IDT Corp (IDT) 2008 Q4 法說會逐字稿

Greetings, and welcome to the IDT Corporation fourth quarter fiscal 2008 earnings report conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jim Courter, Chief Executive Officer and Vice Chairman. You may begin.

Thank you, very much, and good afternoon. This is Jim Courter. Steve and I will be recording this live as we are right now. Steve, our CFO, and I are here obviously to comment on our performance during the fourth quarter of our fiscal year 2008 which ended July 31st.

Before we begin, please recall that any forward-looking statements we may make during the course of the call, either in our prepared remarks, or the in Q&A period that follows, whether general or specific in nature, 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 and uncertainties discussed in the reports that we file periodically with the SEC. We also assume n 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 that we forecast. Now let's get started.

I will begin by addressing key shareholder concerns from a company-wide perspective. Steve will follow with analysis of the performance of each of our businesses, then Liore Alroy, Steve Brown, and myself. Liore, the CEO of IDT Telecom and Chairman of our Executive Committee, will join us to take your questions. Upon reviewing our earnings release, those of you who are fans of Dickens, may be inclined to classify this quarter's returns, as another edition of 'Bleak House.' But I would counsel you that what is going on here, really is better understood as the 'Tale of Two Cities.'

That is, the bottom line numbers this quarter, look a lot like the previous quarter's disappointing results, however our net loss this quarter reflects a host of one-time events, including legacy restructuring costs and write-downs related to current conditions in the credit markets. We recorded 45 million of restructuring and other legacy costs, 10 million of losses on disposition of non-core businesses. Bad debt of expenses of another 15.6 million relating to impairment of our receivable portfolio at IDT Carmel, and finally, a 7 million write-down of the value of our auction-rate securities.

These events together overwhelmed our fundamental progress, and accounted for a substantial portion of the 86.4 million net loss that we recorded. The underlying results of business operations on the other hand, better in my mind, reflect the progress we have made, executing on our turnaround plan. As Steve will point out, our adjusted EBITDA was a positive 8.1 million this quarter, versus a negative 36.5 million in the last quarter. We are on-track to reach operating cash flow positive territory in the coming year. There is still obviously work to be don,e and challenges remain.

Unfortunately the market is convinced that we are in a bleak house. As you know only too well our stock lost 90% of it's value in the past year. Our price per share is well below $1, compared to much better than $8 a year ago today. As a result of the plunge, the New York Stock Exchange has notified the Company that we are out of compliance with their listing standards, by virtue of our market capitalization and also with the Exchanges' $1 minimum price rule.

Under the rules of the Exchange, IDT has 45 days from receipt of the notification of noncompliance, to file a plan with the Exchange to meet, or showing how it is going to meet the listing requirements. Our plan must satisfy the Exchange that we are reasonably likely to raise our market capitalization over the required 100 million level within 18 months. We also have six months to come into compliance with the share price minimums. Although we have not finalized the plan, a key element will be continued execution on our corporate turnaround strategy and program.

As of July 31st, we had 343 million in cash, marketable securities, and investments, roughly $4.50 a share. Clearly the market has decided that management cannot or will not stem the tide of red ink. The market, in my considered opinion, is wrong. If we meet our turnaround goals over the next two quarters, we will begin to reverse the market's judgment, and I would expect the corresponding rebound of our share price bringing us back into compliance.

Many of you listening have argued eloquently that we should be using at least a portion of our cash to buy back the Company's stock. Back in June, Howard Jonas commented that this is a very attractive proposition. Since then, the share price has continued to slide. And now we face the threat of de-listing. The rationale for stock buyback has never been stronger.

However, let me tell you why we have not yet initiated a buyback program, and why we may not do so for some time to come. For the last number of months while we have been preparing our year-end financial reports, we have been restricted from purchasing stock on the open market, as you know. When that restriction expires, in the next number of hours, we still have to consider our available cash resources, and how they meet the Company's requirements for working capital, growth capital, and existing commitments. Let me mention just some of these.

First, it will have to pay the IRS $115 million less the 10 million already paid in July, to meet our liability from the recently completed tax audit covering the years 2001 through 2004 inclusive. We are continuing to discuss the payment schedule with the IRS. Second, approximately 75 million of our cash and marketable securities are currently restricted, to finance operations of our growing energy and wholesale telecommunications operations.

Third, we have paid and will continue to pay, albeit at reduced reduced levels, severance, and other restructuring costs associated with downsizing the Company. And fourth, approximately 40 million of our 343 million is in long-term investments, including hedge funds. We are in the process of unwinding many of our positions, but will not be able to fully liquidate them for perhaps a couple of years. Finally, we must, of course, as you know, have adequate working capital to operate our businesses.

In sum, our discussion on whether to buy back stock is a fundamental question about appropriate allocation of the Company's capital. We do not immediately enter the market, no one should misinterpret this as reflecting management's judgment about the stock's current price, or our Company's prospects for the future.

On the same point, I should note that during the second half of fiscal year 2008, members of senior management have purchased about 4.1 million in IDT stock in the open market. In addition, both Howard Jonas and I have decided to take IDT stock in lieu of our cash salaries. Howard will be paid in IDT stock for the next five years. Let me repeat that. Howard has decided to take his pay in IDT stock for the next five years. And I will be paid in stock during 2009 for the remainder of my current contract with the Company.

We have each taken this extraordinary step, because we believe wholeheartedly in the Company's future. And also want to align ourselves with the interests of our shareholders, and share in their future success. In case you missed it, on Friday we also announced the Board of Directors asked Howard Jonas to assume the CEO position upon my retirement.

