IDT Corp (IDT) 2006 Q1 法說會逐字稿

Good afternoon. My name is Eduardo, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the IDT Corporation Q1 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Jim Courter. Sir, you may begin your conference.

Good afternoon, and welcome to IDT Corporation’s earnings call for the first quarter of our fiscal year 2006, which ended on October 31. I’m Jim Courter, CEO and Vice Chairman of IDT Corporation. The music you heard while you were on hold is from our release of Harry Connick, Jr.’s The Happy Elf. The program aired last Friday on NBC. The ratings were good, and we’re now selling it in stores across the United States.

As you know, I must first 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 prepaid calling card market, our ability to obtain cost effective termination capacity worldwide, our reliance on carrier agreements with foreign partners in order to provide telecommunications services, our reliance on the financial health of other telecommunications companies that are our customers, our reliance on our distributors and representatives for the marketing and distribution of our prepaid calling cards, the impact of the changes in 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 and market animated films, our ability to protect our proprietary rights, our reliance on a few major customers in our home entertainment distribution businesses, our reliance on a small number of titles for a major proportion of revenues in our home entertainment distribution business, the possibility of higher than expected returns of product in our home entertainment business, 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 more 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 statement 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.

Earnings were flat and profits down a bit, but there are reasons for both. I would like to explain them to you first. We believe that our calling card business is a sound business and will be so for many years to come. As you know, we toggle between increasing market share at the expense of margins and then harvest periodically at the expense of market share. This past quarter, we kept our margins up at the expense of revenue, and thus the results that you now see. I just want you to know that these are conscious decisions that our Telecom management team makes on a continuing basis. Second, we are moving back into consumer local and long distance because of our commercial agreement with Verizon. Like AT&T and other long-distance providers, we suspended new market initiatives and advertising because of the changed regulatory environment, the suspension of the old UDP regulations. The agreement with Verizon was signed, and therefore we started marketing again. The results will manifest themselves over the next few quarters.

We also have new leadership here as Norm Rosenberg has taken over the helm at the consumer division. Norm, as you know, was a spokesperson on these calls for years as CFO of Telecom. Long ago, he expressed the desire to one day take on the challenge of running an operating division. He will now do so as the head of Telecom’s consumer division. We have faith in Norm, and we feel that the trust that we’ve put into him will reward shareholders in the foreseeable future.

Third, we saw a minor decline in wholesale Telecom gross margins. We are in the wholesale business because it adds strategic value to our prepaid calling card business. It allows us to make efficient use of our network and broaden our relationships with PTTs and competitive carriers around the world. It is not a standalone business but rather an essential piece of our lucrative prepaid business.

Fourth, IDT Entertainment is investing heavily in movies, intellectual property and gradually moving to a mix of higher margin products. We still produce The Simpsons and King of the Hill as work for hire, but we have de-emphasized some lower profile projects in favor of working on our own proprietary content. We, of course, covet higher margins in entertainment; so, over time, we’ll de-emphasize work for hire and produce our own intellectual property over DVDs, live-action movies and animation.

As you know, we are continuing the stock buy back at what we think is a reasonable pace. We have spent over $26 million in the quarter repurchasing our own shares.

I would like to emphasize that we at IDT do have a philosophy and strategy to grow our business over the coming years, and I will explain the components. There’s basically five components to the strategy - monetization of assets - I’ll talk further in a few minutes about that, organic growth, strategic acquisitions, development of brand new businesses, and preservation of a strong balance sheet.

First, monetization. We try to monetize our assets when appropriate. We did this with the IPO of Net2Phone years ago and in its later sale to AT&T. Those were good events for shareholders, and we still talk about them today and, I think, with justification. I say that because years ago we were one of about 100 EMCs you remember - emerging multi-national carriers and not given, by the way, much hope. Now perhaps we’re the only one left standing.

We announced the pending sale of Corbina, our Russian telecom subsidiary. We bought Corbina in November of the year 2000, when its revenues were $10 million and grew it organically to make it a profitable $64 million per year company. We have received a lucrative offer to sell it and have decided to do so. Clearly, if we sell Corbina, we are shedding a very profitable business, but we think the time is right, and we want to see the opportunity to monetize and appreciate assets.

