IDT Corp (IDT) 2006 Q2 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 Q2 '06 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

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

Good afternoon and welcome to IDT Corporation's conference call for the second quarter of our fiscal 2006, which ended on January 31. 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 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've made or may make, or to update you on the factors that may cause actual results to differ materially from those forecasted at all.

In advance of my prepared remarks, I would like to take a moment to pay tribute to a fine person and great American, whom we will all miss. Dana Reeve, together with her husband Christopher, were the guiding light in the production of our upcoming feature film, 'Everyone's Hero, the Story of Yankee Irving.' Dana devoted her life to her husband, her family and all mankind in her tireless devotion to the Christopher Reeve Paralysis Foundation. We are truly saddened by Dana's passing and offer our condolences to her family. Her presence will be sorely missed.

In last quarter's call, we discussed the strategy that drives IDT today. We are in a growth stage where we are investing significantly in new initiatives with exciting prospects, while also running our more mature businesses that continue to operate profitably. Our investments today are part of a broad-based plan to build upon our key assets and our infrastructure. It is a long process, no doubt, but one which we are confident in and believe in for the long-term. The result of this initiative, as evidenced in this quarter, is a drag on our short-term performance. But we believe it is worthwhile, given the expected long-term pay off.

In the second quarter, our Telecom businesses had lower margins in its wholesale, calling card and consumer phone service operations. As we've been discussing for several quarters, these businesses have been subject to unrelenting competitive pressures for a number of years now, and this quarter represented a continuation of that trend. Importantly, though, part of the decline was temporary in nature and each of these businesses continues to be profitable.

I am confident in our Telecom management, led by it's newly appointed CEO, Yona Katz, to manage the business through these hurdles and continue to drive profitability. Yona was previously COO of Telecom and has proven himself as an exceptional manager. I believe his enthusiasm and vigor as CEO of Telecom will be instrumental in driving future profitability in the telecom sector.

We also made significant new investments during the quarter in our telecom businesses. These investments harness the power of our distribution in the Hispanic marketplace and the brand loyalty we have developed over the years through our market leading phone cards.

Last quarter I spoke briefly about our two-year wireless product, and I would like to expand on it now. As you know, our two-year wireless offering is geared to the Latino market offering a completely bilingual experience with low rates, state-of-the-art handsets, and culturally relevant content. The product is being distributed through our UTA distribution partner, as well as in wireless retail outlets. TúYo was first tested in the market in September of 2005, and during the second quarter it was rolled out to its initial markets. Today TúYo is being sold in New York, New Jersey, Washington, D.C. and the Las Vegas markets, and is on track to roll out in the key Hispanic markets across the United States in conjunction with our advertising campaign with the World Cup this summer.

Other Hispanic initiatives to which Telecom devoted significant resources during the quarter include our English as a second language product, 'Ingles Para Hoy', and the beta test of our financial services product, Sigo. These products are important to our vision of becoming a varied and multiple service provider to the United States Latino community. IDT is pursuing a full Hispanic strategy that will lever our existing distribution and customer loyalty in the Hispanic market to a broad suite of products. We plan to evolve with our customers as their products needs shift and play a pivotal roll in helping them aculturate to American society.

Our investments have not been limited to the Hispanic market. I also want to highlight a significant investment Telecom has been making in its U.K.-based Toucan branded product. Toucan, our branded offering in the U.K. and the Netherlands, offers bundled telecom services in a simple and straight-forward manner on a single bill. Today, Toucan offers its customers a combination of telecommunication services, including wire line, rental, local and long distance phone service, mobile phone service, and broadband internet access.

During the second quarter, we continued to invest heavily in building the Toucan brand name and broadening its suite of product offerings. This investment is paying off as we're seeing increased revenues per user and expanded customer base, while carefully managing our customer acquisition costs. Wire line rental was the most recent service added -- introduced towards the end of the quarter, and we expect to further broaden our suite of products in the upcoming quarter to truly become a one-stop provider servicing our customers complete communication needs.

