IDT Corp (IDT) 2007 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Jim Courter, CEO and Vice Chairman of IDT Corporation.

Good afternoon and welcome to IDT Corporation's conference call for the fourth quarter of our fiscal year 2007, which ended on July 31st. I'm Jim Courter, CEO and Vice Chairman of IDT Corporation.

Before we begin, I must caution all of 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 filed 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.

I would like first to welcome a new member to our management team, Marc Oppenheimer, who will be reporting our financial results for this quarter. Marc has joined IDT as our Executive Vice President, Chief Financial Officer and Treasurer. Marc has had significant management, operating and financial positions during a 28-year career. He has served as a Director of IDT since April 2006; in fact, our lead director. He served on the Board of Directors of Net2Phone for a number of years. Marc has strong financial expertise, but is focused on adding value and increasing efficiencies in operations in other areas as well. He has proven these abilities in [varied] capacities in several industries. His breadth of experience, which complements our existing team, will make him a valuable addition to IDT's senior management.

He will replace, as you know, former CFO and Treasurer Steve Brown. Steve, we're happy to note, will continue to serve as Chairman of IDT Carmel, and will continue to help develop some of IDT Capital's other businesses. Having served on our board, Marc has an excellent relationship with our independent directors. He has a strong mandate, and has already been burning the midnight oil as he takes a fresh look at our operations. I'm very serious about Marc. He is a professional. He is focused. He is deadly serious. And I think he is perfect right now for IDT.

When we discussed our third-quarter earnings, I spent some time on the disappointing results of our calling card business unit, which has historically been, as you know, the core of our telecom business. During the fourth quarter our competitors continued to aggressively price their services. In addition, the gradual shift in demand away from calling cards and into wireless products has continued unabated, which has further eroded pricing power.

In our wholesale markets as well, we have generally had to pass along portions of our permanent cost savings to our customers in the form of lower prices. These trends have impacted our overall telecom business. And as a result, we have continued to experience declines in our overall permanent price realizations and in our profitability.

At times, though, we've chosen to raise prices, particularly within our calling card business in an effort to increase per-minute prices, which generally results in lower volumes, thus reducing revenues. During our fiscal year 2007, we took this approach and instituted selective price increases on our calling cards in the United States and also in Europe. As a result, we experienced improved revenue per minute price realizations, which resulted in declines in minutes of use and in overall minutes.

Historically, we would have followed this period with a gradual selective lowering of prices to increase volumes. However, in recent periods the relationship broke down, and price decreases did not directly result in increased volumes but further erosion of pricing [powers] struggling. And we need to see how the market will react to our next moves.

As I explained in our last earnings call, we are convinced that major competitors of ours engage in unfair business practices that have created an uneven playing field for our calling card products. We have responded on several levels. We have sued six of our competitors and several settled very quickly. We are working to make distributors and consumers aware that our products deliver the minutes that they promise, while those of many of our competitors do not. Consumer education and awareness are essential to our business strategy.

Finally, we are fully cooperating with investigations now underway at the FTC, the Federal Trade Commission, and by various states' attorney generals into prepaid calling card practices. By the way, I've met personally with more than a dozen of attorney generals throughout the United States. Both federal and virtually all state consumer protection laws were written to protect consumers from the very kind of fraudulent sales and marketing tactics employed by unscrupulous operators in the calling card industry. Moreover, legislation was recently introduced in the United States Congress to enhance these protections.

In the quarter we also settled with Aerotel litigation for what we believe to be a fair amount. This settlement removes a significant cloud of uncertainty and eliminates one more source of distraction for our management team. We continue to 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.

There are two segments, however, of telecom where we're very pleased; we are seeing continued growth and profitability. The first is our wholesale telecommunications service segment, which carries our international telecommunications traffic and the international traffic of other telecommunications companies. And secondly is the TuYo Mobile brand, which is our wireless unit of IDT Telecom. First let me just focus on wholesale.

IDT wholesale telecommunications services, which accents the sales channel, as you know, for all telecommunications services sold to our wholesale customers, utilizes our proprietary least cost routing system and capitalizes on our own volume of international long-distance telephone traffic generated on our calling card business. With aggressive purchasing strategies and extensive experience in providing circuits, we're able to provide major carriers and niche carriers alike with rates that, we believe, are often lower internationally than our competitors.

Wholesale telecommunications service revenues were 645 million, approximately, in fiscal 2007, compared with about 597 million in 2006, compared to about 592 million in 2005. So the uptick is continuing.

During fiscal 2007, IDT Telecom's wholesale carrier continued operating as a full-service telecommunications provider. Our voice services business (inaudible) over $20 billion minutes overall, making IDT one of the largest carriers of international minutes worldwide.

