IDT Corp (IDT) 2010 Q1 法說會逐字稿

Thank you, and welcome to IDT Corporation's first quarter fiscal 2010 earnings webcast. This is Bill Ulrey, Investor Relations Officer. IDT's Chairman and Chief Executive Officer Howard Jonas and Chief Financial Officer Bill Pereira will be reporting to you shortly on IDT's financial and operational results for the three months ended October 31, 2009.

This quarter, we're following the same announcement format we used in prior quarters. Our earnings release is available on the Investor Relations page, IDT Corporation's website, it's www.IDT.net. We have also filed the release on Form 8-K with the SEC. These remarks are prerecorded.

If you have any questions after listening to them and reading the Company's earnings release, please email them to us at the following address, Invest@IDT.net. We will accept questions through the close of business tomorrow, December 11. Please include your name and firm name, if applicable, in your email.

If we can constructively answer your question, we will post your question along with your name, your firm's name and our answer on the Investor Relations page of the IDT website as early as next Wednesday, December 16, after market close or soon thereafter. We will also file a Form 8-K with the SEC containing the questions and answers. If you have any questions or suggestions regarding our Q&A process, please email us at the same address.

Any forward-looking statements made during this webcast or (inaudible) in the Q&A, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those that 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 have made or may make or to update you on the factors that may cause actual results to differ materially from those we forecast. In the prepared remarks you will hear today and also possibly in our written responses to questions thereafter, we will make reference to adjusted EBITDA, earnings before income taxes, depreciation, and amortization.

Adjusted EBITDA for all periods discussed here in our remarks is a non-GAAP measure representing operating income, exclusive of depreciation and amortization, restructuring and impairment charges and gains or losses as a result of business or asset sales. Adjusted EBITDA is one of several key financial metrics management uses to evaluate the Company's and the different segments operating performances.

The schedule provided in the earnings release reconciles adjusted EBITDA to the nearest corresponding GAAP measure, loss from operations each of our segments and both loss from operations and to net loss for the Company as a whole. Now, to begin the discussion of our operating results, here is IDT Corporation's Chairman and Chief Executive Officer, Howard Jonas.

Thanks, Bill. Good afternoon. This is Howard Jonas. Let me begin by welcoming our fellow shareholders and IDT employees. Thank you for listening in. (Inaudible) Jim Courter [presented] CEO on these calls. I cannot hope to match Jim's eloquence, but I hope that my own style and confidence in IDT will keep your interest. Jim has been invaluable to IDT and we look forward to (inaudible) advice and service as a Vice Chairman for years to come.

With our results this is quarter, IDT has achieved six consecutive quarters of positive EBITDA. Adjusted EBITDA is one metric we use to provide a meaningful measure and basis for comparison of core operating results. During these six quarters, we generated $65 million in adjusted EBITDA despite the worst global economic environment in a generation.

That's not bad, especially when you consider that in the previous 18 months our adjusted EBITDA loss totaled $181 million. That's nearly a quarter billion dollars net improvement. A big part of the turnaround was achieved by divesting non-core businesses and aggressively cutting costs both in terms of corporate overhead and streamlining our core businesses.

None of these moves was easy. I have been IDT since the beginning, and some of the businesses cut were very dear to me, and the people we had to let go were good friends. But we did what we needed to do to provide a platform for future growth. We have come a long way. That doesn't mean much if we stop at cost cutting.

So now we're all focused on growth strategies in our core businesses as well as in a few select projects where we are investing very judiciously. At IDT Telecom, we have begun leveraging our recent consolidation of a [UTA] distribution subsidiary by rolling out and promoting a new, very competitive national brand of calling cards and in the fourth quarter of last year.

As a result, in the first quarter the rate of decline in U.S. prepaid calling costs slowed and we're looking to turn this around and produce revenue growth in this line of business, although probably at lower margins than initially. Overseas, our retail business in Asia and Europe has double-digit sales increases year-over-year.

Keep in mind that as our retail prepaid businesses generate more minutes, our wholesale carrier business can leverage (inaudible) to obtain better rates and margins. We have a healthy growing retail business in order to have a carrier business and vice versa. We are also leveraging our UTA distribution network to resell an international mobile product line.

