IDT Corp (IDT) 2012 Q4 法說會逐字稿

Good morning, and welcome to the IDT Corporation fourth quarter and full year fiscal 2012 earnings conference call. During management's prepared remarks, all participants will be in listen only mode.

(Operator Instructions)

After today's presentation by IDT's management, there will be an opportunity to ask questions.

(Operator Instructions)

For today's presentation, IDT's Chief Operating Officer, Shmuel Jonas, will discuss IDT's financial and operational results for the 3 month and 12 month periods ended July 31, 2012. Any forward-looking statements made during this conference call either in the prepared remarks or the Q&A session with general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those which the Company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation, it is to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or the Q&A, IDT's management may make reference to the non-GAAP measures, adjusted EBITDA, non-GAAP net income and non-GAAP EPS.

A schedule provided in the earnings release reconciled adjusted EBITDA, non-GAAP net income, and non-GAAP EPS to the nearest corresponding GAAP measure. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website, www.IDT.net. The earnings release has also been filed on Form 8-K with the SEC. Finally, please note this event is being recorded. I would now like to turn the conference over to IDT's Chief Operating Officer, Shmuel Jonas.

Thank you all for joining the call and for your interest in IDT. In the fourth quarter of fiscal 2012, we again delivered strong year over year revenue growth. Revenues increased 6.6% to $384.9 million while our gross margin declined 60 basis points to 15.8%. Those two factors netted out to a slight increase in gross profit to $60.9 million, but the fourth quarter's SG&A relatively flat year over year, the result was an increase in EBITDA to $6.4 million for the quarter compared to $4.8 million in the fourth quarter of last year. Our TPS segment has generated between $36 million and $37 million a year in adjusted EBITDA for the past two years. Looking ahead to fiscal 2013, we expect to do as well if not better. Our CPS segment, which is in harvest mode, generated $4 million in adjusted EBITDA in fiscal 2012 and we expect it to contribute approximately $3 million in adjusted EBITDA in fiscal 2013.

This year, we invested a little over $2 million to grow the businesses in all other segments, mostly in the form of additional R&D and other SG&A costs. We expect to continue investing in the growth of these break-out opportunities during fiscal 2013. Our corporate G&A run rate is approximately $13 million a year and CapEx is likely to be between $10 million and $11 million in 2013. Finally, we are returning approximately $15 million a year in dividends to shareholders at the current dividend rate of $0.60 per share a year. Now, let's look at some of the key drivers behind the results and how we are working to exploit the opportunities we see in our businesses.

The TPS segment within IDT Telecom generates 98% of IDT's total revenue. TPS results this quarter were consistent with recent quarter results. We continue to grow revenue strongly year over year. Revenues generated by our retail communications vertical were historically driven by the sale of traditional disposable calling cards but sales of Boss Revolution are playing a role now. Revenues from our wholesale termination business which carries international long distance traffic for telecoms and call aggregators around the globe have also been trending higher and within the payment services vertical, we are growing sales of international mobile top-up products which we distribute and sell for overseas wireless carriers. While these changes in our product mix have delivered revenue growth, they have also lowered consolidated TPS' gross margin, which has been trending downwards for years. The relatively higher margin prepaid calling card revenues are being supplanted by the rapid growth of these lower margin services.

The decline in gross margin has slowed recently. Our wholesale carrier business has strategically and gradually targeted its growth to more profitable routes. Within our retail communications vertical, sales of higher margin prepaid calling cards are declining at a slower rate. As a result, TPS' gross margin has been relatively stable over the past six quarters, declining by 80 basis points net. In the Fourth Quarter, TPS' gross margin actually increased sequentially by 30 basis points. Gross profit dollars increased nicely this quarter. In fact, GP has grown slowly for the past two years as healthy increases in revenue have more than out-paced the incremental declines in gross margin. We continue to view GP dollar trends as one of the key metrics in measuring success and we hope and expect continued increases in GP throughout fiscal 2013.

SG&A expense, although down year over year, increased sequentially and we expect that it will continue to increase in fiscal 2013 at moderate levels as we invest in several crucially important long term TPS growth initiatives. These include development of new value-added services for our wholesale carrier business customers, expansion of IDT's retail sales force here in the US, development of new payment and remittance services, and expansion of Boss Revolution in both Europe and Asia. In fact, we launched both in the UK earlier this year and after the close of the fiscal year, we went live in Germany and Spain. Before the end of the calendar year, we expect to have launched in Hong Kong, Australia, and Singapore; however, we don't expect that the Boss Revolution will have the same growth trajectory overseas that we have enjoyed in the US.

