IDT Corp (IDT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, this is the operator. Good afternoon. My name is Henry. I will be your conference operator today. At this time, I would like to welcome everyone to the IDT Corp's fiscal third-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 of IDT. Sir, you may begin your conference.

Good afternoon and welcome to IDT Corporation's conference call for the third quarter of our fiscal year 2007, which ended on April 30th. 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 that follows, we may make forward-looking statements either general or specific in nature. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those which 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 statements that we have made or may make or to update you on the factors that may cause actual results to differ materially from those forecasted.

Steve Brown will be reporting on our financial results for this quarter. Steve is a familiar voice to many of you as he was IDT's Chief Financial Officer for many years, having been replaced by Marcelo Fischer while Steve pursued a passionate in entertainment as the head of our entertainment division. Clearly, Steve is a rare breed, expert in both business and finance. With the sale of IDT Entertainment for a significant profit, Steve is returning to his roots as the CFO of IDT Corporation. This decision has, inevitably, affected the positions of other important, loyal and long-term IDT employees. Marcelo Fischer who stood in well as Steve's replacement when Steve moved to entertainment, is staying at IDT in the important role of CFO IDT Telecom, replacing Norm Rosenberg. Norm Rosenberg, a very familiar voice on these calls and our most articulate spokesperson on both business and financial matters, is moving on to explore new opportunities. We will miss him profoundly, both personally and professionally.

Another personnel change is the elevation of Mikhail Leibov, the former CEO and Chairman of IDT Corbina, one of our most profitable telecom ventures, to Chairman of IDT Telecom. We first assigned him to oversee UTA, our calling card distribution business, to address challenges we are facing there, but it soon became apparent that his interests, business acumen, experience in telecom and technical expertise destined him for greater responsibility. We recently designated him as Chairman of IDT Telecom and he is working hand-in-hand with Yona Katz, the CEO of Telecom, to bring greater control, more efficiency, a return to profitability and needed growth to telecom, particularly in the prepaid market, which I will now discuss.

On March 8 of this year, I reported on second-quarter earnings and spent some time on the disappointing results of our calling card division, our core telecom business. I explained that we were convinced that major competitors of ours were engaged in unfair business practices that had created an uneven playing field for our products and that we were unable to compete in the market where our competitors were telling consumers that they had let's say 90 minutes for a call when they were cut off at 60 minutes. Let me report on the current situation.

Our litigation strategy is continuing the pace. We were unsuccessful in our initial request for a preliminary injunctive relief, but are appealing the court's decision and are continuing to pursue the case against those defendants that have not settled. In addition, our actions to level the playing field have attracted the attention of regulatory, enforcement and legislative agencies. Although we cannot predict what conclusions they may reach or actions that they may take. We have also launched a public relations and marketing campaign to bring the issue directly to our consumers. We pledge to our investors and consumers that we will do everything in our power to bring honesty to the market and profitability to our product.

With the downturn in our prepaid calling card business and renewed emphasis on our goal to be operationally profitable, we have continued and accelerated the restructuring drive we commenced in fiscal 2006. By the end of the third quarter of this year, we had seen a reduction of 570 positions and in May, we made a further cut in headcount of approximately 300 individuals. We have also trimmed some small initiatives that did not live up to the promise of growth and significant impact at IDT operations. We expect significant savings from these difficult moves and will be taking a restructuring charge in the fourth quarter. Steve Brown and I will give you more detail on the magnitude of those figures when they become available.

These actions are essential to reach our goal of operational profitability. Given the relationships with the individuals involved, these moves are painful and it would be nice to say that this effort is now behind us and we can, as they say, move on. But from my perspective, this is never over. We will continue to review our infrastructure costs and operational focus on a regular basis to the end that we will have the people and the talent we need for our dynamic businesses and the right engines for growth in diversification, but also no more than we need. As difficult as it may be, this is something that must be done on a regular and ongoing basis.

A word about our dividend policy. The Board of Directors implemented a dividend policy last quarter and kicked it off with a onetime dividend of $0.25 per share and an intention to give quarterly dividends of $0.125 per share going forward. I want you to know that this is a work in progress. We believe that dividends are an element in generating a return to shareholders, but not the one that is appropriate in all situations. Each quarter, our Board of Directors will analyze our operating progress and our cash requirements and make a decision as to whether the cash dividend is in the best interests of our Company and our shareholders. Over the next few quarters and with experience behind us, we will set a long-term policy.

