IDT Corp (IDT) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Brianna and I will be your conference facilitator today. At this time, I would like to welcome everyone to the IDT Corporation fiscal quarter 3 earnings 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.

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

Good morning and welcome to IDT Corporation's conference call for the third quarter of our fiscal 2006, which ended on April 30. I'm Jim Courter, CEO and Vice Chairman of IDT Corporation.

Before we begin, I must caution all those listening today regarding any forward-looking statement 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 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.

I would like to begin with the exciting news we announced after the quarter ended with regards to our Entertainment division. IDT agreed to sell ownership of our Entertainment subsidiary to Liberty Media, in a deal valued at approximately $0.5 billion. In addition, IDT will retain a continued interest in the future success of the business. The deal is pending certain regulatory approvals and other conditions, and we expect to close within approximately two months.

This transaction highlights the best of IDT, our entrepreneurial spirit and drive to succeed. Over a short three years, we invested nearly $250 million to build a world-class entertainment business, and have now successfully created significant value for our shareholders. Under the leadership of Steve Brown and Morris Berger, IDT Entertainment went from a dream to reality and then some. Today, IDT Entertainment joins the Liberty Media family of companies as a fully integrated entertainment company, with full production and distribution capabilities.

In conjunction with Liberty Starz Entertainment, we look forward to a company whose sum is greater than its individual parts and to the business's continued success. I would like to take a moment to applaud all the employees of IDT Entertainment who have worked so hard over the past three years to bring the company to where it is today. It is your ingenuity and hard work that have made IDT Entertainment a success.

Earlier this year, we had another very positive transaction at IDT, the sale of our Russian Telecom asset, Corbina. That sale closed during the third quarter and is now reflected as such on our financial statements. Net proceeds from the transaction after fees and other expenses were approximately $130 million.

We believe both these transactions are indicative of the value we continue to create for our shareholders. In both instances, we made calculated, wise acquisitions that enhanced the value of those companies with further investment and monetized those businesses, realizing value for IDT and its shareholders.

At the same time, I'm not satisfied by our operating results, which continued to show a loss. And as I have mentioned on prior calls, we're focused on moving our businesses to profitability. In past calls, we have discussed the strategy that drives IDT today. An important component of this strategy is the financial discipline and controls around our existing business operations and new ventures. During the past quarter, we redoubled our efforts in this area. IDT is a company built on growth and initiative, but is also a company that couples such entrepreneurism with strong financial focus. As we build from our past successes, we've maintained a key eye to our expenses and focus on driving profitability from all business units.

As the environment for some of our businesses shifted, so did their infrastructure staffing needs, et cetera. All of IDT's employees are like family, and decision to rightsize our operational structure was extremely painful. But over the past number of weeks, we have made the necessary decisions to ensure the future viability of our company. I personally want to express my gratitude to all of IDT's employees for their continued drive, motivation and hard work, despite what has been a very difficult time for our family.

As a result of this ongoing process, we reflected restructuring charges in our income statement for the third quarter and expect further charges in the fourth quarter. This process has forced us to reevaluate the activities and prospects of each of our businesses. We are carefully assessing our operations in each segment and are focused on bringing every business to the cash flow positive mode.

This regrouping is important for the future success of IDT. We have always been a company of innovators and creators, but we must also be a company with strong execution skills and discipline to move forward. IDT still contains many businesses with exciting future potential, and we will be very focused on pursuing these opportunities with the necessary financial discipline.

Over the next few minutes, I would like to highlight the performance of our key business segments during the quarter. Before moving to the specifics of our Telecom business, I not that there is a onetime item included in this quarter, which I believe obscures the reality of the improving performance of our U.S. Calling Card business. We have always been very sensitive to government regulatory agency issues and have paid such fees when we are required to do so.

As many of you may have seen in the filing that was recently posted on the FCC's website following the closure of our 2000 to 2004 USF audit, the Universal Service Administration Corporation, USAC, informed us that it believed we owed an additional $6.1 million. We vigorously contest these fees and disagree with the methodologies the Commission used in assessing these fees. Despite our ongoing appeal, USAC shared the information from its audit with other agencies, and subsequently, a second regulatory body assessed us for fees, using the same methodology currently under appeal.

We maintain that we are not liable for these additional fees, and I stress that we have not paid out any of these amounts. However, for accounting purposes, we have decided to accrue 48.1 million this quarter based on USAC's methodology, that we believe to be flawed. As always, we will keep you informed as developments warrant.

As we have maintained all along, we believe that the current mechanism for assessing Universal Service and other regulatory fees is woefully outdated, and we are heartened by the expectation that legislators in Washington are currently working on improving the methodology. Absent this item, during the third quarter, our Telecom operations had higher margins in our core Calling Card business and slightly declining margins in the Wholesale segment. The U.S. Consumer Phone Services business continued to lose customers, but net margins improved as a result of our cutback on marketing. In the UK, our Consumer Phone Services business continued to spend heavily on brand building and customer acquisition, and our various new initiatives under the Telecall umbrella, which are still in their infancy, continued to have a negative impact on our profitability.

The last time we spoke, I mentioned that beginning this quarter, we would provide investors with more detailed line of business reporting in our Telecom businesses. To that effect, as an addendum to the third quarter earnings release, we have attached a supplemental line of business table for our Telecom division. I believe this will provide investors with a much clearer picture of the health of our core Telecom business today, and further help highlight the important differences between our mature and less mature business operations. As well, I believe that over time, this will provide greater insight to the trends within Telecom at the specific line of business level.