In general, the competitive landscapes in Europe and Asia are not as favorable since many already have strong, entrenched incumbents. The upshot of all this investment is that increases in our SG&A expense will likely offset most of the increases in the gross profit we hope to achieve in fiscal 2013. That will leave us with similar or slightly increasing levels of adjusted EBITDA for both TPS and IDT in fiscal 2013 compared to fiscal 2012. So IDT begins 2013 on a solid footing. We are fundamentally healthy and stable and we are in a position where we can invest significantly in our long term growth while at the same time continuing to return a large majority of our free cash flow to our investors in the form of recurring dividends and occasional share repurchases.

Our positive outlook contrasts sharply with some of our former competitors in the traditional prepaid calling card business, particularly in the US. Several of the companies that once challenged us for dominance of the traditional prepaid calling card market have fallen by the wayside. Earlier this month, Vivaro, which we once considered to be our largest competitor in the US along with all other subsidiaries, including STI Prepaid, Epana Networks, and Care Distribution filed for bankruptcy protection. In its court filings, Vivaro disclosed that its revenues had decreased by 40% since the fourth quarter of 2010. In contrast, revenues of our TPS segment increased by over 26% in the past two years. We at IDT attribute our relative success to three factors. First, we have a dynamic and thriving carrier group that works tirelessly in coordination with our retail businesses to keep our costs competitively low. This makes it very difficult for our retail competitors to undercut our prices for international long distance calls to most destinations and still make a profit.

Second, we first saw the decline in traditional disposable calling cards coming and responded by developing innovative alternative sources of revenue and got them to market ahead of the competition, and third, we have a talented and dedicated group of employees throughout the Company who routinely outperform in sales, technology, and operations and continue to keep us a step ahead of our competitors. We have a great deal of work ahead of us to develop enormous potential within our TPS segment. My colleague, Bill Pereira, the CEO of IDT Telecom, together with his management team, are focused and committed on executing to transform this potential into reality over the coming years.

Today, I also want to briefly update you on three other businesses that are often overlooked beginning with our Fabrix business. Fabrix continues to make great strides. It has the most efficient, most dynamic cloud based video storage solution in the industry. The Fabrix platform enables groundbreaking services such as cloud based CVR that supports the consumer demand for content any time, anywhere on any device. Fabrix customers are also leveraging the Fabrix storage platform as master video libraries and origin servers for content distribution. In addition to media centric applications, the Fabrix integrated storage and computed platforms is also getting a lot of customer interest from non-video applications, including as a platform for big data analytics as well as virtualization.

Many of you know that Fabrix's software is powering a cloud based DVR system for a major US cable operator. The cloud DVR system is now functioning beautifully in over 350,000 homes and we expect it to be operating in over 1 million homes by the end of calendar 2013. The success of this deployment has created a host of opportunities for Fabrix and its system integrated partners. And in a multitude of laboratory trials with various operators, the Fabrix solution has proven its technical superiority and versatility. Following the close of the fiscal year, Fabrix collected $12 million from a system integrator for additional services including storage and video-on-demand applications. This cash will be recognized as revenue over three years, muting its short-term impact on our bottom line. Fabrix is actively marketing to potential customers in North America, Europe, and Asia. The Fabrix team, mostly engineers, is based out of Israel and is extremely capable and intensely focused as other major cable and system operators move towards decisions regarding their deep storage and processing systems later this year, we hope to have much more exciting news for you.

Zedge, our recommendation platform that includes a mobile app that allows users to share and obtain content to personalize their mobile phones and tablets, just surpassed 40 million installations of its Android app which is a remarkable achievement. Zedge's recently launched game channel is off to a great start. Through that channel, Zedge now provides its users with personalized game recommendations and is already generating more than 10 million game downloads per month. The channel has gone over very well with some of the leading mobile game publishers who have provided us with enthusiastic feedback about the high value customers that Zedge brings to them. We expect games to become a major driver of the value for Zedge.