In addition to offering competitive rates to our carrier customers, we have also centered our sales and marketing efforts around our ability to offer the high-quality connections that these providers often require. To that end, we have broadened our wholesale carrier services offerings to include higher-priced premium services, in which we guarantee higher-quality connections based upon a set of predetermined quality measuring criteria. These services meet a growing need for some of our customers, who are providing services to high-value, quality-conscious retail customers. As of July 31, 2007, our wholesale carrier services business had approximately 620 customers. Including vendors, IDT has over [804] carrier relationships globally.

The second telecom division [in] which we are seeing continued growth is TuYo Mobile. TuYo aims to take advantage of IDT's existing prepaid platform infrastructure and competitive international termination rates to provide low-cost wireless phone service to the US Hispanic community, which currently comprises a large proportion of our calling card customer base. This service was launched as a response to the ongoing and intensifying trend of wireless substitution in the prepaid market segment, wherein traditional calling card users have been transitioning from wireline phones to mobile phones to make their calls.

TuYo Mobile launched commercial operations in November 2005. And although it is an early growth stage company, it has sold approximately 244,000 handsets. TuYo's handsets are presently distributed through third-party cellular distributors and through local ethnic markets affiliated with UTA, and in as well (inaudible) Sam's Club locations. We expect to see continued growth for TuYo moving into fiscal 2008.

Despite the current downturn in our prepaid calling card business, we've placed renewed and intense emphasis on achieving operational profitability. To that end, we have continued the restructuring drive we commenced toward the end of the third quarter of fiscal 2006, and have executed a company-wide cost-saving program to better align our infrastructure to our current business needs.

As of July 31, 2007, this program resulted in the termination of approximately 880 employees. These terminations resulted in approximately 25 million and 20 million in severance costs in fiscal 2007 and 2006, respectively. We expect a reduction of approximately 45 to 50 million in annual expenses as a result of these terminations.

Looking forward to fiscal 2008, we currently anticipate that total capital expenditures for our divisions will be in the 20 to $30 million range. Our near-term focus is on streamlining our global network through the hybridization of IDT and our acquisition Net2Phone.

Even though we are currently navigating some difficult times in the telecom business, I am encouraged by a few of the success stories we have had in fiscal 2007. In the first quarter 2007, we completed the sale of IDT Entertainment, as you know, recording a gain of approximately $200 million. In the first quarter of fiscal 2007 we also sold our United Kingdom-based consumer phone service business, Toucan, for $46 million. We recorded a gain of 45 million on the sale of Toucan. These are positive events, and we may continue to monetize additional businesses if and when the opportunity presents itself.

A word about our dividend policy. On July 31st we paid our second quarterly cash dividend of $10 million. Since then our board of directors has elected not to pay a dividend for the current quarter, and has determined that future dividends will be weighed against our opportunities to appropriately deploy capital and on our financial resources and operational needs. And during the fourth quarter we purchased an aggregate of 1.7 million shares of our common and Class B stock for $17.5 million under our stock buyback program. We believe in our company and stand by our shareholders during these difficult times.

I thank you for your continued support and belief in IDT. I look forward to answering your questions a little bit later in the call. I would now like to turn the call over to our new Executive Vice President, CFO and Treasurer, Marc Oppenheimer.

Thanks, Jim, for your kind words, and thank you, Howard, for the opportunity to create lasting value together with our management team.

Over the next few minutes, I will update you on IDT's financial performance for the fourth quarter of our fiscal 2007 and discuss some of the trends we are witnessing in our business, as well as some of our plans for the future. I'd like to begin by walking through a change that we have reflected in our earnings releases quarter.

As you saw in our earnings release earlier today, we have removed our ESCO business, IDT Energy, from our IDT Capital segment, and are showing it as its own segment in order to better report on this now larger and growing business.

Moving to our financial performance, on a consolidated basis, the loss from operations was $124 million for the quarter. Adjusted EBITDA, which we define as our gross profit less SG&A expenses before stock-based compensation, was -$77 million for the quarter.

As Jim mentioned, in the fourth quarter our telecom business continued to perform significantly below our expectation. As we have said for a number of quarters, this business is facing significant headwinds, which we continue to address, but we do not yet know when or 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 rationalizing operational infrastructure to reach optimum efficient performance.

Our telecom revenues in the fourth quarter were $424 million, representing an increase of 4.1% in comparison to the third quarter, and a decline of 16.2% in comparison to the year-ago period. We know that our competitors are not providing all of the services they promised. We will do everything we can to level the playing field in this business. We must be competitive for customers to buy our products, but we cannot compete effectively against phantom pricing by our competition.