Shifting gears to Entertainment, the second quarter was steady financially, but one of great success in our ascent to become a power in the entertainment business. We continued production work on our first CG, that's computer generated, animation feature film, and are pleased with the results so far. The film is in the final stages of production, and a trailer will be released in the early summer of this year. I am sure all of you and your children will enjoy going to the theater the weekend of September 15th to watch 'Everyone's Hero, the story of Yankee Irving,' and of course, buying the DVD as well.

A note on the date change. As we've mentioned to many of you before, we had been in negotiations with FOX, the movie distributor, to push it's release to a later weekend, and only recently did they agree to open the September 15th weekend to Yankee. We believe this is an improvement over the previous date which coincided with the last week of summer, typically a very slow weekend for box office sales.

Although not yet fully announced, significant progress was also made on the development of the next three CG-animated feature films at IDT. I believe we will be able to share some of those details in the next couple of weeks.

During the quarter, our Entertainment division began to generate more significant revenues from the sale of content produced inhouse. This move away from strict reliance on third party license content is in line with our capital deployment goals and validates our integration strategy, demonstrating how we can profit from our unique mix of assets. This is an important change, as it creates proprietary content that we can exploit across all media into perpetuity. Entertainment's inhouse live action and animated productions have already been well received, including the 'Master of Horror' series, which aired over Showtime this past season, 'Master of Sci-Fi,' which ABC network picked up after the quarter close, and Showtime's renewing its contract with us for a second season of 'Masters of Horror.' These properties will begin to be released on DVD later this month. And early indications show a higher than anticipated demand from the retail market.

In our Capital division, revenue is up and income from operations was flat. An important event during the quarter was IDT's divesture of its remaining Winstar service contracts to GVC Networks. As you saw in our results, we did have some one-time charges this quarter in association with the transaction. As you know, after we purchased Winstar, our losses were approximately $19 million a month and that now is down to zero. We are pleased to finally close this chapter in our Company's history. The cash burn and management drain relating to the Winstar operations were significant. We believe its closure will enhance both our Company's financial performance and management's ability to focus on core initiatives. The transaction did leave IDT with the Spectrum asset, which is today well positioned under the leadership of it's CEO, John Petrillo, to exploit developing opportunities in wireless backhaul.

Investment in new businesses this quarter also included an investment in the business that is already somewhat familiar to all of us. As you know, our tender offer for Net2Phone stock we did not own closed during the quarter. And subsequent to the quarter end, a merge agreement was announced. The merger is expected to close in the very near future. So far, IDT has been limited in its disclosure to date about our vision for Net2Phone. It is still early for us to go into the details of this. I would like to highlight that our Company's Chairman Howard Jonas, will personally lead the team for the integration and rebuilding of this company. I hope to share further details with you in future calls on the progress we are making with the new Net2Phone.

Last quarter, I spoke about monetization of assets being one of the components of IDT's strategies. As you saw last week, we once again successfully executed on this strategy with the closing of the sale of our Russian telecom asset, Corbina. As of March 2nd, the deal was fully funded for the purchase price of $145.7 million. This cash will further enhance the fiscal stability of IDT Corporation.

Our stock buyback program, and many of you have an interest in that, continued during the quarter. As we have discussed before, we believe the market currently undervalues our stock because of short-term performance drags on our businesses. We use the opportunity to further buy what we find to be a very cheap asset. In the second quarter, we purchased an additional 3.1 million shares, bringing our total stock repurchases, which began in the fourth quarter of last year, to 6.4 million shares. Subsequent to the quarter end, we announced an internal tender offer for outstanding employee options and we believe this step is a positive effort towards stemming potential future equity dilution.

In recent discussions with our Company's investors, I've been asked if we could provide more granular financial information of IDT's various businesses within specific segments. We believe that sharing them externally will be beneficial to our Company. Accordingly, we look forward to begin providing additional financial segmentation by business lines next quarter. I believe that this will help demystify where we are investing in the future, and will also provide investors assurances of the health of our more mature businesses.