In another example of IDT monetizing assets, we are progressing with the IPO of IDT Spectrum, and we’ll have additional comments in the near future about that.

Second strategy - growing organically existing businesses. In Telecom, we realize the expanding value of the Hispanic market. We’ve been successful by providing this market with affordable telecommunications services. We have allowed our customers to call home, talk to their friends and family at very reasonable rates. We are proud of our relationship with the American Hispanic community. The U.S. Hispanic immigrant market is an attractive demographic for us. The U.S. Hispanic population is growing three times faster than the U.S. population in general. Over 70% of foreign-born Hispanics are frequent prepaid calling card users. For the wireless market alone, we’ve seen estimates of $7 billion a year. Hispanics account for 23% of all households that acquire a cell phone. They spend 10% more than the national average on wireless services.

These are some of the reasons that we recently launched TuYo, our Hispanic-focused cell phone product. We will invest heavily in advertising and promotion of this product. There are two major reasons we believe in the future of this particular product. First, we believe that we have the most competitive international rates originating from the United States. Our customers will now be able to enjoy these rates while on a mobile device. Secondly, the American Hispanic community knows IDT and our calling cards. They trust the brand. We believe they will gravitate to this product. We serve the American Hispanic community well with our prepaid calling cards, and we’ll serve them well with our wireless product.

Third, synergistic acquisitions. We’ve made acquisitions in the past, and we currently have a tender offer, as you know, for Net2Phone. We believe in its VoIP technology. We are offering cash because we think our stock is under valued. The combination of Net2Phone and IDT would result in a substantial savings on operating costs that now burden Net2Phone. The combined business would benefit from shared marketing, technology and research and a reduction in redundant costs.

Fourth strategy. Develop new businesses to diversify, reduce risk and exploit opportunities. Our third division, as you know, is IDT Capital. You know a lot about IDT Telecom, quite a bit about IDT Entertainment, but not really that much about this particular operating division. IDT Capital is where we develop and incubate new businesses that don’t fit squarely into one of the other two. In fact, IDT Capital is where we started IDT Entertainment years ago as a small organization with a big idea in animation. We felt that we could exploit our worldwide telecom network to have animators around the world work on the same product. IDT Entertainment is one outgrowth of IDT Capital. As other business concepts mature and become profitable, we will spin them out as well. If after a year or two they do not deserve further financing, and we conclude that they cannot be large and profitable, then we’ll stop the burn, close the business and simply move on. We have done this before with [Bricks] and [TowTruck], syndicated radio, Winstar, [TV.TV] and others. This is all part of our strategy. It doesn’t happen on its own.

Right now, I’d like to mention within Capital, one organization, one product - Energy. We believe it has promise and is growing very quickly. Revenues are now about $22 million for the quarter. IDT Energy is an energy service company known in the industry as an ESCO. It sources, markets and sells gas and electricity to consumers and businesses. We currently only operate in New York. Energy became attractive to us for two reasons. First, it is a deregulating industry, and the incumbent utilities desire, and are in fact rewarded, to become transporters only. We know how to take advantage of the opportunities in deregulating industries. Second, we could cross market and cross sell to our customers; thus reducing acquisition costs and churn. It’s early, but we think our strategy is correct. We’ll keep you posted on this product in the future.

Final strategy - conservative fiscal policy. As I mentioned before with new initiatives in Energy, Entertainment, ESL, Toucan, TuYo, to name some, we do spend money; but we try to replenish the coffers through transactions, IPOs, sales of assets, credit facilities that have recourse to our subsidiaries and not the parent. We will continue to do so. We take reasonable risks, start and stop ventures as appropriate, but we’ll always have a strong balance sheet. We think this is good for our shareholders and just smart business.

Thank you, and now I’d like to turn the call over to our CFO, Steve Brown.

Thanks, Jim. Over the next few minutes, I’d like to review the financial highlights of our first quarter of fiscal year 2006, the quarter that ended October 31, 2005, while discussing several significant developments that occurred after the quarter ended, which will have an impact on our results for the second quarter and beyond.

