IDT Corp (IDT) 2009 Q1 法說會逐字稿

Greetings and welcome to the IDT first quarter fiscal 2009 earnings conference call. (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 for IDT Corporation. Thank you, Mr. Courter, you may begin.

Thank you very much, Operator. Good afternoon and thank you for joining us. It's Jim Courter. I'm here with Steve Brown, IDT's CFO, to report to you on IDT's performance during the first quarter of IDT's 2009 fiscal year. It's the three months obviously that ended October 31, 2008.

Before we begin, please recall that any forward-looking statements we may make during the course of this call either in our prepared remarks or in the 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 assume no obligation to update any forward-looking statements that we've 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 we'll get started.

I'll begin by addressing key shareholder concerns from a company-wide perspective and discussing some important developments. Steve Brown will follow with an analysis of the performance of each of our businesses. Liore Alroy, CEO of IDT Telecom and Chairman of our executive committee, is not going to be on the call due to an illness. I've invited Claude Pupkin, the head and CEO of our shale oil subsidiary, AMSO, to join us for the questions.

Those of you who joined us on the last call may remember that I characterized the fourth quarter's results as a tale of two cities. That is, the bottom line numbers for the last quarter reflected a host of one-time events including legacy restructuring costs and write downs related to the declining global financial markets which tended to obscure significant improvements in our underlying operational results.

In this quarter, which covers the three months of August, September and October, it is becoming obvious that our legacy issues are fading and our operational improvements and structural changes are becoming more manifest. In other words, our underlying operation results continue to improve while one-time restructuring and impairment losses were greatly reduced. During the first quarter of 2009, we generated positive EBITDA for only the second time in over three years. Our adjusted EBITDA gain this quarter was $3.5 million compared to a $7.5 million loss in the previous quarter and a $16.1 million loss a year ago. Our progress is primarily the result of our adherence to the turnaround plan we've been describing in recent quarters.

I wanted to give you the flavor of our progress towards each of the plan's four key objectives. First, we said we would sell, spin off or close businesses and initiatives that were not contributing to our bottom line. Despite very difficult market conditions, last week we announced an agreement to sell our European prepaid financial services business in our telecom division for $15 million, including $10 million in IDT assets tied up to meet regulatory reserve requirements. Within IDT capital we have sold, shut down or otherwise divested over a dozen initiatives and investments over the last 24 months, including some well-known and some not so known at all, [hop stop], Traffic Pull, LocalPull, Depot USA, the call center business in Israel, IDT Jets, and insurance initiative, a legal business in Israel, a legal paralegal discovery business in Israel, post cash, click to talk. Last year, these initiatives lost approximately $26 million. Those losses are gone forever.

Second, we said we would right-size corporate overhead. Under the leadership of Bill Pereira, our Executive Vice President of Finance, and the person that Steve Brown and Howard and I increasingly rely on, we've been slashing corporate costs. For the first quarter of 2009 our corporate SG&A was $11.1 million, down from $18 million during the first quarter of 2008, a 38% reduction. We expect to do even better and achieve a quarterly run rate of approximately $9 million by the end of this fiscal year. The number of corporate employees has been reduced by 30% and we continue to renegotiate fees with our various vendors and service providers. Here again, we thank Bill for his discipline and his financial leadership.

Third, we said we would streamline our core businesses. During the first quarter of fiscal 2008, our three core businesses, telecom, energy, and our debt management and collection business, IDT Carmel together generated $11.9 million in positive adjusted EBITDA. Now, a year later, these businesses threw off $17.6 million in adjusted EBITDA, a 32% increase and we are working for further improvements.

Finally, we said we would continue to make prudent investments in several long-term initiatives with extraordinary potential. One of these, as you know, is our oil shale initiative. With oil shale south -- with oil south now of $50 a barrel, some of you think we should be well advised to head for the exits. We don't think so. Today, this investment is truly no less important in my mind than when oil was over $100 a barrel.

We always considered AMSO, American Shale Oil, as a long-term investment whose viability depended on the fundamental assumption that the global economies demand for conventional oil will eventually outstrip supply from conventional sources and that is just as true today, we believe, as it was a year ago. When the economy revives, we will soon be back where we were this spring. Demand will rise, prices will spike, and we will continue sending huge quantities of money to unfriendly regimes to pay for our national addiction of oil. Our aim is to use this time wisely to help build a solid foundation for AMSO and the shale oil industry.

