IDT Corp (IDT) 2008 Q1 法說會逐字稿

Good afternoon. My name is Jeanie, and I will be your conference operator today. At this time I would like to welcome everyone to the IDT Corporation first quarter 2008 earnings 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 with great pleasure to turn the floor over to your host, Mr. Jim Courter, Chief Executive Officer and Vice Chairman of IDT Corporation. Sir, you may begin your conference.

Thank you very much. Thank you for joining me. It is James Courter. This is being recorded live. I am speaking live in the studios at 520 Broad Street in Newark. Welcome to our conference call which is obviously, reporting on the first quarter of our earnings, first quarter of fiscal year 2008, which of course ended October 31 of this calendar year 2007. Before we begin, I must caution all of those listening today regarding any forward-looking statements that may -- that you may hear during the course of the conference call, during both the prepared remarks and the Q&A 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 obviously not limited to specific risks, uncertainties discussed in the 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 that we forecast.

First of all, let me start out with an apology about last quarter's call. I apologize for the technical difficulties we had during that call. We recorded and rerecorded. I thought it was well, and we started to launch into the Q&A session, and we were abruptly terminated by the conference call provider without any warning to IDT or any warning to our callers. We will make every precaution, take every opportunity to ensure that something like that does not happen again. It was a personal embarrassment to me and obviously an embarrassment to the Company.

On the call with me this afternoon are our Executive Vice President CFO, Marc Oppenheimer, and Steve Brown, who is a newly appointed COO, Chief Operating Officer. As you know, Steve previously served as our CFO for many years, and then he went over to IDT Entertainment, overseeing its growth and subsequent successful sale to Liberty Media. It is very comforting to both Howard Jonas and myself to know that Steve is back in the Executive Suite at IDT Corporation. We have, as you know been reporting on a regular basis about the difficulties we've been having with our prepaid calling card products and the fact that our sales, our margins and profits have been very negatively affected because of the rapid spread of disclosure fraud in the prepaid calling card industry. Many of our competitors have been distorting the number of minutes consumers receive, both on the cards, the advertisements at points of sale, and actually on the voice prompts as well. Consumers started to buy the cards that advertised the most number of minutes as consumers would, although they would find out later that the minutes delivered were anywhere between 50 and 65% of what was advertised.

Our campaign to clean up the industry and to allow us to compete on even playing field continues. Additional defendants have settled and promised honest disclosures, Attorneys General in many states are investigating the fraud and taking action. The Federal Trade Commission in Washington, D.C. has a task force in conjunction with various States Attorney General to investigate and enforce existing consumer protection laws and standards. I noted that independent Hispanic organizations have had numerous press conferences throughout the United States to sensitize the public resulting in important news stories covering the fraud. Progress is being made slowly but surely. I have confidence that our actions will manifest themselves in improvement of results in the industry for IDT. Some tangible progress has already been made but much more must be done, and I have every confidence that it will be done. Within Telecom our carrier wholesale division is still improving. It continues to grow. We now have a relationship with over 650 customers.

On a broader note, I have addressed our restructuring efforts during the past nine months focusing on SG&A reductions and more specifically head count reductions. We have terminated, not happily, but we had to do the right thing. We have terminated over 900 employees during the past year, some from IDT Corp, some from IDT Capital, and many of course from IDT Telecom, but efficiencies and operations and reductions in force is only part of our plan. Another is taking advantage of our acquisition of Net2Phone by streamlining our global network through the hybridization of the Net2Phone and IDT networks, expanding our soft switching capacity and expanding our VoIP traffic. Another part of plan is the effort by UTA to develop its own direct to retailer distribution network. This is in its very early stages.

Finally, and what we believe will be the most important part of this plan was making Telecom more operationally independent and creating incentives in management to focus on profitability. We did this by guaranteeing Telecom Management a percentage of free cash flow and a percentage of profits above investments by IDT, if there is monetizing event. In exchange, compensation in Telecom was cut across the board. In the future, Telecom Management will be rewarded by what they bring to the table, not by additional options of equity in the parent company. This will dramatically reduce dilution in our stock as we go forward and should have a positive impact on shareholder value. Over the next 12 months this new model in the way operational managers are rewarded will be expanded into all our operating divisions or portfolio companies as some would prefer to call them. Options or shares in IDT Corp, will be used sparingly in the future and will be almost exclusively for the management of the parent Corporation.