Longtime shareholders will recall that Howard not only founded IDT, and also the international Callback business, but also initiated Net2Phone, and continues to this day to be the prime mover behind many of our business initiatives. He is truly, in my mind, one of America's great business visionaries. The Board has asked me to see the current turnaround program through to completion, and that is where I will be focusing my efforts during the coming year.

Now I want to discuss the progress we are making on that turnaround. During our last quarter call we announced the four-part program to achieve positive operational cash flows during fiscal 2009. We expect that our operating cash flow will move into positive territory before the end of the second quarter, and that the third and subsequent quarters will show operating cash flow positive returns.

Our turnaround plan, as you know, has four elements. One, selling, spinning off, or shutting down nearly all businesses that won't help us meet our goal. Two, reducing corporate overhead. Three, streamlining our core businesses, and four, making modest investments in very limited number of closely managed growth opportunities on our own or with strategic partners.

We are very serious about divesting ourselves of businesses that won't help us build value for shareholders. During the current quarter, we shed our call center business in Israel, and two or three other small businesses. These and others we exited during fiscal 2008 had operating losses of over 20 million in fiscal 2008. Still, we are intent upon accelerating our progress in this area.

To that end, we have retained Jefferies & Company to provide financial advisory services, specifically to assist with the monetization of our noncore businesses, explore opportunities in the capital markets to finance the growth of core businesses, and to advise the Company with respect to strengthening our core businesses through strategic partnerships. We expect this will enhance our effort to narrow the Company's strategic focus. This is not an indication that our core businesses, or IDT as a whole, are being considered for sale at all.

Second, we continue to work hard to cut our corporate overhead, and have made much progress on this front in recent quarters. During Q3 of 2008, we eliminated a variety of executive positions, including that of COO, and our entire corporate development department. We have negotiated lower professional fees for attorneys, lobbyists, other consultants. Over the past year, we have reduced the size of our corporate staff by almost 50%. In all, we expect to reduce IDT corporate operating expenses, excluding such items as severance, by more than $20 million per year.

The third leg of our strategy is to streamline our core operating businesses. Let me talk about telecom. Telecom, as you know, represents 80% of our revenue. As a whole, Telecom's adjusted EBITDA was positive for fiscal 2008, and was the largest positive contributor to consolidated EBITDA.

Our wholesale segment carried a record number of minutes for third-party customers, both for the year and for the fourth quarter. Revenues from third-party customers were at record levels, and overall gross margins increased compared with fiscal 2007. Our international operations have been the focus of our growth, particular Africa. This business remains very challenging, as are all our telecom businesses these days, but we are doing more than holding our own. We are actually gaining.

On the prepaid side, revenue has substantially stabilized for the past five months, at about 46 million per month in the United States, plus another 10 million internationally. Our aggressive effort to alert law enforcement and regulators to the massive fraud perpetrated by many of our competitors, and our own lawsuit against six competitors, has helped in the effort to level the playing field for IDT. Attorneys Generals in Florida, Texas, California, Illinois, New York, New Jersey, and other states, have launched investigations into the industry.

At the federal level, the Federal Trade Commission has begun a nationwide crackdown on companies who distribute fraudulent cards, moreover, IDT has been supporting state and federal legislation to protect calling card consumers. Last month, the US House of Representatives passed landmark legislation, to reform the calling card industry by empowering the FTC to prosecute calling card fraud, and similar legislation is pending in the United States Senate.

We continue to streamline the business aggressively. We significantly reduced our telecom connectivity and network costs in 2008, on top of considerable reductions achieved in fiscal 2007. We have streamlined our wireless operations, saving about 10 million annualized. We have consolidated European operations, and merged all of our call centers. Another streamlining target is our debt collection business.

For the second quarter in a row, IDT Carmel did not add to it's debt portfolio. Additionally, Carmel's new management team reexamined our portfolios. We recognized a 15.6 million bad debt expense, as Carmel's new management team reexamined our portfolios. We have attracted leaders with extensive industry experience. Under their direction, we are rapidly bringing state-of-the-art technologies and performance metrics on-line.

IDT Carmel did generate positive operating cash flow in every quarter of fiscal 2008, and we expect improvements in near-term performance, as we implement additional cost cutting measures. I should also mention that IDT Energy is performing on target, actually above target, contributing earnings and cash flow. During the quarter, we added customers at a record pace, and meters are up 25% from one year ago. Company-wide our headcount has been brought down by a third from July 2007 to July 2008.

Management's fourth task is to look to the future, and modestly fund a few businesses, which in our judgment, represent truly extraordinary opportunities. Our free mobile content destination site, Zedge, our shale oil investment, and the defense of course of our intellectual property. We are spending about $5 million a quarter on these opportunities in the aggregate. These ventures offer potentially extraordinary gains, that do not appear to be recognized in the current market valuation.

In July, Zedge, our free mobile content destination business, surpassed the formidable 0.5 billion download mark by it's members. Currently the site averages approximately 13 million web and mobile page views, and close to 2 million downloads per day. Zedge's 10% month to month growth remains entirely viral, with no significant market expenditures. That is especially noteworthy because the United States free mobile content market, which trails much of Europe and Asia by 18 months, is poised, we believe, for explosive growth, and Zedge is well-positioned to grow with it.

We are focused on initiatives that translate Zedge's substantial and rapidly growing customer base into ad revenue. We believe we have achieved a critical mass for direct advertising sales, and we are exploring ways to aggregate with other content providers, to provide an appealing global demographic. What YouTube is to video, Zedge is becoming to mobile content. We believe that we will be creating considerable value here over the next three to four years.