Let me start with the events that occurred after the quarter ended. First, as Jim mentioned and as we mentioned in our press release, we have agreed to sell Corbina, our Russian telecom operation, for approximately $146 million in cash. We expect to close this sale, and accordingly record our profit from it, in our second quarter results. Consequently, starting next quarter when the transaction will likely close, we will account for Corbina as a discontinued operation. At that time, we will reclassify the presentation of our comparative financial results with Corbina’s results reported in a single line item, removing Corbina’s results from the historically reported telecom financial results. In fiscal 2005, Corbina’s revenues were $64.3 million, and its operating profit was $16.5 million. In the first quarter fiscal 2006, Corbina’s revenues were $18.5 million, and its operating profit was $4.6 million.

Secondly, as I’m sure you saw in our filing and press release earlier this week, IDT Entertainment has closed on a $125 million credit agreement with a syndicate of banks led by JP Morgan Chase. This facility is a 5.5-year revolving credit facility which will be used to fund a large portion of the production and marketing costs of IDT Entertainment’s first six CG, or computer-generated, animated feature films. The loan under the facility will be secured by the slate of the feature films. In the event that IDT Entertainment does not complete the six films required under the contract, the loan will be recourse to IDT Entertainment assets but will be non-recourse to assets held at IDT and its other subsidiaries.

Thirdly, Net2Phone announced on November 17 that Altice One S.A. had terminated its contract with the company because of an ownership change and paid Net2Phone $18.8 million for this termination. As stated in their press release, Net2Phone believes that Altice One is required to make an additional payment of approximately $29 million for terminating the contract, and Net2Phone has reserved its rights to all claims that may result from that termination.

Lastly, IDT Entertainment recently closed on the purchase of an Australian video distribution company called Imagine Entertainment, which it purchased for about $3 million. Imagine Entertainment distributes filmed entertainment in Australia and New Zealand, and it also has a large library of properties. Strategically, this acquisition expands IDT Entertainment home video distribution business’ geographic coverage to virtually the entire English-speaking world, thus enabling IDT Entertainment to further exploit its extensive proprietary and licensed film library.

Now to the first quarter results. Firstly, I would like to point out an accounting disclosure change for you. We adopted FASB-123R as of August 1, 2005. As a result, our non-cash compensation expense is now included in SG&A and on our balance sheet. This deferred compensation line item in our equity section is now collapsed into the additional paid in capital line item.

On a consolidated basis, revenues declined 1.1% compared with last year’s first quarter and were flat compared with the fourth quarter of fiscal 2005. Compared with the year-ago period, a $25 million increase in revenues at IDT Capital, driven by the growth of our new retail energy business, was outweighed by a $20 million decline at IDT Telecom and a $12 million decline in IDT Entertainment revenues.

Gross profits decreased by $4.5 million versus the year-ago figure to $155.3 million and increased $4.2 million sequentially. The decline in gross profits versus prior year was due solely to lower revenues from our U.S. consumer phone service business and was partially offset by gains in all other IDT businesses.

SG&A expenses, including non-cash compensation, rose 6.7% versus the year-ago period to $154.4 million and decreased 2.6% sequentially. The main reason for the increase in SG&A costs versus prior year is the higher marketing and advertising costs, as well as increased compensation and infrastructure costs required to fund the development and growth of our entertainment and retail energy businesses, as well as our new product initiative at IDT Telecom, such as TuYo mobile prepaid wireless product, which is now being rolled out, as well as Net2Phone’s continued investment in its cable telephony businesses. The increase in SG&A was partially offset by significantly lower marketing, advertising, compensation and bad debt costs in our U.S. consumer phone service business.

