IDT Corp (IDT) 2006 Q4 法說會逐字稿

Good afternoon, my name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the IDT Corporation for fiscal Q4 earnings 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

It is now with great 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 fourth quarter of our fiscal 2006 which, as you know, ended on July 31st. 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 a 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 as you know 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 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.

First, let me discuss Liberty Media.

On September 29, we closed the final stages of our sale of IDT Entertainment to Liberty Media. As you have seen in the press release and the 8K, when we announced the deal the final terms were slightly different from those initially anticipated, with Liberty deciding to maintain a small equity position in IDT in return for increasing the cash compensation paid to IDT.

We believe this is a great deal for both companies. And we welcome Liberty as a continued stockholder in IDT. As I mentioned on the last quarter's call, we are proud of the accomplishments of the IDT employees who built the Entertainment Company and look forward to continuing to share its economic returns in our now now passive role. A word about savings and SG&A.

This quarter, we continued our focus on driving efficiencies in our operations. As I discussed on last quarter's call, I believe we have made a good deal of progress over the past few months that will ensure discipline in all of our businesses as we move forward. As I have said on many occasions in the past, we have no shortage of new business ideas. Howard Jonas, our Company's Chairman, is a perpetual innovator. Our challenge is to manage that innovation with financial discipline. I believe we're doing so at this juncture. And as a result, we are paused for a bright future.

As I mentioned last quarter we made some painful decisions to reduce our workforce to become aligned with our current operational needs. I want to again applaud all of our employees for their hard work and fortitude in what has been a difficult time for us.

On this note, I would like to address our employees for one moment. On the doors of our headquarters in Newark are the words, "Through these doors pass the finest communications professionals in the world." This is ultimately the secret to our business success. Although we are more than a telecommunications company, our success is predicated on the people who walk through those doors on a daily basis. Our future is only a factor of our human capital. I am mindful of this and want to thank all of our employees for their hard work, their ingenuity and the strength. It is a product of our hard work that IDT has maintained and will continue to grow its strong position in a very competitive market.

To my earlier point on financial discipline, I would like to walk through some of the major business decisions we have made since last quarter's call that are reflective of the business review process we have recently completed. I will also spend some time discussing our capital deployment strategy as these decisions today will shape our businesses for years and years to come. I am going to touch quickly on Toucan and Spectrum.

The competitive landscape for our European consumer phone service offering sold under the Toucan brand name changed significantly over the past few months. When we entered this market close to three years ago, Toucan gained market share as a result of its brand imaging and bundled product offering. Over the past few months though, a number of our competitors began offering similar product bundles at reduced prices, particularly offering broadband in the UK for absolutely free.

While we initially continued marketing our product hoping to capitalize on our brand recognition for quality and value, our European management quickly recognized such a path no longer represented the highest return. As a result, we made the decision to sell the business and on September 7th announced that Pipex Communications, a UK-based provider of telecommunications and Internet services agreed to acquire the UK portion of our Toucan business for approximately GBP24 million in cash and stock.

Although the proceeds from the Toucan sale essentially represent a recoupment of our investment in this business, I believe the ramification for this transaction are greater. I believe this is financial discipline in action. We responded to the changing dynamics of a market and faced with several possible directions chose the path we believe represents the highest return to our shareholders, thereby helping to ensure the future success of our entire business.

Spectrum, in addition this past quarter, we closed our IDT Spectrum operation that had been focused on developing a wireless backhaul solution for mobile network operators in the United States. In this case, after a careful review process we decided the business plan was ahead of its time and that it was simply too expensive to carry the personnel costs of the Spectrum division far in advance of operational profitability.

We continue to believe in our Spectrum assets, however, and the potential opportunities they present and we are exploring strategic alternatives for deploying these assets in conjunction with others. We intend to work diligently to ensure we maximize its value for our shareholders. As I mentioned at the outset, IDT is a company founded on innovation opportunity. And while at work this past quarter reviewing our existing businesses, we also devoted significant time to focus on some new initiatives.

Many of these have a long way to go before becoming meaningful to our bottom line. Nonetheless I feel it's important to discuss two of them. One is energy and the other is food.

In energy, in our IDT Capital division, in addition to our more established Brochure Distribution business, we have quickly built a large energy service company or Esco in New York State. This business is predicated on discipline and although low in margin, much the same as many telecom businesses, it will become more accretive as the business continues to scale. We now have over 150,000 customers in New York state.

