IDT Corp (IDT) 2007 Q2 法說會逐字稿

Good afternoon. At this time I'd like to welcome everyone to the IDT Corp. fiscal second 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).

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

Good afternoon and welcome to IDT's Corporation's conference call for the second quarter of our fiscal (technical difficulties) which ended on January 31st.

I am Jim Courter, CEO and Vice Chairman of IDT Corporation.

Before we begin I must caution all those listening today regarding any forward-looking statements that you may hear during the course of the conference call. During both the prepared remarks and the question-and-answer period that follows we may make forward-looking statements, either general or specific in nature. These statements are subject to risks and uncertainties that may cause actual results to differ materially (technical difficulties) that we anticipate. These risks and uncertainties include but are not limited to specific risks or uncertainties discussed in our reports that we file with the SEC. We assume no obligation to update any forward-looking statement that we've made or may make or to update you on the factors that may cause actual results to differ materially from those forecasted.

I want to begin by saying that we are disappointed with our prepaid calling card results this quarter. This is our core telecom business and it suffered significantly as we faced ever stiffer competition. Yona Katz, our CEO of telecom, addressed this issue during our Investor Day, held in mid-January as he presented his plan to refocus and rebuild the business.

That plan is centered on strengthening and broadening our distribution network, expanding our geographic reach, and then painting a pricing structure that while competitive is also profitable. Based on the results of the last quarter we now believe that our plan must include (technical difficulties) additional steps. IDT is committed to do all that is possible to address this situation and return our core prepaid calling card business to its dominant and profitable past.

We are optimistic that we will be successful but success will take many months. The sharp downward trend in our calling card business has led us to look at everything, ourselves and our competition. We are convinced that our major competitors are engaging in unfair business practices that have created an even playing field for our products.

We believe we can thrive in a level competitive marketplace. We intend to take its extraordinary steps to ensure just that. To that end, today, we have initiated a civil antifraud action in Federal District Court in New York against our principal competitors in the prepaid calling card market.

The suit alleges that these companies have been systematically making false promises and statements regarding the number of minutes they provide to customers on their cards. The suit further alleges that the defendants' fraudulent conduct in the prepaid calling card marketplace has negatively impacted our market share, resulting in a reduction in our gross revenues and also has caused losses to our income.

Through this legal action, we are seeking first and foremost a preliminary injunction against the defendant companies prohibiting them from continuing these fraudulent activities as well as money damages. We invite competition and we have succeeded in the past in a low margin industry. However, we cannot compete on an unfair playing field.

Our customers know that when they dial into our system and are told they have 90 minutes remaining that in fact they will be able to speak on the phone for 90 minutes. We are simply unable to compete in this market if general practices are to tell the customers they have 90 minutes remaining when they don't. When they're told they have one thing and are given another.

Concurrent with this litigation we will also be working to inform the immigrant population that we serve that IDT cards as opposed to those of our (technical difficulties) deliver the minutes that are promised. In addition to ensuring that the competitive landscape is fair, we must also make sure that our operating infrastructure is the most nimble in the industry. Even with the return to a fair playing field we cannot be assured that we will regain lost market share.

The telecom industry will remain competitive and will likely to continue to face declining prices to the detriment of providers and, of course, benefit to consumers. As we have over the past several quarters, we will continue to drive toward an operating infrastructure that is the envy of the industry in all aspects of the business from sales to engineering and technology to back office.

As I have mentioned in the past, we believe our integration with Net2Phone will help in this area as we are able to route traffic and deploy capacity in a more cost-effective manner. We have begun to realize these cost savings and they will continue to accrue over time.

Most importantly, though, we must continue to innovate and improve our customer relationships. IDT, like all other companies, will not cut its way to profitability. If we do not achieve the proper scale on the top line we will not be able to be the industry's low-cost provider. We must continue to introduce new products and improve our sales to ultimately see success from our businesses.

While not pleased with our core telecom performance, we are pleased with our IDT Capital businesses and we are continuing to make significant progress in these diverse areas. Our fundamental philosophy is the same now as it was more than two years ago in Capital and that is to start or buy and incubate diverse businesses while keeping only those that we feel can break out or add operating profits over a short term. The others will be sold, otherwise monetized, or terminated.

Many of these businesses are still in their gestational phase. Do not expect to see positive cash flows until they are fully developed though we remain committed to our policy of demanding prompt results and delivering our potential, with reasonable expectations as to the development developmental timeframe in defining periodic success. Our business managers are held accountable to very specific operating metrics so that even at an early stage, we can determine whether business is ahead or behind schedule.