Within our Capital Division, Carmel, our debt collection portfolio company, IDT Energy, our New York ESCO, and our Internet Mobile Group deserve mentioning. This year we're going to invest approximately $8 million in our Internet Mobile Group, IMG, which is headed by Morris Berger, the former CEO of IDT Entertainment. IMG continues to add approximately 13,000 new members a day and is now the 351 largest Internet site by traffic. Our content for mobile devices is growing each and every week. We are also investing millions in IDT Carmel. We feel that this will be a very large part of IDT in the future.

IDT Energy is profitable, and we're looking to expand to other states besides New York. We're one of the largest ESCOs in New York and serve over 300,000 meters. As you know, we suspended our quarterly cash dividends, we felt we could deploy our cash in a more effective way. First, continuing our stock buyback program, we have purchased a total of 5.3 million shares for about $42 million since August 1, of this year. Second, exploiting our intellectual property which is about a $15 million investment per year, third, investing in IMG, as I mentioned before we've invested approximately $8 million recently. Fourth, buying debt portfolios for Carmel for which we have spent $115 million gross to date or 80 million net of collections giving us a current face amount of debt to collect of approximately $1.4 million; and finally, continuing to pursue our debt card efforts by our legal, legislative, regulatory and public relations campaigns. I would like to mention that our expenses for litigation although costly, have already reaped a dividend. We received an award from the arbitration panel hearing our claim against Altice One to the amount of $40 million in cash which we should receive in the early part of calendar 2008. We believe in our legal efforts, and we will continue to invest in them across the board.

I would like now to turn the call over to Marc Oppenheimer, Executive Vice President and CFO of IDT Corp. Marc.

Thanks, Jim. Over the next few minutes I would like to update you on IDT's financial performance for the first quarter of our fiscal 2008, discuss some of the trends we continue to witness in our business and provide some insight into our plans for the future. I would like to first walk you through some changes that we reflected in our earnings release this quarter resulting mainly from the way we now view the operations of our Telecom Division business segments. The purposes of the changes we made is to better track our business' performance in order to align them with economic realities and shareholder expectations, replace some of our more experience managers at the helm of Telecom in order to drive the turn around. The goal for the reorganization plan is to assure that Telecom maximizes cash flow generation so that the Company has the opportunity to deploy it in the future growth opportunities. Those managers and much of their staff are now directly incentivize to create cash flow. They have accepted substantial salary reductions in return for a share in the value creation and cash flow that they generate. As a result of these changes, the segment reporting information has been modified to conform to current managerial business views.

The Wholesale Telecom business segment now reflects revenues not only from selling termination minutes of use to third-party Telecom Carriers, but also inter-segment revenues generated from selling minutes to IDT Telecom's internal retail businesses on the basis of termination costs plus an agreed upon markup. In turn, all network operating costs for terminating traffic such as connectivity and network SG&A which historically had been proportionally allocated amongst all Telecom businesses that use minutes are now fully absorbed by the Wholesale Telecom segment. This effort now helps the management team better understand how each business is performing on a stand alone basis. For purposes of reporting consolidated Telecom results, inter-segment activity has been eliminated.

To provide meaningful comparisons, fiscal 2007 results have been reformatted to conform to the current segment presentation. Additionally, we've disclosed our Wholesale segment results showing inter-segment and third-party revenue as well as total results for the segment. This approach has helped, and I believe will continue to help our management remain flexible and focused in the ever-changing competitive Telecommunications industry. We will be able to more accurately and promptly detect problem areas in the businesses as well as ensuring that each business unit is accountable for their own performance. We expect to follow through on our promise of delivering a more focused and performance-driven Telecom division. We also made a change in the accounting for our aged receivables business, IDT Carmel. This is something we mentioned in our last earnings call. We've adopted the effective yield method of accounting for revenues, changing from the cost recovery method employed in fiscal 2007. The effective yield method allows us to record some revenue from each collection we make, giving, what we believe to be a fair reflection of performance. As a result of this change in accounting method, IDT Carmel has reported its first ever operating profit. Revenues were $9.7 million, gross profit was $3.3 million, and adjusted EBITDA, which we define as our gross profit less SG&A expenses before restructuring, severance, and impairment charges was $2.1 million.