I believe in the managers of each of our business lines, and I have the utmost confidence in their ability to execute. It will take continued hard work from all of our employees and time for our successes to be realized, but we recognize that our Company is at a point of transition. And I believe we've made significant progress in stabilizing our existing businesses, while also building on that base to provide a very bright future. Most importantly, our management teams share an unrelenting focus in managing our investments toward value creation.

In closing, the second quarter was one of continued investment in our future. IDT continues to be a fiscally strong company with a very bright future. I am confident in the future of our Company. And thank you, our shareholders, for being partners alongside of us on this path. I will look forward to reporting to you next quarter on our progress.

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

Thanks, Jim. Over the next few minutes, I will review the financial highlights for the second quarter of our fiscal 2006, this quarter, which ended on January 31st. As always, I will aim to inform you how best to understand our quarterly results, especially how they affect the future of IDT and the growth of IDT, as well as highlighting one-time transaction related charges.

Before I get to this quarter's financial results, I would like to make mention of one important accounting change relating to the sale of Corbina. As you know, the sale of our Russian telecom business to a consortium of private equity investors for approximately $146 million closed last week. In the third quarter, we expect to recognize a gain of $75 to $85 million for the sale. Beginning with the second quarter, Corbina met the criteria to be reported as a discontinued operations. And accordingly, the results of operations for the three and six months ended January 31, 2006, as well as the prior year's comparative results of Corbina, were classified into the discontinued operations line and are reported below the operating income line.

On a consolidated basis, excluding Corbina, revenues increased 1.8% or $11.1 million from the previous quarter, and 3.7% or $22.2 million from the second quarter one year ago. This increase was driven by Entertainment's business continued growth, and also increased revenues at both Net2Phone and IDT Capital's energy business. Partially offsetting these increases were moderate declines in revenues in our Telecom division.

As we have discussed for some time, our Company is at a point of transition. We have heavily invested in our new initiatives that build upon our current businesses, and many of those businesses have yet to contribute significantly to revenues. We continue to strongly believe in these initiatives. Many of our Hispanic initiatives ben our Telecom division, particularly TúYo, made significant strides this quarter, but as I just mentioned, are still in their early stages.

Consolidated gross profits decreased 5.8% or $8.3 million for the previous quarter, and 10.8% or $16.5 million from the second quarter one year ago. Our Telecom division continues to face competitive pricing pressures, which affect it's revenues, and by extension, gross profits. The decline in consolidated gross profit was primarily driven by lower revenue streams in our U.S. consumer phone services business, which has been negatively impacted, of course, by the change in the UNE-P regulation a year ago, and also by severe competition from the [Arbox], from cable companies and is other VoIP operators. Secondarily, our U.S. and European calling card businesses also showed lower gross profits, though we believe some of the factors affecting these markets are short-lived and will correct over the coming quarters.

Consolidated SG&A increased 11% or $16.5 million from the previous quarter, and 14.4% or $21 million from the second quarter one year ago. Most of the increase in SG&A during Q2 was due to our settlement with Lucent and others, as we successfully completed the sale and disposition of Winstar's remaining operations during the quarter. Additional one-time items that added to SG&A for the quarter were, of course, Net2Phone incurred in the tender offer we launched to acquire it, as well as the settlement of outstanding litigation against our U.S. consumer phone services businesses, as have been mentioned in our filings.

Consolidated net loss increased by $26.7 million in the previous quarter and $38 million from the second quarter one year ago, primarily as a result of the reduced gross profits and higher SG&A noted earlier. Our continued spending on new business initiatives, particularly within the Hispanic market, had an expected negative effect on our short-term profitability, as most of these initiatives, as I have mentioned numerous times, had little revenue to show yet.

Focusing on our Telecom division, revenues declined by 1% from the first quarter and 5.4% from the same period a year ago. These declines are the result of the continued decline in our calling card and wholesale business permitted price realizations, particularly in Europe, which outweighed an increase in minutes sold. On the positive side, we saw a stabilization of the revenue declines that we experienced in the first quarter of fiscal year '06 in our consumer U.S. phone service businesses. During the second quarter of '06, we sold 6.1 billion minutes, representing a 3.9% sequential increase from the previous quarter. While the downward trend in gross profit that we have been seeing for several quarters continued, resulting in a sequential decrease of 7.3% or one-eighth of $0.01 gross profitability from the previous quarter.

