IDT Corp (IDT) 2013 Q1 法說會逐字稿

Good morning and welcome to the IDT Corporation's first-quarter fiscal 2013 earnings conference call. During management's prepared remarks all participants will be in a listen-only mode.

(Operator Instructions)

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

(Operator Instructions)

In today's presentation, IDT's Chief Operating Officer, Shmuel Jonas, will discuss IDT's financial and operational results for the three months ended October 31, 2012.

Any forward-looking statements made during the conference call, either in the prepared remarks or in the Q&A session, whether 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 either to update any forward-looking statements they may have made or may make. Or to update the factors that may cause actual results to differ materially from those 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 reconciles adjusted EBITDA, non-GAAP income and non-GAAP EPS to the nearest corresponding GAAP measure. Please note that IDT's 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. Please go ahead.

Good morning and thank you all for joining the call and for your interest in IDT. For the first quarter of fiscal 2013, we delivered solid results, both from our telecom operations and our earlier-stage businesses. Our performance was in line or maybe a little bit better than the high-level guidance we gave you last quarter. Our results this quarter were also without a lot of non-routine events.

On a consolidated basis, revenue increased 6.3% year-over-year to $400.6 million. Our gross margin, which had been declining for some time, rose to 16.3%, compared to 15.2% in the year ago quarter. Gross profit for the quarter was $65.3 million. SG&A expense was $55.2 million, a 6.7% increase year-over-year, in part reflecting our continued investment in several growth initiatives that are being prepared for launch.

Now I want to provide some additional details and color on the results of the Telecom Platform Services segment or TPS, which generated 98% of our revenue in the first quarter of fiscal 2013. Within TPS, our retail communications segment continues to perform very well. Revenue increased by 16.4% year-over-year, led by higher sales in Boss Revolution pinless calling service. Which more than compensated for reductions in revenue from calling cards and a decline in retail sales in Europe. Sales in Europe have now decreased for four consecutive quarters. Although we recently rolled out Boss Revolution in the UK, Spain and Germany, those efforts have yet to have had a significant impact on sales.

Revenues generated by our Wholesale Termination Services business decreased 2.8% year-over-year. TPS's gross margin increased to 15.1%, an 80 basis point increase year-over-year. And gross profit reached $59 million, a very nice increase of 12.1% year-over-year. One of the primary drivers of the improvements in gross margin and gross profit is the slight shift in product mix. Our Retail Communications segment's revenue growth continues to outpace our Wholesale Terminations revenue growth.

TPS's SG&A expense, including non-cash compensation of $480,000, totaled $47.1 million for the quarter, a 4.8% increase year-over-year. We continue to invest in expanding our domestic market penetration, particularly in the West Coast which was outside of our traditional distribution footprint. As we have discussed in the past, we also are investing in new products, services and technologies to drive long-term growth. Including additional payment services and minor remittance offerings, as well as multiple voice and message services. These new services have incurred significant development costs but have not yet impacted revenue. Looking ahead, we also expect to increase our marketing spend later this year to help drive sales, launch new products and increase our market share.

TPS's adjusted EBITDA in the first quarter of '13 was $11.9 million, compared to $7.7 million in the year-ago quarter. TPS's depreciation, amortization expense also continues to decline. This quarter it was $2.5 million, compared to $3.8 million in the year ago quarter. However, $700,000 of that decrease was a non-routine reduction in our estimate of capital expenditures subject to use tax as a result of a New Jersey audit.

TPS's income from operations was $9 million, which includes the impact of a $400,000 legal settlement charge. Our all other businesses generated a loss from operations of $1.6 million compared to a loss from operations of $900,000 in the year-ago quarter. Largely reflecting the impact of the non-cash compensation expense. In fact both Fabrix and Zedge are at or very near breakeven on an income from operations basis. And their businesses are performing very well and have tremendous upside potential. Zedge is on the cusp of passing the 50 million download mark on its Android app, which makes it one of the most downloaded Android apps. I'm also encouraged by the fact that Zedge's game channel is now driving millions of downloads a month. Also we expect to launch the Zedge app for IOS in the current quarter. And I have a beta version of the app on my own phone and it's really great.