In our Telecom business, revenues declined 3.6% compared with the year-ago period and 4.7% versus fiscal Q4. Calling card revenues decreased 3.4% and 3.8% respectively. The revenue decline is due to softer volume sales in our U.S. calling card operations, where we experienced a decline in minutes of use of 10.4% versus Q1 2005 and 6% versus fiscal Q4. Our international calling card business, consisting mostly of our European market, saw a decline of 1.2% in minutes used during Q1 as compared to Q1 of fiscal 2005 but a healthy volume improvement of 6.2% on a sequential basis. During the quarter, as we have done on several occasions in the past, we focused our efforts on gross profit generation. As a result, our average revenue per calling card minute increased 3.2% compared with Q1 of fiscal 2005, as we focused on improving our revenue per minute pricing at the expense of market share. As a result, our calling card gross margins have increased 130 basis points to 24% as compared to Q1 of fiscal 2005.

Revenues also continued to decline in our U.S. consumer phone service businesses, both as compared to the year-ago period and as compared to fiscal Q4 2005. Obviously, this was not unexpected, as this business consists mostly of America Unlimited, our U.S. bundled product offering. We stopped advertising America Unlimited about a year ago when the UNEP rules under which we were marketing local service were changed. We signed an agreement with Verizon effective this past August, as everyone is aware, and we have begun to slowly reinvest in this business. Even as we resumed our marketing efforts, we did sell at a much more modest level than during our peak marketing months of over one year ago; and our advertising campaign did not ramp up until the first quarter was well underway, which is why our customer count continued to fall. The customer count for our bundled product offering was approximately 202,000 subscribers as of October 31 compared to 220,000 customers as of July 31. Our long distance only customer base declined by approximately 29,000 customers to 296,000 customers as of October 31. Notably, U.S. consumer phone service revenues during the month of October were essentially unchanged from the levels recorded in September, perhaps signaling that this unit’s revenue decline, which started in January 2005, has been arrested.

As for our European based consumer phone service business under our Toucan consumer brand in the UK, we offer not only wired phone service but also a wireless product and Internet access. We are investing heavily to build our Toucan customer base, which as of October 31 included over 150,000 subscribers. In addition, during the quarter we rolled out our Toucan phone services in the Netherlands and expect to launch Internet access service in that market during the second half of fiscal 2006.

Wholesale telecom revenues declined 4.5% compared with fiscal Q4 2005 but increased 6.3% versus last year’s first quarter. The 6.3% revenue increase year over year was driven by a 28.6% increase in minutes, which was partially offset by a 17.3% decline in per-minute pricing. The wholesale carrier gross margins of 9% for Q1 of 2006 were weaker than the 10.2% achieved in the year-ago comparative period.

Telecom’s operating income declined from $15.7 million a year ago to $6.2 million in Q1 of 2006. Most of this decline in profitability is due to approximately $7.5 million incremental SG&A spending during Q1 ’06, which was used to prepare for the launch of Telecom’s new product offerings, mostly for TuYo mobile prepaid wireless and our English as a Second Language product. Both of these were introduced to the marketplace last month. Increased depreciation expense resulting from our higher asset base accounted for the remaining drop in year-over-year profitability.

Turning now to IDT Entertainment, we note that revenues in Q1 of fiscal 2006 declined 20.3% versus Q1 of fiscal 2005 as a result of our significant de-emphasis in our work for hire business in order to devote our efforts and our resources in producing proprietary content. As a result, Entertainment’s gross margins came in at 39.6% improved from last year’s 30.2%. Again, this is mostly due to the strategic shift away from the low margin production service businesses. Sequentially versus Q4, our Entertainment revenues grew 21%, as our business as strong seasonal components. The first fiscal quarter includes much of the shipments of Halloween and Christmas products. The seasonality is mostly due to our home video entertainment business, which at this point represents the majority of our Entertainment revenues. Our home video entertainment business specializes in the horror, children’s and fitness genres, which are particularly sought after content for Halloween, in the case of horror, and the year-end holiday season, in the case of the children’s, fitness, and also the TV shows which are bought as gifts. Thus, during the quarter, we have stronger than usual catalog sales to go along with our usual video premieres. Revenues from our home video entertainment business in Q1 grew by 2.2% as compared to Q1 of 2005. Our strong video sales during the quarter were partially offset by a higher level of product returns, continuing a trend that we and the DVD industry as a whole began to experience earlier in 2005. Incidentally, as distribution trends in the industry change, we are changing with them. For instance, in the last two years, we have made sure to acquire video on demand licenses along with any other property license we acquire, and we are looking how to participate in this aspect of the market.