Revenues continued to decline in our U.S. consumer phone service business, though at a slower pace than the decline we experienced earlier this year. During the second quarter, we had declines of 5.7%, as compared to a decline of 11.9% in the first quarter of the year. Marketing costs did increase at the beginning of the quarter, as we were in a testing phase. And by the end of the quarter, management decided to significantly curtail this marketing effort. This business continues to be managed for cash flow and we anticipate spending only minimal amounts on marketing over the coming months. Towards the end of the year, we may reenter the market with a more targeted ethnic offering focusing on the international calling element of the market. By the end of the second quarter, we had approximately 187,000 local bundled customers and 278,000 long distance customers, as compared to 202,000 and 296,000 customers respectively at the end of the first quarter.

As Jim mentioned, Toucan, our European based telecommunications business, continued to invest heavily in subscriber services growth during the quarter. Because of the bundle nature of the Toucan offering, we measure our customer base in terms of services provided and not of subscribers alone. As of the end of the second quarter, we had approximately 191,000 services sold to 165,000 customers. We expect to continue spending to build the Toucan subscriber base over the coming quarters, as well as add additional services, including VoIP, to the bundled offering.

Our management today is focused on stabilizing our more mature telephony businesses, while continuing to invest prudently upon this base for the future of the Company. As mentioned, we continue to invest in our two-year wireless product, as well as other products which build upon our distribution to and our relationship with our core Latino customer base.

Turning now to Entertainment -- I know that revenues increased marginally from the prior quarter to $48.4 million. This stability occurred despite the expected single drop-off in our revenues and our home entertainment distribution business. This is reflective of our continued focus on growth, primarily through the exploitation of our own home-grown proprietary production of non-feature film live action and animation.

During the second quarter, we recognized revenues from the television release and foreign presales of various properties, including on the animation side, 'The Happy Elf,' and on the live action side, most notably the 'Masters of Horror' series, but also several of our low budget direct to TV or DVD productions. We expect revenues from this part of our business to vary from quarter to quarter, depending primarily on timing of release dates. And we believe this business will deliver steadily increasing value to our overall Entertainment businesses. Our focus in proprietary production give us titles that can be sold across all distribution platforms, including digital delivery and perpetuity, a proposition which we believe adds significant value to money invested in acquiring new content.

Also on the IDT Home Entertainment business, we have been impacted by the same industry trends our competitors have been subject to. And I am referring to mostly the retailers trends to return inventory quicker and in larger numbers. The overall impact to the bottom line from this trend has been marginal, and we continue to be very focused on managing our inventory and the growth and profitability of this business.

Most importantly to our Entertainment division -- we have secured, in our opinion, a more attractive date from FOX to release 'Yankee Irving,' which is now scheduled for nationwide release on September 15th. This film is on budget and on time, and in my opinion, looks great.

In our Capital division, we experienced flat operating results in comparison to the first quarter. Revenues in our Retail Energy business grew significantly, but bottom line impact remains negligible. As of the quarter end, we had over 114,000 meters in New York state. Our brochure displayed business, CTM, continued to grow as well, and is making progress in expanding its sales reach to other local media platforms.

Returning to the IDT spectrum, for a moment, as Jim mentioned earlier, subsequent to the sale of the remaining Winstar businesses in GVC in January, IDT retained its nationwide spectrum assets. During the quarter, we canceled our IPO for the spectrum division because of market conditions. However, we continued to believe in the management and the business proposition. IDT recognizes the capital intensive nature of this business plan, and we continue to look at a variety of possibilities for funding the business without recourse to IDT's assets. Our objective is to partner with others in building this business and funding its growth.