Let me take a few moments to explain the table in more complete detail. We have broken down the retail Telecom Services segment to a more granular level. In this presentation, the subsegments of Calling Cards, Consumer Phone Services and Other are delineated. Further within the Consumer Phone Services subsegment, U.S. and Europe are separated. I believe this gives a comprehensive understanding of our Telecom business today.

Calling cards is a more mature but stable business, while our U.S. Consumer Phone Service business, also within the mature category, has been in decline since the change in the UNE-P regulation about a year ago. Our European Consumer Phone Service business is fully operational business, but sales spends heavily on customer acquisition and branding, while the other category includes a variety of earlier stage initiatives, with minimal revenues to date.

In last quarter's call, I spoke briefly about our acquisition of Net2Phone, and would like to fill in some details and report our progress. The transaction closed during the third quarter, and the Net2Phone is now being fully integrated within IDT. Integrations take time, but when we are through, we expect to realize significant savings. Net2Phone no longer carries the burdensome costs of being a public company, and a significant amount of overlap in infrastructure is also been removed. We hope to eventually integrate all product lines into our Telecom division and maintain a single network for operations of our various Telecom offerings.

Net2Phone's business, prior to our acquisition, included two distinct products, voice line and cable telephony. The voice line product is SIP, Session Initiation Protocol, and utilizes the public Internet for transport of calls, while the cable solution operates over a managed network using cable packet technology. I believe there is a future for both products, but significant work must be done to properly position each to their potential, especially as VoIP becomes more mainstream and will grow larger.

Cable telephony is a turnkey solution for cable operators that want to provide their customers with phone service. This product has had minimal deployments to date, but we believe has great potential if it is able to gain economies of scale within the market. Net2Phone's integration is being handled by the very capable Telecom team led by Yona Katz, Kathy Timko, and Norm Rosenberg, and I am confident in the fruits we will realize from their labors.

In the past, I have reviewed our Entertainment's business results for the quarter in detail. Because of the pending transaction, I will devote less time, but still would like to highlight a number of items, particularly because with our equity appreciation right to the future success of IDT Entertainment, its performance will continue to have important financial ramifications to the future of IDT.

During the quarter, IDT Entertainment continued to build on its talent base and progress on its creative projects. Chris McGurk joined the executive management team as a special advisor and will be spearheading a number of new initiatives. Chris is an important addition to the team, bringing significant expertise both from the creative and financial sides of the business.

We also announced the title of our next CG, computer-generated animated film, "Space Chimps." This comedy is being developed jointly with Vanguard Animation and is expected to reach theaters in calendar year 2008. Additionally, on the proprietary production side, we announced that ABC Network signed on to carry our "Masters of Sci-Fi" series, which we expect to air later this calendar year. "Everyone's Hero", our first CG animated film, is scheduled to arrive on time and premiere the week of September 15 of this year. The film is presently in its final stages of animation and the trailer is expected to debut alongside another Fox distributed film earlier this summer. As IDT Entertainment moves to join the Liberty family of companies, it is well-positioned and has strong momentum to blaze a successful path in the future.

IDT Capital's top-line revenue declined slightly as a result of the seasonality of our ESCO energy business, and the bottom line improved as a result of the economies of scale we have reached within the business.

IDT Spectrum continues to explore various alternatives. Management is focused on securing a test contract from a leading mobile network operator, and we continue to look for the appropriate means to help unlock the value within this asset.

We did not buy back any stock in the open market this quarter, as the IDT Entertainment transaction was in progress. However, through the transaction, we believe that we will have delivered on our goal of buying back our stock when we believe it to be selling at a discount to its intrinsic value. Under the existing stock buyback program approved by our Board of Directors, we still have authorization for the purchase of an additional 13.6 million shares in the open market. Additionally, as you know, we were successful in buying back 7.9 million employee options at $2 each.

Speaking of our Board of Directors, I would also like to formally welcome the new head of our Audit Committee, Marc Oppenheimer. Marc is an Executive Vice President at Kenmar Global Investment Management, and brings significant financial and investment expertise to the Board of Directors. We thank Marc for his service and we look forward to working with him in the future.

Before closing, I would like to spend a few moments discussing our long-term-held practice of not providing earnings guidance. As you know, many of our past successes have come in the form of monetizing businesses we created, built and operated in-house and then sold to third parties. The results of these activities generally do not show up in quarterly recurrent earnings per share, and are instead one time in nature. More importantly, they are not quarter-to-quarter events, but rather long-term projects with considerable time horizons, sometimes spanning a number of years. We have the patience to cultivate value, even if the rewards are not instantaneous, and fortunately for IDT, we have made a habit of delivering such results and intend to continue to do so in the future.

This is not to say that we don't also have successful ongoing businesses that do in fact generate significant cash flow. We do. Our more mature Telecom businesses are consistently profitable and our management teams work tirelessly to protect our margins in these businesses despite intense competition. However, given our long-term track record, we believe insight and updates on our new initiative provides more substantial information to evaluating the future of IDT than quarterly earnings per share. At the same time, I emphasize that we are focused on moving our business as a whole to become EPS positive.