We have also recently purchased together with our partners at [UTA] a small ethnic food distributor called Vita Rose. Vita Rose which operates our Ethnic Grocery brand segment is a distributor of branded Hispanic food products across the Northeast region of the United States. The Company has built strong brand recognition over 50 years and we intend to leverage that through our existing distribution to the Hispanic market. In certain logistical respects, this is a very different business from calling cards but is also very similar and that it is predicated on strong distribution and brand building to a specific market.

Although at the present time it is still a small business, we believe it presents an interesting opportunity for IDT and our partners at UTA. It will take time and expertise to build Vita Rose and we, by no means, expect instantaneous excess but we are excited about the synergies to our existing businesses.

I believe that these are two good examples of our capital allocation strategy. We are building upon existing infrastructure with a relatively small investment and seeking to leverage our existing inroads to markets. I look forward to periodically updating you on these initiatives and various others in the future.

Our integration with Net2Phone continued the pace this quarter under the leadership of Yona Katz, CEO of IDT Telecom, and his very good team.

Since the end of our first fiscal year, the integration process has quickened. And we have begun the lengthy process of integrating the Net2Phone and IDT Telecom networks. We expect this project to take between 18 to 24 months and when complete to greatly improve our cost structure. To date, we have made significant strides forward by better utilizing our existing capacity by moving more of the network over to Internet protocol, IP, and taking advantage of the historically lower termination rates the IDT network has been able to achieve historically.

As we continue along this hybridization process, we expect to remove certain legacy TDM network components. For example, we are presently in the process of removing a legacy domestic switch in New Jersey for further cost savings. By replacing this switch with IP components on the modular basis we're able to better match our capital expenditures to our specific infrastructure needs, without excess capacity. Additionally, we benefit from the lowering ongoing operating costs of these newer components.

On the financial side, this is the last quarter we will be reporting Net2Phone as a separate segment. Beginning with the first quarter of our fiscal year 2007, Net2Phone's various businesses will be fully rolled into our Telecom segment reporting. Though we do intend to continue providing details on Net2Phone specific product lines, we believe from a financial reporting standpoint its results as a stand-alone will no longer be meaningful.

A word about our capital structure. Through IDT Entertainment transaction, we accomplished the largest stock buyback in our Company's history. We took an approximately 14.9 million IDT Class B shares that were previously held by Liberty, bringing our total shares outstanding to approximately 81.5 million. In addition during the fourth quarter, we purchased an additional $6 million of shares on the open market. And also we announced the closing of the buyback of options with further reduced shares outstanding by 8 million.

As you know, our Board also recently authorized a large buyback program allowing us to procure up to 25 million additional shares regardless of class. This is a large number of shares and we will continue as we always have to act on this authorization by being prudent buyers of our equity in the open market.

Last quarter I spoke a bit about earnings and the value IDT delivered over time to its shareholders. Although perhaps unconventional in comparison to other companies, we believe our approach building and operating businesses while also being open to selling businesses at the correct price has been sensible. You know this story, Net2Phone years ago, Corbina Entertainment, Toucan, et cetera.

As I mentioned then, we also strive to produce free cash flow from our existing businesses and to sustain those cash flows for a long period period of time. This quarter we made significant progress towards delivering on this important goal. As a matter of policy, we do not give specific guidance, but I do believe we are on the road to reaching our goal of becoming cash flow positive.

Financial discipline has been thoroughly implemented in all facets of our businesses; and I believe we're now well situated to achieve these goals.

Finally, fiscal 2006 clearly has been a year of transition for IDT. During the year, we completed a number of significant transactions that proved our ability to continue to create and deliver value for our share of shareholders. We've taken a lot of the expenses that had grown with the Company and we are now once again positioned as a lean company poised for strong performance from our core businesses, who are pursuing new opportunities in a disciplined fashion.

As we enter fiscal 2007, I'm confident in our future and thank you our shareholders for being partners along with us in this journey. I look forward to reporting to you next quarter.

Right now I would like to turn the call over to our CFO, Marcelo Fischer. Marcelo?

Thanks Jim. Over the next few minutes I will update you on IDT's financial performance for the fourth and final quarter of our fiscal 2006 as well as discuss some of the trends we're witnessing in our business.

As Jim mentioned, a number of key transactions occurred during the fourth quarter and extended into our first quarter of fiscal 2007 that began in August. On May 16, we announced our agreement to sell IDT Entertainment to Liberty Media. The transaction was divided into three closing stages because of the various regulatory requirements in each of the businesses' jurisdictions and the first stage closed on August 24 and in two subsequent stages which encompassed the Australian and [Pan-Asian] components of the transaction closed on September 29.

