IDT Corp (IDT) 2007 Q1 法說會逐字稿

Good afternoon. My name is Lawrence, and I'll be your conference operator today. At this time, I would like to welcome everyone to the IDT Corporation fiscal first quarter earnings 2007 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] Thank you.

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

Good afternoon, and welcome to IDT Corporation's conference call for the first quarter of our fiscal 2007 which ended on October 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 statements that you may hear during the course of the conference call. During both the prepared remarks and the question-and-answer period to follow, 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 and uncertainties discussed in our reports that we file with the SEC. We assume no obligation to update any forward-looking statements that we made or may make or to update you on the factors that may cause actual results to differ materially from those forecasted.

To begin, a number of the transactions we've spoken about for the past several quarters culminated during this first quarter. Therefore, our financials for the quarter reflect the completion of the sale of both our Entertainment division to Liberty Media as well as the sale of our U.K.-based Toucan consumer phone service business to Pipex Communications.

We have also discussed in the past our companywide cost cutting initiatives. These are being implemented now and are just beginning to manifest themselves in our financials.

That said, in Q1 our SG&A costs were down significantly particularly in our Telecom division leading to overall SG&A reductions of approximately $20 million. As a result of these lower expenses as well as margin improvements in some of our businesses, we produced positive adjusted EBITDA in Q1.

Our CFO, Marcelo Fischer, will discuss this in more detail in a few moments.

Our restructuring efforts will soon materialize in the smaller Board of Directors that we disclosed in the proxy, and the elimination of outside directors on our advisory boards both designed to increase simplicity and add cost savings. Our structuring review process will continue for the next number of months.

As mentioned in our press release, we continue to believe that this program will result in approximately 35 to $40 million in annual savings as we go forward.

Despite these operational achievements, we faced real challenges in the quarter in our core prepaid calling card business. The calling card industry has always been fiercely competitive with minimal pricing power normally forcing us to choose between increasing sales or maintaining margins. In fact, in a few major markets we've seen some competitors reduce prices to unheard of levels.

It goes without saying that IDT will not engage in price practices that make no economic sense to us in the long-term. Nevertheless, IDT will focus on growing market share where we can in some sectors of the market while maintaining profitability.

Towards that end, over the last several weeks of the quarter, we lowered prices on some cards in selected markets in the United States and Europe and we've continued to do so in the second quarter. This may have a dampening effect on our margins in the second quarter, but this is what must be done to sustain our prepaid calling card business as part of the important products that we have at IDT.

As we calibrate the right balance between market share and margins, our share of the market will fluctuate and many times go down, but this practice we believe is essential for our long-term goals of continuing profitability in this product. Goals that will be achieved through the appropriate pricing, regional expansion, and by broadening our distribution relationships.

Through the years we've seen many competitors come and go, mostly go, but we have maintain and grown our market position. We remain the market leader in calling cards.

We intend to maintain that position all the while focusing on delivering the maximum sustainable free cash flow from this business. IDT's debit card business is continuing and should continue to maintain healthy cash flows in the future.

The integration of Net2Phone is a key component in a cost-cutting plan. Product lines and business functions from Net2Phone and IDT Telecom have been integrated, and the longer-term hybridization of our telecom network is progressing nicely.

Net2Phone's two distinct products, SIP, Session Initiation Protocol, voice line and cable telephony have both doubled in size during the past year. It will take, however, a number of quarters before we realize the full operational and financial impacts of these combined networks. As with the SG&A efficiencies, these efforts will not manifest themselves fully until future quarters.

A few quarters ago we took a significant accrual related to the potential liability of certain regulatory charges, and I would like to briefly mention them now. We have submitted our appeals to various regulatory agencies and the review process has begun. In the interim we've chose to pay certain of these accrued fees because of the stiff penalties imposed for the non-payment regardless of our appeals outcome.

I stress that these payments are reflective of our overall strategy for managing the appeal process and not our acquiescence to the methodologies employed in levying the fees.