I believe in the managers of each of our business lines and have the utmost confidence in their ability to execute. This quarter, we saw the best of IDT in our ability to execute in new businesses and build shareholder value out of an idea, ingenuity and hard work. It has also been difficult as we have refocused our efforts on the bottom line and have made the necessary adjustments to our businesses. I believe we are better positioned as a result and ready to tackle the challenges ahead.

In closing, the third quarter was one of renewed focus to drive profitability across our businesses. We enter the fourth quarter as a fiscally strong company with a bright future. I am confident in that future and thank you, our shareholders, for the partners alongside us on this path. I look forward to reporting to you next quarter on our progress.

For many years at this point, I have handed the call over to Steve Brown. As you know, for the past three years, Steve has headed up our IDT Entertainment division as its chairman, while also continuing to serve as IDT's CFO. With our pending sale of IDT Entertainment to Liberty, Steve has transitioned his role as CFO to Marcelo Fischer so that he may focus full-time on the Entertainment business. I want to convey my deep sense of gratitude to Steve for all his hard work on behalf of the Company for so many years, and I wish him the best of success as he proceeds on the exciting path ahead with IDT Entertainment.

Marcelo is no stranger to you or IDT. He has served as IDT's Chief Accounting Officer and Controller and been involved in our corporate strategy and decision-making for many years. We are excited by Marcello's acceptance of his new role and look forward to his continued service to the Company. I would now like to turn the call over to our new CFO, and my friend, Marcelo Fischer.

Thank you, Jim. Before I review our financial highlights for the third quarter of fiscal 2006, I would first like to thank Jim, Howard Jonas and IDT's Board of Directors for providing me with the opportunity to serve as IDT's Chief Financial Officer. I appreciate their confidence and support and look forward to working with them and the rest of IDT's team on our commitment to bringing our businesses to cash flow positive and create value for our shareholders.

I would also like to seize the moment to thank Steve Brown, my mentor and close friend, for all his work on behalf of IDT for so many years. Steve has been a tremendous asset to the Company, and his keen business sense and judgment will surely be missed. I wish him the best of success as he moves full-time to the Entertainment business.

As we mentioned during last quarter's call, the sale of our Russian Telecom subsidiary, Corbina, was completed during the third quarter, and as a result, is reflected as a discontinued operation this quarter. We realized net proceeds from the sale of about $130 million after banking and audit-transaction related costs, which represents a return of over 14 times our original $9 million investment five years ago. Based on the carrying value of Corbina's net assets prior to the sale, an accounting gain of $81 million was recorded this quarter.

Before we discuss our operating results, I would like to point out that as of the end of Q3, our shares outstanding stood at 96 million. After the close of our pending transaction with Liberty, we expect the total number of IDT shares outstanding to go down to approximately 79 million. In addition, subsequent to the completion of our tender offer for employee options, which closed on May 22, we had 7 million remaining options outstanding with an average strike price of $9.62.

Now let's discuss our operating results. On a consolidated basis, excluding Corbina, revenues were $589 million, a decrease of 4%, or 27 million, from the previous quarter, and roughly flat compared to the third quarter one year ago. IDT Telecom's continued focus on margin over revenue, as well as the continued decline of our U.S. Consumer Phone Service's customer base, were primarily responsible for the sequential revenue decline. The seasonal nature of our retail energy business also contributed to lower revenue than Q3 as compared to the winter months included in our fiscal Q2.

Before discussing our gross profit results and or bottom-line earnings, I would like to address the regulatory accrual we booked this quarter at IDT Telecom, which have negatively skewed our reported earnings and overshadowed an otherwise very positive quarter for our Calling Card business. The Universal Service Administrative Company, also known as USAC, which is charged by the FCC with collecting and administering Universal Service Fund, or USF, recently completed an audit of our Telecommunications filings for the five-year period of 2000 through 2004. As a result of this audit, USAC asserted that we owed an additional 6.1 million in USF-related fees.

We also recently were assessed by another regulatory body, the Telecommunications Relay Services Fund, or TRF, as a result of the findings in our USF audit. As Jim mentioned, we are presently engaged in an appeal process with USAC over its findings and are also contesting the methodologies used in its assessment of additional fees, which we believe to be flawed. Despite the ongoing process relating to this appeal, USAC shared the data from its audit with other regulatory agencies, including the TRF, which resulted in this additional assessment.

As a result, we decided to record an additional accrual of $48.1 million this quarter, which includes the amount of this assessment, as well as the maximum potential liability to IDT for the full period through April 30, 2006, based on the methodologies USAC has used. We plan to appeal all of these potential additional fees as we fundamentally disagree with the methodology used in their calculation. However, given the timing and uncertainties of the appeal process, we concluded it prudent and conservative to accrue for the potential of these additional fees at this time.

On a going-forward quarterly basis, based upon the methodologies used by USAC, and our projected Telecom revenues, traffic and call termination destinations, our U.S. Calling Card business could potentially be liable for approximately 3.5 to 4.5 million in all such additional fees. We plan to incorporate these fees within our pricing structure going forward. In effect, we will be passing these costs along to our customers.

From a competitive standpoint, assuming a level playing field in terms the payment of fees, we expect to maintain what we believe is the industry's low-cost position. Most importantly, even with such fees, the business will continue to be very profitable for us. As this accrual taken in Q3 relates to a period of several years, for the purposes of this quarter's review, I will discuss IDT's financial results both as presented in our earnings release, as well as excluding the effect of the regulatory accrual. I believe that this will provide for a more meaningful operational comparison to prior periods.