We discussed our American shale oil company subsidiary AMSO at length in the last two calls. We continue to execute on our operational plan. We have received most of the requisite permits and approvals, and expect to begin drilling to characterize the site this fall. As Howard mentioned during his call with you, in July, we are seeking a partnership with a major oil company, who can lend expertise this venture, and provide a share of the capital needed to see this project through to commercialization.

We have also been heartened by the bipartisan support for Oil Shale Research Development Demonstration lease program under which AMSO operates. At least for now both Democrats and Republicans agree that this RD&D program should proceed, so that the shale oil industry can develop and test specific shale extraction processes, including different approaches to protecting air and water quality. As a result, we are hopeful that AMSO will be able to continue to perform on it's plan of operations under the next administration, regardless of the outcome of this coming November's election.

We are also investing modestly in Fabrix TV. A promising new technology platform, providing media storage, processing, and delivery tools to satellite, cable, telco, and Internet service providers. Fabrix scalable architecture supports a variety of next-generation video streaming applications, including remote storage DVR, real-time targeted advertising, video on demand, and over the top delivery. We are excited by the trials we have underway, and look forward to sharing our progress with you in the coming quarters.

In conclusion, we are make going progress on our efforts to turn IDT around. Although restructuring and nonrecurring costs made for poor numbers this quarter, we have made great progress, and we look forward to making even greater progress in the future.

Now here's IDT Chief Financial Officer, Steve Brown. Steve.

Thank you, Jim. I am going to put this on speaker, I hope the quality of the call stays consistent. Hold on a second. I am going to be repeating a lot of what Jim already said, but I will give you my insights from the financial side.

While we do note with concern the large operating loss this quarter, the purpose of the forthcoming analysis will hopefully give you a better picture, and some better insight of what happened this quarter, especially to the extent that we continue to improve operational EBITDA of our core businesses. This quarter in particular has been negatively impacted by the shrinkage of our core businesses operations, as we have been right-sizing them, and this caused to us incur certain impairments, such as severance costs, which are cash impairments, as well as noncash impairments, such as large write-offs of existing goodwill.

In addition, IDT, like most of corporate America, is not immune to the effects of the bad global economy, and as a result we have also taken sizable hits as a result. This quarter we incurred restructuring and impairments charges totaling $45 .5 million, of which 15.7 million relates to the reduction in our workforce, and $29.8 million related to write-downs of goodwill primarily in our telecom business unit, and this is the result of our annual assessment we do every year, as required under Generally Accepted Accounting Principles under FAS 142. Of course, for the most part, these charges are noncash related.

We also incurred a $15.6 million impairment, as Jim talked about, on our inventory asset of purchased receivables, lowering the asset on our balance sheet from $79 million to $63 million. I will discuss this in much more detail when I get to the segment analysis, talking about IDT Carmel, our debt collection business.

And finally we incurred a $9.6 million loss on the sale and shutdown of certain non-telecom foreign divisions, most notably our Israel call center, which was sold to it's management, and the Puerto Rico call center.

Below the line we took a $7.2 million expense writing down investments in auction-rate securities, which were backed by Preferred stock in Fannie Mae. While we hope in the long term that we eventually will be made whole in this security, GAAP certainly requires to us mark to market the investment.

In addition, and the following quarter which is Q1 2009, which is the quarter ending October 31st, we expect to record an additional $6.3 million expense, to further write-down the auction-rate securities, as a result of the September 2008 announcement of the takeover of Fannie Mae by the US Government.

To return to my original point about operational improvement. Eliminating the impairment charges of $45.5 million that we talked about, depreciation and amortization of $16.7 million, the $9.6 million loss on the sale of the noncore businesses, and the $15.6 million impairment of the Carmel portfolio recorded as a bad debt expense, our adjusted EBITDA was positive 8.1 million this quarter, which is significantly better than last quarter where we recorded a $36.5 million EBITDA loss.

And even taking into account that our operating results were enhanced this quarter by $12 million due to positive reversal net accruals, due to various disputes that were resolved favorably this quarter, net/net this quarter is a strong indication of the beginning of the operational turnaround, that Howard talked about in his call to investors a couple of months ago.

The biggest improvement operationally most notably, and most importantly, came from our Telecom segment. With EBITDA improving to $13 million this quarter, from a negative $1 million last quarter. This quarter saw robust revenue growth in our wholesale business, with an 11.6% increase to $175.7 million, our largest revenue quarter ever, and we were able to maintain the gross margin rate with the small 20-basis-point drop this quarter, to a healthy 12.6%. Our Telecom numbers were enhanced again by approximately net $6 million of the accrual reversals.

While not at that time point we desire, but not unencouragingly, prepaid calling card revenues increased quarter-over-quarter for the first time in the last 11 quarter. Even though that is only a 1% increase, we are very encouraged that the basic business seems to have stabilized, and we are cautiously optimistic that over time we can regain our market share.

SG&A expenses in Telecom's operations continue to decline, with a 5% decrease quarter-over-quarter to $70.6 million, as we continue to streamline operations, particularly in non-profitable segments, such as the prepaid wireless segment, and our overseas operations.