Moving to IDT Capital our new businesses there have been progressing nicely. Howard Jonas and I are extremely pleased with the progress that we are making.

you know, IDT Capital is our incubator division and as such contains a variety of loosely connected businesses. Despite the number of businesses and their varied fields of focus, all are unified through the strict process governing their development and the financial discipline we exercise in managing them.

We believe that within Capital the next Net2Phone, the next IDT Entertainment or the next [Corbino], all relatively young businesses monetized at the appropriate time yielding extraordinary profits.

During the quarter we made a significant management appointment in IDT Capital with the ascendancy of Steve Brown as co-CEO with David Greenblatt. As most of you know, Steve served for many years at IDT's Chief Financial Officer while engineering the creation, the expansion and the ultimate sale of IDT Entertainment. We're excited by Steve's acceptance of this role and look forward to his guidance as IDT Capital continues to grow.

IDT Capital's largest businesses are three: IDT Energy, local media, which includes CTM brochure display and ethnic grocery brands, which primarily operates under the Vitarroz food label. We have mentioned all of these in past calls.

There are various other initiatives that are small now but are very exciting and have great potential. We will talk about them at a more appropriate time. Suffice it to say now, that they are the new initiatives that will help transform IDT from a predominant telecommunications company of today to its new configuration in the future.

IDT Energy is a young business within the IDT family. One which has grown rapidly and where we continue to see real opportunities.

As an ESCO, or Energy Service Company in New York state, IDT Energy serves as a middleman between the producer and distributor of natural gas and electricity to residential and select small businesses. We offer customers a unique opportunity to save money because of the specific regulatory structure in New York state which encourages consumers via tax incentives to switch to an ESCO provider.

As well, we seek to distinguish ourselves from the competing ESCO's by providing our customers with the best possible pricing for their energy usage needs. This business is not unlike the long distance telephone business during the early 1990's.

Customers are being offered a new way to buy a commodity type server that hitherto was only offered by the incumbent utility. Similar to the long distance market during early deregulation, we are positioned to service this customer and gain their loyalty as the market develops.

Despite its similarities to telecom, there are key differences, and we've focused during the past two years on building the correct team with the specific industry expertise necessary for such a business. We have industry leading talent in customer acquisition, operations and risk management.

Our customer base has expanded dramatically this year from approximately 88 meters at the close of the first quarter of fiscal 2006 to the approximately 258,000 meters we have today. We believe the business continues to grow nicely and presents significant future opportunities.

At this point, I'd like to shift focus for a moment to our capital structure. Reflecting the close of our sale of IDT Entertainment to Liberty Media, we now have approximately 81.6 million shares and roughly 6.3 million options outstanding.

We did not purchase any shares in the open market this quarter but will continue our practice of doing so when we believe the opportunity presents itself. We maintain broad authorization for the purchase of an additional 24.5 million shares.

I'd also like to address the Board changes we proposed for vote at the upcoming shareholder meeting. Our Board members at the corporate and subsidiary levels have played an important role in our decision-making, and we want to ensure our Board continues to serve this role in an efficient and effective manner.

We believe that a smaller Board comprised of members with business experience will be more effective in making business decisions for the Company as we move forward. Many of our past Board members are personal friends of mine and Howard's, and on behalf of Howard and I, I want to thank them for serving so diligently and so hard at IDT.

As a reminder, our annual shareholders meeting will take place at the Company headquarters in Newark on December 14th.

In conclusion, the first quarter of fiscal 2007 has been an important step in the transformation we began last year. Our bottom line reflects the SG&A changes we made over the past several quarters and our focus on financial discipline. At the same time, we face significant new competitive challenges to our top line in our core calling card business.

We are focused on maintaining our core foundation while effectively deploying resources for our future growth. I look forward to reporting to you next quarter on our progress.

I would like now to hand the call over to our CFO, Marcelo Fischer.

Thank you, Jim.

Over the next few minutes I will update you on IDT's financial performance for the first quarter of our fiscal 2007 and discuss some of the trends we are witnessing in our businesses.

As Jim mentioned, this quarter our financials reflect the closing of two major transactions. Subject to certain adjustments, we recognized a net gain of $198 million on our sale of IDT Entertainment to Liberty Media and a gain of $42 million on our sale of Toucan to Pipex Communications.