IDT Carmel, our receivables management and collection business, made particular progress during Q2. We are fortunate to have teamed up with First Financial Asset Management, a quality firm with significant operating experience in the sector. Together we purchased a significantly sizable receivable portfolio. This purchase has accelerated the growth of IDT Carmel's business and we now look forward to providing our operational excellence as we and First Financial together collect and realize value from this portfolio.

As is consistent with our Companywide capital employment philosophy the anticipated returns on capital for this portfolio purchased were in line with those we typically look for and we were there for [comfortable], deploying significant capital towards this business. We will continue to search out such opportunities; and providing we have the operational capacity we would consider acquiring additional receivable portfolios that provide us with attractive returns on capital employed.

IDT Energy continues to grow its customer base and expand its products offerings. During the quarter, we added a total of 12,000 meters, bringing our customer base to 196,000 customers with 270,000 meters. This business is growing nicely; and we are encouraged by our results thus far as well as by its future growth potential. As mentioned during our investment day, we believe the most exciting part of this business still lies ahead as we hope to expand its geographical scope as well as the products we offer our customers.

As we have done in building this business until this point, we will continue to grow in a controlled fashion, testing first and then deploying capital in a meaningful and rational way.

IDT Capital is a busy place. Much has happened there. In this and perhaps another areas we intend to deploy meaningful levels of capital as we go forward.

At this point, I would like to shift focus for a moment to our Capital structure. At the end of the quarter we had approximately 82.2 million shares and, roughly, 5.8 million options outstanding. We did not purchase any shares on the open market this quarter but we'll continue our practice of doing so when we believe the opportunity presents itself. We maintain Board authorization for the purchase of an additional 24.5 million shares.

I would like also to address the recent Board change that occurred after the quarter ended. On February 16th we announced the Rev. Eric Constantino joined our Board of Directors and then [Allen Clemmon] decided to step down from his board position. We are pleased that Allen will continue with IDT in a different capacity.

In conclusion, the second quarter of fiscal 2007 was financially disappointing for our telecom business while also encouraging as our Capital business continued to grow.

I thank you our shareholders for placing faith in our management team and 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. Marcelo.

Thanks, Jim. Over the next few minutes I will update you on IDT's financial performance for the second quarter of our fiscal 2007 and discuss some of the trends we are witnessing in our business. I'd like to begin by walking through certain changes in our recording this quarter.

As you saw in our earnings release earlier today we have adjusted (technical difficulties) our telecom results to better meet our current operations. As a result this segment, formally known as Retail Telecommunications Services, has now been removed and replaced by two component parts namely a segment now known as Prepaid Products and another segment now known as Consumer Phone Services.

As a result of this new breakdown of reporting segments the category known as Other, which was previously also included in Retail Telecommunications Services is now subdivided and appears in both the Prepaid Products segment while predominantly represents our two-year prepaid (indiscernible) products and in the Consumer Phone Services segment where it relates to our Net2Phone cable telephony business.

Moving to our financial performance, on a consolidated basis, loss from operations was $30 million for the quarter. Adjusted EBITDA which we define as our gross profits net our SG&A before non-cash compensation was a negative $6 million for the quarter.

As Jim mentioned, in Q2 our telecom business performed significantly below our internal expectations. As we have said for a number of quarters, this business is facing significant headwinds which we are addressing though we do not yet know whether we will be successful in stemming the tide.

Since the third quarter of fiscal 2006 we have made significant progress in reducing our SG&A expenses and improving operational infrastructure to reach optimum efficient performance. But these savings will more than offset this quarter but decline on the topline and in gross margin. Our [repeat] telecom's revenues in Q2 were $437 million to presenting a decline of 5% in comparison to the first quarter and a decline of 16% in comparison to the year ago period. If we exclude the revenues from Toucan, our European consumer phone services business which (technical difficulties), our first quarter telecom revenues declined 2% in comparison to the first quarter and 14% in comparison to the year ago period.

Due to the (technical difficulties)in lower minute volumes in our U.S. calling card business as well as continued churn in our U.S. Consumer Phone Services business, while being somewhat offset make continue upticks in our wholesale carrier revenues in the sequential and year-over-year period.

In our QuickBase products business, overall revenues were down 4% in comparison to Q1 and down 20% in comparison to the second quarter one year ago. This decline was primarily due to lower sales in our traditional calling card business in the U.S. which are distributed through our EPA partnership.