The next business unit is IDT Energy, our ESCO business, and that continues to impress. It is $75.5 million revenue quarter was 13.8% higher than last quarter, and of course, our largest revenue quarter yet in this segment. Gross margins remain very strong this quarter at 12.2%. SG&A increased $1.8 million this quarter, but that is a very healthy increase, because that increase was totally due to increased marketing expenditures, and the cost of customer acquisition. Of course, this should lead to continual higher revenues and profits, all subject to the seasonality of the business.

EBITDA this quarter was a healthy $1.6 million for this quarter. We are very encouraged this past quarter, that we added 33,000 net leaders, our most successful period of growth to date. While the immediate impact of this growth hurts earnings, as I just stated, because of the immediate impact of the customer acquisition charges, the long-term profitability of the business is greatly enhanced.

IDT Carmel, the debt recovery business on the other hand, had another disappointing quarter, including a second impairment, this one for $15.6 million. To date, IDT Carmel has purchased and collected on portfolios and charged off consumer credit card debt, with a face value of $1.8 billion. We spent $148 million to purchase these portfolios.

After reducing the portfolios for the amounts that we collected on and for the impairments, the remaining amount of inventory on our balance sheet at July 31st is $63.1 million, of which $14.7 million is included in the current assets, under other current assets, and $48.4 million is included in the Other line item on long-term assets. The impairment is mainly due to the result of two factors. First, and not to understate, the mismanagement by our partners who have managed the JV that controls the HSBC forward flow, which equals approximately two-thirds of our purchases. The second cause of the impairment was of course, the general downward trend of the economy.

We have dealt with both ends. On both fronts, we have taken strong and decisive action. To deal with both matters, we have brought in seasoned executives led by Carmel's new president and COO, Mark Meisenbacher, to turn around the operations. Additionally we have brought court action, to take over the management of the HSBC portfolio away from the underperforming partners. And we are optimistic the court will turn over the management to Mark and his team, at the same time, we also hope to recover damages for the mismanagement.

IDT Capital's results were a conglomeration of the following. Revenues were derived from the following components. $7.5 million from CTM and the local media business, $3.4 million from Zedge and IDW, and $3.9 million from various other initiatives. The main drivers of capital EBITDA loss was a $3.9 million loss expense from Net2Phone ventures, mostly spent on legal fees and the like, in the protection of Net2Phone's intellectual property.

And our call center business though sold at the end of the quarter, during the quarter lost $1.6 million. Slightly offsetting these losses were gains from CTM and IDW. IDT corporate expenses posted an EBITDA loss of $3.7 million this quarter. Included that lowered the loss, we recorded a $4 million positive reversal of our accrual for the Alfred West legal case. It was settled for a lower amount than the court had awarded by the previous jury decision. We also received an employee workforce grant from the state of New Jersey for $2.3 million, and then of course as promised, the infrastructure continues to get lower, and there was at least a $2 million reduction this quarter from the smaller workforce.

Now I am sure there are a lot of questions people want to know, about liquidity, capital needs, and our balance sheet, so I am going to give a lot more detail on these matters than I have done in the past. Firstly, as Jim has discussed earlier, we have been considering buying back stock, but we continually must weigh the obvious merits of a buyback, against our capital and liquidity needs. In particular, the payment schedule for our tax liabilities at this time is still resolved.

We owe the U.S. Government approximately $105 million, after settling the IRS for the years 2001 through 2004. We plan to pay another $20 million shortly, and we have begun discussions to determine the timing of future payments. We are also evaluating the merits of financing this liability.

On our balance sheet, our cash and cash equivalents of $169 million, consisted of cash sitting in checking accounts around the world, money market funds, and short-term government funds. Given the recent market turbulence today, or certainly as of September 30th, we are predominantly in cash and short-term government funds. Our marketable securities of $111.5 million at July 31st, consisted of $58 million in a variety of Federal Home Loan Bank notes, and $46 million in structured notes and bonds backed by a variety of issuers, most notably Merrill Lynch, BNP, and Federal Home Loan Bank.

Most of these structured instruments were called or sold after the end of our fiscal year. So as of September 30th, our portfolio contained only $14 million of structured notes, $9 million of these were issued by the Federal Home Loan Bank, and $5 million issued by BNP. Our marketable securities also included auction-rate securities with a carrying value of $7.1 million. As I talked about earlier, in Q1, unless anything specific happens, we expect to write down an additional $6.3 million on the auction-rate securities, as a result of the September 2008 announcement of the takeover of Fannie Mae by the US Government.

Our short-term investments included $22.6 million, which consists of $10.1 million in hedge funds, and $11.4 million in the structured membership interest for Liberty Media. We have recently liquidated these investments, and we expect to receive the proceeds before the end of our second quarter of this fiscal year. Our long-term investments of $40.3 million, consisted mainly of $38 million of hedge funds. We are continuing to evaluate the opportunity to liquidate these positions in an orderly manner.

In addition, the major components of other key current assets are $14.7 million of purchase debt portfolio I mentioned earlier, the Carmel short-term portfolio, $17.7 million of inventory from the telecom and energy business, and $27.9 million in miscellaneous and various receivables that will be turned into cash during the current fiscal year. And as I discussed earlier, included in our long-term assets under Other is $48.4 million of the purchased debt portfolio of inventory that we consider long term.

At this time, I would like to turn the call over for questions.

Thank you. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). One please moment while we poll for questions. Thank you. Our first question comes from Mr. Isaac Schwartz, Robotti & Company, please proceed with your question.

Hi. I was just wondering how much total investment you have made in the consumer finance, the consumer receivables business.

Again, I will refer to the numbers in the report. To date we invested $148 million. Obviously as we collect, based on the expected ROI, or the expected curve, we write down a certain portion of what we collect against the inventory.