As in recent quarters, corporate overhead continues to decline. General administrative expense fell to $2.8 million in the first quarter of 2013 compared to $3.9 million in the year-ago quarter. However, a large amount of that reduction was primarily the result of fees charged to Genie for services provided in the first quarter of 2013. Net income attributable to IDT in the first quarter was $3.6 million, compared to a net loss attributable to IDT of $4.3 million in the first quarter of last year. I also want to point out that because of a tax benefit we realized last quarter from a GAAP perspective, our P&L statements will continue showing tax provisions equal to approximately 30% to 40% of our pre-tax income. However, this does not impact our cash position. We will continue to use our NOLs to offset our federal tax obligations.

That concludes my remarks. Marcelo Fischer, our Senior Vice President of Finance and CFO of IDT Telecom, will join me now. And we would be happy to answer most of your questions. Operator, we are ready for the Q&A.

(Operator Instructions)

Jay Srivatsa of Chardan Capital Markets.

Congratulations on a good quarter. Let me ask you a little bit about the Boss Revolution plans. I know you've expanded to Europe. What are some of the other geographies you're looking at as you look into the rest of fiscal '13 to expand the Boss Revolution platform?

We're hoping to launch it in Hong Kong and Australia, also, in the next quarter. Those are most of the geographical expansions, I believe.

Hi Jay. Marcelo. Good morning. Thank you for dialing in. Early good morning for you. As you know, we have recently launched in Europe, in UK, Germany and Spain a couple months ago. Too early to tell the impact of that launch in terms of the opportunity there. It's just starting to grow. We see good indicators in the UK at this point in terms of units growth. And as Shmuel just mentioned, our next goal and target is really the Asia region, with Hong Kong and Australia leading the country that we're going to be trying to introduce Boss Rev over there.

All right. Just a quick on what was your motivation in launching in Europe when, as you know, the economy there has been pretty weak? What was the thinking behind launching there versus elsewhere? I'm not sure what the logic there was.

It's still our second largest market for calling cards. And we have our largest presence outside of the United States in the UK. So that's the main reason that we launched there first. I think we actually might have greater potential in Hong Kong than we have in the UK, but it was an easier launch, especially because of the language, as well, in the UK.

And macro-economics aside in terms of the European region, if you have a good product it's always a good time to launch a good product, which is strategic. And it leverages the rest of the organization. We do have a very strong presence in Europe on the carrier side, as well. We have very entrenched and lengthy relationship with many of the distributors in Europe. Not just in the UK, but as well as in Germany and Spain where we just launched, and some of the other countries, as well. And to a large extent, we see the launch of Boss Revolution in Europe, to some extent, as a defensive strategy in the sense that, similar to what you have seen in the US, the calling card market for traditional calling cards have been declining quite substantially in Europe, as well as the rest of the world. And just like here in the US, Boss Revolution was able to confirm our presence in the retail space, even though traditional calling cards continue to decline. We do hope that Boss Revolution will contribute and also help our European operations to have a turnaround and start growing again, if we do the right to work and we execute in launching the product in those countries.

All right. In terms of your gross margins, it looks like they appear to be stabilizing and maybe even improving. As you look ahead with a lot of these Boss Revolution launches, are you concerned about being able to grow the margins further from here? Or are we expecting more stability in terms of flat margins going forward?

Sure. You're absolutely right. When we launch Boss Revolution in new markets, typically, as part of the growth and the strategy, we launch them with aggressive rates. We promote the products heavily. And, as such, we generate very low margins on that product at first, sometimes even negative margins in trying to get the market share and the minutes to grow. That being said, both European and Asian markets are relatively small compared to our overall revenue base, And therefore, those investments really should have very little impact into our aggregate growth margin for the corporation. If anything, I would say that what makes more of an impact to our gross margin trends going forward is really the product mix relationship between our wholesale carrier performance and now overall retail business performance.

As you know, Jay, in the wholesale carrier, our margins are lower than in retail. Both the wholesale division and the retail division have been growing nicely year over year over the past few quarters. And it really depends on which one grows faster. More recently, retail had grown faster than wholesale. And because of that, it has had a positive impact on the gross margin. We here at IDT are happy to grow both of them. And if one grows faster than the other in one quarter versus another quarter, we are equally happy, as long as both of those segments generate incremental gross profit dollars to the Company, that we could then reinvest in terms of additional investments in SG&A and CapEx. Or to use the additional money to build value into our balance sheet and hopefully share with our shareholders at the right moment.

All right. In terms of Fabrix and Zedge, it looks like you're pretty close to getting to breakeven. When do you expect meaningful contribution from these two segments, both in terms of revenues and earnings as you look at fiscal '13?