Last quarter I remarked that pricing in this business seemed to have become irrational at times. As Jim shared in his remarks, we now know that this behavior was in fact quite rational with many of our competitors not providing the dollar value of the services they promised. We will do everything possible to once again level the playing field in this business. We must be competitive for customers to buy our products but we cannot survive if we are competing against phantom pricing by our competition.

The litigation we announced today is an attempt to remedy this problem. In addition, we continue to seek to grow closer to our customers to gain their continued support. Even if we are in fact successful in once again creating a level playing field, it is entirely possible that we will never regain the revenue that we have lost over the past several quarters. We believe that even with a fair playing field, the market will continue to be price-sensitive with little to no pricing power. Our telecom management is focused on running this business for maximum sustained cash flows and will continue to adjust pricing to remain competitive while focused on delivering bottom-line profitability.

The second quarter also witnessed a significant deterioration in our prepaid products growth margins from 23.4% in Q1 to 17.6% in Q2. Several factors contributed to this decline.

First, our cost per minute rose at a faster rate than revenue per minute. In addition we offered higher discounts to our distributors in an attempt to generate higher sales levels. As well, a greater portion of our prepaid solutions revenues which are derived from sales to big box retainers and chain stores came from lower margin (indiscernible) wireless counts. Lastly, given the decline in minutes volumes the relative fixed elements of our cost structure such as [software] related expenses accounted for a larger percentage of overall revenue than in the past.

Our calling card business carried 3.66 billion minutes in the second quarter as compared to 3.78 billion minutes in the first quarter and 4.63 billion minutes in the second quarter one year ago. At the per minute level, gross profit at $0.01.1 per minute was lower than the record high growth profits of $0.01.5 per minute that we experienced over the last two quarters.

On the wholesale carrier side we continued to increase minute volumes while reseeding to a more normalized gross margin during the second quarter.

Also, carried 2.16 billion minutes this quarter as compared to 1.98 billion minutes carried in the first quarter and 1.87 billion minutes carried in the second quarter one year ago. On a per minute basis gross profit in Q2 was $0.82 compared to $0.01 in the first quarter and $0.82 in the second quarter one year ago. Revenues for our U.S.-based consumer phone services line of business declined 7% in comparison to the first quarter and 35% when compared to the second quarter a year ago. As you know we have declined our entirely new reflective about our decision to stop actively marketing the service following the change in the UNE-P rules in 2005.

Despite the revenue decline growth margins in this business improved to approximately 24% as a result of additional customer fees that were added during the quarter, as well as seasonally heavier long distance usage during the holiday month. As of the end of the second quarter, we had approximately 106,000 bundled and 231,000 long distance only customers.

Moving to our IDT Capital division revenue for the first quarter (indiscernible) 75 million representing an increase of 24% on a sequential basis and 70% year over year. The sequential and year-over-year increases are predominantly reflective of the continued growth of our customer base in IDT Energy, as well as seasonally higher natural gas consumption in Q2 as compared to Q1.

As I have spoken about in the past, our business model for IDT Energy is geared towards achieving growth margins in the 5 to 6% range. That said we do take advantage of market price volatility and, again, this quarter we were presented with such opportunities. As a result gross margins came in significantly higher than our budget range at 14%.

I do want to caution, however, that we fully anticipate over a longer cycle that growth margins move for closure to the 5 to 6% range that we budget for in this business. This quarter, I would like to spend some additional time discussing IDT Carmel as it is a newer business with unique financial and operating characteristics. To that effect, please note that (indiscernible) enhanced disclosure last quarter in our IDT Capital segment. In our earnings release today we have began to add line of business detail for IDT Carmel.

IDT Carmel posted its consumer receivables from credit card (indiscernible) utilities and others at a discount to face value in (indiscernible) six to collect these receivables. Receivables management and collections business had matured significantly over the past several years and today the competitive landscape includes a number of public companies, as well as many hundreds of other smaller operators focused on specific niches within the market.

We have seen this broad-based business we participate in several arenas. IDT Carmel is a debt buyer, collector and contingency collector. On the buying side, we look to buy low-priced portfolios relative to their collection value while on the collections side -- whether for our own portfolios or those that we collect on a contingency basis for others, we seek to collect with operational excellence to maximize collections to collect for our employees.

In certain cases, we also outsource collections of our own portfolios to other collectors. We believe this mode of traffic's approach to the market is critical to our long-term success. It will allow us to take advantage of objective return opportunities while not forcing us to be beholden to any single segment of the business. From the accounting perspective we recognize revenue in charge expenses using this cost recovery method.