Other items to note; we purchased an additional 3.1 million shares during the quarter for approximately $37 million. Since the initiation of our stock buyback program in the fourth quarter of '05, we have spent over $79 million dollars to date repurchasing over 6.4 million shares. As a result of these and other investments, we finished this quarter with approximately $700 million in cash, cash equivalents and marketable securities. Obviously, this does not include the proceeds which we received in Q3 from the sale of Corbina.

We will now be pleased to take your questions for the remainder of the time allotted.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Andy Baker of Cathay Financial.

Thank you. A couple of questions. First, could you quantify for us the -- you talked about the negative impact from some of your investments to Toucan, ESL, can you quantify their impact on operating income in the second quarter, please?

Before we do that -- I think Norm will handle that question -- let me tell you who is here. Marcelo Fischer, who is our Controller, is not here for personal reasons. [Mitch Silverman], his assistant is here. Norm Rosenberg is here and he will answering that question, the CFO of Telecom; Steve Brown, of course he has already spoken, CFO of IDT Corp.; Morris Berger, CEO of Entertainment is here; Jonathan Levy, Executive Vice President of IDT for Investor Relations and Capital Markets; finally, Sam Abraham, CFO of Entertainment.

Sure, Andy, I will take your question. Again, the issue was, what was the cost of those investments we made on operating income line? From an EBITDA perspective, that's a pretty good proxy for these businesses. There's not much in way of depreciation from these businesses. These new businesses represented a negative EBITDA of $15.5 million for the quarter, and that's up from about a shade under $11 million last quarter. That was the impact for this quarter, and it was about $5 million more than what we saw last quarter. Is there any way to do it on a year-over-year basis or it's really not comparable? We can. The comps are not going to be as meaningful. I think that if you do look at it on that basis -- I would say off the top of my head about the biggest contributor there would have been Toucan, which did show a negative number, operating income wise last year. So I would say that number would have been about $8 or $9 million last year.

Okay. If I can ask a question of Morris -- a couple things. One, if you can talk about the negative cash flow in the quarter in Entertainment from the investments you're making in the proprietary products, as well as the buying of rights and licenses. And then secondly, in terms of the pricing going -- that you received this time around for 'Masters of Horror II' and 'Masters of Sci-Fi,' if you can compare those to what you saw for 'Masters of Horror I', please?

Sure, on the first question I will turn that over to Sam Abraham, our CFO.

Okay. The question had to do with the amounts of cash that invested this quarter in film costs, as well as licenses in 'Masters.' This quarter we spent a little over $20 million, most of that -- about $15 million of which went into investment in film costs. The balance is largely in royalties -- new license acquisitions and mastering of those licenses to put them into onto DVD's and get them into retail.

Any update on the projection for the year that you put out in the filings -- the quarterly filings?

There really is no change in that. We're on track for original guidance -- pretty much exactly the same as we anticipated from day one.

Back to the second question, this is Morris. Both on 'Masters of Sci-Fi' and 'Masters of Horror II,' we've gotten a premium from the cable network, Showtime, on 'Masters of Horror II,' as well as a much larger number from the network, ABC, on 'Masters of Sci-Fi.' And in addition to that, we've already struck some international territories with quite a premium of 'Masters of Horror II' on the sale of the DVD rights.

And then are costs for 'Masters of Sci-Fi' inline of the costs of the 'Masters of Horror' on a per film basis?

They are exactly in line with 'Masters of Horror,' correct.

I will turn it over to someone else and come back to you if I have any more questions.

Thank you very much.

Thank you.

Our next question is coming from Donna Jaegers of Janco Partners. Please go ahead.

Hi. Thanks for taking my questions. Two questions -- or three questions, I guess. Any guidance on when we might expect to see peak losses in some of these investments?

I assume, Donna -- this is Norm, you're talking about on the Telecom side?

Yes, TúYo and ESL and most of them being run through Telecom right now.

Sure. I will give you approximations on those new businesses. And for the discussion let's assume we have four new businesses we're going to talk about. There is Toucan, which is our U.K.- based consumer phone services business, we have the English as second language or ESL product, we have TúYo, which is our prepaid wireless here in the U.S. We also do have some financial services, but it's a relatively small number.