Further, I want you to know that we have also changed our compensation policy for executive and top managers. With so many employees, some of them, very long-term, being asked to leave IDT, we thought it fair and appropriate that those upper-level people remaining have interests more in line with shareholders. To that end, compensation for the top people in the Company will be primarily comprised of base salary and stock options. Cash bonuses and restricted stock have been deemphasized and will be substantially eliminated. The options to be included as a key element of compensation will be valued at a substantial premium to their Black-Scholes valuation. We expect that this will result in lower overall cash compensation to management and management having far more skin in the game.

We are focusing more closely on two other initiatives as well. The first is our efforts to improve the returns on our cash investments. IDT is still blessed with a strong balance sheet and we believe it is one of our distinguishing characteristics. In the past, we have not exploited to the degree we should have the returns on our cash position, so we have created an investment committee, comprised of our most financially sophisticated executives and advisers in conjunction with several of our outside board members. The committee is chaired by Jim Miller, who successfully ran General Dynamics for many years. Also serving on the committee are Mark Oppenheimer, our Lead Director and financial expert, who is a former CEO of Crystallex; and Judith Shore, who manages to be a full-time medical doctor as well as a successful entrepreneur.

We believe that we have the diversity of perspective and expertise to make this body function effectively. The group meets and discusses opportunities often and closely tracks our investments. The goal here is to significantly improve our return on cash investments over time while managing risk.

The second new initiative is also related to the leveraging of our balance sheet, but includes exploiting our transactional experience and expertise. Motti Lichtenstein, our skilled former CEO of Telecom, is heading a new and dedicated M&A group. They are exploring dozens of potential transactions. I will report during the next quarter the results of these two new initiatives.

Despite all of the changes at IDT over the last quarter, we have not changed our core strategies. We will continue to monetize assets when we deem it in our shareholders' best interests. We can't guarantee another Net2Phone, Corbina or Entertainment transaction, but we are vigilant and focused. We will continue to believe in organic growth when we feel we have hit on something worthwhile, such as prepaid calling cards or carrier wholesale. We will continue to diversify as we've done in the past and are doing now. In that regard, our energy and debt businesses are performing well and continue to grow nicely. I will address our other business efforts in the future when they are of sufficient materiality to merit attention. We will continue to protect our strong balance sheet and avoid risky levels of debt.

Finally, we will continue to focus on our spectrum assets. Our 39 GHz spectrum brand licenses cover virtually the entire U.S. population. We hold 931 exclusive economic area licenses across all 50 states and significant other licenses as well. We believe that this is an asset with significant potential and thus merits our close attention today.

I know that we are sharing some difficult news, that IDT and its management team has always faced challenges and explored the opportunities that come with adversity. Many of our finest moments have been as we rose to and above the challenges and I'm excited about our prospects and the goals we're selling setting for ourselves. As we undertake the necessary steps, some of them difficult, for continued growth and success, I'm reminded of the words of one of the most resolute and principal leaders of the Western world in modern times, Sir Winston Churchill, who said it is no use saying we are doing our best. We have got to succeed in doing what is necessary, and we will.

I thank you for your continued support and belief in IDT and look forward to answering your questions a little bit later in this call.

I would now like to turn the call over to our multi-talented, Steve Brown, our former CFO, our former Chairman of Entertainment, and once again, our CFO of IDT Corporation. Steve?

Thank you, Jim, for the kind words. I'm glad to be back.

A proper dissection of the events that occurred in our quarter just ended, Q3 '07, is indicative of both the management style of IDT as well as a reaffirmation of the entrepreneurial spirit of IDT. This is borne out by analyzing how we have reacted to the changing environment of our telecom businesses and reaffirmed by our continued development of our early stage businesses, such as the TuYo products, IDT Energy, IDT Carmel and the many other businesses in development being nurtured to increase shareholder value.