Under this methodology, all cash received in collection of receivables is first applied against the purchase cost of the receivables portfolio and only once that cost has been recovered do revenues begin to flow through to the income statement. As a result, particularly in the early stages of the business, the P&L was somewhat confusing as it reflects the full cost associated with collections while not showing any corresponding revenues.

As such the matching of revenues and expenses we see -- the same reporting period does not began to occur until the original portfolio cost is totally recovered. During Q2, IDT Carmel purchased receivable portfolios with a total face value of approximately $159 million. In all this was comprised of five purchases for a total cost of approximately $13 million.

As Jim mentioned earlier a large portion of this purchases relates to our joint venture with First Financial Asset Management to which we have committed to purchasing 12 monthly forward flow debt portfolios. We purchased our first such portfolio towards the very end of Q2 for approximately $8.5 million. On the collections side we had gross collections of roughly $2 million during the quarter, which is relatively low compared to the street value purchased today because of the timing of our purchases. Particularly that of our first portfolio purchased together with First Financial Asset Management.

Turning to our balance sheet and cash flows we finished the quarter with $768 million in cash, cash equivalents and marketable securities. Walking through some of the larger movements in our cash flows during Q2 CapEx spending primarily for IDT telecom was approximately $6 million. We now expect total CapEx to be approximately $35 to $40 million for fiscal 2007. Working capital -- which consists primarily of Accounts Receivable, inventories and Accounts Payable -- deteriorated by about $9 million during the quarter primarily as a result of increased AR at IDT energy as a result of the higher number of customers and level of sales achieved in January as compared to October of last year.

Deferred revenues, primarily relating to our calling card business declined by approximately $14 million in Q2, reflecting the revenue softness we have been experiencing in this business. In Q2 we also made approximately $6 million in restructuring-related payments, mostly relating to employee severances. We also borrowed approximately $6 million net in new capital lease obligations during the quarter. Our cash per share as we defined at our recent Investor Day on January 17 was roughly $8.54 as of quarter end.

In closing I am disappointed by the operating and financial performance of our core calling card business this quarter. Despite our best efforts to reduce SG&A expenses overall and actively manage our telecom business from maximized sustainable cash flow we hit significant bumps and our performance was below our expectations. That said I'm hopeful that the hard work of our dedicated employees will prevail, particularly once a fair competitive environment is re-established.

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

(OPERATOR INSTRUCTIONS) Clay Moran of Stanford Group.

Thank you. I don't fully follow the Carmel accounting. Can you just simplify that for us? Did you say $8.5 million in costs were incurred on the P&L and $2 million in revenues so there's a net debt -- is that what you said? Or can you please let us know how that impacted this quarter's P&L?

In this quarter the P&L was impacted negatively by only $2 million. $1.8 million to be precise on the EBITDA line as a result of the IDT Carmel -- the receivables collection of the business. On the cash flow basis which is (indiscernible) to look at because using the accounting (indiscernible) under the cost (indiscernible) method. The P&L is really not a good indicator of activity on the cash flow perspective we actually invested about $17 million toward the new acquisition of portfolios. The main one being the first forward flow portfolio that we announced late in January; and that first post was about $8 million on that one portfolio.

Second question. Haven't had a chance to dig through the numbers yet, but on a consolidated basis gross margins were down pretty significantly. Can you tell us what the drivers of that were?

This is Jim. First of all, just let you know who's on the call. That was Marcelo, obviously, CFO of IDT Corporation. Morris Lichtenstein is here, COO of IDT Corporation, Norm Rosenberg will be answering that question. He is the CFO of IDT Telecom and Yossi Cohn and all of you know Yossi, director of IR. Norm.

I'll take your question today. Obviously telecom is the biggest culprit as far as the overall consolidated drop in gross margin. Within telecom the biggest drop was in our calling card business. That's something that took place both in U.S. and in Europe for several different reasons. Some of which Marcelo went through during his prepared comments.

Number one, won starting in the late part of Q1 and moving into Q2 we had lower rates on our U.S.-based calling card business in order to generate more business as we typically do. So that obviously led to a decline in margins. We did so in select markets in Europe as well. We did it in the UK in the early part of the quarter and then in markets like Spain and Germany, and a couple of others as the quarter went through. So part of it is in general that our rate per minute went down, overall, on the blended basis for calling cards. Our cost per minute actually went up at the same time. So that obviously is going to lead to some margin narrowing.

The other factor is in the U.S. even on the distribution side we gave away more of a distribution discount to our subdistributors. So that's also something that hits the bottom line; it is also something that we tend to in an attempt to drive higher sales volumes.