So out of that $148 million, 31 has been impaired, and the remaining amount to get you to $62 million has been collected on. So we are sitting today with $62 million of remaining portfolio that we are collecting on.

And what is the time period? What is the time period over which you made the investments?

Pretty much a three-year period.

Over three years, the gross dollar amount that you invested was $148 million, you impaired 31, you collected, and you have 62 million net on the balance sheet.

That is correct.

Okay, thanks.

Thank you. Our next question comes from Mr. Marc Lunder, Lunder Capital, please proceed with your question.

Good afternoon. I had a question Jim. The previous call mentioned that employees, you would not be giving them a lower strike price on their options. Does the stock in lieu of cash compensation plan apply to any other employees, consultants, or service providers of IDT?

No, it doesn't. IT is Howard Jonas five years, and myself until the end of my contract.

Right. So it doesn't apply to anybody else then.

No, if people want to step forward I suppose we would entertain it, but we didn't really think about it, and didn't ask.

Right. Could you help me understand a little bit, Howard, as far as your thought process on this, you say the stock is absurdly low.

I just want to correct you, Howard is not on this call. Just Jim, myself, and Liore Alroy.

That wasn't Howard?

No, that was me, I am sorry.

So I am trying to understand the thought process. You say the stock is absurdly low. You issue stock in lieu of cash compensation, but yet you have money sitting in hedge funds, and as of right now, you say you don't have a lot of excess cash to be able to go in and buy stock back. Am I missing something, or could you help me understand that?

Steve can help me to answer the question, but I thought I walked through it pretty clearly in my prepared remarks.

Right. I guess what I am trying to understand is, if it is absurdly low like you say is, like you say, I take you at your word, why wouldn't you look to add to some of the hedge funds, and use some of that money to reduce the dilutive effect of issuing stock to you and Howard?

Steve will answer that. I forgot the technical word. We are trying to liquidate the hedge funds as we speak. We are monitoring closely our conversations with the IRS, because we haven't really, although we settled the total amount that we owe them plus interest, we don't know whether we can pay that over 12 months two, years, three years, so those negotiations are still up in the air, and we want to make sure that when the IRS calls, and they want cash we can give them cash.

Yes. Again obviously there is, with the stock being low it is something that we are strongly evaluating, we are in discussions with the IRS about possibly paying off the liability over a longer period of time, or looking at other options. For the very reason, because there are liquidity needs.

The telecom business does require a certain amount of working capital available. The energy business most particularly does require a lot of working capital available, for us get the favorable rates that we need to get. And we are taking all these things into consideration, and where you are at, we do think that the stock is grossly undervalued, and we are trying to figure out the best way to run the business, at the same time, do the smart things.

Let me just add to that. If we were not buying stock, and we are not doing anything else, I suppose those facts would belie our statement that we think it is undervalued, but we are not buying back because of our conservative nature, in making sure we can continue to operate the business and pay our short term obligations to the IRS, but also by virtue of the fact that I and other executives have purchased on the open market over $4 million of stock, and that I and Howard Jonas, and Howard for five years, and me for we one year, are accepting stock in lieu of cash confirms, or underlies our statement that we believe personally, that the stock is undervalued.

Alright. Let me just address one more thing. We are covering a lot. But on the hedge funds, we have liquidated everything that could be liquidated, with insuring to make sure that the principal amount has not been damaged. And as I said, there is about $38 million left, and we are going to try to liquidate those in a timely manner, but it just doesn't make sense to take a big hit.

Thank you. Our next question is from Mr. Thomas Kahn with Kahn Brothers. Please proceed with your question.

Hi Steve. Two questions. First question is, where is Howard? I would have expected Howard would be on the call. I know we are approaching the Jewish holiday, but certainly you are on the call. And Howard is a control shareholder, and going to be the new CEO.

And the second question is, Mr. Alroy, if we could hear from him, what his business background is, what his current role is in the Company, and what his role might be, or he think might be going forward? For example, is he going to be the COO of the Company going forward? I think it would be useful for us to hear something from him, because he should understand that a lot of water has gone over the dam, and a lot of things have been said which have not happened, or have not come true. So it would be useful for him to speak a little.

Liore will speak to the second question. This is Jim. I don't mean to be speaking for Howard, but as you know, I look at it as quite extraordinary for Howard to get on a call to investors two months ago. It is something he doesn't do, and hasn't done for years. I have been the spokesperson on these calls for the Company, along with Steve Brown and other operating executives. So he is basically consistent with past patterns, allowing other executives to handle these earnings calls.

And certainly as the time approaches, that he becomes the CEO, he is going to want to address people on these calls in his own way, but right now his pattern is quite consistent over various years.

Well, the consistency is not adequate, Jim, and I don't think it is right. We are in extraordinary times. As you know, the company is, some people consider it an [extremus] and in a death spiral, and what you have done in the past in unusual times, is something one shouldn't be doing currently.

Before Liore just jumps on, in defense of IDT, number one, I think our comments today and the fact that we have done a substantial amount in the turnaround and restructuring, indicates that we are not in a death spiral. That is number one.

Number two, when I started with the Company, that was whole host, probably 15 telecommunications companies that were competitors of ours, called emerging multinational carriers. We are the lone person standing. They all are out of business, they all went bankrupt, also to defend where we are. No one, you probably or anybody else, could possibly have thought six months ago that Bear Stearns would be out of business, Merrill Lynch would be sold, Lehman Brothers would be going out of business, AIG would be in the problem they are, and IDT would still be here. So in defense,

Jim I don't want to get into a conversation of you defending your work as the CEO--

I am just answering the question, we have done reasonably well --

I think the stock price essentially tells the whole story, and I think we should hear from Liore.