Our investment in proprietary productions consisting of both animated feature films for theatrical release as well as broadcast and directed DVD live-action animated productions continued in full force during Q1. We expect to see several of our productions beginning to generate more significant revenues in the coming quarters. We are on target to release Yankee Irving, our first CG theatrical film in late summer 2006. Total capitalized production costs incurred in Q1 were approximately $20 million and related primarily to the spending on Yankee Irving and on our Masters of Horror anthology on Showtime. In addition, we are commencing production on our second theatrical film and are in pre-production for others. Further information will be released in the near future. We continue to invest in our lower budget directed TV and directed video productions in both animation and live action. In addition to our investments in proprietary productions during Q1, we continued to build our library of licensed products to be distributed by Anchor Bay. Total investments in new third-party license titles and in our [mastery] of DVD releases were approximately $6 million in this past quarter.

Within our IDT Capital division, revenues increased significantly from $6.6 million in Q1 2005 to $31.4 million in Q1 2006. The revenue growth was driven by our retail energy business which was launched in the beginning of 2005. On a sequential quarter basis, during Q1, we doubled our energy subscriber base to approximately 84,000 meters. Gross margins for this new business are in the 7% range, and we are excited by its early prospects.

Turning to our balance sheets, since 2001 we have maintained very high liquid balances and, until recently, negligible long-term debt. In fact, as of fiscal year 2003, our only long-term debt consisted of capital lease obligations. If you have read today’s earnings release, you will notice that our long-term notes payable have now grown to $146.1 million. Please realize more than 60% of this long-term debt represents mortgages on real estate that we own and occupy to conduct our global operations or which we have purchased for investment purposes. The remainder of this debt is borrowings by IDT Entertainment. We expect IDT Entertainment to continue to borrow in order to finance development of its proprietary projects. We view this as a conservative use of financial leverage, as IDT Entertainment’s debt is secured solely with its own assets and, to repeat, non-recourse to the other assets of IDT Corporation.

You have probably noticed that our working capital increased significantly in Q1, and receivables in particular were up about $30 million. Much of the accounts receivable increase relates to our home video distribution business. As I mentioned before, we expect a seasonal rise in revenues and receivables associated with the Q1 business, and the timing for collecting much of these receivables under our agreement with Fox Home Video occurred subsequent to the end of Q1. The increase in receivables was also related to the strong growth in our retail energy business.

Our inventory balances also experienced an increase during Q1, primarily as a result of accumulating higher storage gas inventory for our retail energy business in preparation for the winter months, as well as higher home video inventories and the purchase of inventory associated with the launch of our new TuYo mobile handsets. Based on the above, we anticipate that some of these negative working capital movements will reverse themselves as we move further along in our fiscal year.

In the first quarter of fiscal 2006, we repurchased 2.1 million shares of IDT stock for $26.6 million. Since we began our buy back program during Q4 of fiscal 2005 through October 31, we have repurchased a cumulative of 3.3 million shares for an aggregate amount of $42.2 million, which represents roughly 3% of our total number of shares outstanding. Please note we have bought authorization to acquire another 16.7 million shares.

I am also pleased to announce that we anticipate to report in our soon to be filed 10-Q for Q1 of 2006 that we have addressed the material weakness in internal controls that existed as of July 31, 2005, which related to the calculation of our tax revision and deferred income tax balances, and now believe that such deficiencies in internal control have been remediated.

We will now be pleased to take your questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Donna Yaegers of Janco Partners. Please go ahead.

Hi. Thanks for taking my question. First of all, congratulations on the Corbina sale. I think you guys got a great price there. Are there any regulatory approvals necessary on that sale? I know, Steve, you mentioned you thought it would close in Q2. Any more specificity on when that might be?

Yes. Steve can talk about when we anticipate closing. It’s going to be very soon. I think the effect of it is going to be booked in the second quarter, but we anticipate a closing in the foreseeable future - a couple of months at the longest. There’s no regulatory requirements at all, so we think we’re in a binding contract to sell it. The price is reasonable. We’re very lucky. I appreciate the call.