Operation from IDT Entertainment that still remained during Q1 are reported as discontinued operations while Toucan's operations continue to be reported as ongoing operations within IDT Telecom because of our services agreements with Pipex. I also want to note that included in our net gain on the Entertainment transaction is a preliminary working capital adjustment accrual which reduced the gain by approximately $20 million.

Within the next two months we expect to finalize the working capital adjustment and determine what amount, if any, IDT must pay Liberty Media.

Moving to our financial performance. On a consolidated basis loss from operations, excluding IDT Entertainment, was $15 million for the quarter. For our continuing operations adjusted EBITDA, which we define as our gross profit less our SG&A before non-cash compensation, was a positive $11 million for the quarter.

While this is not cash flow positive when taking into account capital expenditures, minority interest distributions, and other costs that fall below the line, we are encouraged by the progress we are making in bringing the Company closer to cash flow profitability. The steps we have taken over the past several months to reduce operating expenses have begun to show in our SG&A line and I believe we will continue to see additional improvements over the coming quarters as these savings become fully reflected.

Shifting to our major reporting segments, at our IDT Telecom division revenues in Q1 were $462 million representing a decline of 9% in comparison to the fourth quarter, and a decline of 12% in comparison to the year ago period. These revenue declines resulted from lower minutes volume in our U.S. and European calling card businesses as well as continued churn in our U.S. consumer phone services business.

Somewhat offsetting these revenue declines was an uptick in wholesale carrier revenues in the sequential period as the business continued to add additional customers and has begun adding certain new products, including VoIP and mobile solutions, to its product mix.

I would also like to spend a few moments walking you through our IDT Telecom line of business reporting table included in this quarter's earnings release. This quarter we are providing a more comprehensive version building upon the line of business table that we began providing last fiscal year.

As I mentioned last quarter, Net2Phone's results are now incorporated into this presentation as well. Net2Phone's products and operations have been integrated within IDT Telecom, and this is now similarly reflected in our financial reporting.

The bulk of Net2Phone's business, which focuses on selling product to our international resellers, sales channel, is now incorporated under our consumer phone services operations in a line called Net2Phone channel. Net2Phone's calling card business has been included in the results of our U.S. calling card operations, and Net2Phone's wholesale carrier operations are now included within the wholesale line.

The division known as cable telephony, which provides a turnkey telephony solution to small cable operators, has been included in the "Other" line. Our results for the prior periods presented in this table have been reclassified to reflect these changes.

Since Net2Phone historically was reported a single voice over IP segment, I would also like to take a moment to add a level of clarity to the scale of these businesses. In fiscal 2006 the Net2Phone wholesale carrier business had revenues of approximately $5 million, its cable telephony business had revenues of roughly $10 million, and its calling card operations had revenues of approximately $22 million.

The Net2Phone reseller channel had revenues of $14 million in Q1 and has been growing gradually as existing relationships broaden the distribution of our products and we introduced additional product offerings. Gross margins in this business have historically been in the high 30s to low 40% range.

I should note that notwithstanding full operational integration, we do intend to continue using the Net2Phone brand name for certain products.

In our calling card business overall revenues were down 14% in comparison to Q4 and 17% in comparison to the first quarter one year ago. This decline is a combination of low sales across our traditional distribution to local ethnic stores as well as low sales in our European operations.

Sales of our traditional U.S. calling cards distributed through our UTA partnership were down approximately 16% sequentially and 21% in the year-over-year period.

As Jim shared in his remarks, this market has become extremely competitive and our telecom management is focused on running this business for maximum sustained cash flows and continues to adjust pricing to strike the optimal balance of revenue growth and bottom line profitability. During the coming quarters we intend to selectively bring down price on certain cards to regain market share, but not at the expense of long-term profitability to the business.

It is also important to note that while we have been struggling with the top line of this business, the bottom line has been strong. Even as we selectively adjust prices in the coming quarters, I expect the SG&A changes we made during the past several quarters, as well as savings we expect to realize as a result of our network hybridization, to also impact the bottom line and as a result for the business to continue to produce strong cash flows.