I would say that the one that is closest to having maxed out, if you will, in terms of the loss, especially on an annual basis, would be Toucan. We think the biggest draw in town left is going to be over the rest of this fiscal year. If you look at fiscal '07, it lost [inaudible] significantly smaller, and we would turn to profitability sometime during fiscal year '07. So on a full year fiscal basis, fiscal '08 is a profitable year for Toucan. That presupposes that we allow the model to continue going as it is. The key thing to remember, of course, much as with the U.S.- based CPS business, is that you get to a point you could harvest it if needed. That's not the call at this point. Understand, we could technically move that date up if we were to decide we needed to do that.

From an English as a second language perspective, I think that that's one of those new businesses where we're not going to let it get too far out of hand before we start to look at the model in terms of the way we market it, whether we want to focus on the -- some of the direct marketing that we're using now. We do have the opportunity to scale back the marketing so that we're basically advertising on our calling cards, whether on the prompts or on the physical calling cards themselves. In such case, we would be able to make this mostly a variable cost business, so that fiscal '06 -- late fiscal '06 would be the peak there. Otherwise, I think fiscal '07 in the model is also the peak for TúYo. I think those losses probably run through most of fiscal '08, but with the typical hockey stick like pattern that people always put into projections going forward, and of course execution is going to be the key.

On financial services, I think that number remains pretty small throughout most of fiscal '07. And I guess there is a recurring theme here which says that we continue to invest through the end of fiscal '06. And for the most part -- aside from the go or no-go decisions that we make on some of these things, fiscal '07 would be more of the same, where we would hope to reap the benefits of these things, really, beginning in fiscal '08 and beyond.

Norm, one other question for you. Given that consumer -- the U.S. unlimited consumer offering is not working out as well as maybe you guys originally expected, is there any liability on the Verizon deal? I know on a lot of these contracts, Verizon was sort of locking companies into a certain commitment on a number of lines.

Okay. Good question. We do have a commitment to Verizon. At the same time, we're doing fine. Just to elaborate on the question that you had asked -- when we went into the fiscal year, the idea was, once we had the Verizon contract, we were going to go out and we were going to advertise. Even at that point, the advertising was going to be done on a strictly return on investment basis. And originally, we were doing a decent job of it. Then, when it became apparent we were not getting the returns on investment, or at least the cost per sale that -- and other metrics that we demanded, we decided to scale that back. That happened midway through this quarter.

Of course before doing that, we have to take into account what the decline curve would look like if we put this thing back into full harvest. Upon feeling comfortable that we would be able to meet all of our commitments to Verizon, we will be able to do that. I think Steve eluded to it during his -- Steve Brown alluded to it during his comments. We're going to take a couple of little shots here and there on some niche -- or segments of the market on a pure variable cost basis, where we'll do a little investment. If we get the return, fine, if not -- as we've talked about in the previous question you had there, there is plenty of sources -- plenty of uses of our funds. So if there are parts of our business that we determine to be mature and can act for us as a source of funds, we have no problem doing that, if that's the what the return on investment discipline tells us to do.

Great. One quick question for Steve brown. I am assuming that the $10 million payment to Lucent is included in the SG&A line for -- and the break-out for solutions, is that a correct assumption?

That is correct.

Great. Thanks, Steve.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Justin Evans of Langley Capital. Please go ahead.

Hi, guys. Just wanted to try and reconcile your cash number. You have $700 million on the balance sheet. That doesn't include the Corbina sale. Are you guys getting a full NOL's for the $80 million or so in profit, it's $138 million you should get for that sale?

Excuse me? NOL's?

Is that basically going to add $138 million in cash onto your balance sheet?

$146 million, yes.

Okay.

Net of cost.

It's going to be a bit lower than that because of certain obligations, but it is close to that.

Well, Liberty owns 5% or something, right?

Right, right. There is also some people that have a bit of a termination package that will continue to work there.

Got you. The other $28 million will go out Net2Phone, but that leaves us with roughly $800 million or so that I can think about as cash currently? Does that sound right?

That sounds right.

About $8 a share?

Right.