This service allows the customers in the United States to buy minutes and transfer them to the accounts of their friends and family with participating wireless carriers overseas. We weren't even in this business a year ago, but it really took off in the last half of 2009. We expect great growth for this business in the year ahead.

At our headquarters, I am the in-house optimist, and I am optimistic that these and other growth initiatives will gain momentum this fiscal year, significantly improving our top line outlook for IDT Telecom global retail businesses while aiding our carrier businesses as well.

Now let's talk about our Genie Energy division. We formed Genie Energy to put our energy business and growth initiatives under a common managerial structure to provide focus and coordination. Within Genie, our (inaudible) IDT Energy has delivered solid performance for several quarters. We have maintained margins well above expected levels and been successful in terms of rising, declining and stable prices.

We have recently refocused sales and marketing on bringing higher value customers and our continued growth will depend on how that program develops. We are pleased with IDT's energy performance and our expanding our model to more states. We are monitoring deregulation developments in a number of states and if the regulatory parameters are right for us and if utilities take a supportive approach then we'll start up operations elsewhere.

If we do enter new markets, we will invest to build our customer base much as we have already. We already have a proven model and seasoned management in place to optimize our use of capital and maximize the return on that investment.

Our alternative energy segment, AMSO's R&D operations in Colorado continue according to plan. We currently are designing our pilot plan and plan to begin a pilot [reading] test late in calendar 2010 or early in 2011. Upon successful completion of the pilot test, we'll begin to work to design and implement a larger demonstration to evaluate the commercial viability of our (inaudible) approach.

In Israel, our alternative energy subsidiary, IEI, has begun drilling and other work to characterize the oil shale results in the licensed area. The early results are promising and if all continues to go well they will begin to design, build and eventually operate a pilot stage test the feasibility of and prepare the (inaudible) for commercialization.

However, the scope of the project and its technical and capital requirements are very high. That is why we may recruit a well-capitalized partner just as we did with Total in Colorado. Taken together, these two shale initiatives are tremendously exciting, especially given the advance the industry is making to develop environmentally friendly shale oil extraction technologies.

The magnitude and importance of the oil shale resource is such that it can favorably reshape the geopolitical landscape of the United States and our allies around the world while at the same time becoming a powerful engine for economic growth and job creation here at home. In addition to shale oil, we have continued to invest modestly in a very few targeted initiatives with high growth potential.

Zedge, our destination for mobile content, continues to exceed expectations. The Zedge website received approximately 23 million unique visitors in the first quarter of 2010 compared to approximately 16 million in the year ago quarter. Zedge Mobile enjoys phenomenal growth year-over-year. In the first quarter of 2009, it had 4 million unique visitors. A year later 25 million unique visitors came to the site.

There is, of course, a fundamental shift underway in the marketplace for mobile content. That's one reason Google paid $750 million for mobile advertising provider last month. So I am very pleased Zedge Mobile has developed such a large following so quickly in this corner of the market. We are working to ensure that it remains one of the key mobile content destinations.

With the Zedge community's growth combined with the slow rebound in the global advertising market should help Zedge move toward financial self sustaining. If Zedge's community continues to grow at its current pace, Zedge will become an increasingly valuable tool to reach young people around the world.

Finally, we continue to invest modestly in [Fabrics TV] in which we are a majority shareholder. Fabrics has developed a highly innovative video content delivery and storage platform enabling content operators, telecommunications providers, and ISPs to provide [union cast] television applications including next generation video-on-demand and remote video storage capabilities.

[Fabric] and software is being OEMed and is currently being deployed across several cable systems. We believe that Fabrics has great potential to be a winner in a new world of content delivery, and I expect exciting developments in the quarters to come. We are aggressively pursuing growth strategies in our core businesses and we have potential game changers in oil shale, Zedge and Fabrics.

Overall I am extremely happy with our recent progress and where IDT is headed. Before turning the call over to Bill Pereira, I want to take a moment to thanks all the IDT employees who work so hard to make our progress and the turnaround possible, and also express my appreciation for our long-term shareholders who stuck with us when so many others failed.