Hi Tom. It is nice to have you on the call. I don't remember the last time you have been on the call. Howard many years ago when he became the Chairman and Jim became the CEO, he said he wasn't going to be on these calls anymore, but I guess if he knew you were going to be on this call, maybe he would have made an appearance.

He has lost the most amount of money, I don't know how many hundred million dollars. He is the teed up CEO. He has a lot of interest. I don't want to get into a big discussion. I know he doesn't feel comfortable on the calls, but I want you to know that in unusual times, he should certainly be available on every call.

He is very engaged.

He is probably sitting at home and listening.

I interrupted Liore.

--sitting in the office and listening, but he should be available for shareholders to talk to.

Good afternoon, Mr. Kahn.

Hi.

I think you asked two things. I think you asked two things, you asked about my business background, and then you asked about the role that I foresee for myself?

Yes, that is right. I was under some impression from Steve Brown or Howard that you are the heir apparent, in terms of COO, and that we had thought that Mark would be a good foil, and a good accountant, and a good reality check person, and I had him in this room where I am sitting now for lunch, of course, I was very unhappy when he left. The Company has had sort of a revolving door of people, and now you are the new man, so we want to hear a little from you.

Alright. Business background. My working career starts in 1993 as an attorney. I was with Skadden, Arps for about five years, mostly doing tax work, transactional tax work, I then went on to private practice elsewhere, including on my own. I did a little bit of advising and consulting as a sort of quasi-finance, quasi-tax advisor to some people, and then came to IDT through that consulting role.

Eventually took a job working for IDT with responsibilities for what was called mergers and acquisitions, and then later called strategic initiatives, it was basically a corporate development role. And then subsequently took the job as CEO of Net2Phone in the fall of 2004. Stayed with Net2Phone until my ascension to the role of CEO of IDT Telecom, which is a good place to segue into my view of the future.

To be honest, I am arms, legs, and body, and a good part of my head into Telecom right now, there is so much to do, and I am keeping so busy with it, I don't think too much about what my next role is. I do have this other title, Chairman of the Executive Committee, which means that I know a good deal about what goes on elsewhere in the Company.

I occasional voice my opinion, mostly about things like compensation, and about cost of capital, and kind of keeping some discipline on the way. The various units are organized. But 90-plus% of my time is on Telecom, and I see that as occupying my time for the foreseeable future.

But you have not been a CEO of any profitable business venture, where you bring a background of being a CEO of a successful business venture to the IDT environment. In other words, one of my concerns has always been that there are too many lawyers and too many people with 160 IQ's running around IDT, but not enough people who have been out working elsewhere, and have demonstrated track records of running successful profitable businesses.

I am sure you are doing a fine job where you are, but I would like you to pinpoint and give me, maybe you can e-mail the names of some people who are in the top upper echelons of IDT, who have run successful businesses on the outside, that have made money and grown, and yada-yada-ya, because grown, because I would be interested in knowing who is in the inner sanctum, who meets that standard. Steve knows my e-mail address. Thank you.

Our next question comes from [Brian Kusanwic], Cross Management, please proceed with your question.

Thank you. I am going to try to make this real simple, like in layman's terms. Jim, you stated we have 343 million in cash. 115 million has to go to the IRS, whenever that may be, $75 million is restricted for finance operations. $40 million is tied up in hedge funds. So I am looking pretty much to run the business, we have $113 million in cash. Is that a correct statement?

One thing, we did pay the IRS 10, so we owe them 105, but I will let Steve Brown, our CFO, it is a numbers question, if that is okay with you for Steve to--

I am just saying ballpark, at 103 or 113 million.

Steve is best capable of answering that question. Thank you for the question.

Your assessment of July 31st is not incorrect.

So we are talking $113 million. This is why you are not looking to buy that stock?

We also have negative working capital after that. We have to also make sure that we have sufficient capital to pay, as the remaining liabilities are larger than the remaining current assets.

Alright. And you are expecting further restructuring and further severance pay, this is again going to come into that.

Most of it is real business liabilities. It just happens that the way most of the Telecom business has been run, the Payables have exceeded the Receivables, especially in the prepaid calling card business.

Yes, because they are the ones howling to buy back stock, there really isn't any money to buy back stock.

It is something that we are considering. A lot has to take into account the type of deal we would do with the IRS, if we would do a deal with the IRS, and taking it into account, to make sure that our working capital does not go below a certain amount, that would force a lot of the relationships we relationships we have, to go from 30 days to 60 days, that we would have to stop repaying them.

We have been in business for a long time. And there is a short-term opportunity over here. But we don't want to take advantage of short-term opportunity that is going to have a long-term detriment effect in the business, we have got to really approach this in a very rational manner, but we see the same things you see.

Okay. We met over the summer, I think you are a very sharp individual, I was kind of concerned though that you didn't, you personally are not taking advantage of taking stock in lieu of cash for salary.

That is something I don't feel appropriate to address on this call. I will say I fully agree both with the Chairman and CEO of IDT, that I think that the stock is undervalued. Okay. Would you be willing to make a projection, on what you think the cash burn rate would be for this current first quarter that ends I believe it at October 31st, and the second quarter? It is not something that we have discussed. And I don't think it is the appropriate at this point. The only thing that, I think everything that has gone on, will get us to the point of what Howard talked about that we would be operationally cash flow positive from the quarter November 1st on, which is our second quarter.

