IDT Corporation conference call. Please disconnect your lines at this time, and have a wonderful day.