Consolidated gross profit, excluding Corbina, was 93 million, a decrease of 32%, or 44 million, from the previous quarter, and 35%, or 49 million, from the third quarter one year ago. Excluding the onetime accrual this quarter, gross profit would have been approximately 141 million, an increase of 3%, or 4 million, from the previous quarter, and a slight decline of 1%, or 1 million, from the third quarter one year ago. This quarter-over-quarter increase is due mostly to improved margins in our Calling Card business, while the year-over-year decline resulted primarily from the continued revenue declines in our relatively high-margin U.S. Consumer Phone Services business.

Consolidated SG&A, excluding Corbina, was 153 million, a decrease of 8%, or 40 million, from the previous quarter, and an increase of 9%, or $30 million, from the third quarter one year ago. Most of the sequential SG&A decline was due to lower marketing and other expenses for our U.S. Consumer Phone Services offering and reduced SG&A in Corporate. In addition, IDT Solutions' SG&A, which includes the cost of our former Winstar business, declined markedly, as remaining shutdown costs for that operation were quite small during Q3 in comparison to previous quarters.

During the third quarter, we also initiated a companywide cost reduction program to rightsize our infrastructure to our present business needs. As a result, to date, approximately 375 positions, including about 270 customer service positions, have been eliminated. In the third quarter, we recorded restructuring charges of 5.2 million as a result, and expect to record additional charges in the fourth quarter. As mentioned in our earnings release today, at this time, we estimate total restructuring costs to date to be approximately 40 million. As a result of the cost reductions achieved to date, we expect to realize approximately $15 million to $20 million in annual savings on a going-forward basis. We believe our operating results should begin to reflect the savings in SG&A beginning in fiscal 2007.

Consolidated loss from operations, excluding Corbina, was $91 million for the quarter; but excluding the regulatory accrual, improved by $14 million from the second quarter to a $43 million loss. As Jim mentioned, we are not happy with this continued loss, but are encouraged by the strides we have made to move our Company to profitability.

Shifting from our discussion on a consolidated basis to our major reporting segments, at our IDT Telecom division, excluding Corbina, revenues in Q3 were 485 million, a decline of 2% from the second quarter and of 6% from the year-ago period. These declines are mostly due to lower permitted price realizations in our wholesale carrier business, compounded by fewer selling days in the third quarter, as well as continued churn in our U.S. Consumer Phone Services customer base. Revenues in our Calling Card business remained relatively stable, as higher permitted price realizations offset the decline in minutes of use.

Specific to the results I just mentioned, by focusing on improving margins and generating more cash flow, we experienced a significant improvement in our realized gross profit per minute on the minutes we carried on our network. Our Calling Card business carried a total of 4 billion minutes, a decline of 6% from the previous quarter, but witnessed a strong improvement in gross profit per minute to 1.45 pennies per minute compared to 1.16 pennies in the second quarter and 1.29 pennies a year ago. Excluding the regulatory accrual mentioned earlier, gross margins in our Calling Card business improved to 24%, the highest margins seen in well over two years. Our wholesale carrier business carried 1.8 billion minutes, a decline of 3% from the previous quarter.

Moving to our Consumer Phone Services line of business, in the U.S., revenue declined 7% in comparison to the second quarter, but bottom-line performance continued to increase as a result of our pullback in marketing. This business continues to be managed for cash flow and we anticipate very limited spending on marketing the existing service over the coming months. At the end of the third quarter, our U.S. Consumer Phone Services business had approximately 165,000 local bundled customers, a decrease of 23,000 customers since the end of Q2; and 266,000 long distance only customers, a decrease of 12,000 customers during the quarter.

Toucan, our European-based communications offering, continued to invest heavily in subscriber services growth during Q3. Because of the bundled nature of the Toucan offering, which now offers its customers broadband, mobile and wireline rental, in addition to its original local and long distance voice service offerings, we measure our customer base in both services provided and number of subscribers. As of the end of the third quarter, we provide approximately 221,000 services to 186,000 subscribers. This compares to approximately 191,000 services provided to 162,000 customers at the end of Q2.

Turning now to IDT Entertainment, I would like to begin by taking a few moments to review the details of the deal we entered into with Liberty Media. On May 15, Liberty Media executed a binding term sheet agreement with IDT to fully acquire the 96% of IDT Entertainment that it does not yet own. In exchange, IDT will receive 17.2 million Class B shares of IDT Corporation owned by Liberty, as well as Liberty's approximate 5% minority interest in IDT Telecom, which Liberty originally purchased for $30 million in January 2002, and its approximate 4% minority interest in certain of IDT Capital subsidiaries, which it purchased in April 2003. In addition, Liberty will pay IDT $186 million in cash, subject to certain pending adjustments, and will assume IDT Entertainment's debt as of the transaction's consummation date. This debt, which is presently consolidated into IDT Corporation's balance sheet, stood at approximately $74 million as of the end of Q3.

IDT will also receive additional consideration based on 25% of IDT Entertainment's value appreciation above an equity value of $425 million over the coming five-year period. We believe that IDT Entertainment coming together with Liberty's various media company holdings, including Starz Entertainment, is a powerful combination, with far greater resources and potential for value creation than as a standalone entity. We are delighted with the transaction and are working diligently to complete the deal before our July 31 fiscal year-end.