The first quarter we do expect will be better than last quarter. And that is sort of the guidance that we have gotten. We have to be consistent with what we have put out in paper, how we address the call.

Thank you. Our next question comes from Mr. [Harold Weber], Smith Barney. Please proceed with your question.

Couple of questions. If you could go back for a minute to the auction rates, and where you are holding with that, you had given some numbers? You said you took a a further write-down on that this quarter. I would like to know where, are you holding, what type of methods are you using on the write-down on that?

Okay. The write-down is basically what the fair market value of the security is, since it is basically backed by Preferred Fannie Mae. We have to go by what the going rate was at July 31st. So it was a 14.6 million purchase that we were holding for a considerable period of time.

The market value of the preferred, underlying preferred security was $7.5 million at July 31st, causing to us mark to market that amount. Since then, the underlying security now is worth about $1 million. So we are going to make the valuation at October 31st, which is the end of the next quarter, see what the underlying market value of the auction rate security is, and mark it down to that amount, which should be about a further reduction of about $6 million.

Now I mentioned in my remarks, even though GAAP requires to us mark to market, and we have to be conservative, and the balance sheet is going to reflect that conservative amount and obviously the income statement, I would go on a limb, and say the environment right now is that these firms, this was a legitimate firm clearly sold us something, and did not inform us properly when it was sold.

I think the Attorney Generals, most particularly in New York and Massachusetts, have gone a long way to have individuals recover full amounts. We think companies our size may be able, once the Attorney Generals finish with their negotiations with these investment banks and banks, I think companies our size should be able to recover, if not all of it, a sizable amount, and at the very least I think we have a strong legal case. So we are not ready to give up the 13 or $14 million, the $13-plus million that we will have written off by October 31st if things don't change. But I would not bet against us being able to recover a good percentage of this.

Is that the total amount you have invested in the [accruing] preferreds?

That is correct.

so out of all the other cash you are saying only 14 million out of the 300 is in auction rates?

That is correct, yes.

And the other securities that the money is in?

Again, if you would have listened to the prepared remarks, there was great detail. I was reading from a sheet, and the reason why I was reading from a sheet, is because I was talking about where we were July 31st, and where we are today.

We have a large amount of structured notes, I think about 58 million. Most of those structured notes have been sold from July 31st to date. So for the most part, the cash and marketable securities has very little exposure. Most of it is sitting in cash market funds, or things backed by government securities.

Okay. So only that 14 is the issue here at this point?

That is correct, yes. Again we have $38 million in long-term hedge funds. The short-term hedge funds we are going to monetize at the amount that we put on the balance sheet, so the long-term hedge funds we think are very safe and secure, and the funds are working with us to figure out how to cash out the rest, but that is going to take a while.

Okay. And in relation to other businesses that you guys are winding down, getting out of, I would think it shouldn't be that difficult from that to generate $7, 8, 10 million, with the stock at $0.70 that you could buy 10% of the company for next to nothing here. I certainly hope you guys would give some serious consideration to doing that, based on the myriad different kind of assets you have, and some remaining value that should come from some of these things that are not core of operations.

I understand 100% your comment.

It is a topic of discussion that we often have. Thank you.

Okay.

Thank you. Our next question is from Mr. Clay Moran with Stanford Group. Please proceed with your question.

Thank you. I have a couple of questions. I think Steve mentioned adjusted EBITDA for the quarter. I think he said 8.7 million. Maybe you can walk us through how you get there? You didn't put the quarterly results in the press release, and I can't get there based on the numbers you have provided. Steve, can you just let us know sort of from the revenues down to EBITDA, what are the inputs there, and how you get to a positive number?

I don't have a calculator with me, but let me pull out the press release, and just give you some, we have loss from operations of $79 million. So the numbers that come out of that, the loss on sale of business is $9.6 million, it is taken out of adjusted EBITDA. Restructuring impairment charges of $45.5 million is excluded. And depreciation of amortization of $16.7 million is not included. And for the purposes of analysis, to understand how the business is going forward, I also did not include the 15.6 million impairment from the Carmel Receivable that is included in bad debt.

Okay. I will try work with it. Couple of other questions. As of last quarter you had tax assets of like, I think it was 230 million, tax liabilities of 330. This quarter you only have it looks like the short-term tax liability, of whatever it is, 115, but does that mean that the 115 is a clean number, and everything, and that sort of brings to you even with the IRS, or I mean, because there were also some assets in there, some other liabilities. Have you cleaned all of that up in some type of settlement?

Again, the reason why the liability was more complicated, is because there were liabilities that were being offset by net operating losses. Until we reach an agreement with the IRS, we didn't offset one against the other because there was no settlement. Once that was settled we offset, we now have a clean liability.

Since we are taxed in other regions, there are small amounts of other liabilities besides the IRS in there. That are included in that number, but obviously the large, large majority of that is the IRS, and it is all in current liabilities, which means we expect to pay in cash the full amount over the next 12 months. That said, again we talked about, we are exploring the opportunity of taking a portion of the IRS liability, and seeing if we can work out a deal to pay it over. But until anything is worked out, it stays in current liabilities.

So the amount is settled and closed, the only thing open for discussion is when?

Yes.

Okay. And then getting back to the question on the payment in stock, the press release says Howard Jonas will receive 3.5 million shares, and Jim Courter I think 0.9 million. Is that the total, and how does that vest over the four to five years, and can you give us a sense of, I think that is about 6% dilution. Can you give us a sense of the annual cash savings, what you are saving to give up that 6% of the Company?