On a going forward basis we expect quarterly SG&A expenses in IDT Telecom to be in the 75 to $80 million range. Our ability to reduce SG&A expenses and network related capital spending is particularly important as we seek to regain market share. It will allow us to maintain our operating cash flow margins in this business even if we were to sacrifice some gross margin to drive higher revenues.

Traditionally, we have emphasized our gross margins as a key targeted metric in maximizing the profitability of this business. However, given that our current operating and cost structure even after recent reductions allow for significantly higher minute volumes than we are currently carrying, we have an opportunity to leverage our operating structure and benefit the bottom line even at lower gross margins.

Simply put, we can be as profitable as in the past on an operating and cash flow margin basis even if gross margins were to decline.

Our calling card business carried 3.74 billion minutes in the first quarter as compared to 4.14 billion minutes in the fourth quarter and 4.42 billion minutes in the first quarter one year ago. At the per minute level, gross profit per minute was similar to the high level achieved in the fourth quarter at 1.57 cents per minute.

This also compares favorably to the gross profit of 1.35 cents per minute that we experienced in the first quarter of fiscal 2006. It is also important to note that as Net2Phone is now being reported as part of IDT Telecom, all per-minute figures for the current and prior periods include minutes carried by Net2Phone as well.

On the wholesale carrier side, while continuing to focus on margins, we were also able to increase minute volumes during the first quarter. Wholesale carried 2 billion minutes this quarter as compared to 1.92 billion minutes carried in the fourth quarter and 1.77 billion minutes carried in the first quarter one year ago.

On a per minute basis, gross profit in Q1 was $0.93 compared to $0.78 in the fourth quarter and $0.76 in the first quarter one year ago. This increase in margin per minute were primarily a result of the continuation from the fourth quarter of a number of new higher margin carrier agreements as well as a gradual shift to higher margin minutes.

Though we have been fortunate to see margins steadily pick up in our wholesale business, at this point we believe margins will continue to fluctuate over the broader range we have experienced during the past few quarters.

Revenue for our U.S.-based consumer phone services line of business declined 14% in comparison to the fourth quarter and 33% when compared to the first quarter a year ago. As you know, these declines are entirely reflective of our decision to stop actively marketing this service over a year-and-a-half ago following changes in UNE-P rules.

As mentioned in our earnings release today, despite our introduction of a Triple Play package to complement our existing offerings in this business, we have yet to gain any significant traction with new customers.

As I mentioned earlier, the U.K.-based Toucan business continues to be reported within our financials this quarter under the European consumer phone services line, as it did not qualify for discontinued operations reporting due to our ongoing service agreement with Pipex. Toucan's results for the quarter reflect approximately two months worth of activity and beginning in Q2, we expect this business line to no longer show any financial activity.

Moving to our IDT Capital division. Revenue for the first quarter was $60 million representing an increase of 22% on a sequential basis and 90% year-over-year. The sequential and year-over-year increases reflect primarily the continued growth of IDT Energy, as well as revenue increases in our ethnic growth of the brands business, which was acquired towards the end of fiscal 2006.

In our earnings release today, we have begun providing a line of business detail for IDT Capital similar to that shown for our IDT Telecom division in an effort to better convey the financial results of the various businesses in this segment.

As of the end of the first quarter IDT Energy was servicing approximately 258,000 meters, or about 180,000 customers, compared to roughly 200,000 meters at the end of the fourth quarter. The business has been growing steadily, and we intend to continue reinvesting profits from the business in new customer acquisition.

Since this is a new business, I would like to spend a few moments discussing its operations and financial characteristics in further detail. Generally, this is a cost best to business where each unit of energy used by a customer is marked up creating [our] gross margin.

As the business scales the fixed SG&A infrastructure on the per-customer basis decreases and only medium variable SG&A is necessary. Operational execution in this business is critical as we must ensure that we have appropriate supplies of natural gas and electricity for our customers needs.