As we mentioned last quarter, we experienced increased competition in our core and club businesses, mostly with competitors who, as Jim said, we believe engage in unfair business practices. This caused us to spring into action in various ways. Firstly, we announced three months ago that we're going to use every legal angle available to not only level the playing field, but also to restore integrity and consumer confidence back into the calling card business. Since this is not a short-term play, we were forced to reevaluate our existing telecom businesses with the following goals. A, first reduce and then stop the decline of our U.S. distributed prepaid calling card product and finally, regain market share. B, as a result of the decrease in the operating profitability, we needed to review all the current new and long-term initiatives to determine which projects we should put on hold. And C, as a result of A and B, we needed to determine if we had excess capacity in our infrastructure course that we can terminate.

Regarding the churn of the prepaid calling cards, we believe that our various efforts so far have been successful in reducing the churn rate and are hopeful that with the continuing efforts and with a more even playing field, that the tide will turn sometime in the first half of fiscal '08.

Regarding the review, we have shut down certain projects and other initiatives are still under review. And as a result, as referred to in our earnings release, 300 positions were eliminated primarily in IDT Telecom. This event will lead to a restructuring charge in Q4, which we are tentatively estimating to be in the $12 million range.

Included in our U.S. prepaid products is our prepaid wireless product marketed as TuYo, where as a percentage of revenue, it still remains less than 5% of the total U.S. prepaid revenue base. It has started to gain nice traction, doubling its revenue quarter over quarter from $3.4 million to $7.3 million. And because of the large marketing costs needed, it incurred an EBITDA loss of $3.9 million, slightly down from $4.1 million loss last quarter. This strain on earnings is expected to continue for the next 18 months or so, but the long-term prospects going forward hopefully will result in a business with sustaining increased cash flow in an industry which potentially can create large shareholder value.

In analyzing the results of the quarter of our telecom units as detailed in our release, let me reiterate what was mentioned in the press release regarding gross margins. Calling card gross margins increased 205 basis points quarter over quarter. This was a result of the realization that aggressively priced cards will not get us back market shares due to what we believe are the unlawful business practices of our competitors, and, accordingly, we managed our prices to maximize gross profit. Whereas we hope to maintain these margins going forward, our businesses continue to be subject to the fluctuations of market conditions.

The gross margins for our other prepaid products went from a negative 10.7% last quarter to a positive 19% this quarter, mostly due to the success in traction of our prepaid wireless product, TuYo, to the selling of the top of cards this quarter. This is significant because the sale of the handsets are sold below cost and for the first time, the gross profit from usage exceeded the gross margin loss from the sale of the handsets. Wholesale gross margins settled out at 13.8% this quarter, down 200 basis points from last quarter. As indicated in our press release, wholesale margins will most likely stay at these levels until our retail businesses start regaining market share.

Telecom's SG&A costs remained fairly stable at $75.8 million this quarter compared to $77.7 million last quarter. As discussed earlier, as a result of our cost-cutting initiatives which started a year ago, Telecom SG&A should continue to drop as the full effect of our implementation will not be realized until Q1 '08. IDT Capital, the non telecommunications entrepreneurial arm of IDT, currently consists of 11 active businesses and several other initiatives in various stages of growth, mostly which are still in the early stage of development.

In terms of being able to bring significant future enterprise value, the two most prime to break out are IDT Energy and IDT Carmel. IDT Carmel, of course, is our portfolio management collections operations business. IDT Energy by nature is a seasonal business, subject to fluctuations in both the weather and the underlying market price for electricity and gas. And despite increased competition, IDT Energy still increased their customer base about 9.8% quarter over quarter to approximately 260,000 customers from 197,000 and increased their meters by 5.1% to 284,000 meters from 270,000.

Please note that while the business model for energy is to sustain gross margins at the 5% to 6% level, we do aim, from time to time, to take advantage of volatility in the price of operations as we did, again, this quarter, resulting in an unusually robust gross margin percentage of 11.2%. We hope to eventually enhance this business by adding the selling of energy-related products and by up selling for the use of the Internet.

We continue to be very bullish in IDT Carmel and although not reflected in the numbers as reported, we are extremely pleased at the performance of the forward flow joint venture.