Finally, another couple of factors are that on the prepaid solution side or overall on our U.S. debit business we sold a lot more of the wireless [pop-up] cards which are very very low margin pieces of business. They are roughly 2, 3% margin cards. These are basically pass-through distribution products that we're selling on behalf of others.

And finally when volumes come down, we have the issue of a relatively fixed cost base so that part of our cost base such as connectivity and other costs along those lines that then obviously make up a higher percentage of our revenues. So we had a scale disadvantage as well. So there are a lot of different factors in a lot of different regions moving in that direction.

Finally on the wholesale side we had guided towards this number I believe on our last call. I think the Q1 margins that we saw in wholesale of about 14% were somewhat outlier, based on some very new high margin business that we had. It was something of a reversion to the mean in the wholesale business.

So our margins came down to about 12.6% for this quarter which is higher than we had been running in the past but as we had been guiding, we think that our margins are going to come back to certain that level that we had seen during fiscal '06. So again a bunch of factors that in the aggregate had a big impact.

Despite the fact that most of the decline was at IDT telecom as Norm explained, also IDT energy we saw the gross margin coming down from Q1. If you recall we tried to model and manage the business to generate about 5, 6% gross margin. In Q1 we had a very large pricing opportunities in the market and we got gross margins for energy at about 24%.

Now in Q2, we still did much better than what we usually model at. We got to a gross margin of 14% but still significantly less than the opportunities we got during Q1.

Thanks. And based on what you said about telecom and prepaid, what's going on should last at least a few more months. It is likely that will see similar margins at least this quarter?

Yes, I would say so. In fact I think we can tick up from where we are and I think we gave this guidance in the release. I think we tick up from where we were in Q2, but I think we need to adjust our margin expectations to a level that is somewhat below that than in the past.

If I could ask what more question. I did notice one line item, one detail line item and that was the IDT consumer phone revenues seemed to take a pretty significant step down sequentially. Can you explain if there was any reason for that accelerated decline?

Yes; sure could. The biggest impact obviously was the fact that we no longer include the Toucan revenue, the European business. That was roughly $17 million I think in revenue in Q1. So that was -- there's two full months of Q1 revenue for Toucan because the sale was completed right at the tail end of September.

So when you take that out that is about $17 million; and so the EBITDA of course increased as a result because it was a negative EBITDA business. But in terms of the revenue mostly, obviously that is driven by the fact that we no longer have Toucan in there; and then the regular U.S. consumer phone services business moved down by about a couple of million bucks, from about $35, $36 million to $33.5 million.

That makes sense. Thank you.

(inaudible) in South America as well as in the Far East we launch recently consumer phone service products both in Argentina and Peru as well as in Hong Kong and we are seeing nice growth in that space.

(OPERATOR INSTRUCTIONS) Donna Jaegers of Janco Partners.

I was curious if -- I don't know who this question belongs to but if someone could give us an update on the relationship with Union TeleCard because obviously there was some -- there were -- you had mentioned during the Analyst Day that you were looking at trying to renegotiate the terms with them. Can you update us on that?

And on Spectrum it looked like you had negative expenses in Spectrum. Did you reverse a reserve or something? Can you comment on that?

(technical difficulty) I will take the first question on UTA and I will pass over the question on the Spectrum to Marcelo.

(indiscernible) is bringing people closer together and the core of the problem was the rates issuance and when it came to understanding that the competitors were playing unfairly, it brought us closer together so the relationship is fine right now. The documents have not been signed but everything is on track together to grow the business back to previous levels, hopefully.

And Donna, talking about IDT Spectrum, when we decided to shut down the business more than a year ago, of course at that point we had a number of accruals in the balance sheet for future payments. Particularly payments for real estate obligations and connectivity obligations. During this quarter what happened is we were ready to negotiate (indiscernible) we had in one of our connectivity agreements and we negotiated more favorably in a way that what we had accrued originally was a bit we overstated. So we reversed about $1.5 million of that accrual in [establishing] that connectivity (indiscernible).

Marcelo, on the severance cost you went through on the balance sheet items or the cash flow items. What was that number again that you paid in service this quarter?

We paid this quarter $6 million.

Thank you.

That's in total. That's not the, seven, it's total restructuring costs. The seven portion was about 4.5, 5. (indiscernible) more like Windstar old real estate to discuss the items.

(OPERATOR INSTRUCTIONS). There appear to be no further questions and I would now like to turn the floor back to Mr. Jim Courter for any closing comments. Please go ahead, Sir.

Thank you very much for being here. We look forward to improvement in the next quarter. We'll see you in about -- talk to you in about three months. Take care. Have a good day.

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