This at times presents certain trading opportunities. The prevailing monthly retail price charged to consumers for the power and gas by the incumbent energy providers is generally known ahead of time.

IDT Energy, as a nimble player in this market has the opportunity to take advantage of market volatility and purchase the commodities at a discount to the price we will charge our customers when the opportunity presents. Because the volatility can also cause our cost of energy to increase, we hedge a portion of our exposure to make certain our total cost of commodity will be below the price we will charge our customers.

During this past quarter as wholesale energy, and the electricity prices in particular fell dramatically, we took advantage of such an opportunity. We believe the opportunity was extraordinary and do not expect the gross margins we achieved this quarter of 23% to be the natural run rate of the business.

Our business model for IDT Energy operates under the assumption of gross margins in the 5 to 6% range.

Looking at our balance sheet and our cash flows, we finished the quarter with $808 million in cash, cash equivalents and marketable securities. During Q1 Cap Ex spending, primarily for IDT Telecom which now includes Net2Phone, was $10 million, while restructuring related payments companywide amounted to approximately $5 million.

Working capital deteriorated by about $25 million during the quarter as a result of $8 million we paid on previously accrued regulatory charges, as Jim mentioned earlier, as well as increased inventory in IDT Energy and at ethnic [grocery] brands. We also repaid approximately $5 million in capital lease obligations during the quarter.

In closing, I see some encouraging signs from our performance this quarter while I remain cautiously optimistic about our future. We have executed on our goals set out mid-fiscal 2006 to improve our operating structure and become more efficient and have made significant progress that's now being reflected at our bottom line.

At the same time, we are facing increasing competitive pressure on the top line in our core calling card business with minute volumes and revenues now well below the levels of a year ago. It will be our ability to stem the declining revenues and to eventually increase them that will be the primary determinant of our success in this business much more so than our ability to simply cut costs.

I am encouraged by the hard work of our employees which I am privileged to witness on a daily basis, and believe we will succeed as we tackle these challenges.

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

[OPERATOR INSTRUCTIONS] Your first question is coming from Andy Baker of Cathay Financial.

Good afternoon, guys. A couple of questions for you.

Can you just help me out? Maybe I'm messing up my math but it looks like, I mean, if calling card revenues were down 14% quarter-over-quarter but minutes were only down 10%, and if revenues were down 17% year-over-year but minutes were only down 15, that would sort of suggest that pricing was weaker not stronger, so I guess what am I missing there?

Is there a mix issue? I know last quarter you gave us pretty good detail on some of the changes in mix. Maybe there's something going on there you could clarify for us.

And on the second point, I noticed this is sort of the first quarter that you were -- you seem to be operating cash flow positive in Capital. I was wondering if that's something that we should expect to continue?

Obviously, I Know we got the benefit of Energy this quarter, something we should expect to continue or even if it's something that you want to continue. I mean, obviously, you want to continue to invest in start-up operations as well.

Andy, that's two questions.

First of all, let me say this is Jim who's here. Norm Rosenberg, will answer the first part of that question, of course, CFO of Telecom.

Yossi Cohn is here, the head of IR, Investor Relations at IDT. Monty Lichtenstein, COO of IDT Corp. is here and Marcelo Fischer, and he will answer the second part of your question. Go ahead, Norm.

Yes, thanks. Good afternoon, Andy.

As to your question, yes, it would seem that minutes were down actually at a slower pace than the decline in revenues. That definitely is a mix issue.

Looking at things globally and also understanding that we included Net2Phone into the mix for all previous periods as well, so that would be part of the change.

I think that most of that was driven by the end of the quarter, more the month of October than anything else as we had changed some prices selectively, as I think Marcelo and Jim both alluded to in their comments. So that had the impact of lowering the average revenue per minute over the quarter versus Q4 of '06.

[So is the] Net2Phone inclusion I guess was, brings us down as well as the pricing at the end of the quarter, that's the right reason?

That's correct. Net2Phone's average revenue per minute tends to be lower than all our overall blended revenue per minute globally.

Hi, Andy, it's Marcelo.