I am grateful for your commitment to IDT. Now, here is IDT's Chief Financial Officer, Bill Pereira.

Thank you, Howard. Good afternoon, everyone. As most of are you aware, by the end of fiscal 2009 we had substantially implemented the Company-wide restructuring and streamlining plan which we viewed as essential in providing IDT with a solid foundation for growth.

Nevertheless, there were several developments during and subsequent to the first quarter of 2010 that have allowed us to further sharpen our focus on our core businesses. Before getting to the quarter's results, I would like to discuss some of these developments.

In August 2009, we received $4.4 million in proceeds from the sale of our Palo Alto real estate holdings, of which we paid $1.5 million to our non-controlling partner in November, and we followed that up in October with the sale of our building in Puerto Rico that previously housed our call center operations. The Puerto Rico sale netted $800,000 in cash on a total sale price of $7.4 million.

These real estate transactions followed the sale of our Jerusalem, Israel building last fiscal year. At this point, our remaining real estate holdings consist of our former headquarters building at 520 Broad Street in Newark and two (inaudible) properties in Piscataway, New Jersey which house part of our telecom network infrastructure and related employees.

The $37 million in notes payable remaining on our balance sheet consist essentially of the mortgages underlying these three remaining properties. In mid-September, we spun off to our shareholders the equity CTM Media Holdings Inc. which included the CTM Media Group, IDW Publishing, and the WMET Radio station in Washington, D.C.

The spin-off of CTM Media Holdings reduced our total assets by $21.2 million. Included in that total is $9.8 million in cash, $4.1 million in property and equipment net of accumulated depreciation, and $3 million in net accounts receivable. In addition, the CTM spin-off reduced our liabilities by $5.4 million.

During the quarter, we also announced the formation of our GE Energy division, bringing our energy-related businesses under a common organizational umbrella. Within Genie we operate two segments, IDT Energy, our ESCO operating in New York state, and our alternative energy segment.

The latter consists of AMSO which holds our interests in the joint shale venture in Colorado with Total and Israel Energy Initiative, IEI, our alternative energy venture in Israel. We also began an auction during the quarter to monetize our [STC] Spectrum license holdings. Although the auction generated no bids, we continue in discussions with interested parties.

Now let me turn to the financial results for the first quarter of fiscal 2010. The quarter continued the trend of recent quarters with improved year-over-year results and adjusted EBITDA and operating income while our top line continues to decline. Company-wide revenues for the first quarter declined $76.5 million or 18.9% year-over-year, and $15.7 million or 4.6% sequentially.

Revenue at IDT Telecom fell to $285.6 million, down 14.9% from the year-ago period and down 6.3% sequentially. The larger of the two IDT Telecom segments, Telecom Platform Services, or TPS, generated $275.2 million in revenues, a 14% decline compared to the first quarter of 2009 and a 6.1% decline sequentially.

TPS delivers international long distance telephony services to retail and wholesale customers. Within TPS, our largest lines of business are our wholesale carrier service business and our global retail business which includes our U.S. retail calling card operations as well as our retail operations in Europe, Asia, and Latin America.

The revenues from carrier services declined 10.8% year-over-year and 7.3% sequentially. The minutes of use rose slightly, but revenue per minute declined 11.5% year-over-year as a result of intensified competitive pressures in the wholesale market. Global retail revenues fell by 15% year-over-year and 3% sequentially.

Within global retail, revenues for our U.S. calling card operations declined substantially year-over-year, but the rate of decline slowed significantly in Q1 2010 compared to the sequential declines we saw in fiscal 2009. During the fourth quarter of fiscal 2009, we purchased a remaining interest in our UTA distribution subsidiary that we didn't already own.

As a result, we are now able to better align our sales and marketing efforts with product development and pricing strategies and we have launched a new brand of prepaid calling cards nationwide to leverage this synergy. We are encouraged by the fact that U.S. calling card minutes of use increased sequentially in response, though average revenue per minutes and gross margins declined as a result of more aggressive pricing, particularly on the new brands.

As Howard mentioned, growth in sales of international Mobile Top Up, IMTU, was very strong. The IMTU business resells minutes provided by participating overseas mobile operators to customers in the U.S. who can then transfer them directly to the mobile phones of friends and family overseas served by the operator.