That is why we recently signed agreements with two of the world's most respected business and research institutions, the first agreement was with our -- with oil supply large company, [Slumberjay], who will help us characterize and evaluate our resources in western Colorado. The second was with Lawrence Livermore National Laboratory, one of the world's premier environmental and energy research institutions to study new and exciting carbon sequestration technologies in oil shale fields. We believe that oil shale can be an environmentally viable alternative energy source. To get there, we're going to have to solve several key challenges, including developing ways to reduce the carbon emissions from shale oil extraction. We could not ask for a more capable partner in that quest than the Lawrence Livermore National Laboratory. Howard Jonas mentioned back in June that we were seeking a strategic partner who would both assume a share of our research and development costs and provide AMSO with additional technological capabilities.

Let me give you an update there. We are currently in discussions with not one, but two potential partners. Both are major and internationally well-known oil firms about forming such a partnership. They are interested in working with AMSO for several reasons, including the fact that our lease hold in Colorado is terrifically rich in oil shale and the scientific and operations team we have put together in Colorado is nothing but world class. I don't want to speculate about timing, but suffice it to say our discussions are going very well.

In summary, we've made good progress adhering to our plan and we have some phenomenal long-term opportunities. In the near term, the Company's future depends on the performance of our core businesses. Steve Brown will delve more deeply into the operational performance and outlook for these businesses during his remarks.

Before I turn the call over to him, let me briefly touch on a couple of interrelated balance sheet issues that are very much on the minds of all of our shareholders. First, I'll begin with an update on the IRS tax obligation, which resulted primarily from the sale of our Net2Phone division to AT&T in the year 2000. We've already paid $50 million of the amount owed. Just today we entered into an installment agreement with the IRS whereby we will pay $55 million of the remaining $67 million we owe by mid february of next year and the balance by mid June 2009.

Second, as we mentioned in our earnings release during the first quarter, IDT purchased 4.6 million shares of Class B common stock for $2.9 million. During the current quarter, as of Friday, we've paid $1.9 million for an additional 2.3 million shares. The buyback program has been relatively modest considering the extraordinary low price of our stock recently. I am asked almost constantly by shareholders why we are not using our balance sheet to repurchase stock given the prices at which it is currently trading. The bottom line is that because of the IRS payment schedule in conjunction with our growing working capital requirements, we do not have as much unrestricted cash available to repurchase stock as we would prefer.

We will continue to look at our available and projected resources and weigh the pressing desire to purchase stock at these attractive levels against our other cash needs and determine the best way to use our resources in maximizing shareholder value. There's one further development that deserves mention at this point. As most of you know, IDT, along with a growing number of public companies, faces delisting from the New York Stock Exchange if our stock price and market capitalization do not attain the Exchange's minimum price and market capitalization criteria. We submitted a plan to meet these requirements to the Exchange and expect to get a decision from the Exchange soon on the viability of the plan.

If our plan is accepted, we'll have several more months to achieve the dollar per share standard and approximately one year beyond that to meet the market cap standard as well. If our plan is rejected, the New York Stock Exchange will obviously commence delisting procedures. We believe at IDT the best way to protect our shareholders is to continue to do what we have been doing, to stop the bleeding and to turn around the Company and then we are going to work just as hard to rebuild IDT's strong balance sheet. We're in this for the long haul and are wholly committed to rebuilding IDT, creating value for you and other shareholders and to provide rewarding careers for the many talented and dedicated people who work for us.

I'll close by saying that I hope to see many of you on our shareholder meeting which is scheduled for December 17 here in New York. For those of you who cannot make the meeting, I wish you and your family a joyous holiday season, and now I'd like to turn the call over to my friend and our CFO, Steve Brown. Steve.

Thank you, Jim. And for the most part, I'm going to echo the remarks that you just made and provide additional details for our shareholders. As you said, we do feel that we are moving in the right direction to deliver the financial results consistent with the goals described several months ago by our Chairman, Howard Jonas. But a very important note to look at at this quarter's results, it should be noted that the positive adjusted EBITDA that you spoke about of $3.5 million for this quarter was not enhanced by any special one-time events or true-ups, but represents the turnaround and discipline of our core businesses that we have been promising.

Obviously, we are not satisfied and there remains much work to be done. We continue to face strong competition in our retail communications business. The strong gross margins delivered by IDT energy this quarter may not be sustainable quarter to quarter. Our turnaround strategy in Carmel, while leaving us cautiously optimistic, is still in its infancy. IDT Corporate expenses which continue to be a major focus are still too high. That said, we are focused on and we are dealing with all these issues, and we feel that we are on track with our corporate turnaround.