In regards to IDT Capital profitability EBITDA, Q1, as I mentioned in my preliminary remarks, was an unusual quarter because we had opportunities in the trading side of the Energy business which allowed us to have a very nice EBITDA for the quarter of about $2 million.

We do not expect to have those same opportunities all the time, we do model our business assuming a 5 to 6% gross margin as opposed to a 23% gross margin that we actually had during the quarter. So if you take out the trading gain that we had this quarter, okay, IDT Capital will continue to probably be EBITDA negative in the range of about $2 million in the future.

Thank you.

Thank you. Your next question is coming from Donna Jaegers of Janco Partners.

Congratulations on showing progress this quarter. Just two quick questions.

The $5 million in restructuring charges, Marcelo, can you give us a little more detail on what those charges went for?

And then maybe a question for Norm. The sharp drop that you had in the ethnic calling volumes, is that mostly due to competition or is there some other trend going on there?

Sure, Donna, how are you?

The restructuring during the quarter is really just a -- mostly a continuation of what we have done already in Q3 and Q4 of the last fiscal year. In Q3 and Q4 we're really reducing the organization mostly the headcount [in] primarily happening in the Telecom division.

During Q1 the $5 million reflects mostly now the integration of Net2Phone of an additional structure into IDT Telecom of an additional structure. That has been almost completed by now, and that's why the $35 million in restructuring.

So that's mostly headcount at Net2Phone?

Yes, it's mostly headcount at Net2Phone. And I'm sorry, it's mostly headcount in the IDT Telecom and Net2Phone divisions combined.

Okay.

Donna, it's Norm. I'll take the question about calling cards, of course.

As you know, we've talked about the relative maturity of the calling card business, and that would lead one to believe that from time to time you're going to see some sequential declines in the business here and there, but, clearly, I think we all agree that declines such as the one that we're unfortunately reporting for Q1 versus Q4, is obviously more than just a natural decline of such a business. And to be honest, the first thing to take into account is that when you consider that we do calling card business in about 25-plus markets on four different continents, I can't give you one reason why it is that the numbers went down.

There are actually a few reasons and the confluence of a few reasons, although a couple of them keep coming up. Number one, obviously, the competition was a factor for us, and competition combined with some of the decisions we've made, as everybody knows since the mid-point of fiscal '06, had a lot to do with that.

So when we started raising rates coming off of relatively weak gross margin quarter in Q2 and we started raising rates through the second half of fiscal '06, so as we continued to do that, so we definitely saw higher revenue per minute in the second half of '06 and then into '07 compared to the first half of '06, but obviously, that started to take its toll.

I think that even that doesn't explain the full amount of it. As I think both Jim and Marcelo alluded to earlier, we've seen some very, very aggressive pricing by some competitors in our different major markets. This is not only in the U.S., it's not only in the Northeast U.S., but we've seen it in certain markets in the U.K., for example, we've seen it in other markets in Europe as well.

One other factor within that is that there are some competitors who are selling cards at prices that indicate that perhaps they're just look to go raise as many cash as they possibly can, and as some companies weaken, you actually get a stricter type of competition at first as people are trying to do everything they can to raise cash.

So we've seen a lot of, what I would say, is perhaps non-sustainable pricing in those marketplaces. That obviously had a pretty big effect because if others are lowering prices as we've been raising prices, so obviously, that's going to have a pretty sharp effect on the calling card business.

The other thing is, to be honest, I think that we spent a lot of time over the last couple of months looking at our business and the way we conduct business and we're not sitting idly by and just sort of watching others take some market share away from us, and it's not just a pricing issue. I think, frankly, we need to re-examine and continually re-examine how we do the business.

We need to get better at how we do the business, we need to do the so-called blocking and tackling a lot better than we do, and we're now doing that. We've embarked upon that.

We're getting closer to our distributors, closer to our customers, rethinking how we distributed the cards, getting deeper, getting more broadly distributed, obviously, all those different, very basic things that I think, frankly, we could always stand to get better at even though I think we're good to begin with.