We continue to work on monetizing our IP. The patent asset portfolio held by our wholly owned subsidiary, ICTI, our goal is to strike the right balance between maximizing the value that we can realize for our shareholders from these IEP assets while minimizing risk. We are hard at work and will keep you updated on our progress. Finally it is worth noting that during 2012, we resolved many legal cases with significant downside potential for IDT. We begin Fiscal 2013 in a much stronger position as a result. All in all, this year promises to be very exciting as we pursue excellent opportunities for growth. Thank you for your continued interest in IDT. Now, Marcelo Fischer, IDT's Senior Vice President of Finance, and I will take your questions. Operator, please go ahead.

(Operator Instructions)

Jay Srivatsa of Chardan Capital Markets.

Hi, congrats on your quarter. This is actually Pierce Hewes from Chardan Capital Markets. I've got a couple first questions but the first one is how much penetration have you had with the Boss Revolution products so far?

What do you mean?

Just in the overall market, how is it pushing forward or kind of would you just expand on kind of its ability to take over the market space?

Well it's continuing to grow very nicely and we think that it will continue to grow very nicely.

Yes, hi, it's Marcelo. We have seen very nice growth on Boss Revolution here in the US, both sequentially as well as [vosos] a year ago. If you look at any type of market whether it's a number of points of presence of number of active customers, number of transactions of revenue, they are showing growth of about 15% in Q4 versus Q3 and with 100% growth year over year, so we think that the products are doing very well and we continue to penetrate.

Great, thanks and then also as you mentioned one of your key competitors filed for bankruptcy. When do you expect to see the benefit of this?

I think we've already seen some of the benefit from it and I think that we'll continue to see some of the benefit from it as things play out.

With them declining, you said like 40% or so, is it already somewhat priced in? Have you seen most of it or is there going to be any additional benefit in the coming year that's going to make a market difference?

Yes, I mean, I believe that there is a reason why they went into bankruptcy and their revenues are down by more than 40% and I think part of that reason is the fact that we at IDT have more than doubled our sales in the US over the past two years while they were going down. We do believe that probably a good portion of the former customer base had migrated to us, especially as that customer base is looking for the market information that came [via ping less services] which they do not really offer, so going forward, they really felt cards which are like really not clean cards. Most of the cards that they sell of [cardage] have a lot of fees in them, that's not really a market that we compete, our cards have no fees. They are clean because we have great rates and we are able to drive those great rates because of our buying capacity which they do not have, so I believe that probably customers that are interested in cards which have fees probably those cards will be taken over by some other of our competitors who are willing to launch cards at the loss and see if they could turn the market around. We believe that we don't have to do that. We don't have to lose money in launching cards at the loss to grab that market share, we think we are executing a good strategy right now by starting product at the profit and we'll continue to grow that way.

All right, thanks, and then could you just comment quickly on the status of the spinoff?

We don't have an update at this time on the status of it.

Okay, no problem. And I guess finally, how do you see the wholesale carrier business scaling in the next year?

Can you repeat the question?

Of course. How do you see the wholesale carrier business scaling up next year?

Yes, I mean I think the wholesale carrier business is doing well. I think that we see more and more in the marketplace, more of a focus on our voice products that offer high quality termination. More and more of customers are migrating towards our gold and platinum quality offers and I think that's been driven a lot by the fact that we continue to focus on serving operators that have their own retail traffic and therefore it requires the highest level of service and IDT has a good network and they are able to provide quality termination services. And we also, I think more and more wholesale carriers using more of our customer interactive products that we have launched and we are developing new features on that and this portals allows the customers to interact more with our quality management team. It allows them to develop the portals to allow greater degree of flexibility for the customers to give them better option in terms of pricing and quality on given routes so we think that we are providing a good customer service experience to our customers and we believe that as we try to grow the number of direct connections that we have into connections with both fixed and mobile operators around the world that will allow us to continue to provide high quality voice services to them and continue to grow our market share in that space.

Great. Thank you so much. I'm sorry? Thank you so much for your answers. Appreciate it. Congrats on the quarter.

(Operator Instructions)

There appears to be no further questions at this time. I'll hand the call back over for any closing comments.

Thank you very much. If you have any questions in the coming days, please feel free to e-mail Bill Ulrey and we will post them in an additional 8-K. Thank you.

Ladies and Gentlemen, the conference has now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.