Moving to IDT Entertainment's results, revenues for the third quarter were $42 million, a decline of 14% from the second quarter and 9% from the third quarter last year. These declines were primarily as a result of the timing schedule for release of new titles this past quarter, both proprietary and licensed, and as a result of the expected lower revenues from our work-for-hire business, which we have been deemphasizing in recent quarters. In Q3 of this year, we released 45 new titles to the market, whereas in the same quarter one year ago, we released 61 titles.

In IDT Capital, revenues for the third quarter were $38 million, representing a decline of 13% on a sequential basis and an increase of slightly less than 250% year-over-year. Both changes reflect the significant growth of our retail energy business and the seasonal declines associated with this business as we enter the summer months. To date, the business is only operating in New York State, providing gas and power to mostly residential and small-business customers as an ESCO, or Energy Services Company. IDT Energy presently services over 100,000 customers with approximately 165,000 meters.

Our revenue projections for fiscal 2006 for the retail energy business are well on track to exceed $100 million. Operating profit for the retail energy business in Q3 was 1.7 million, including the cost of subscriber acquisition. We are very pleased that in just over one year, we have built an energy business that is now self-funding, and we intend to continue acquiring customers aggressively.

Moving on to our balance sheet, we finished the quarter was $709 million in cash, cash equivalents, and marketable securities. I would like to take a few moments to walk through cash flows for the quarter to help investors understand how this number relates to the $130 million in net proceeds we received from our sale of Corbina.

Some of the larger items which offset this cash during the quarter include approximately $30 million paid for our purchase of Net2Phone's remaining shares following the consummation of our merger. Approximately $31 million was spent in proprietary productions, including "Space Chimps" and "Everyone's Hero." As well, with approximately $9 million in new third-party license titles and mastering costs from our home entertainment business.

In addition, CapEx was $22 million during the quarter, higher than what we expect going forward, as it included approximately $7 million in CapEx for IDT Entertainment, mostly for studio buildouts in L.A. and Canada. Additionally, working capital increased by slightly more than 20 million, mostly as a result of a decrease in carrier and connectivity payables at IDT Telecom as of April 30, compared to the end of Q2. Working capital changes within our core businesses are largely temporary in nature, as they tend to reverse themselves over the course of a couple of quarters.

In closing, I am very encouraged by the progress we made during the third quarter. We stabilized our operating results, particularly within our Calling Card business, and also executed on our decision to rightsize our infrastructure to the needs of our current operations. This process has been difficult, but one we feel necessary to move our existing businesses to profitability. I am also pleased with our continued ability to execute in other elements of our business strategy, as we did during the third quarter, particularly in the monetization of assets.

At this point, we generally open the call to questions. Before we do that, I would like to note one recent news item that we will not be able to discuss in the Q&A. As many of you have seen, we filed suit in U.S. District Court of New Jersey this past Thursday for patent infringement by Skype. As has always been our policy, we do not discuss ongoing litigation, and as such, we will not be able to discuss this at the present time. We will now be pleased to take your questions for the remainder of the time allotted.

Thank you. (OPERATOR INSTRUCTIONS) [Terry O'Connor] with Cedar Creek.

Yes, I would like to ask a little bit about maybe investor relations, investor communications function. The extra disclosure in Telecom and Energy is much appreciated, but we had -- you had a fairly heavyweight guy, a vice chairman, in the IR position, and he's gone now -- love the (indiscernible) Cohen and all.

But you have a large and complicated company here, and I have been asking and want your opinion on having an analyst day. It would be fine to be in Newark -- you don't have to have an expensive New York City event -- where you could showcase each of the divisions and roll out the managers for all of 45 minutes that could run through and we could get a good understanding of what is going on an all of these projects. Could you comment on that?

Yes. This is Jim Courter. I would be happy to comment on that. First of all, let me just explain and say who is here on the conference call. Myself, obviously, CEO and Vice Chairman. Marcelo Fischer is here with us, the new CFO, and Treasurer of IDT Corporation; Norm Rosenberg, CFO of Telecom; and Yossi Cohn, who is heading up our Investor Relations.

We think we did a good job in breaking down the press release on earnings so it is more granular. You will be able to see a lot more as to what is going on in the subdivisions of the divisions. This is something that we talked about some time ago and we finally got it done. And we can tweak it and improve it based on comments that we get from investors and analysts.

Secondly, with regard to an analysts' day, we have had them in the past. Our intention is to have another one sometime in the future, and we probably would. If we do -- and not 100% we're going to -- but if we do, we would probably like to do it in Newark. It is a complex company, but I think as people track it and as people are staying with the stock longer, they are beginning to understand the real nature of IDT Corporation and its various subsidiaries. Yossi, did you want to add something to that, Yossi Cohn?

The only thing I would add to that is we were successful this quarter in bringing additional disclosure and insight into the Telecom business. If there is anything in specific, we are very open to investors and would like to continue to provide further insight into the business. So any suggestions are always welcome and we will do our best to deliver on them.

I appreciate all that. The main suggestion is that it is timely now; there are a lot of moving pieces, as always, but especially now. And more lines on the press release is great, but I think we need a dialog back and forth with the individuals running the businesses, like TuYo, and all this stuff that is going on. You really can't do it on a conference call; we need something more in-depth. Thanks.

Donna Jaegers with Janco Partners.