And finally, when you also consider that towards the end of quarter we started to drop rates, that's the kind of thing that's going to take a little bit of time to, as we know, to sort of flow through the marketplace. So in terms of looking ahead, I think that I would not call this quarter an aberration, so I don't think that you're going to see an immediate bounce back in Q2.

There's even the possibility depending on how long things take to cycle through that we could see some small declines in revenue from Q1 to Q2. But we're hopeful that some of this stuff will show up in the second half of fiscal '07.

Okay. And then just one follow-up.

On the Triple Play you guys mentioned that you weren't getting a whole lot of traction yet. You just started rolling it out sort of in the latter part of the quarter.

What sort of conviction do you have? Are you going to keep at it for another few quarters to try to market the Triple Play?

Yes. I think the main issue as far as not getting traction is not so much a matter of people not wanting to sign up as that we got a kind of a late start. If you look at when we really started rolling it out towards the back end of the quarter and a lot of back end stuff like getting all the call center people ready for it and things to that effect.

We signed up a few hundred customers. I mean really, almost nil, but it's sort of to be expected. I think we had sort of alluded to this on a call either last call or two calls ago as I recall -- if I recall correctly, and that is that this business is going to have something of a short leash.

This is sort of less strategic business than some of our other businesses, and so this is a matter of us sort of taking a shot down field, to use a football term, and if we're able to come up with something that's great. If we don't get the kinds of returns on investment that we would expect to get, we know what a customer should be worth to us, if we can't bring in customers at a low enough cost per sale that would dictate that we would get a good return on investment, then obviously, we're going to be pretty conservative about it.

I would that say to date we've probably spent in aggregate less than $200,000 on this program, so it's still not something that's very high on the radar screen. We'll keep everybody updated, obviously, as we go forward.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Your next question is coming from Paul [Savodis] of [Intana] Management.

Hi. Most of my questions have been answered except for one.

Do the competitors, have the competitors gained an edge in pricing? In the U.S. and abroad? I'm not sure what you mean by an edge in pricing.

Do you mean is their pricing lower or do they have an edge in costs?

Yes. Both.

Okay. I think it's important to differentiate between those two and I'll take them a little bit out of order.

From a cost structure perspective and, obviously, we're not privy to every small line item detail of our competitors books any more than they would be of ours, even though we're a public company, it is our belief given our scale, given our ability to terminate minutes and given what we think is a pretty good structure here, that we are as close to being a low cost provider depending on the destination as anybody out there.

I don't believe that there's anybody out there that has an appreciably better cost structure than we do in providing calling card minutes to just about any destination. Obviously, that's not something I can prove but it's something that we feel pretty confident in.

That having been said, as far as the pricing is concerned, yes, sure, there's always markets where in a given market to a certain destination there are people who have lower priced minutes than us. In fact, if we would look back over the years, we're very rarely the lowest priced provide in any given market and we still are able to build pretty big market share over the years based on the fact that we have staying power, customers know that our cards are going to work, or perhaps better reached distribution wise, but obviously, on the shelf level within the store we've got to fight all the time.

The biggest issue for us, really, is deciding if we want to be the low price provider on top of all of that, and it really comes down to being a matter of what kinds of gross margins, or I should really say operating or free cash flow margins, we're willing to accept. But we're always fighting that particular battle because there's always somebody out there who's a lower priced provider than we are.

Are you planning to continue to basically compete with these low prices?

We're going to pick our spots. I mean there are a lot of things that tell us when it's worth it and when it isn't worth it. A lot of it is tied to trying to predict elasticity.

So for example, if I look at a particular destination from a particular place, let's say, calling the Dominican Republic from New York, for argument's sake, on different cards, if we determine, for example, that by lowering our rates we can get more minutes than we'd giving up, and that we'd be able to get market share and that we plot out those curves and believe that we can get a reward on the back end, then perhaps we'll do it. There are other destinations where we don't feel that it's worth it.

So it's really a matter of us figuring out where the competitors are but not using them as our sole basis for our pricing because sometimes they do things that aren't that rational. We don't want to chase it.

We like to look at ourselves, perhaps it's arrogant, but I think we've been around for a while. So we like to look at ourselves as price setters as opposed to price takers in the market for the most part.