In total, IDT received 14.9 million Class B IDT shares that Liberty previously held, $287 million in cash - including the repayment of an intracompany receivable from IDT Entertainment - and an equity appreciation right for the coming five years. Net of all associated transaction costs, and the intercompany receivable, we expect to realize cash proceeds of approximately $218 million in the first quarter.

As a result of this transaction, IDT Entertainment mapped the criteria for the classification as discontinued operations, beginning with the fourth quarter, and it therefore no longer appeals as a separate operating segment in our financials.

On September 7, we announced our agreement to sell Toucan to Pipex Communications PLC for GBP20 million in cash and GBP4 million equating to 43 million shares of Pipex stock. At current exchange rates this amounts to a total of approximately US$45 million. During the quarter we also finalized our tender offer for employee options, resulting in the retirement of 7.9 million option at $2.00 a piece for a total cost of $15.8 million. We now have a total of 6.7 million options remaining outstanding with an average strike price of $9.54.

Over the past few years, we've significantly curtailed our issuance of stock options and restricted stock to employees. In fiscal 2006, we issued a total of approximately 544,000 shares of restricted stock and a negligible amount of options to employees. This is a sharp reduction from previous years. We do believe that equity grants are an important compensation mechanism to align employee interests with those of our shareholders.

Going forward, we intend to continue using equity in a similar limited but judicious manner to align our workforce with our goal of increasing shareholder value. During our last earnings call on June 7, I had mentioned that we initiated a cost reduction program in an effort to drive down our operating costs. At that point, we had eliminated approximately 375 positions and incurred associated restructuring charges of approximately $14 million with projected annual savings of $15 to $20 million.

During the fourth quarter and continuing now into fiscal 2007, we expanded this cost reduction program, mostly as a result of operating synergies being achieved as a result of integration of Net2Phone's product lines and operation with IDT Telecom. As a result, through September 30, we have cumulatively eliminated approximately approximately 535 positions.

As mentioned in our earnings release today, including charges incurred during our first quarter of fiscal 2007, we estimate total restructuring costs to date to be approximately $23 million. Of these P&L charges, approximately $7 million has been paid out from cash. As a result of the cost reductions achieved to date, we now expect to realize approximately $35 to $40 million in cumulative annual SG&A savings on a going forward basis.

We believe our operating results should gradually reflect these savings in SG&A during fiscal 2007 and fully in fiscal 2008.

Moving toward our financial performance on a consolidated basis, loss from operations excluding Corbina and IDT Entertainment was $44 million for the quarter and $221 million for the full fiscal year. For our continuing operations, adjusted EBITDA - which excludes non-cash compensation - was a loss of $6 million for the quarter and a loss of $88 million for the full fiscal year.

On a more normalized basis, excluding IDT Solutions and Toucan, consolidated adjusted EBITDA in the fourth quarter was a positive $1 million. While this is still not cash flow positive, when taken into account CapEx spending and minority interest distributions, we are very encouraged by the progress we're making in bringing the Company closer to profitability.

Shifting to our major reporting segments at our IDT Telecom division - excluding Corbina - revenues in Q4 were $482 million which was basically flat in comparison to the third quarter and a decline of $48 million or 9% from the year ago period. Revenue declines in the year over year period resulted from continued customer churn in our U.S. consumer phone services business since our decision to pull back on marketing last year, in order to have harvest the business as well as our focus since mid fiscal 2006 on gross margin over revenue growth in our (indiscernible) and wholesale carrier businesses.

Beginning this quarter we have begun further breaking out revenues in our calling card business by region in the Telecom addendum table included in the earnings release. I believe this will provide investors with added clarity to the geographical trends we have seen our overall calling card business. Within our U.S. calling card business, overall revenues were down $7 million or 2.3% in comparison to Q3 and $25 million or 8% in comparison to the fourth quarter one year ago.

It is important to note that this decline was a combination of stronger sales of lower margin wireless (indiscernible) cards and weaker sales in our traditional calling cards sold to local stores in the ethnic market. Sales of our traditional calling cards were down approximately $17 million or 7.3% in the sequential period and $31 million or 12.7% in the year-over-year period. This market remains competitive with price remaining the key differentiator for the retail consumer. In recent months we've maintained our current pricing strategies and continue to operate the business for maximum free cash flow, even in the face of continued price cutting by our competitors.