Perhaps the only negative surprise this quarter was our below-the-line loss in the other income loss line of $21.2 million. This loss consists of two components. One was the final write down of the auction rate securities which were backed by Fannie Mae and Freddie Mac and we discussed that last quarter. The final write down was $6 million this quarter, wiping out the bulk of that investment. We also wrote off $14 million of losses pertaining to our long-term investments in hedge funds. This decline of -- this is due to the decline of the general stock market and we are required to record losses on our investments as we mark-to-market.

That said, we are making great strides and we made great strides last quarter to reduce our market risk to market fluctuations, by lick which liquidating these long-term investments. We hope by the end of the third quarter we will have minimal to no long-term investments that have exposure. In addition, we are, as I mentioned last quarter, pursuing all avenues including legal remedies to be made whole on the $13 million on auction rate securities that we have written off over the last two quarters.

Now, to understand our operational results, I will as usual go business unit by business unit. First of course, IDT Telecom. IDT Telecom's results this quarter were enhanced by the stabilization of our sales of prepaid phone cards mostly due to our successful strategy of publicizing and litigating against many of our competitors who engaged in unfair marketing practices, our continued efforts in reducing network costs. Our continued efforts in reducing telecom's SG&A costs, and our continued strategy of shutting down or harvesting unprofitable business units in the telecom segment.

As a result, wholesale carrier gross margins remained strong, consistent with last quarter with a 14.7% margin. Calling card margins were a healthy 22.5% this quarter and overall telecom had gross margins of 20.5% this quarter. Regarding revenues, overall telecom revenues dropped 6.7% sequentially to $353 million this quarter. Key drivers of the decrease on the retail side pertain, as of -- pertain similar to last quarter to our non-US businesses. We have stopped marketing our less profitable cards overseas and unique to this quarter we were also negatively impacted by the declining European currencies vis-a-vis the dollar this past quarter. Traditionally, as retail exposed, so does wholesale and wholesale revenues declined also this quarter, roughly an 8.6% drop from last quarter. Telecom's SG&A expenses decreased by 10% to $63 million as we continue to focus on reducing costs. And as discussed, adjusted EBITDA for our telecom division was $6.6 million this quarter, a large step in the right direction.

Next is IDT energy. Our [S-Go] business which had a very strong quarter. Gross margins were unusually high. This is because we took advantage of opportunities in the stock market as we often do in periods of volatility and energy prices, to manage our supply at attractive rates compared to the prices we were able to charge our customers. While we do not believe these margins are sustainable, we will from time to time continue to take advantage of opportunities in the stock market in volatile times when we are able.

Revenues continue to be strong, reflecting our successful efforts to expand our consumer base. We grew to 320,000 customers using 392,000 meters by the end of the quarter. Obviously, we are very pleased with energy's results this quarter which resulted in $11 million of profit from operations. However, as I said before, 30% gross margins are probably not sustainable over the long-term.

The news and progress at IDT Carmel are not properly reflected in this quarter's results. The business basically broke even at the adjusted EBITDA level but these results do not reflect the great strides that new management team has made in coming together on both internal collections, external collections as well as collections using the legal system. In addition, the buyout of the management piece of the JV that owns the HSBC portfolio, the largest portfolio in IDT Carmel's portfolio, which took place in November, should enhance performance going forward, especially as we come into the strong months of tax season.

Gross margins came in lower than usual. This mostly is because we accelerated our legal system based strategies to collect on receivables which resulted in an acceleration of the upfront court fees underlying this strategy. Now that we control 100% of the JV, we plan to sell off portions of the underperforming files. We may use part of the proceeds of such sales to fund new purchases of consumer bad debt while we continue to search for opportunities to find investors or other joint ventures to help finance such purchases or we may look to bring in more outside contingency business.

IDT capital's adjusted EBITDA loss of approximately $3 million was mostly driven by businesses that we think will bring long-term value to IDT. Most specifically, we had a $900,000 loss from AMSO, our oil shale initiative that Jim discussed in detail, and we had an $800,000 loss from [Zedge], both businesses that we continue to judiciously invest in these promising ventures. We also lost in the IDT capital segment $2.4 million loss this quarter from Net2Phone ventures as it continues to defend infringements of its intellectual property. Offsetting these losses, and most particularly of the other capital businesses were CTM, the publishing business, which garnered an $800,000 profit this past quarter. Corporate expenses came in higher than expected and this is even as we continue to streamline corporate overhead mostly as a result of higher than expected professional fees incurred this past quarter. We do expect corporate overhead to continue to decrease going forward on a quarter by quarter basis.