I will let Steve do the math with regard to the shares. But the vesting is for me cliff visiting after a year. And for Howard cliff vesting after three years, with respect to the first traunch, and then cliff vesting after an additional two years for the second traunch. So he will not vest until the end of the three years some of it, and the balance of it at the the end of five years, and I of course, at the end of my contract.

And his total is 3.5 million roughly. Do you know what the first traunch is, so we can plug that into our models?

Steve will get back to you on that. That if he doesn't have it at the top of his head, he will do the math, but I can't right now. I don't know.

It should be in the press release, but we will get back to you on that.

And you don't have the roughly what the annual cash savings?

Yes, mine is right. It is about 0.9. I recall that. Mine is not so complex, because it is only one traunch. With regard to the savings in cash it is about $1.6 million for '09, and then I am guessing after that, because no one really knows what compensation will be in '10, but I am guessing about, if it is just Howard, it is about $1 million a year in cash savings, as we go forward every year.

Okay. One last question. You have to set aside some cash for the wholesale telecom business that you have in restricted cash. Have any of your carrier providers come back and requested more, and if not, do you think that is a risk going forward?

On the telecom side the cash set aside is really for equipment leases, that were backed by letters of credit. The largest part that Jim is on our purchase of our energy needs, is backed by a letter of credit.

So you don't have those, like you used to have historically the requirements, the deposit for the wholesale relationship, you don't really have that anymore, it is not meaningful?

I am not exactly sure what you are referring to here. Liore?

I don't understand exactly what you are referring to?

Your carrier provides, at least let's say in the business, the wholesale business in general, they used to require deposits up front?

I don't recall you covering us back in '95, because I think that is the last, '95 or '96 is the last time--

I understand the question. It has not risen to the level of materiality that it has come to my attention in that way. I mean, I am sure that from time to time there are some conversations about such things, and frankly the concern that you express is a reasonable concern, given the credit environment out there. On the whole our affiliation with IDT Corporation is healthy, and I think something which we can draw on to distinguish ourselves from some of our smaller competitors in that business, but yes it is a reasonable thing to be mindful of.

Okay. Thank you.

Thank you. Our next question is from [William Ostrand] with Oppenheimer and Company. Please proceed with your question.

Good afternoon, gentlemen. Quick question regarding some of the liquidations that we know are taking place during the month. It was previously announced that several large funds including Southeastern Asset Management, et cetera, would be liquidating by October 31st. Is that still the case? I haven't seen any filings.

I don't have update information. And obviously there has been a lot of downward pressure on the stock, mostly from a lot of large funds that we are selling, that IDT was such a small amount of their total portfolio, that they couldn't care less what the price was. The fact that we don't that have pressure, that same pressure for the last couple of weeks, is a hopeful sign, but I don't have any accurate information on that.

Okay. And relating to some of what Howard said on the operations call a couple of months ago, what is the status like, or can you comment at all on the ongoing work towards partnering with either the shale oil or telecommunications business, either in a joint venture or some sort of investment from another company?

It is forward-looking statements. One, with regard to the telecom, Howard and others have been speaking to one or more well-known international carriers that you would know. There is such turmoil out there economically, and the major carriers I certainly know from experience in dealing with them on the termination side, when I started with IDT, take a long time. The are very deliberative, they take months, sometimes years, so that is certainly worth the effort, but it is a very future oriented thing.

With respect to the energy side, with regard to oil shale, it is much closer at hand, although we are dealing, and we are speaking with a very major energy company, those conversations have been going on a long period of time, much more focused, and we expect, we don't know, we expect something will happen in the next couple of months.

Thank you. We only have time for one final question. Our last question comes from Mr. [Jeff Gaggin] with Milwaukee Private Wealth Management. Please proceed with your question.

Good afternoon. Can you hear me okay?

We can hear you.

Great. There was a time recently when you announced some shale oil exploration in Israel.

Yes.

And I haven't heard much about that since, but wondered if you could comment on your progress there, as well as the special skill set that IDT had that allowed them to win that contract, and what you might expect as a result of your work over there?

As to how we did it, we are noted as a company being innovative, technologically advanced, and one of the factors that weighed into the Israeli decision by the department, I would call it the Department of the Interior, but they call it I think, the Department of Infrastructure in Israel, was the fact that we are involved in the United States in Colorado in oil shale. So we are basically one of three companies that have a lease in Colorado, and therefore, by it's very nature, we came to their attention.

And also we are a company that is not conflicted when it comes to the production of energy in Israel, and some of the major international companies are, so that was a factor as well. We have not talked that much about it. It is in very early stages, but we have received, as you have probably read, if you read Israeli sources, a three-year lease agreement on 150 square kilometers of land in the central part of Israel, to do some research and development in oil shale.

So it is similar to Colorado, but I would make the argument that Israel is going to be there a lot more quickly than the United States, because Israeli security concerns are extraordinarily important in a basically hostile part of the world. So Israel I think is going to pursue the production of oil and gas from oil shale more quickly than the effort in the United States, and we are gratified that we are on the ground floor.

It strikes me that conceivably in collaboration with the Israelis, or independent of more stringent environmental regulations in the United States, there may be the potential for some breakthrough technologies that could then be imported, if you will, back to the US, is that a fair statement or understanding?

That is certainly fair, although for various reasons our effort in Israel, and the effort in Colorado, are going to be distinct efforts.

Okay, thank you.

Very good question. Thank you very much, and we will talk to you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.