This has led and will continue to lead to further declines in our U.S. calling card revenue base. However, historically, we have from time to time invested in the business in the form of more aggressive rates with an eye towards recapturing market share and driving topline increases.

During fiscal 2007, if we determine that market conditions present the opportunity for such a strategic shift we will do so. While the timing of the strategic shift are difficult to predict as they are largely dictated by market conditions, our overall strategy for our flagship calling card business remains unchanged. We are focused on delivering the highest possible through cycle cash flows. Overall minutes carried in all our calling card businesses declined to 3.6 billion minutes from 3.9 billion in the third quarter and from 4.3 billion minutes in the fourth quarter one year ago. Offsetting these declines were increases in our gross margins realized on each of these minutes with gross margins growing from 5.3% in the third quarter to 22.6% in the fourth quarter.

It is important to note, though, that the large difference in gross profits from our third quarter was primarily driven by the Telecom regulatory accrual we took in that quarter for the potential future reliability of such fees. Absent that onetime item, gross margin in the third quarter would have been 21.8%.

Looking at the entire calling card business on a per-minute basis, gross profit per minute sold improved from $0.01.36 in the third quarter to $0.01.78 cents this past quarter. Our highest per minute gross profit performance in over two years. On the wholesale carrier side, we also continue to focus on margins though we were able to increase [minute] volumes at the same time during the fourth quarter. Wholesale carried 1.92 billion minutes, a 7.4% increase from the 1.79 billion minutes carried in the third quarter, and the 6.1% increase from the 1.81 billion minutes carried in the fourth quarter one year ago.

Wholesale margins also continued to move upward reaching 12.1% in the fourth quarter, up from 11.2% the quarter earlier and 7.8% in the fourth quarter of fiscal 2005. The increases in margin that were achieved this quarter in comparison to Q3 were primarily a result of a number of new higher margin carrier agreements we have seen in our Wholesale segment.

Looking at our Wholesale carrier business, on a per-minute basis, gross profit per minute sold improved from $0.78 in the third quarter to $0.83 this past quarter.

Moving to our Consumer Phone Services line of business, in the U.S., revenue declined $3 million or 7.8% in comparison to the third quarter and $19 million or 32% when compared to the year ago period. As I mentioned earlier, these declines are entirely reflective of our decision to stop actively marketing the service about a year ago following changes in UNE-P.

In addition to our cutback in marketing dollars, we have also pulled back significantly on other SG&A costs associated with this business. In particular, during June, we closed our Newark-based call center; and as a result the U.S. Consumer Phone Services business continues to perform well from a cash flow perspective. At the end of the fourth quarter, our U.S. Consumer Phone Services business had approximately 134,000 local bundled customers, a decrease of 31,000 customers since the end of Q3; and 257,000 long distance only customersm a decrease of 9000 customers during the quarter.

As Jim mentioned, beginning in the fourth quarter, we moved certain new Hispanic focused initiatives from our Telecom segment to IDT Capital. From a reporting standpoint both ITT Capital and IDT Telecom's prior periods comparative segment results have been reclassified to reflect this new alignment of the businesses. From an operational perspective, we believe this is an important move that better aligns our Hispanic initiatives with ITT Capital's incubation engine, while allowing IDT Telecom management to focus exclusively on the Telecom businesses.

TuYo, our wireless MVNO product geared to the Hispanic market, continues to be reported within IDT Telecom. Moving into ITT Capital results, revenues for the fourth quarter of $50 million representing an increase of $7 million or 15.6% on a sequential basis and $35 million of slightly less than 230% year-over-year. The sequential increase reflects primarily the addition of our new ethnic growth or rebrands business which were responsible for over $5 million in additional revenue during the fourth quarter.

For the Q4 year-over-year period, growth in IDT Energy's businesses were the primary driver of the significant revenue increase. For the full year-over-year period, revenues were $168 million, representing an increase of $128 million or just shy of 320% above revenues for fiscal 2005.

This rapid growth was also mostly the result of the expansion of our energy business. As you know, IDT Energy operates as an ESCO - or Energy Services Company - in New York state. We opened for business in the latter half of 2004 and began servicing customers in November of that year.

Since then, we acquired North American Energy - one of the oldest ESCOs in New York state - and have assembled the industry and operational expertise to grow the business. As of the end of our fiscal year, IDT Energy was servicing approximately 200,000 meters or about 130,000 customers compared to roughly 165,000 meters at the end of the third quarter. The business has been growing steadily and more importantly from a financial perspective has also been self-funding, including the cost of new customer acquisitions.