Although we have seen very rapid growth in this business since we launched it in the second quarter of fiscal 2009, it generates significantly lower margins than our traditional calling card product and is still relatively small, but we are excited about the growth potential of this business. Outside the U.S., we continue to see healthy retail minutes and revenue growth in Europe and Asia.

Our other telecom reporting segment, Consumer Phone Services, CPS, provides residential local and long substance calling services. This business has been in [modest] mode since fiscal 2006 and its customer base continues to [mature] at expected levels. CPS revenues were $10.4 million in the first quarter, down nearly a third from the year ago level.

Turning now to our newly formed Genie Energy division, our ESCO, IDT Energy, had another strong performance in the first quarter of 2010 largely due to gross profit per unit level that we don't believe are sustainable. Although revenues declined 40% year-over-year to $40.2 million, this was mainly due to a decline in both electric and gas prices as consumption remained effectively flat.

IDT Energy's meters served declined year-over-year in sequentially as well, however, going from 397,000 in Q4 2009 to 372,000 in Q1 2010. We retooled our sales and marketing program in order to reduce churn, target higher value customers, and increase productivity.

This effort has significantly reduced churn which declined from 6.1% in Q1 2009 to 2.7% in Q1 2010, but that was not enough to offset the slower pace of gross meter acquisitions. We expect that the rate of growth acquisitions will improve in the second quarter and aided by continued low levels of churn we expect to begin growing our customer base once again growing the current fiscal year although at lower growth rates than we achieved during the first half of fiscal 2009.

Also within Genie Energy as expected our alternative energy segment reported no revenue as it is still in the RD&D phase. Gross margin at IDT fell to 21.1%, down 140 basis points year-over-year and 170 basis points sequentially driven largely by IDT Telecom where the gross margin dropped 220 basis points year-over-year and 320 points sequentially to 18.7%.

The investment in our new calling card brand in the U.S. that I mentioned earlier coupled with the aggressive pricing on our European calling card as well as the mix impact from the growth of our IMTU product and the decline in average revenue per minute in our carrier services business were all factors contributing to the growth margin decline.

Gross margin at IDT Energy jumped 620 basis points year-over-year and 1,100 basis points sequentially to 36.3%. We continue to believe that this level of gross margin is not sustainable on a consistent basis going forward. However, IDT Energy has been successful in maintaining strong margins despite fluctuating market conditions over the past several quarters now.

Company-wide SG&A expense totaled $57.1 million, fully one third lower than the year-ago quarter's level $85.6 million and down by 8.9% sequentially. Corporate SG&A of $5.5 million was half the level of the year-ago period. We have cut costs by reducing personnel as well as legal and professional fees while stock-based compensation expense rose somewhat this quarter related to arrangements with Jim Courter on his retirement as CEO.

SG&A at IDT Telecom was reduced year-over-year by 27.1% to $44.5 million reflecting the same factors I just mentioned [overall] as reduced facilities and equipment and software maintenance costs. SG&A expense at IDT Energy declined to $4.1 million, less than half the level of the year-ago period. The reduction was led by a steep decline in customer acquisition costs and the associated compensation as a result of the sales and marketing restructuring begun during the fourth quarter of fiscal 2009.

Lower purchase of receivable costs and other fees billed to us by the incumbent utilities also contributed. As those of who you have listened to previous calls know, we use adjusted EBITDA as a key metric when evaluating the performance of our businesses in the Company as a whole. It is a non-GAAP measure representing income from operations exclusive of depreciation and amortization, restructuring charges, and impairments.

In the first quarter of fiscal 2010, adjusted EBITDA company-wide was $9.5 million, a healthy increase compared to the $2 million generated in the first quarter a year ago. The improvement reflects the impact of our corporate restructuring program and particularly reductions in SG&A.

But the pace of cost cutting did not keep up with the decline in sequential gross profits at IDT Telecom and adjusted EBITDA fell 28.9% compared to the prior quarter. Adjusted EBITDA at Telecom was $7.5 million, up 8% compared to the first quarter of fiscal 2009. TPS contributed $3.6 million to that total and CPS the balance.