Hi. First, I want to congratulate Marcelo for being named CFO. Congratulations on that. And then I have three quick questions. Jim, for you, in the Barons article, there was a quote from you saying that you had a goal to do enough cost-cutting to bring Telecom into profitability in an 18-month target. Can you sort of expand on that?

Yes, we have spent a lot of time -- we don't talk about it much, but we have spent a lot of time. The three people that were most involved in restructuring the Company were myself, Marcelo, and Motti Lichtenstein. And we -- I think the press release mentioned the fact that we gave packages to about 450 people at IDT. We are constantly looking at SG&A and efficiencies that we can make going on in the future. Obviously, when there is a package given, the efficiencies don't really manifest themselves until subsequent quarters, and we have been very generous to our employees.

So all that having been said, I'm looking forward to the day that we will be operationally profitable. I don't want to say precisely when, because you never know. There are sometimes fees that come up and businesses experience different types of competition than you anticipate. But I just want to emphasize that profitability is something that we are focusing on in a very sincere way. We are going to make the difficult decisions, we're going to make the cuts if necessary. We will reduce our plans with regard to expansion of some of the new products that -- if we believe they are not going to be profitable in a short period of time.

So all this will be revealed in the next quarter and the quarter after that, with my personal goal and the goal of Marcelo and the goal of Howard Jonas -- and he's very much engaged in these efficiencies and these difficult decisions -- the goal is to be operational profitable in a short as time as possible.

Great. And then on Spectrum, can you -- they seem to be sort of in a box here, because they need money to put up the test systems to get the contracts for backhaul, and yet, IDT's stance has seemed like they did not want to put in any more capital into this business, and I have not seen any success in bringing in outside capital. Can you sort of discuss your plan for Spectrum?

Yes, I will say a couple things, and then if Marcelo wants to join in, he can, or anybody else can comment on it. You know, by virtue of the fact that we have now sold Corbina at a huge profit, by virtue of the fact we are under a binding agreement with Liberty on Entertainment, will allow us to focus more on IDT Spectrum, which has, we think, very valuable spectrum assets that so far we have not been successful in monetizing. As a matter-of-fact, in about 15 minutes, I'm going to have to leave the conference to go to Washington D.C. and talk to various people with regard to the value of IDT Spectrum.

So it's something that we're focusing on. John Petrillo has done yeoman work in working out what he thinks is the appropriate business plan as we go forward with regard to Spectrum, and that is utilizing the tremendous amount of spectrum that we have into backhaul scenario, which would be very important for the cellular providers in the United States and also the Blackberry providers, the data providers. They need backhaul, and backhaul requirements are going to expand, and this spectrum, we think, is ideal for that particular purpose.

Have we figured it out? No. Have we so far monetized it? No. But obviously, it is something that we have a good team looking at, we are thinking about it everyday. And with the sale of, as I mentioned, Corbina and the contract now with Telecom, we will be able to focus a lot more on IDT Spectrum. You will be hearing a lot more in the future. Marcelo, would you like to add to that?

Yes. Hi, Donna. Thank you so much for your compliments on me becoming CFO. I appreciate -- hope to be working with you in the future.

In addition to everything that Jim said, we are continuing to look for sources of funding and financing for the Spectrum business, and looking for other alternatives in terms of structure of that business to unlock its value, including taking it public, as well as maybe considering a spinoff or some other type of way to unlock and to increase a pure play in product business.

Thanks, Marcelo.

Finally on TuYo, any update as far as customers or the extent of the rollout yet?

Yes, sure, Donna. It's Norm Rosenberg. I will take that one. In terms of number of customers, we had a pretty good month subsequent to the quarter in May. So we're up to about 20,000 subscribers. Not all of those are active, obviously; with a prepaid product, you have to take a look over time, over a two, three-month period to see what the usage is like. But so far, there are a couple of interesting metrics that I think we are happy with in the short-term.

One thing is that the percentage of traffic that is international, which is really going to be the hallmark of this product, is higher than we had projected; it's about 29%, which for a cell phone is actually quite high. You can't compare it to calling card type of patterns; it is actually very high, and it's higher than we had projected.

In terms of the rollout, some of the things that we're looking at today -- and this gets back to what Jim had mentioned -- where there is a mandate now from Howard and from Jim, from Corporate, in other words, to Telecom that we be free cash flow positive in fiscal 2007. And so we have to look at managing our businesses from the top down that way.

From a TuYo prospective, what we have looked at is potentially focusing on a smaller number of markets first and then expanding it to more markets. Instead of saturating about 20 or 25 markets, we might go to 4 or 6. But again, it's really the same addressable market in terms of potential customers. So that is one potential change that we could make. Other than that, so far, it has been slow but steady, and we have seen steadily increasing customer numbers and customer acquisition every month.

Great, thank you.

Andy Baker with Cathay Financial.

Good morning. Thanks for taking the question. First, I just want to congratulate also Marcelo. It could not happen to a nicer guy.

A couple of questions now. One, in the Net2Phone, this quarter, the 14 million of losses, if you back out prior impairment charges, it seems to be about the biggest loss we've seen in a quarter for Net2Phone for quite awhile. I was wondering if you can tell us if that is a direct result of initiatives that you are taking to try to grow the business or what is going on there.

Second, cost savings you talked about, the 15, 20 million that should show up, are those going to show up within the individual business lines, in the SG&A line of Telecom, for instance, or how much of it will show up in Corporate, if any?

Marcelo, if you could address --?