Because this is a relatively new business, I would like to talk through some important financial characteristics of the business, particularly as they relate to this quarter. Revenues for IDT Energy are determined by customer usage of electricity and natural gas during a given period and the build market price. In seasonally lower natural gas usage periods - such as our fourth and first quarters - revenues naturally decline.

In addition, market price for gas and power fluctuate. For this reason the businesses run with a focus on gross dollar margin in real terms per unit of energy sold and much the same way we look at our Telecom businesses, we are focused on developing a customer base large enough to cover fixed SG&A.

Both in the third and fourth quarters, given our current middle levels, we will successful in covering SG&A costs as well as funding our new customer acquisition costs from within the business itself. And our goal is to continue doing the same way forward. Namely, reinvesting substantially all profits from the business back into (indiscernible) customer acquisition.

For the fourth quarter, IDT Energy was roughly operationally break even and for the full fiscal year, the business realized a small operational profit. At certain points in time, including our most recent third and fourth quarters, market pricing may increase our realized gross margins beyond those reasonably expected based on our normalized projections. And as a result we may show a profit even after the continuing to reinvest in additional customer acquisitions.

We intend to take full advantage of such pricing discrepancies as they arise. But I'm also mindful that achieving this higher margins are more an anomaly than baselined and expect over a longer cycle time to realize lower gross margins of about 5% against which we have built our business model.

It is also important to note some of the working capital movements associated with this business. Each year around April, we begin building guest inventories to ensure appropriate supply during the winter months and then commence withdrawing from this inventory towards the end of the calendar year.

Moving on to Net2Phone, as Jim mentioned we are presently in the process of fully integrating Net2Phone's network and product lines into IDT Telecom and expect to no longer report a separate VoIP segment, come the first quarter of 2007.

In the fourth quarter, Net2Phone revenues were $23 million. A decline of approximately $1 million or 2.2% as compared to the third quarter and then an increase of $3 million or 15.5% when compared to the fourth quarter one year ago. The year-over-year increase was driven by the continued growth of both voice line and cable customers, as well as higher minute volumes.

On an operational level, Net2Phone's loss in Q4 reverted to its historic run rate levels as certain onetime items that appeared in the second and third quarters, relating to our acquisition of the Company, were no longer present.

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Peter [Dern].

Jim, as an old friend I'm very curious about - even though you don't own the Entertainment anymore, you don't spend so much time following Yankee Irving and when's it coming? September is now gone, and maybe I just missed it. Can you tell me what is happening over there even under a different name?

Well, they continue to march forward - Liberty Media - when it comes to the Entertainment division that we had. As you know we sold the whole thing. They kept a small piece at IDT Corp.

Everyone here was okay. Just before the radio program I was talking to two of the individuals that are now working for Liberty that had really -- these are the people that produced Everyone's Hero. That's the movie about Yankee Irving. And they said for whatever reason that these things are cyclical by year and the amount of money that Americans spent going to the movies after the summer was over - that is the first week ended September and the second week in September - was around 70% down over what was a year ago. So that -- you could say one of two things.

That it will come back next year or you could say we were genuises because we sold it when we did. You don't know. But they continue to have opportunities and we continue - of course - we will be working with them and rooting for them. That is, Liberty Media, because we have a five-year potential upside to the gross amount that we receive.

So we thought it was a great transaction; our timing was very good and we wish them the very best.

But you don't know when it's going to be in the theaters?

Oh I'm sorry. Everyone's Hero is in the theaters now.

It is?

Yes, it was launched approximately three weeks ago.

I just missed it. Right. Okay.

Go see it. It's a good movie.

Andrew Rittenberry.

Hey guys, thanks for the question. Actually, I had two questions. The first one, pro forma cash amount you gave. Does that include the restricted cash?

Hi, Andy, it's Marcelo. Yes, it does include all restricted cash.

It does, okay. The second question, just on the Energy business. Could you remind us what the working capital use of that business was in 2006 and how should we think about that for 2007 as a use of cash is you buy inventory in April and you don't work it down until the first or second quarter of the next year? What kind of cash outlay does that require every year?

Andy, thank you, you're right. We ended July 31, 2006, with about $10 million in total working capital investment in the Energy business. That investment is really mostly in accounts receivable, inventories offset by our trade payables. That working capital tends to grow usually as we begin right now our Q1 and Q2, and picking around the middle of Q2 and into Q3 because we are usually buying inventory ahead of the winter months. So we expect that by the end of Q1 for inventories to grow by about $5 million; and we expect to end fiscal 2007 with slightly more than $10 million in working capital I mentioned before because the business is growing quite nicely, and quite fast.