Even if we are in fact successful in leveling the playing field, it is possible that we will never regain the revenue levels we saw before the past several quarters. We believe that 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 we'll continue to adjust pricing to remain competitive while remaining focused on operating it profitably.

The fourth quarter also witnessed the significant deterioration in our Prepaid Products gross margins from 20.5% in the third quarter to 17.9% in the fourth quarter. Several factors contributed to this decline.

First, our costs per minute rose at a faster rate than our revenue per minute price increases, partially as a result of our thorough review during the fourth quarter of outstanding disputes that we had with wholesale carrier vendors.

Second, we offered higher discounts to our distributors in an attempt to generate higher sales levels.

Third, a greater portion of our prepaid solutions revenues, which are derived from sales to big box retailers and chain stores, came from lower-margin products such as pop-up wireless cards in which we act as resellers.

Lastly, given the steady decline in the last few quarters in minutes volumes, the relative fixed elements of our cost structures such as connectivity-related expenses accounted for a larger percentage of overall revenue than in the past.

Our prepaid product business carried 2.5 billion minutes in the fourth quarter, as compared to 2.6 billion minutes in the third quarter and 3.7 billion minutes carried in the fourth quarter one year ago. At the per-minute level, gross profit at $0.0121 per minute in the fourth quarter was lower than the $0.0144 per minute that we experienced during the third quarter.

On the wholesale carrier side, we continued to increase minute volumes. Wholesale carried 3.4 billion minutes this quarter, as compared to 3 billion minutes carried in the third quarter and 2.5 billion minutes in the fourth quarter one year ago. On a per-minute basis, gross profit in the fourth quarter was $0.043 compared to $0.056 in the third quarter.

Revenues for our US-based consumer phone services line of business declined 2.1% in comparison to the third quarter and declined 53.6% when compared to the fourth quarter a year ago. As you know, the decline is reflective of our decision to stop actively marketing the service following the change in the UNE-P rules in 2005. As of the end of the fourth quarter, we had approximately 78,000 bundled and 207,000 long-distance-only customers.

IDT Energy, which as I mentioned earlier we now report as a separate segment, has seen significant growth in its customer base, leading to continued revenue growth. As of the end of the fourth quarter, IDT Energy serviced approximately 300,000 meters, all in New York State, compared to approximately 284,000 meters at the end of the third quarter of fiscal 2007. Seasonally lower gas revenues have more than offset seasonally higher electric revenues in the fourth quarter of fiscal year-end 2007.

Gross margins in IDT Energy for the quarter were 10.1%. Gross margins continued to remain strong as a result of our managing the direct costs and taking advantage of unique market opportunities. We anticipate that gross margins in IDT Energy will range between 6 and 7% in fiscal 2008.

Moving to our IDT Capital division, revenues for the fourth quarter were $23 million, representing an increase of 11.9% on a sequential basis and 7.4% year-over-year. The sequential and year-over-year increases are predominantly reflective of the continued growth in our IDT Carmel debt collections business. IDT Carmel, as you know, operates aged receivables buyer and collection businesses. In accordance with accounting rules and guidelines, through fiscal 2007, we use the cost recovery method of accounting to account for our investments and receivable portfolios. During the fourth quarter, we believe that we established a sufficient track record for assessing returns on our receivable portfolio investments, such that we will now utilize the effective yield method of accounting beginning August 1, 2007.

The effective yield method allows us to record a portion of each dollar collected as revenues. We believe that this method more accurately reflects the results of operations and cash flows of this business. Had we reported IDT Carmel's results this quarter under the effective yield method, we would have recognized approximately $9 million of revenue, approximately $4.9 million of gross profit, and $2.8 million of positive EBITDA, as opposed to what we reported under the cost recovery method, which was revenues of $1.8 million, negative gross profit of $3.1 million, and an EBITDA loss of $5.2 million.

Additionally, during the fourth quarter, IDT Carmel purchased receivable portfolios with a total face value of approximately $370 million in 13 separate transactions for a total cost of approximately $30 million, compared to the third quarter where we purchased $300 million in face value in eight transactions for approximately $30 million.

Turning to our balance sheet and cash flows, we ended the quarter and fiscal year with $661 million in cash, cash equivalents, marketable securities and investments. Walking through some of the larger cash flow movements during the fourth quarter, CapEx spending, which occurred primarily in IDT Telecom, was approximately $10 million. Cash used for operations was approximately $18 million during this quarter. IDT Carmel invested approximately $30 million to purchase receivable portfolios and collected approximately $14 million during the quarter.