Thank you and great to hear from you again. Let me take your questions in reverse. The $15 million to $20 million in savings to date will be shown in the respective line items of each one of the divisions, okay -- primarily in SG&A. So it's going to be reflected on a segment basis.

As it relates to the Net2Phone increase in losses, it is really what you could call one time in nature. It does not reflect any savings from the restructuring and integration of Net2Phone, but rather a large portion is -- about $4 million -- relates to non-cash compensation in Net2Phone, which is included in our SG&A, primarily related to the fact that upon acquisition of Net2Phone by IDT, any unvested options and unvested restricted shares of Net2Phone had to be accelerated, and the P&L charge relating to that acceleration had to be reflected in the current quarter. As well as about $1.5 million, $1.7 million in restructuring charges that were taken at Net2Phone, primarily for some severances that we already incurred in Q3.

Okay, thanks. And then one other final question, I guess. In the new breakdown of Other, I assume that is where TuYo is in Other in the new Telecom line of business?

That is correct.

And anything else -- what are the other major components of Other?

Sure. In addition to TuYo, you have in there the new initiatives in terms of English as a Second Language product, as well as our Financial Services products, primarily our SiGo offering, which is the prepaid debit card.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) [Thomas Kand] with Kand Brothers & Company.

Jim, a few questions. One, is Motti on the call?

Is who on the call? Motti? No, he is not on the call.

Motti is not on the call at the moment?

No, he is not.

I see. With respect to the goal of having -- is your goal to have profits or cash flow positive -- one of the things that has burdened the Company, as you know, for a long time, has been you just look at the income from operations column, and you just see everything in brackets. And as you know, shareholders generally don’t like to see everything in the negative category. Should we be looking for that column down the road to have items that are not in brackets, or are you referring more to just cash flow positive as opposed to real earnings?

Marcelo will back me up on this. Our goal is -- there are a number of things that we would like to accomplish. Number one, the business environment moves and changes all the time; telecommunications is a difficult business; the margins are thin; there is a lot of pressure, a lot of competition. So we're always looking for new initiatives and new businesses to get involved with. And when you start something, it is not going to do immediately profitable. That is clear.

But having said that, we have the goal of being cash flow positive, operationally positive. We recognize the fact that last year and the year before, if you add up all of the initiatives we were having with Financial Services, with Energy, with English as a Second Language, with Toucan in Europe, with TuYo in the United States, we were trying to do too many things. You can't do everything, and we recognize that. So as time goes on, you will see less brackets in our quarterly financial statements. Marcelo?

Yes, to add to what Jim was saying, we actually are starting to see some real nice improvements in our operating income line. If you exclude that onetime restructuring accrual, the Company is doing a number of things --

I understand that, Marcelo. Let me ask another question, if I could. Is there an ability to assign responsibility to meeting revenue or earnings or cash flow goals to individuals, and if they don't meet those goals, then there are financial consequences? So that there would be specific individuals responsible for specific goals, for example -- I don't know -- whether it is TuYo for example. Norm says there are positive things there. I heard that it was not going according to plan or as well as hoped for. And is there a way to say, well, Mr. or Mrs. X is responsible, and therefore we are going to judge them based upon where they are 3, 6, 18, 24 months out?

This is Jim, and then Norm, because Telecom is taking the lead in this in totally revamping our compensation goals. We have, in conjunction with the compensation committee of the Board of Directors, drafted internally -- or not obviously for public consumption -- but internally, compensation rules, compensation goals, rewards, that are measurable, that are objective, not subjective. And yes, in fact, we are starting to implement them. And we have given certain -- and particularly Telecom -- and Norm can go into this -- Telecom has given certain goals, financial goals, to individuals that run the different subunits. And if they don't fulfill those objective criterion, then there are compensation consequences.

So the answer is yes, the compensation committee is very much involved with this, and Telecom, through Norm, is really carrying the burden when it comes to Telecom. And his model is going to be adopted as we go forward in the other divisions as well. Norm?

Yes, Tom, I can add some color to that, because I have been involved with this for quite some time. In fact, Telecom has actually had an incentive compensation structure for over five years now. And I would say any of our top 30 to 40 people have a couple of interesting characteristics as far as --.

Norm, that's good, but my point is -- take for example TuYo, which we thought was going to be sort of the cat's meow and really a cool product and everything else. My understanding is that so far, it has not lived up to the expectations that everyone -- maybe I had great expectations and people in the Company had more modest expectations. But in terms of, let's say, a product being developed like that, that product, which seems like really a great product, should have certain projections, I would hope, and should have consequences if it does not meet goals and projections.

Tom, I can tell you that the leadership of TuYo has received a fraction of the compensation that they had expected. And it has been tied to all those sorts of metrics, whether it's number of customers, whether it is other metrics related to their P&L; there absolutely has been from day one that kind of structure and people --.

Take for example the VoIP strategy with cable. We were led to believe that that would be a very intelligent way to pursue VoIP without going down a Vonage route, where you're going to lose money on each new customer you get. But my understanding is there have only been six or eight cable companies that have actually signed on to that initiative, though that has been going for more than a year. And my question is, were there realistic goals set up for that? Is there a particular individual, a group responsible for it? Is it still a viable strategy?

We seem to get turned on by what seem like great ideas and very sensible things to do, and then they don't live up to where we think they should be, and the question is, what happened, are there consequences, how do we learn from it? All of these questions, Norm.