Before I go further, let me just mention the individuals from IDT that are in the room. Morris Berger, CEO of Entertainment, to handle the Entertainment questions; Steve Brown, Chief Financial Officer of IDT, to answer, obviously, the financial questions; Jonathan Levy. This is the first time for Jonathan. He’s the Vice Chairman of Telecom and here to answer the Telecom questions. And, of course, Marcelo Fischer, Controller of IDT Corp.

Great. A few other quick questions too. You guys recently won the 7-Eleven contract, and that’s 53,000 stores across the U.S. Can you give us any sort of guidance for how many cards these stores sell or anything like that that we could try to derive some revenue estimate off of them?

I think right now, from my recollection, we have about-- In the private label, we have contracts, as you know, with a lot of well known stores - Kroger, Coca Cola, OfficeMax, Giant, Sears, now 7-Eleven, Goia, Exxon Mobile, AOL Latino and others. It’s about 50,000-- private label, 50,000 stores. Under the prepaid branded UTA cards, we have about 150,000 stores. It’s getting larger quite rapidly. I remember when it started. But, I don’t know the number of cards that are sold in those 50,000 stores. Perhaps Jonathan does.

Yes. Hi, Donna. This is Jonathan. First of all, 7-Eleven’s stock just shot up because I think by accident you said 53,000 stores. It’s actually 5,300 doors.

Oh. 5,300. Sorry.

Yes. So, the 7-Eleven we won last quarter - 5,000 doors. On average, the range is somewhere between a half a card to as high as 7 or 8 cards that we’ve seen in different spaces. I will tell you that 7-Eleven is somewhere probably in the middle. 7-Eleven was the-- we refer to as the founding father of the prepaid card business, as they were the first major retailer to carry cards. So, for us, it was sort of a crown jewel to take away from some of the incumbents this past quarter. We also are looking forward, hopefully, to expand that relationship, as we’ve been speaking about all along, and try to leverage that relationship and bring some of our other products in 7-Eleven doors as well.

Great. Yes. It looks like it should be a good relationship going forward. And, then, obviously this current fiscal year ’06 is going to be a big year of investment in new ventures, with wireless and with coming back into the consumer business. Can you give us any guidance-- maybe this is a question for Steve-- as far as what your SG&A budget is for the year, because I think investors feel sort of lost in not knowing how much you guys are going to spend in these businesses trying to ramp them up?

Hi, Donna. It’s Marcelo. We are expecting to spend a significant amount of dollars to support our SG&A growth in terms of subscriber acquisition costs, primarily in our TuYo mobile prepaid wireless offering, as well as to continue to support our Toucan consumer phone service business in the UK over the coming year, as well as to grow the subscriber base in our new retail energy business. For TuYo, we will be expecting to increase our expenditures up to about $25 million this fiscal year to support this launch. As it relates to retail energy business, so far, we have been seeing some very low customer acquisition costs in that business, and we believe that we may be almost breaking even in that business as it continues to grow. Finally, in our Toucan offering, we are planning on continuing to grow that business. The revenue has been growing very steadily, and you should be expecting a reduced level of EBITDA loss this year compared to the prior year of about $5 to $6 million.

And in the consumer business in the U.S., any sort of guidance? You guys, I think, used to spend about $6 million a month on marketing. Can you give us any sort of guidance on where your thinking is now to get to revive the subscriber growth?

Yes, Donna. It was never actually quite that high. Probably our max was about $4 million at the peak. One of the things that we’ve said in meetings, and I think we talked about it on the last call, is part of the new phase of consumer for us is not really just about the contracts and the rates but really also how we’re going to look at spending the marketing dollars. One of the things that we noticed in this quarter is that we actually spent a little bit less than we had originally anticipated. As Jim talked about, the former CFO, [Ian Stern], that business unit has given us a greater sense of fiscal responsibility and financial analysis as to how we do it. We’re going to go slow with this. We believe there’s still opportunity. We’re still committed to try to make the best we can with this new contract. Specifically, we’re probably looking at about $1 million or $1.5 million a month right now, but we’ll continue to keep challenging ourselves on that.