We are seeing customer growth of over 20% on a quarter to quarter basis and that comes with an increase in amounts of receivables. So we should probably end up July 2007 with Media about $16 million or so in working capital.

(OPERATOR INSTRUCTIONS) Ken [Priotl].

Hi, two quick questions. First of all what are your comments on the results of the recent SEC auctions and second question is, how much money do you have in the hedge funds right now?

I will take a shot at the FCC auction. Our comment is that the federal government received an extraordinary sum of money. I don't know exactly what it is but it's in the tens of billions of dollars. These auctions are generally successful. They have been. It's just like once again, manifests the fact that wireless devices is the wave of the future; that people not only are going to get their voice communication but they're going to get stock quotes, entertainment, videos wirelessly.

So in the spectrum from the standpoint of the FCC was a huge success and we're happy that it was successful because eventually they are going to need backhaul, fixed wireless backhaul capability and we will be there with our Spectrum 18 months from now.

Yes, and with regard to the amount of hedge fund, our hedge fund investments do not show in our cash balance. They show in a separate line from the balance sheet on the divestment line and the total amount at July 31 was about $31 million.

Andy Baker.

Thanks a lot. A couple more questions - one, Norm said you were talking about this before and it's [not to] Donna's question before. Was wondering if we can just follow-up on that. If you could talk a little bit about the longer-term cyclical trend around which your results are ebbing and flowing in the calling card business.

I mean we often talk about this business has over the longer-term is probably somewhat of a secular decline. Just how fast do you think that is and what do you guys do about that?

Jim Courter Very good question. Something that we spend a good part of our day on every single day. Marcelo - in his prepared comments - used the word through cycle which is a word we have been kicking around internally probably for the last quarter or two. It's something we borrowed probably from the chemicals business where we want to focus not so much on what we're doing month-to-month or quarter-to-quarter although we are on top of it. But the key for us is to plot out the business both looking forward and looking back, and look at it from a peak to peak and a [trust to trust].

So when we talk about it being either an investment mode or being in harvest mode, the key is really what is your -- how does your flow work, from top -- you know, you want to look at your peaks and you want to look at your troughs. It's almost like looking at a stock. You want to make sure you're making higher highs and higher lows.

Unfortunately, if we plotted out looking back that hasn't always been the case, which means, we need to do a little bit of a better job of managing that particular cycle.

As far as the maturity of the business is concerned it's an extremely mature business. I would not indicate to people we're going to drive 20 to 30% growth from where we are right now. I think we're pretty close to a point on the top line where we max out in this business and it's not the same customers and it's not in the same states or the same specific ethnic groups; but technically the size of the market probably doesn't grow all that much.

The key to us again is to make sure every point in the cycle be it at a peak or a trough, we're pulling as much out of it as we can. There is wireless substitution. Obviously there are other factors involved but we think there's still quite a bit of money to be made in this business.

On the other hand when we look at our businesses outside the U.S., and we haven't had frankly very good results - or the type of results we would've liked out of our European business for example - but when we have looked at that market where those markets, those 17 or 18 markets that we participate in out there, there - when you look at where they are up to on their curve much earlier than where you are here in the United States.

So there should be a lot of upside in those markets, both in terms of the market growing and more to the point of where we can get market share wireless within those markets. And of course Asia and Latin America - very new markets for us, very fast-growing probably still a little bit small in absolute dollars to really register on the radar for us. But that's really where most of our growth in the calling card if not all of the growth in the calling card business going forward will be for us and that's going to be outside of the U.S.

Okay. So I mean then just to rehash, domestically, the goal is you didn't really point to growth or decline over the longer-term move. You said you managed the best you can peak to peak. But obviously as minutes grow SG&A grows with minutes and dollars per minute goes down. Is it reasonable to assume that you come under pressure over time?

Jim Courter Not necessarily, I mean some of the SG&A stuff we've talked about and I guess if you read between the lines of some of the comments we made as far as scaling our business to the current operating needs or whatever language we used. In particular a lot of that has to do with the fact that our minutes are down by design; and there has got to be -- it's almost like a peace dividend. There is the dividend to be had by taking your minutes down.

If you look at our CapEx for the year in Telecom it was under $40 million. It was probably $20 million and some odd dollars lower than it was the last couple of years before that. And it will be lower in '07 perhaps in '08. Even lower than in '07. We have taken a switchdown, a legacy switchdown. We are going to be taking a switchdown.