Again, please note that because we do not have a long enough track record, we are required to use the cost recovery methodology in which all cash received in collections and receivables is first applied against the purchase cost of the portfolio and the cost of the collections are expensed. Once we have established a sufficient track record, we can refer to the effective yield method, which allows us to record collections as revenues and allows us to book the inherent profit of the collection. Had we reported IDT Carmel's results this quarter under the effective yield method, we would have recognized $6.2 million of revenue, $3.4 million of gross profit and $1.9 million of positive EBITDA, as opposed to what we reported under the cost recovery method of revenues of $950,000, negative gross profit of $2.3 million and an EBITDA loss of $3.2 million.

Additionally, IDT Carmel spent $28.1 million this quarter acquiring new portfolios, mostly through the forward flow joint venture and we generated $8.7 million this quarter of cash from collections of these portfolios. The inherent value of our remaining uncollected portfolio at April 30th was $34.3 million.

Whereas we are optimistic that there are other gems in our IDT Capital portfolio, two early-stage initiatives that we are extremely bullish on are the Internet Mobile Group, which is a leading supplier of content for mobile phone users, and Net2Phone ventures, which has several initiatives taking advantage of Net2Phone's robust and cutting-edge technologies and assets. I single out these two because of the significant shareholder value they may one day bring and the fact that these two initiatives will incur significant costs for the next several quarters before they start generating significant revenues. We will discuss these initiatives in further detail in future calls.

Similarly, we hope to unlock shareholder value from many of our hidden treasures. If one examines our financial statements, one may overlook our spectrum assets, our warrant on the 25% of the upside of the former IDT Entertainment subsidiary, now part of Starz Entertainment and Overture Films, of the value of our underlying Company-wide intellectual property, of the intrinsic value of our debt inventory and of the potential incubation businesses in IDT Telecom and IDT Capital.

Turning to our balance sheet, our cash, cash equivalents, marketable securities and additionally our long-term investments combined still total to a robust $750 million or $9.22 per share. If one includes our purchased debt asset of $34.3 million, which is extremely marketable, to our balance, then the liquid assets would total $785 million or $9.64 per share.

On the other side, please note that we still have a deferred tax liability of $107 million on our balance sheet. One other item to note included in other income for the first time are gains in our long-term investments stemming from limited partnerships that we do not have any management control, as required by the EITF Topic B-46, for accounting for limited partnership investments. At this point, I would like to turn the call back to the moderator for the Q&A session.

(OPERATOR INSTRUCTIONS). Donna Jaegers, Janco Partners.

Three questions. On the timing of the lawsuits in the calling card business, is there anything on the calendar yet as far as when the hearings will begin?

This is Jim Courter. Let me just mention that Kathy Timko, the COO of Telecom, is here to speak and answer questions. Motti Lichtenstein, the Chief Operating Officer of IDT Corporation; Steve Brown, CFO, of course is here.

The answer is no. We have -- we say very little about litigation. We requested an expedited hearing and appeal with regard to the injunction and we'll find out what happens.

And then the initiative that you trimmed during the quarter in May, can you talk a little about which ones, is SiGo still with you? English as a second language? What sort of incubated businesses have you trimmed?

Yes, Motti, I'll have Motti answer that question.

On the ESL, we have cut back significantly on the marketing side of it. We are still doing -- we are selling the product with our UTA channel, but we have cut back on spending media dollars. On SiGo as well, we have cut back on the staff and looking at that opportunity closely.

Any others that were cut back significantly?

Enterprise core value as well has been cut back.

I'm sorry, that was what?

Enterprise core value.

Oh, okay, got you. And then --

(multiple speakers) some more initiatives that we probably never discussed that we have incurred some expenses, we've moved away from those. And some of the existing businesses -- smaller businesses have been more in a harvest mode with our future investments.

Okay. And then on the Net2Phone patents, I know you guys have filed several lawsuits against Skype and Vonage. What's the status of those lawsuits?

This is Jim. We initiated the litigation and particularly in intellectual property, things take a real long period of time. So it's very early in the litigation process and I really can't say too much more about that. By the way, Vonage, you're wrong on Vonage. We did not sue Vonage.

Okay, all right, my mistake. Thank you.

And let me just say one other thing and that is what Motti said about those smaller businesses that we are taking another sharper look at and scaling back and Steve mentioned some -- we decided not to go forward on some small things we've never mentioned before. I think the message here is that we, over a period of the last number of quarters have developed a discipline and a funnel, so every initiative that we have launched over the past few years, and it's still ongoing, goes to a very dedicated and disciplined process such that those that can, we believe, have faith in, that can grow, that can be profitable, we keep. And those that don't have long-term prospects of profitability and growth we get rid of as quickly as possible. So we have, I think, greater discipline internally than we have ever had before.