Great. And, then one last question, and then I’ll let somebody else ask questions. On Entertainment, can you talk a little more--? It sounds like-- In the press release you talked about higher marketing expenses, but it sounds like, really, the return policy was what really hurt the results for the quarter. Can you talk a little bit more about how you account for that? Did that impact sales numbers? Do you have like a contra account for returns?

The interesting thing about returns, even though the return rate is high, the orders we’re getting for our product is also higher. So, net/net-- The net sales were not significantly off on the video distribution business. I think the key thing to note on the financials in the first quarter for Entertainment from this first quarter this year to the first quarter last year, last year we had two properties that we were doing work for production that were significant revenue, which were The Simpsons and King of the Hill. Right now, we’re only doing production work for The Simpsons. Also, we had some other smaller projects. We’ve gone away from doing work for hire productions and totally concentrating, for the most part, on our own proprietary productions. On the animation side, the proprietary productions, even for TV or DVD, do take a long period of development and animation and production; and they have not really been hitting the P&L yet because we haven’t started selling them. As a matter of fact, the first launch, really, was The Happy Elf, which was aired in this quarter on NBC Thursday night, and we played some of the music here for you. The revenue for that is really not going to come from TV but is coming from the sale of DVDs. The revenue from all the work that we’re doing is now going to start coming in starting in the second quarter and is going to hopefully snowball.

Just to add to that, as far as the return rate, what we really track besides the return rate is the obsolescence rate. And the fact that we’re in the categories which are niche categories, our obsolescence rate continues to track very solid. So, as opposed to the larger studios that have mega hits that get hit with returns and can’t really turn them around, the majority of our properties once we get returns, we can reship in the next season.

You’re right. There’s no shelf life, number one. It’s not technology that is old technology. So, this stuff can be hopefully reshipped out in later months.

Great. Thanks. I’ll let somebody else ask some questions.

Thank you. Our next question is coming from Tim [Hassera] of Kennedy Capital. Please go ahead.

Yes. Congratulations, too, on the Corbina announcement. Just a clarification. I presume you’ll be able to use your net operating losses so you’ll have materially close to that number in cash after the deal is closed. Is that correct?

Yes; that’s correct.

Is it fair to assume that you’ll be focusing more on Entertainment with most of your initiatives going forward? I know you have a lot of things on the plate there, different projects going on on both the video side and the production side. Just in general, is that where we would expect a lot of your resources to be focused on?

There’s a number of things. The answer is yes and no, I suppose. We like Entertainment. It’s been around only for three years; it’s already profitable. We have high hopes for our live action. We have a number of them. They are quite successful. Anchor Bay is shipping out more videos and DVDs than ever before. Our box office-- The computer-generated films are going well. But, we’re not going to keep our eye off telecommunications either. We are very much interested in what is happening in Spectrum. I’m not allowed to talk about it right now because, obviously, we’re in the middle of a road show, which would be completed very, very quickly. We will continue to focus on the new opportunities in telecommunications with Toucan, TuYo, Energy, financial services. We’ve broken this company up. We have a talented team that works on telecommunications and works on the Hispanic community. We have a very talented team on IDT Entertainment. Janet [Healy] is one; [Neil Branz] another, and we’ve got others. I just spoke with, was it Jerry Davis? I just met him for the second or third time today. He’s here on a full-time basis. We’re going to be focusing on a number of things, not just on Entertainment as we go forward.

Good. Back to Entertainment, though, Yankee Irving is scheduled for a 2006 release. The next film you inferred that’s in pre-production - will that be a 2006 release, or can you give me some more details on the schedule of releases?

The way we’re looking at it now as far as releases, Yankee Irving is slated for August of ’06. As far as the next features on the animation side, we’re looking at a potential for a release of a feature in some time ’07, and then we’re looking for multiple releases in ’08.

Okay. Great. Thank you.

Thank you. Ladies and gentlemen, that is all the time we have for questions today. This concludes today’s IDT Corporation conference call. You may now disconnect.