Okay. Great. A few other things --in the past you guided about shares for options in restricted stock that will be issued. Is that still kind of on track for 2 to 2.5 million going forward?

It is on track to that level or less. It is something that we're discussing internally amongst the executives. It is certainly not going to be more than that, probably less.

Great. Okay.

By the way, we're making a real effort to reduce dilution and mop up whatever overhang there is -- there is substantial over hang, but we're focusing on that to dry it up.

That's great. Looks like you're creating a lot of value by buying stock here. One other housekeeping question. The small amount of debt that you have on your balance sheet, $146 million note payable, does that represent a non-recourse real estate mortgage -- or group of them from your real estate venture businesses?

All of the loans are non-recourse and they are to specific assets. Some of it equipment leasing, and some of it on the IDT Entertainment Anchor Bay assets.

Good. Great. That's -- one other question about share repurchases. Can you talk about kind of where you are since January 31? Have you bought more? Can you give us some guidance on where your thinking is along those lines?

We -- unfortunately, we can't give guidance now on that.

Sure. Thanks, guys, I appreciate it.

Thank you. Our next question is coming from Steve Balog of Cedar Creek Management. Please go ahead.

IDT solutions lost in the quarter of $8.4 million, $10 is from -- of that loss came from the Lucent. The rest -- is that the ongoing level of losses? Or what else can you help me parse that out? I am trying to get to what is the run rate loss level?

We had one other -- one-time event was the cost incurred in trying to see if there was a public market for spectrum. That costs us about $2 million. That's a one-time event. The rest is the cost of building out the business as [inaudible]. I am comfortable with saying it is not going to be significantly -- it is at it's peak right now. I don't think you will see anything significantly change.

[Inaudible] to a $6.4 million and it will slide down from that but not materially?

Correct.

That's it.

Thank you, Steve.

[OPERATOR INSTRUCTIONS] Our next question is coming from [Michael Harvey] of [Benton Capital]. Please go ahead.

Thanks. Now that you almost wrapped up the Net2Phone purchase, can you tell us if you're got any plans to do things differently there?

We have definite plans to do things differently there. We're just so getting started. We have a good team that our analyzing Net2Phone -- the products that they now have some future products. And Howard Jonas as is spending, probably half of his time over at Net2Phone. We'll have a lot more to say. Norm, did you want to answer that?

I'll mention very quickly a couple of no-brainers, if you will, that we're getting in involved with. Obviously, we're hoping that we can use Net2Phone to at least explore the possibility of having a voice-over IP product -- a consumer voice-over IP product. Perhaps that's the kind of thing where we can get the economics on a consumer product that we couldn't get -- or that we cannot really get today out of the resale business of the -- what used to be the UNE-P product. And there is also the wholesale side. We do a lot of wholesale carrier termination that is IP-based, and I think that where that manifests itself -- or where the connection with Net2Phone might manifest itself is that we'd be able to grow in that arena without doing much more CapEx than we would do otherwise.

There is a lot of network synergies we hope to get out of this. As Jim eluded to, there is so much to do and it is complex. Hopefully, we'll be able to talk about it as we go forward. Those are a couple of general categories where we're looking for some synergy.

And just on the share count -- I guess the average shares for the quarter is about 95 million. What was the share count at the end of the quarter?

Correct. That's 94, 95 million.

99.4.

99.4.

99? The average share count was 95 for the quarter, is that correct?

We're taking a look at it right now. I know it is around 95, 97.

95.

95.

Okay, thank you.

We stick with our first answer.

Sir, did that complete your question?

Yes, thank you.

Thank you. Our next question is coming from Andy Baker of Cathay Financial. Please go ahead.

Thanks for taking the follow up. Just to confirm, who were -- the IDT solutions, that's where the build-out of the backhaul business is going to be booked from now on? Just like from where the old Winstar businesses were?

IDT -- I think we'll call it Spectrum going forward.

We call it IDT Spectrum, and it is right now the focus is on backhaul. That's exactly it. We have this nationwide great amount of Spectrum and it has value. And we want, obviously, to monetize that value. And right now, we think the best way to monetize it is to get some contracts with with cellular service providers for backhaul. I know there is a lot of them that are very interested in it.