On July 31st we paid our second quarterly cash dividend in the amount of $10.2 million. As mentioned by Jim, our board of directors has elected not to pay a dividend this quarter and determined that future dividends will depend on the Company's opportunities to deploy capital, as well as financial resources and operational needs.

We also repurchased approximately 1.7 million shares during the fourth quarter for $17.5 million. In this stock repurchase, we purchased 182,000 common shares and 1.5 million Class B shares. As of July 31st, our cash, cash equivalent, marketable securities and investments approximated $8.18 per share.

We strive to be very clear about both the scope and the substance of our challenges and opportunities, and the need to address those challenges realistically and with a sense of urgency. The fourth quarter was a major setback in the strategic transformation of our company, and we know that the only way to get healthy is to fully understand our problems, meet them head on, and fix them.

First, it's important to note that with our earlier years of success has come much more complexity in our business -- more customers, more business initiatives, and more products. The game is really quite different, and frankly, that increased complexity has led to some challenges. We know that the first thing we need to do is make some basic changes in the way that we operate in order to put ourselves in the best position to succeed.

In that connection, we have established five priorities that need immediate attention -- unrelenting focus on maximizing our near and long-term cash flows; the establishment of a lower and more flexible cost base; the creation of a more efficient, focused and accountable operating structure; changing our culture to one that has a complete commitment to engaging collaboratively with the people outside our walls that are critical to our success; and finally, making IDT a great place to work.

We are committed to delivering on these changes because they will provide the foundation that we must have for IDT's success as we develop our plans for the future. These problems have been with us for some time, and we have no illusions today that these changes can occur overnight. I believe that in the next 12 months, as we adopt these priorities, we will make significant progress and we look forward to continue to provide you with status reports. That said, I'm hopeful that the hard work of our dedicated employees will prevail.

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

(OPERATOR INSTRUCTIONS). Donna Jaegers, Janco Partners.

A question on the lawsuits that you guys have filed in the calling card arena. Any sort of update as far as timing on those lawsuits?

Marc and I will attempt to answer your questions this evening, this afternoon. On the litigation, it's important to keep in mind that the litigation is just one of a multi-pronged strategy to even the playing field with regard to the prepaid calling cards.

The litigation -- in fact, the best part of the litigation, I think, occurred right away when three of the defendants basically conceded that they were not disclosing appropriately the information on their calling cards or on their prompts, and have changed their behavior.

And the next best thing with regard to the litigation is the fact that through discovery, we have found out -- and this is through e-mail traffic and also testimony in open court -- that some people [at] our competitors in the calling card industry have admitted internally, and now it's exposed, that they were giving false information to consumers. We have, for example, e-mail traffic that we have given to various attorney generals under the law that says -- for example, one competitor has an e-mail traffic going back between himself, the service provider, and distributors saying let's [prompt] 150 minutes to Guatemala and give our customers 65 minutes. We have information such as that through the litigation; that's one of the best parts of the litigation.

But we don't think this even playing field scenario is going to be produced solely because of litigation. That's the reason that we have spent time speaking to members of Congress. And there's legislation that's introduced in Congress, giving the Federal Trade Commission clarity that they have jurisdiction over calling cards. Right now, they didn't know they have jurisdiction over calling cards because of the federal communications carve-out. The FTC is rolling up their sleeves. They have been talking to various attorney generals throughout the United States. And our hope is, through increased vigilance by the attorney generals, and increased enforcement effort by the FTC, the industry will be cleaned up and we'll be able to compete on an even playing field.

We also, finally, have another effort, and that is public relations. We have spoken to consumers groups. We are advertising the fact that with IDT, you get what you pay for, and some of our competitors you don't. So it's a long, multi-pronged effort, and the litigation is just one of those prongs in our strategy.

And as far as the timing of the litigation, is there any dates yet at all, Jim?

No. We feel that probably in the late fall of this year or the early winter of this year we'll be in court again on the litigation. But once again, we're not putting all of our ducks on the litigation side. I think the most important thing is the FTC and the attorney generals. They're the ones that can clean up the industry.

I know you guys were trying to compete. As you mentioned, you were doing more marketing in calling cards, trying to advertise that you had fair cards. Any sort of breakout into what that spending was in the quarter, and you expect that to continue, I would imagine, for a few quarters?

It's going to be more. Very little has been spent right now on marketing. And so that really has not kicked in yet. So I think whatever we spent is kind of not very important and inconsequential. But that's going to be ramped up.

I'll get back into queue and let other people (multiple speakers)

Thank you. That appears to be all the time we have left for the Q&A session. This concludes today's conference call. You may now disconnect your line. Have a wonderful day.