It's a hard question to answer. I don't know if in fiscal 2013 they're going to show meaningful impact definitely on the bottom line. But I do believe that 2014 could show meaningful impact from both.

All right. Last question from me. I know macro conditions have been pretty tough globally. But yet you're posting some pretty good numbers. As you look at the rest of the year, how do you see the landscape, both competitively and macro-economically? How do you expect that to effect your business positively or negatively?

We continue to focus on our business. Obviously, the macro-economics in any economy are going to have an effect on our business. And I think that's been true in Europe and in the US, frankly. But as long as we come out with good products at good prices people buy them, so that's our focus.

Yes, Jay. I would say that we are continuing to see good strength in our wholesale carrier business. We are seeing that more and more of our customer base, the carriers that we do business with, are migrating more towards gold and platinum offers, high-quality graphics. We have a robust and strong-quality network. And we're doing well with them, with those customers. We also focus on buying our termination at better rates with these carriers. And we have been successful in doing so. And by bringing a low termination cost into our product, we are able to maintain and expand our gross margins. And I believe that that relationship hopefully will continue over the course of this year.

And on the retail side, even though the traditional calling card market is still very competitive, and pricing is there all the time, and we probably will continue to see some erosion on the traditional calling card products in the US and abroad. But on the other hand we believe that Boss Revolution continues to grow nicely to penetrate into various geographies, and within the US into different states. And growing our customer base quite nicely. I think the customer likes our product. We have created a level of stickiness with them.

So the moment looks good for IDT. The cash flows are strong. The profitability is good. It's a business that has to form itself over the past two years in the sense that it's now easier for us to actually monitor and actually estimate and look forward in terms of how to budget for it. I think the team is executing very well and in good harmony both on the (inaudible) side and the retail side. And we continue to invest on the SG&A side in new products and new strategies. We are continuing to hire more sales representatives here in the US to expand the distribution. We continue to invest money in advertising and marketing behind the Boss brand. We continue to develop more customer-facing applications, whether it is creating new apps for Boss Revolution and some of our other products. Whether it is revamping our Boss Revolution and other customer-facing websites. I think we have a lot on our plate. And I think the investment, hopefully, will pay off to continue us to generate the cash flow that we need to run the business.

Thank you. Keep up the good work.

Jake Kilroy of Willis Investment Counsel

To follow on your last statement, you mentioned that the cash flow's improving, the performance is good, it's easier to monitor the business. As I look at your balance sheet, I'm curious as to your philosophy on capital utilization. You've got a market cap of $210 million and you're holding roughly $166 million of cash before the dividend, $152 million after. You just did $22 million in free cash flow this quarter. And you mentioned in the notes how CapEx is expected to remain at reduced levels going forward. Given your increased visibility, and all the things you've said on this call, what do you view as an amount of sufficient cash going forward? It would seem as though -- your cash is 70% of your market cap -- it would seem as though that's an inefficient use of your cash going forward, particularly with the increased visibility. I'd like to hear your comments on that. Thank you.

I'm not going to give you an exact answer because I don't have one. But I would say that we need definitely over $50 million to run our just day-to-day operations. And we definitely do have, we'll call it, some excess cash on our balance sheet. We do believe that it helps us with the partners that we work with, which are some of the largest phone companies in the world. And they view the fact that we have a relatively strong balance sheet as a positive. And we are continuing to invest in money -- different types of products related to money, remittance, et cetera, that are going to have higher capital requirements for banking licenses, et cetera. And, again, we don't intend on, we'll call it, dividending out the excess cash that is on our balance sheet currently. We do intend on going back to our normal dividend policy in 2014 if tax policy remains relatively stable.

So if the necessary cash is $50 million for day-to-day operations, the other $100 million that you're currently holding is needed for partners?

Again, as I said, it's not an exact answer. That's one of the reasons.

Right. But I'm just thinking in order of magnitude $100 million on a $200 million market cap is an enormous amount of cash to hold without something concrete to designate we're going to allocate to this $100 million. If you weren't cash flow generative, or if you had some sizeable CapEx in the pipeline, I could understand it. But an incremental $100 million sitting on the balance sheet, when you say you only need $50 million to run the business, seems really large.

You might be right but that is our plan.

Okay, thank you.

(Operator Instructions)

Having no questions at this time, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.