On a consolidated basis our income from operations was $4.3 million for the quarter which includes an arbitration award against Altice One consisting of EUR 23 million plus interest which will accrue on the amount awarded until we receive it. We expect that to be in the first calendar quarter of 2008, and the total should be approximately $40 million U.S. Excluding this award, we had a loss from operations of $35.7 million for the quarter and adjusted EBITDA of negative $16.1 million. The year ago figure was positive 9.6 million of adjusted EBITDA, so that clearly shows that we have a lot more to do.

At this point in time, and on a going-forward basis, expense control was particularly important for us. I therefore want to discuss SG&A expenses a bit more. On a consolidated basis, they improved 27.4% sequentially but they grew 3.4% year-over-year. If we remove the SG&A expenses associated with our Toucan business which was subsequently sold from the period a year ago, the consolidated increase comes to 12%. This increase is something that we must address. The major factors with roughly equal dollar weighting with pre paid Telecom products, predominantly TuYo wireless, IDT Capital, and IDT Corporate.

IDT Energy's SG&A increased only $250,000 while wholesale Telecom and the remaining portion of consumer phone service each decreased SG&A expenses by a couple of million dollars. Here is our thinking in more detail. Prepaid wireless at part of Telecom will be thoroughly scrutinized to ensure that each expense is warranted and builds value. This process is already ongoing at Telecom. There is a constant search for savings across all Telecom businesses even those whose cost structure has already been rationalized.

IDT Capital's SG&A expenses increased year-over-year in all its business lines. Some of the increase, but not all relates to the growth of new businesses. In an effort to cut costs, we decided to close our Puerto Rico Call Center which should result in annual savings of approximately $2 million a year. SG&A also continues to be above our expectations due to special one-time payments and increased legal expenses. As you know, we have ongoing matters under litigation that we believe will be positive contributors to IDT's overall growth and profitability. One small example is the recent success I mentioned a moment ago in the arbitration suit related to Altice's termination of cable telephony license agreements. While these legal expenses are expected, their timing can be difficult to predict. Another step that corporate has committed to is the purchase of our headquarters building which will give us significant savings over our escalating lease payments.

Turning to the results for our operating divisions, our Telecom revenues in the first quarter were $403 million representing decreases of 6.8% sequentially and 14.6% in comparison to the year ago period. Calling cards were predominantly responsible for the revenue decline. The market for calling cards continues to be price sensitive with little to no pricing power. However, in the first quarter our Prepaid Products gross profit margin improved to 18.4% versus an average of only 15.1% in the prior three quarters. This result was still 140 basis points lower than the 19.8% gross profit margin of last year's first quarter. Our cost per minute declined at a faster rate than our revenue per minute declined partly as a result of the continuous reduction in connectivity costs achieved in wholesale as well as due to shifts in our product mix. Our Prepaid Products business generated 2.3 billion minutes in the first quarter as compared to 2.5 billion minutes in the fourth quarter and 3.2 billion minutes carried in the first quarter one year ago. At the per minute level gross profit of $1.22 per minute in the first quarter was higher than the $0.89 per minute we experienced during the fourth quarter but still fell slightly short of last year's $1.31 per minute. The more significant problem was that SG&A increased 14.5% for Prepaid Products year-over-year in the face of a gross profit decline of more than 25%. The largest component of the SG&A increase relates to TuYo Mobile, which is growing but which still operates at a loss. The question of reducing fixed costs for this business is high on the priority list for management.