Thank you very much.

We have a follow-up question from Donna Jaegers of Janco Partners.

As long as nobody else was asking questions, I have a few others.

On the Energy business given the volatility in energy prices, how are you guys hedging this volatility, especially given the low gross margins normally in the business?

Hi, Donna.

We do hedge our positions, and we hedge in a way that we're able to generate 5 to 6% gross margins, so as pricing goes up, those hedges take effect, and on the flip side, when pricing come down, as what happened in Q1, okay, then the hedges actually act against us, and we do take some hedging losses, but we make [somebody] with money on the trading side.

Back on the two questions, well, I'll stick with you probably Marcelo.

On the food business that had been sort of running at more like an $8 million per quarter revenue run rate and now it looks like it was $9.2 million I think in the quarter. What are you guys doing differently to grow the business?

Hi, Donna.

We have been growing the business slowly month-to-month. We are introducing some new SKUs, getting rid of some other SKUs, bringing some new product lines, and at the same time just trying to make the organization and the distribution more efficient, okay.

We are in the process of putting in a new ERP system, trying to have better visibility as to the distribution process, fill up the orders and deliveries in a more efficient matter and slowly that's allowing us to grow the revenues.

In addition, when we bought the Vitarroz business, which is most of the ethnic food brand, that business was in clear distress. They were losing shelf space with the retailers and they didn't have the capital to maintain inventories and working capital to grow the business.

We have seen added that working capital bought inventory and we are now rebuilding the relationship with the trade and refilling the shelves. So this is just a natural process of trying to bring that business to profitability and for growth.

Let me add to that. When we bought Vitarroz, we found out that, not to the consumer but to the food outlets, Vitarroz' had a terrible reputation. They were very bad on resupplying the shelves, they were unreliable with regard to the timing of resupplying the shelves and retailers really didn't want to do business with the corporation Vitarroz's.

And changing that understanding of the company, changing that perception takes a period of time and I think what's happening is the fact that although consumers love the product, they're familiar with the brand, that's good, the retailers are starting to recognize the fact there's new leadership here, a new company here, and a new way of operating the business.

Great. Thanks, Jim. And then two quick questions for Norm.

On the wholesale business iBasis and KPN look like they're going to try to get together to garner more scale in the wholesale business. Is this good news because it shrinks, it consolidates the market more or is that more competition for you guys?

I'd probably say it's something neutral. I mea, obviously, if they're going to both going to stay in the business and it's just a combination of the two of them, so they're going to be going after the same business that they had always been going after.

So I don't see that as a major factor unless, you know, the only time that I see it as a big factor is when you get two companies getting together and by combining the two of them, they're able to do something to their network to sort of bring them to the next generation or offer different products that neither would have been able to offer alone.

I think the biggest issue is that we don't always play in the same sand box as those guys because part of the growth that we've seen both in the top line and wholesale in the recent couple of quarters, and more importantly, on the margin side over the past three or four quarters, is due to the fact that we have sort of shifted our business a bit towards somewhat more stable, higher margin service-oriented businesses as opposed to the trading type of wholesale business that we had done in the past.

So it's worked for us until now, and I don't see that this particular deal is going to get in the way of our trying to close those deals and grow the business further.

Great. And then just one last quick [charge].

On the U.S., on the Universal Service Fund charges, how much did that, could you quantify at all how much you guys ended up paying into that on a quarterly basis or how much that's increased your price?

Hi, Donna.

We have been accruing for USF roughly about $2.5 million on a quarterly basis. To date that translating to about close to about $60 million in total accruals of which we have already paid about 8, so we, the net accruing on the books right now is about $52 million, and that increases every quarter by about $3 million, and now last whatever payments we are making as we got invoiced and do it by the USF.

Great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]

Okay. Thank you very much. It was a pleasure. We'll see you next quarter.

Thank you for joining us. Bye.

Thank you. This concludes today's IDT Corporation fiscal first quarter earnings 2007 conference call. You may now disconnect your lines at this time, and have a wonderful day.