In summary, are we happy where we are today? Obviously not. But we have indeed made great strides in right-sizing the Company, more strides are needed and we are undertaking them. In the short-term we have to continue to divest ourselves of underperforming assets, continue to streamline our operations, and make conservative well-planned investments where there are opportunities. We need to carefully manage our cash flow to make sure there are sufficient available resources to cover our working capital needs as we pay off our tax liabilities and we will continue to evaluate opportunities to buy back company stock. We are not there, but we are getting closer. At this time, I welcome Claude Pupkin to join us and we will open up the call for questions,.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is from Mr. Clay Moran with Stanford Group. Please proceed with your question.

Thanks. Clay Moran. I only have one question. Your SEC filings indicate that the IRS has moved on to 2005 through 2007. Can you give us a sense if there's a dispute there or if we might see another potential tax liability as a result of this new audit? Thanks.

We have -- since we've been a public Company, we have been audited every year, every year that we've been a public Company so the fact that audits continue is just a fact of life of being a large business, even though we're not as large as we used to be, God willing we will be again. But we are a large business in New Jersey. That said, we have -- to characterize disputes with the IRS. In our filings we have never changed any -- made any significant changes in our tax liability from the way we accrued things from day one. Even though we did have a negotiation with the IRS to finalize the last audit, there was very immaterial change in the total liability and it was reflected in our balance sheet. The only major difference was when discussing what was long-term and what was short-term. So the Company's always felt that the tax liability is properly reflected and there's nothing in anything that we have knowledge of of any order of any entity that we're aware of that would require any additional disclosure or accrue any additional liability.

Clay, does that satisfy your question?

Thank you. Our next question is from Mr. [Mike Trainer] with Milwaukee Private Wealth Management. Please proceed with your question.

Hi, thank you for taking my question here. With regard to the shale oil, what level do you assume you need to have crude trade at in order to be competitive with your end product?

I'm going to have Claude, who runs our AMSO division, answer that question. Claude.

It's fairly early in our R&D work to be able to give you a thorough answer to that question. The preliminary numbers we've run, which happen to be consistent with some of the majors who are involved in the business, show a cost of production roughly $40 to $45 a barrel range. We are several years, quite a few years away from getting in the position to be in commercial production and we strongly believe what Jim referred to earlier, which is the long-term prices are going back up, so we feel fairly confident that there will be significant margin between our operating cost and our -- and the external cost of producing oil. I'm sorry, the external market price of oil. However, as I said, it's still early in the game.

Are these production costs similar to what you've heard from other folks outside of the Colorado area, for instance, in [Bakken], and did you mention anything about the work you're doing in Israel during this call earlier?

I'll take those two questions separately. With respect to Bakken, that is not oil shale. That is -- oil shale in the same way that we're working in Colorado. That's basically traditional conventional oil that is trapped between layers of shale but it's already in liquid form. Shale -- the oil shale that we're talking about in Colorado is basically rock that contains a material called [kerogen] that once it's retorted which basically means you heat it up, it converts into a synthetic crude oil. So they're not comparable. The costs of production that I was referring to that are consistent between our estimates and those that some of the majors talked about are in terms of cost of production in Colorado.

The other part of your question -- this is Jim -- had to do with Israel and I did not mention Israel and our oil shale initiative on this call, but I did last quarter, the fourth quarter, I mentioned Israel and we're in a situation there where we are a Company and the only Company that received a three-year lease to do exploration, research and development and that effort in Israel is separate and apart from the effort in the United States, but there's nothing new to report with respect to Israel so I didn't mention it on the call.

I appreciate it. And in conclusion, is the potential oil shale in Israel the Bakken type or more the kerogen type in Colorado?

It's more like the kerogen type in Colorado. The nature of the deposits, they are different, in the sense that it's drier there so some of the water issues that are so publicly discussed about Colorado we believe are easier to deal with in Israel, but it is more -- it is the type of oil shale that you have in Colorado and in Utah and perhaps it's helpful for you to know that there's been a lot of press associated with major contracts that both Shell and other major oil companies are making into oil shale in Jordan and that Jordan oil shale deposit and the Israeli oil shale deposit are part of the same geologic formation.

Thank you very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) . There are no further questions at this time.

Thank you very much. We'll talk to you next quarter.

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