Thanks. I'll get back in queue.

[Gene Rusky], The Prepaid Press.

Good afternoon, Jim, and the rest of the folks there. Just a quick question, most of the analysts agree that the, or concur, that the prepaid calling card industry, particularly, is either flat or maybe a slight negative trend over the next few years. You've trimmed back some people. I'm just curious what the strategy is or how you intend to increase either market share and/or revenue in that sector in light of those developments. Thank you.

Kathy Timko.

We expect that our U.S. debit revenues, our U.S. calling card revenues, are actually going to decline over the next couple of quarters, largely due to the unfair and non-level playing field that we are experiencing right now. We're hoping that those revenues are going to flatten out after --

Can't be heard.

We have seen the rate of decline of those revenues, however slow because of our litigation efforts.

In terms of our calling card revenues in non-U.S. regions, we actually see some growth in those revenues. In Europe there is some limited growth. There's growth in Asia and there's growth in South America as well.

We are also able with our TuYo wireless product to be able to leverage our UTA distribution and our traditional Hispanic customer base and to migrate some of those customers from our traditional calling card business over to our wireless business as well. So we were able to actually move those customers into a different product line that we are offering.

Our [PPS] business as well had seen some growth and that represents an adjacent, but different channel for our calling card products, so we do anticipate to see some limited growth there as well.

Thank you.

Donna Jaegers, Janco Partners.

Unfortunately, I couldn't hear Kathleen's answer, so I don't know what your plans are for prepaid. If maybe she could repeat the main points there. And then I had another question for Motti I guess, the new M&A group that he's heading up. What sort of criteria are you going to use to look at M&A?

Motti, why don't you go and maybe what we'll do is swap mikes. Maybe your mike is not working. I don't know. Go ahead, Motti, why don't you start?

We're looking from two angles. One we're looking from our operating business units to leverage their spreads and their penetration to the marketplace in bringing new products and new technologies to grow the businesses, and that is A. And B, we're looking at the whole world from a different perspective in looking at the new opportunities. We're looking more from the perspective of cash flow predictability, solid businesses; we're not looking to turn around businesses. We're looking for operational efficient businesses and whether it's roll-ups or industries that are going through change etc. and bringing new technology and automation to grow those businesses.

Great. Given that the --

Hi, Donna. I'm sorry you couldn't hear me the first time. Relative to our calling card business, we expect in the U.S. because of the unfair playing field that we're operating in, that our revenues for our U.S. calling card business will actually probably decline over the next couple of quarters and we hope to flatten that decline out. Although we are seeing the rate of that decline slow largely because of what we believe there are litigation activities.

In terms of other opportunities we have in the prepaid space, however, we are seeing some growth in our prepaid calling cards in our non U.S. markets. And Europe is stable to growing slightly in various European markets, and South America is stable to growing as well.

In terms of other prepaid products, however, we actually see that our big opportunity is to leverage our UK distribution channel in our traditional Hispanic customer base, and to migrate some of those customers from our calling card business to our TuYo wireless business, where we're seeing very healthy growth there as well.

At the end of the day, if we can level the playing field, we believe in terms of the delivered minutes on our calling cards, that the minutes that a customer can actually use, IDT delivers the most minutes at the best rates, and so can view that if we can level that playing field and fix the competitive environment that IDT will prosper because they offer the best value calling cards in the market.

Okay, thanks, and then just one quick question for Steve, I guess. It looked like your cash burn from last quarter was around 93 to 94 million. Obviously, EBITDA was negative and then you guys spent I think you said $28 million or so on the -- or 28 million to acquire more debt portfolio. Can you sort of run -- that still leaves a gap of about 35, 40 million. Can you -- I'm assuming working capital --?

The biggest is the dividend; that was approximately $21 million. CapEx was approximately $10 million. And then you have capital lease obligations and changes of working capital. So those are the major -- and also minority interest payments is about $1.8 million.

Great, thanks.

Thank you. That is all the time we have for today's Q&A. This does conclude today's conference call. You may now disconnect your lines at this time and have a wonderful day.