We are going to be reengineering our connectivity, which is the circuits that connect our switches and connect us to our different suppliers or our customers. A lot of that is something we can do because of the fact we have managed our minutes. And we have always said that we have to look at the business on the basis of your profit per minute because minutes drive your expenses.

It takes as much SG&A to run a $0.20 minute as it does to run a $0.10 minute. And when you try to make it up on volume, that hasn't worked for us in the past. So, I do think over time we will be able to squeeze more cost of this thing if we look at it on an absolute dollar or cents per minute level.

As far as top line is concerned, I think we can get back to where we had been a few quarters ago. So, if the debit business were a $300 million a quarter business maybe we're closer to that. I don't think it's exceeding that all that much.

Thanks a lot, that's very helpful. The question I guess left is for Marcello. Can you talk about the corporate expenses? I mean, obviously that's -- it's down a bit but it seems to bounce around quarter to quarter. What leads to the quarter to quarter movements optional seasonality if you will?

Andy, overall the corporate expenses are more or less flat to slightly down as a result of some of the SG&A savings we had taken. Usually corporate costs are the highest during our Q4 because that's when we recalled also a lot of our auditing and accounting fees from a year to year basis. But excluding that (indiscernible) previously stable and we are going to continue to be looking at our corporate expenses and trying to rightsize corporate after the businesses get rightsized on an overall basis.

Thanks, if I could ask one follow-up question. What is the risk of losing your Spectrum as it goes unused and what is also I guess the risk you'd have to deploy some cash to defend the Spectrum and if so what sort of order of magnitude are we talking about?

There is something I could say but I don't want what to say too much with regard to this. I have spent some time with the commissioners at the SEC. I have spent some time with members of Congress that deal with the SEC that have oversight over the Federal Communications Commission and my reading at the present time is that we are in pretty good shape. That the bulk of our licenses - our 38 GHz licenses - do not become expired until 2010. So our immediate job in the next six months or nine months or 12 months is to make sure that those smaller and probably less valuable licenses are extended to that 2010 timeframe.

So I'm very bullish, very optimistic that we are going to get the regulatory renewals that we need.

Is New York one of the ones that is coming up?

There's part of New York that's coming up. The major ones in New York are not. Those are the 38 GHz and they're not up until 2010.

Clay Moran.

Thank you. The capital spending looks like it was about $53 million for the year. I assume that is for Telecom only. Can you clarify that? And is that sort of a good runrate going forward? What's the purpose of that CapEx? I assume it's going into the network but is that just simply to maintain the network? Or should we expect that CapEx to result in some top line growth in the Telecom business?

The total CapEx for fiscal '06 was about $53 million. Of that, about - like Norm had mentioned before - about $38 to $40 million was Telecom-related. And it's significantly down from previous deals on a going forward basis as we continue to integrate Net2Phone. With IDT Telecom and we are going to start migrating portions of our IDT Telecom network to be more of a IP-based network and by doing so we believe that even though we achieved a lot of SG&A synergies - which I mentioned before the $35 to $40 million - we do believe that they're going to be in the next 18 to 24 further significant savings on the connectivity side and the network side affecting cost of sales as well as a reduction in the overall CapEx as we integrate the network to be more IP-based, without having to incur a lot of the CapEx spending from the network to IT because we have now the Net2Phone asset.

(multiple speakers) spending in CapEx and telecom, a lot of it is indeed maintenance related. Some of it is capitalized labor (indiscernible) working with the development of both the software development as well as network development as well as investments in computer-related items, like cellphones, [little] improvements, etc.

CapEx for 2007 should be less than $40 million because your other current businesses are not capital intensive. Is that right?

Our expectation is to grow in order to achieve that number.

A couple of other quick questions. Can you give us the Net2Phone cable subscribers at the quarter end? And then the other one was just on there was a mention of bundling with DSL and satellite TV here in the near future. Who are your partners on that?

I'll take the first question. Maybe Norm will take the second question. On the first question, our cable subscribers actually have grown from the end of Q3, we had about 60,000. We ended Q4 with about 75,000 customers. So it's growing quite nicely. Cable telephony overall has revenues of about $3 million during Q4.

$3 million?

$3 million, yes.