IDT Energy generated $10.5 million in adjusted EBITDA, down from the $11.1 million in adjusted EBITDA it generated in the first quarter of fiscal 2009. Depreciation and amortization charges company-wide continue to fall as a result of our recent relatively low levels of CapEx spend.

IDT Telecom's migration of its global network from dedicated capacity TDM circuits to burstable Internet Protocol circuits have significantly reduced our CapEx requirements as well as our network operating costs. Depreciation and amortization declined 27.1% year-over-year to $9.4 million.

This reduction contributed to IDT's ability to achieve positive income from operations of $200,000 in Q1 which compares favorably to the loss from operations of $12.1 million in the year ago period and the $200,000 operating loss in Q4 2009. In my fourth quarter 2009 remarks, I made note of the fact that we had achieved positive income from operations of $1.8 million and noted it as a significant milestone in our past to bottom line profitability.

While that was accurate at the time, two events since the end of the fiscal year have conspired to change the situation. First, we completed the CTM spin-off in the first quarter of 2010, so CTM Media Holdings and its subsidiaries were reclassified to discontinued operations for Q1 and all prior periods which reduced Q4 2009 income from operations by $1.3 million.

Second, during Q4 2009, we entered into an agreement to sell our European prepaid financial services business, EPP, and as a result we reported EPP in discontinued operations. We subsequently determined that EPP's prospective buyer was unlikely to complete the transaction and, therefore, that EPP no longer met the criteria to be reported as a discontinued operation.

The assets, liabilities, the results of operations and cash flows of EPP were reclassified to continuing operations this quarter which reduced Q4 2009 income from operations by $700,000. As a result of these two changes, we had a $200,000 loss from operations last quarter rather than positive income of $1.8 million I reported to you at the time.

Still, I am encouraged by the fact that we have now operated at break even over the past six months as we look to improve from here. We reported a net loss of $3.5 million in Q1 2010, a substantial improvement from our $37.3 million loss in Q1 2009.

Last quarter, we reported net income of $7.2 million which included a one-time reversal of a $16 million tax accrual. By the way, I should mention since we account for our 50% ownership in the operating company, [Encore LLC], using the equity method our share of [Encore LLC's] net loss for the quarter, $400,000, is included in the other expense line in the consolidated statement of operations and does not impact our revenue, expenses, adjusted EBITDA or operating income.

Net loss attributable to IDT per share, which was formerly referred to as net loss before minority interest, in the first quarter of fiscal 2009 was $0.17 compared to a net loss per share in the first quarter a year ago of $1.53 and net income attributable to IDT per share in Q4 of $0.35.

Turning briefly to IDT's cash flow, net cash generated by operating activities turned positive during the quarter and totaled $2.2 million compared to net cash used in operating activities of $52.4 million in the first quarter a year ago and $2.4 million used last quarter. The statement of cash flows also includes negative $9.8 million in cash consolidated as a result of CTM Media Holdings spin-off.

Moving on to our balance sheet, as of October 31, 2009, cash, cash equivalents and marketable securities totaled $187 million, of which $20.3 million is restricted. As we previously announced, BP Energy became our preferred supplier of electricity and natural gas in New York State during the prior quarter.

As a result of that agreement, collateral comprised of $57 million in letters of credit outstanding at the close of our 2009 fiscal year on July 31 was reduced to just $7 million as of October 31 resulting in a $50 million increase in our liquidity. Which brings me back to where I originally began my remarks.

I believe Q1 continued to solidify our footing and puts us in yet in a better position to go after growth in our two main businesses while at the same time bringing us ever closer to our goal of sustained bottom line profitability. This wraps up my discussion of our results for the quarter.

Before I leave you, I just to want remind anyone who has a question, to email it to us at Invest@IDT.net by the close of business tomorrow, December 11. If we can constructively answer your question, we will post our response on our website and through a Form 8-K as early as Wednesday, December 16, following the market close.

I hope everyone enjoys the holiday season. I thank you for your interest in IDT and wish everyone happiness and prosperity in the year to come.

Thank you. This concludes the IDT Corporation's first quarter fiscal 2010 earnings webcast.