While every aspect of our Telecom business faces intense competition, our wholesale business is faring much better than retail. With our lease cost routing system, aggressive purchasing strategies, and extensive relationships, we've been able to provide major carriers and niche carriers alike, with rates that we believe are often lower internationally than our competitors. We're also able to offer guaranteed high quality connections suitable for the most quality sensitive traffic of our customers. Our wholesale business has been the beneficiary of several key initiatives and is already showing improved results. Faced with excess capacity, particularly during last year's third and fourth quarters, wholesale carried some very low price traffic. The network has been right-sized and gross profits per minute increased some 44% in the first quarter versus the immediately prior quarter. Connectivity expenses, compensation, including capitalized labor, and the capital spending budget have been cut. We've identified cost savings amounting to more than $33 million on an annual basis for Telecom overall with much of this accruing to the wholesale business.

Our consumer phone service continues to be in harvest mode. We haven't actively marketed it since the UNEP rules changed in 2005. In harvest mode it is still contributing. As of the end of the first quarter, we had approximately 67,500 bundled and 195,500 long distance-only customers. Operating profit was $5.2 million for the quarter.

Shifting from Telecom, IDT Energy is one of the largest ESCOs in New York state. As of the end of the first quarter, the Company serviced approximately 312,000 meters, all in New York state, compared to approximately 300,000 meters at the end of the fourth quarter of fiscal 2007. This business is on track in its management and performance. First quarter revenues rose 16.2% versus last year's quarter, but declined 7.2% sequentially as expected. Although operating profits fell, the Company was still profitable. Gross margins were 12.9% in the quarter versus 23.2% in the year ago period and 10.1% in the fourth quarter.

At IDT Capital revenues for the first quarter were 23 million representing an increase of 52.5% on a sequential basis and 56.7% year-over-year. Both increases are predominantly due to our IDT Carmel debt collection business. I previously discussed the accounting change at IDT Carmel with you, and this change is the main reason for the gains in IDT Carmel's revenues, gross profits, and operating profits. During the first quarter IDT Carmel purchased receivable portfolios with a total face value of approximately $412.2 million for a total cost of approximately $37 million compared to the fourth quarter where we purchased $370 million in face value for approximately $30 million.

Turning to our balance sheet and cash flows, we ended the quarter with approximately $542 million in cash, cash equivalents, marketable securities, and investments worth $7.14 per share. Walking through some of the larger cash flow movements during the first quarter, cash used for operations was approximately $55 million during this quarter. We decreased accounts payable and accrued expenses by about $38 million. IDT Carmel invested approximately $37 million to purchase receivable portfolios and collected approximately $7 million during the quarter. CapEx, which approximated $9 million was spread across our various business units with the largest amount being in IDT Telecom, $11million was also used for additional investment. Additionally, we repurchased approximately 4.9 million shares during the first quarter for $38.2 million, and from November 1 to date we purchased an additional 448,300 shares for $3.6 million.

Although there is still a great deal to do, we're starting to see results from the hard work and efforts of our employees. I am encouraged by the new sense of awareness and urgency you can feel when you visit with our management teams. We believe that the proper incentives have been implemented and the proper accounting metrics have now been put in place to create a more nimble, more focused and more aggressive company. Thank you for spending the time with us this afternoon. We look forward to answering an y questions you may have. Operator, if you'd please open up the lines for questions.

Thanks you. (OPERATOR INSTRUCTIONS) Your first question is coming from Donna Jaegers of Janco Partners. Please go ahead.

Just a few quick ones, I guess. There is a sharp increase in the income taxes payable on the balance sheet. Can you address that?

Yes, Donna. It is Marc. There is a new accounting pronouncement called FIN 48 where instead of putting a net figure we actually put on the balance sheet deferred tax assets where as previously it was just deferred tax liabilities as well as income tax liabilities, so if you look at the number previously we had $105 million. After you show all the detail, that number now is actually $127 million. It went up 22 million in the period, but because of visibility we actually show that $345 million as a potential tax liability against which you have the credit of the 218 million. The net number actually only went from 105 million to 127 million.

There has been no change in the audit from the IRS?

This is purely the accounting pronouncement that went into effect August 1, for us.

The share repurchases you mentioned that you guys had bought back 4.9 million shares in the quarter. I am assuming that this was late in the quarter since that doesn't show up in the weighted average number of shares?