Okay, I'll take the second one. There are two parts to that. There is going to be a DSL piece which I am pretty sure I can say that that's going to come from Verizon. So that is an extension of our existing wholesale services agreement. The other one it's going to be is it's a satellite TV provider. I apologize but I am not 100% sure if I can disclose which one of the two main satellite TV group pieces it is. And trying to figure out a way to say it between the lines. (multiple speakers)

After the program we will check and they can call you (multiple speakers). And they can call Yossi Cohn to (multiple speakers).

I know which one it is but I am just not sure if we are able to disclose that right now. (multiple speakers)

Okay. very good. Thank you.

(OPERATOR INSTRUCTIONS) Donna Jaegers.

Hi, just two questions I guess, on your idea about bundling. Obviously the Bells are pushing us pretty hard and they're giving discounts. What do you guys think you can bring to the party on this? And I know you have been very disciplined especially as concerned -- as concerning Toucan at exiting the business. On TuYo, ESPN just exited their MVNO business. How long of a leash or how long are you willing to try to grow the TuYo business?

I will take those. I think the first question's related to the bundling. To be honest, I look at bundling as sort of a window of opportunity. I think the product we are going to come out with, well, I know the product we're going to come out with -- the bundle will represent financially, pricewise it will represent an attractive price. Although ultimately I can't say for long whether or not we are going to be able to compete with whatever price changes are made. It really comes down to -- it will be a product that will save customers money if they were to sign up.

It's going to come down to what the economics are for us in terms of bringing in the customer. On the DirecTV piece, or I should say the satellite piece, we're going to be able to benefit by having a pretty good deal in terms of acting as a reseller.

So it's really just a matter of fact we spent a lot of time trying to put together the particular product and the bundles. I think economically it could work. It's really a matter of putting your advertising out there and seeing how many people sign up; then doing the math and figuring out if you are going to get your money back. And there are a couple of nuances to it that could allow us to continue to grow it.

I don't really look at our U.S.-based Consumer Phone Services business as a growth business. If I had to put our businesses into growth or mature categories, I would continue to consider that business mature. So I don't want to mislead anyone into thinking that the ability to bundle a triple play tie product will change the rules of engagement here and will drive this business to growth.

The VoIP business is another question and that obviously remains to be seen. In terms of TuYo, I think there are a few things to look at. Not to spend too much time drawing comparisons or contracts between us and ESPN, I think the biggest issue with ESPN where we sat was this is a company that has a great deal of content. They have some very good content we're all familiar with whether it's on the Web or any of their 12 TV channels or any of their expensive networks, an ability to deliver good information.

But they were going after a very narrow demographic. I think from day one we looked at ESPN as a company that really would have been best suited to take their content, package it, and sell it to another cellphone provider and I guess that's probably the path they're going to go down.

We're looking at it from a different standpoint. Here we are starting -- we're in the business of serving these particular customers that we're going after. So we're going after basically the U.S. Hispanic and the recent immigrant and that market we have been serving for the better part of the last decade.

We also have a price advantage. So unlike ESPN we are -- I think they were expecting people to pay a premium price for the content. We understand price is a leading factor and the leading factor. Competitively in order to be able to get customers we're offering what we feel and continue to be very competitive prices to the people we're trying to sell it to, to call Mexico and other parts of Latin America that they want to call.

Thirdly, it's the power of our distribution which we believe is a good way for us to be able to get these products out to people who want to sell it to. Now that having been said, I think things are a little bit slower than we had hoped originally. We are trying to iron out distribution. We are trying to determine what parts of our calling card distribution network can also be used to sell phones. What parts of them are better off to be used for either top up when somebody is a subscriber or to sell sim cards only.

So there is a lot we are trying to hammer out. As far as leash, we measure leash not in terms of time but more in terms of money. So we always have a relatively short leash on the business like that but I think it's very, very early in terms of being able to figure out whether the business is successful or not.

We crunch those numbers every day, it's a little bit frustrating when we know the answer is it's too early to be able to tell; but we're on top of it and it's not the kind of thing we would allow to go for very long. By the same token on paper, this is a business that really ought to be a good business for us and at a minimum would be a nice add-on to our existing U.S. debit business and would help us fight against some of the wireless substitution we're seeing.

If I could just throw in one last one for Jim, maybe. Any update on the VoIP patent suits as far as any sort of of timing of the court date?

No. There's no updates. When we can talk about it we will but nothing right now. Sorry, Donna.

Thanks.

Okay, thank you very much for joining us on the call. We look forward to talking to you next quarter. Have a good evening. Bye.

Thank you. This concludes today's IDT Corporation fiscal Q4 earnings 2006 conference call. You may now disconnect your lines at this time and have a wonderful evening.