I might also add that the wireless backhaul for the cellular products is very large in Europe, and not so in the United States. I think probably 60 or 70% of the backhaul in Europe is wireless. This is not something that has not been done before.

And then second question, can you give us an update of where you are on projects two and three in the Entertainment business for your computer generated part of the business?

Project two will be a project that we're doing in Vancouver. It is a project that we are in the process of clearing a title for. We hope to deliver that project sometime in '08. And there is another project in development which has not hit the production level, which will be our next project in Toronto. Once we have that development done, we'll be able to slate a production and release date for that project.

Is that fiscal '08 or calendar '08?

Calendar '08.

By the way, it could very well be the Toronto project --- it could be done earlier than the Vancouver project, even though its starting later, just because of the --

-- nature of the project.

-- nature of the project, correct.

Thanks a lot.

Sure.

Thank you. [OPERATOR INSTRUCTIONS]

Our next question is from Donna Jaegers of Janco Partners. Please go ahead.

Thanks for taking my follow-up. I know it is early days on TúYo, but given that you're asking investors to wade through all of these investments -- can you give us any sort of anecdote s as far as how well the product is selling so far -- any numbers on customers?

Sure. I can. I think that -- there are a couple things to note while I say that. I think that what we've done in the early days is spend a lot of time trying to make sure that we have a diverse and a very well built-out distribution channel. Obviously, UTA is the most important piece of that. Of course, our business is not limited to that. And I would say in the last two to three months, our team has signed up about a dozen or so national wireless distributors to be part of the wireless puzzle. The numbers right now are very small. I would say we probably have close to 7,000 active subscribers, which is a relatively small number. Our hope is that we would see significant growth in that number overtime, given that we're in the early stage.

Other than that, I think the usage per customer is a bit higher than we had thought. We had expected -- again anecdotes here -- we had expected 20% international usage as a percentage of total usage, and that number is about 22%. International tends to be more profitable for us. Net-net perhaps we're slightly more profitable on a per customer -- on a recurring customer basis than we would have thought otherwise. It's so early, I would hate to -- to really draw conclusions from that.

So long story short, the economics look okay. We're probably a little bit slower than I had hoped, in terms of the numbers of subscribers, as we sit here today. We're definitely laying the ground work for future growth. And then it is a matter of where we do the launch. Right now Jim had mentioned we're in the New York area, the DC area, Las Vegas. Within short order, we hope to be in other major markets like Dallas, Houston, Los Angeles, Chicago, and other major metropolitan areas. And that's when, hopefully, we'll see some of the bigger growth.

Can you give us any anecdotes as far as what your cost per gross ad is -- or I guess that's going to be way out of whack, because you have all of some marketing over very small gross ads. But what's your game plan there, as far as what you're going to hold your cost per gross ad at?

The way I boil down the economics -- obviously, cost per gross ad in its own right is a number that shouldn't be looked at in a vacuum. The way I would look at it is that on a batch of advertising dollars, if you will, we like to break even on the customer. Right now the model would call for -- if a customer stays about 12, 14 months or something on that order, that would cause us to breakeven. When you factor in churn -- we would like on get our money back, if you will, on a 20 to 24 month period, if we could. Right now -- and as you pointed out, we're a little bit early on. It really skews the numbers and we're probably above that. At least the consumer -- the recurring customer economics give us indication we can get what we have to get. It is really just going to be a matter of moving product. And I really hope that --and every month is bigger than the month before by a significant amount. And my hope is, that as we go on quarter after quarter. we can give you those kinds of details.

The final point there is simply that -- I really do believe that the economics, as we expected them to be are there, and it is just a matter of moving product. If we move product I think that all of our projections will be met.

Great. Thanks.

Thanks, Norm. Thanks, Donna. And thank you all for attending the conference call. Take care. Bye.

This concludes today's IDT Corporation Q2 '06 earnings release conference call. [OPERATOR INSTRUCTIONS]