Actually, there was purchasing under the 10b5-1 program that is a current program, and then others that were late in the quarter.

Was there also new shares granted that offset some of that or should we be looking for a sharp drop in number of shares outstanding next quarter?

You're actually going to look at a number that's now below 76 million.

Great. And finally, on the plans on further debt purchases for Carmel, I know when I talked to you guys last quarter you were evaluating several large portfolio purchases. Any decision been made there?

Yes. On Carmel we're actually watching the environment very, very carefully. As you know, there has been a deterioration in the credit markets, and that's impacted pricing. We see portfolio pricing in the spot market coming down, we still have contractual obligations of approximately $20 million on the forward flow programs, but we're evaluating opportunities on a regular basis now in the spot market because those prices have definitely come down.

Okay. I guess just one last question, too. You mentioned moving the infrastructure of the wholesale operation as far as the cost-cutting on connectivity charges to more of a VoIP platform. Can you talk about any goal there that you have as far as reducing that connectivity costs?

Sure, Donna. If you look at the -- as an example, the start rate, if you go to the beginning of fiscal '07, which would be August 1 of 2006, our run rate for connectivity globally on our platform was approximately $47 million. If you look at the current run rate because of the change over to the VoIP as well as shutting down some of the antiquated switches, that run rate is currently 38 million. If we look to the end of our fiscal year, so if you forward, let's say, another seven months from now, we are expecting that number to drop down to the 32 to $33 million level. We have a $15 million drop from that steady state run rate.

And 32 million would be on an equivalent number of minutes.

That's correct.

Okay. Great, I'll get back in the queue and let other people ask questions.

Thanks.

The next question is coming from Clay Moran of Stanford Group. Please go ahead.

I have a few. On the IRS audit, do you have any sense of the timing of when that could be resolved, and since there is no accrual for any potential settlement, does that mean you don't expect any significant expense out of that?

We actually have an accrual in those numbers, Clay. As I mentioned to you before, we had a variety of items that is we showed as deferred tax liabilities, so it was in there. As far as timing is concerned, it is difficult. We still hold to our position. It is an ongoing audit. If we're able to put this behind us as I said to you before, we'll be happy to do it, but it is something that is still ongoing, so I am not able to report at this time any concrete additional information. Obviously, if we can make this go away, it is in everybody's interests.

And how much for Net2Phone issue is included at the current accrual?

We have in the current accrual approximately $70 million, and then there are additional moneys accrued for some interest, but that is the amount that had been accrued, and as I said, that's covered in the $105 million that previously showed up as part of the deferred tax liabilities.

Okay. Well, you mentioned 55. When you were talking about the cash uses during the quarter, I think you mentioned 55 million used by operations.

Yes.

Then you gave a bunch of other numbers. Were those other numbers included in that as well or what is in that 55 million from operations since I think your EBITDA loss was about 15 million?

If you look at EBITDA, it was about $15 million. There was about $1.5 million of non-cash compensation. You had depreciation and amortization of approximately $18 million. Offsetting that you had clearly we didn't collect the cash yet, but you have the arbitration award for $40 million. You also have some minority interest payments, some restructuring and impairment charges, also some residual severance drag from the reduction in force and work force that we previously done where we've had some of those, and then the largest part was obviously the reduction in accruals and payables.

Okay. Some of those numbers that you gave afterwards were in that 55 million?

That's correct. I just wanted to give some color to it, Clay.

In the accounts payable went down by about $38 million, so I think that's the biggest portion of the difference between EBITDA and operating cash flow.

Okay. On your balance sheet there is line item for investments, about 20% of your market value today. Can you give us more color on what's included in those investments?

Sure. Some of the investments are actually strategic investments that we made where we are interested in as Howard mentioned in the last call migrating from some commodity margin types of businesses to areas that will allow us to be an enabler of technology versus servicing, so those are some of them. Others are part of a blended portfolio. You'll see that number as pretty consistent, though, Clay, quarter-to-quarter. It has reached an area where I wouldn't anticipate there would be a significant change in that. Obviously from a P&L perspective with the deteriorated credit environment and the FMOC actions to lower interest rates, the interest income on the treasuries and other investments, at least safe investments will go down, but as far as mix is concerned, pretty much it is going to be consistent as you see it.