Tom, let me just jump in -- it's Jim Courter. Number one, everything can't live up to expectations. But certainly your expectations, I think, were more than fulfilled a long time ago when we sold Net2Phone and bought it back, more than fulfilled when we got the cash from the closing of Corbina, more than fulfilled when we announced the sale of Entertainment. When it comes specifically to cable telephony, that is something that Norm and his team and Kathy Timko and others are looking at right now. We just acquired the complete ownership of Net2Phone, and that is a component of Net2Phone.

I understand.

So if you were excited about it, you were probably excited because of what the former executives of Net2Phone were saying, not what IDT was saying.

The cable strategy -- and I remember sitting with some of the IDT people saying, you know, we need a strategy that is not a race to the bottom, a strategy which can make money. And we are not sure we have one yet, but being a vendor to small- and medium-sized cable companies strikes us as an initial intelligent strategy to pursue. And I said, that sounds pretty good, because racing to the bottom against the Verizon and AT&T and everybody else, who knows where that is going to end.

So that seemed like a very intelligent and wise and cautious way to move. But then when I see that we only have six or eight customers, or whatever the number is, signed up to that strategy, then I wonder was it correct, is it a successful strategy, just not pursued aggressively enough? Does it have to be modified? I don't hear consequences and what happens going forward.

To get to the consequences issue, again, I can tell you directly and firsthand, there are consequences and always have been consequences. When the Company is disappointed by the performance of a particular business unit, then the people who lead that business unit tend to the be disappointed with their compensation.

I think, Norm, what should happen then is, very frankly, the Company should say this is what we thought was a good, conservative, intelligent strategy. We have been pursuing it. It has not worked yet to date. We're not giving up on it, we are giving up on it, we're taking our foot off the gas pedal a little, or we just didn't have our foot down hard enough on the gas pedal. Now we know what the problem is, just market it a little more aggressively -- whatever the proper answer is.

But in terms of excellent transparency -- and I want to compliment you folks on this report, which is really like a breath of fresh air -- keep it up in terms of breaking down divisions and telling us what is going on -- the ability to say to us, listen, we hoped that TuYo was going to do this, it has only done that. This is how we think we can fix it. Or the same thing with VoIP over cable or whatever. Just coming out and speaking very frankly on these issues as we move forward I think is a great thing to do.

Because what we have is, we have a stock which basically trades on a net asset value basis, like a closed-end mutual fund. And take for example -- and then I'm going to let you guys go -- First Avenue. You know, First Avenue is monetizing their spectrum, and the question comes down to how about our spectrum? Were we contacted by the investment bankers relating to the First Avenue transaction? Jim, do you know?

We have been -- on the First Avenue transaction, I am not positive, but we clearly have been looking at First Avenue; they have been successful in monetizing that.

I understand that, but what I am saying is just recently, First Avenue did a transaction which values their spectrum at $600 million or $700 million. And I have been told that our spectrum is the same or better than First Avenue's. And apparently, an investment banker put together a group that did this monetization. And my question is, was IDT Spectrum contacted in any way by the investment banker? If it wasn't, should it have been? Should we ask the management of Spectrum why they weren't involved, and if they knew this was going to happen, that they contact the investment bankers or the potential people who were doing the deal with First Avenue? These are a lot of unanswered questions that I think we would like to know.

I think the best thing is to have Yossi Cohn give you a call after the program and he can (multiple speakers).

Sounds fine. Thank you. That would be great.

So he'll be directly in contact with you, and I have about 30 seconds before I --.

Let me just say, Jim, in conclusion, that Yossi is doing an excellent job.

I know he is.

And I want to compliment you on putting him in the position that he holds at the moment, because he is excellent in dealing with the institutional investment community.

Great, thanks. And we have one last question for me?

Roger (indiscernible) with Société Générale.

Thanks, guys. I have a question really for Jim, and it's sort of dovetailing on the last question. A little bit new to the situation, so I'm sure it's been asked in the past but exactly why is IDT still a public company? It seems to me if everyone looks at this as some sort of net asset play, then it's probably a better form to that as a private entity. You have all that cash sitting there on your balance sheet. Perhaps you can pay the shareholders what you guys think the Company is worth. Then you can go and build these businesses up and take them public or sell them as fit. But to have them in a public entity doesn't seem to be the best way that people can value your Company right now.

We have no intention of taking the Company private at the present time whatsoever. And we are a public company and we have been for ten years. There is a number of things. There is obviously you can compensate people in a non-cash way when you're a public company. We think the price share will go up over time and all of these things manifest themselves, number one.

Number two, when you're a public company, you do have the capability to make acquisitions using other than cash, which is important. And number three, we are pleased with the fact that if you adjust for various things, that there is a number of investors that have done very well by stock appreciation, and we think it will appreciate in the future. So we have the currency being a public company; we can do acquisitions using that currency with the public company; you can reward and reward employees without cash if you're a public company. And so those are the reasons that we are a public company and we anticipate continuing to be one.

I understand that. If you look at a chart of your Company, obviously it is down -- up a little bit of recent days -- but overall it is a down trend. And it just doesn't seem to be the most efficient way to reward investors by having us wait and wait and wait for you to monetize assets, that time, value and money mean something. It just makes, I think, more sense to, the company, we think, is worth X, we can pay everybody this. And then you can pursue your strategies in a more appropriate forum. Thank you.

We appreciate your comments.

Thank you.

Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.