So it is investments in -- within our IDT Capital?

It is investments. Some of them are in Telecom. Some of them are in capital, and some of them are part of a treasury portfolio, to while we're waiting to deploy the funds in our businesses, we're taking advantage of certain opportunities to supplement the P&L.

Okay. One more question just on the CapEx. I guess I was thinking you could see some change there given some of the asset sales, change in the run rate that is, the asset sales, and the pullback on expenditures in general. Is the 9 million about right for a quarterly run rate, and can you give us any idea of what the Telecom investments are these days?

I think that if you look at a run rate on an annualized basis, as an example for the fourth quarter, we were running at about $17.8 million in PP&E CapEx. If you look at the estimate for 2008, it is going to be closer to $12.5 million. We also have, as we previously discussed we're going to be purchasing the building that we're in which will save us significant amounts of cash over time as the escalating lease payments are avoided, but if you look at the mix of CapEx, part of it is going to be to allow us to to have better margins. Part of it is going to be in some of the various businesses, the IDT Capital as well as some of the Telecom and proprietary technology that we're looking at.

Are you saying 12.5 million in Telecom CapEx annually? Is that what you're referring to when you say PP, properties?

Yes, that's correct.

Like switches and such.

Yes.

Okay. Thank you.

Thank you. Your next question is coming from Donna Jaegers of Janco Partners as a follow-up. Please go ahead.

The food business is not broken out any more so is that still in IDT Capital or part of the other?

The EGB is part of at this point in time Telecom because it is handled through our ethnic distributions which is the UTA venture. At this pointed in time it is not material as far as a segment is concerned, and we're looking at whether it really should take management time and focus and under the new capital asset allocation model that we created, Donna, the return that we're going to get from that business is a commodity return, so it is not something we're going to deploy any significant funds into.

It was running around 4 or 5 million, wait, sales on ethnic grocery were around, what, 6 million a quarter. Is that still where it is and what part of Telecom is it in, the Prepaid?

It is in Prepaid. The number that you're quoting is an accurate number. It is basically an auto pilot asset that is is not going to create a tremendous amount of value for us at this point in time, so we're looking at losses of approximately call it $2 million for the year, and based on the fact that it is going to be losing and not contributing, I would have thought that we can do better things with our time and money, Donna.

Any chance of monetizing it?

We're actually looking at that. There are a variety of avenues that we're looking, and certainly over the next few months we want to have come to clarity on that particular asset.

Donna, it is Jim. We're going to try to monetize it. Otherwise we're going to close it down.

Okay. Thanks, Jim. On then on corporate expenses, obviously we saw that tick up in this quarter. Any sort of color on what's causing the uptick and where the plan is for the year?

Yes. Actually on the corporate SG&A we're actually looking for it to come down. We had some residual one-time items in it. If you look at the average for 2006 we were at 14 million. We got that down marginally to 13.5. We're looking to get that down to 11 million, but, again, I have to say that there are periodically things that percolate that can have an impact in any one given time. That's a fair expectation, Donna.

11 million per quarter?

That's correct.

Just one last question on the price versus the face value of the debt that you purchased this quarter, it ticked up from, somewhere in the 8s to looking like $9.1 of pennies per dollar of debt purchased. Is that because of the agreement that you had that you're locked into the higher rates because otherwise I would have thought the market would be more opportunistic than that.

Actually it is because of the forward flow. As I said the spot market has come down. If you look at a dollar weighting, the bulk of what was purchased were the forward commitments versus spot market.

Again, there is typically been a mix of different spot market purchases compared to the forward flow that we have that we're purchasing every month at the committed price. The difference in pricing is there was less other purchases during the quarter, so there was less mix of other portfolio purchases.

Okay. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) There appear to be no further questions and this does conclude today's IDT Corporation first quarter 2008 earnings conference call. You may now disconnect your lines at this time and have a wonderful afternoon.