IDT Corp (IDT) 2014 Q1 法說會逐字稿

Hello and welcome to the IDT Corporation's first quarter fiscal 2014 Earnings Conference Call.

(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-month period ended October 31, 2013.

Any forward-looking statements made during this 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 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 reconciles adjusted EBITDA, non-GAAP net income and non-GAAP EPS with the nearest corresponding GAAP measures.

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 a Form 8-K with the SEC. Finally, please note that this event is being recorded. I would now like to turn the conference over to IDT's Chief Operating Officer, Shmuel Jonas.

Thank you very much. I'm joined here in Newark by Marcelo Fischer, the Chief Financial Officer of IDT telecom. At the conclusion of my remarks Marcelo and I will be happy to take any questions that you may have. As I did last quarter, I want to focus on a few developments that help to explain changes in our business and opportunities which will impact us going forward. The results themselves are available in the Earnings Release posted on our website, and again as a reminder, we will take your questions after these remarks. And we look forward to seeing you on December 16.

Overall IDT delivered solid results this quarter. We increased revenue compared to the year-ago quarter for the 15th consecutive quarter with telecom, Zedge and Fabrix all contributing. We strengthened our gross margins allowing us to deliver over $70 million in gross profit in a single quarter for the first time in years. Adjusted EBITDA increased year over year and sequentially to $10.3 million, again a multi-year high. All in all it was another good quarter.

Turning now to the dominant TTS segment within IDT telecom, the strong year over year growth in our retail communications vertical continued to be driven by Boss Revolution pinless international long distance calling service. Boss pinless growth more than competitive for declining revenue from traditional disposable prepaid calling cards as well as from declining retail sales overseas, notably in Europe. Sequentially retail revenue decreased from $176 million in the previous quarter to $172 million this quarter as the revenue increase generated by Boss Revolution's pinless prepaid voice services was less than the decline in traditional disposable prepaid calling cards.

Looking ahead we expect to continue to deliver double-digit year over year growth in Boss Revolution voice revenues but at a more moderate rate compared to the past few years. We have now fully penetrated some of the key geographies in our legacy footprint and probably maxed out on our market share to certain call destinations. To a lesser extent but still significant, we are seeing increased competitive pressures, smaller struggling operators are offering aggressively priced traditional prepaid calling cards in order to compete. In response we just launched our own very aggressively priced traditional calling cards. Pre-and postpaid wireless providers and NBO's are offering all-you-can-use International long distance calling plans. We plan to compete by offering enhanced services and by launching buckets of minutes plans to certain destinations.

Also pure over the top providers like Skype and Boss Revolution imitators are collectively dampening growth. To compete and win here, we have launched our own app and continue to enhance the Boss Revolution platform. The fantastic rate of growth Boss has generated since its inception are not sustainable as this business matures. We have anticipated this evolution and have been preparing for it for a couple of years.

Our long-term Boss Revolution growth strategy centers on a comprehensive multi-pronged approach. First, we are leveraging our technical expertise to innovate new features to enhance Boss Revolution's appeal and ease-of-use and to broaden our customer base. The introduction of our award-winning mobile app for Android and iOS this quarter is a successful product of this effort. Second we are diversifying and expanding Boss Revolution's product offerings by adding payment services such as International air time transfer, International money remittance and domestic bill pay. We will continue to introduce additional payment services in the months ahead with the goal of making Boss the trusted voice in payments platform tailored to immigrant populations. Third, we are working to retain our customer base for the long-term with incentives and pricing that build customer loyalty and that allow us to cross-sell our different products. And finally, we continue to aggressively market and move into new geographies while deepening our penetration into existing markets where we have not yet achieved our targeted market share.

Internationally we recently launched Boss Revolution in Canada, and we continue to see Boss Revolution gaining traction in both Asia and Europe but at a slower pace than we would like. Here in the US which accounts for just under 90% of our retail revenues, our internal sales team is spear-heading our effort to further expand our geographic coverage, sign up new retailers and make sure that our new products and service offerings are understood and adopted by our distributors, retailers and of course by our Boss Rev customers. I believe this program will deliver sustainable growth in retail communications on our top line and even more so on our bottom line. We are very excited about the growth potential of Boss Revolution while being realistic about the competitive nature of this business.

Moving on to wholesale carrier terminations, this was an outstanding quarter with revenues increasing to $178 million from $165 million in the prior quarter. The increase was generated by new sales in South America stemming from currency exchange rates and related macro conditions. This opportunity could continue to benefit wholesale's performance further into the year, or it may not. IDT has always been opportunistic company, and this is certainly true of our wholesale business. Absent this particular opportunity, the underlying carrier business experienced a slight decrease in revenue year over year and sequentially.

Our payment service business continued to expand, reaching just under $50 million in revenue compared to $44 million in the year ago quarter and increasing very slightly compared to the prior quarter. Sales of our International air time transfer service have declined slightly in recent quarters, but new payment offerings such as International money transfer are coming online and will gradually become a more material part of the growth story. Overall TPS's revenue increased to $413 million from $392 million in the year ago quarter and from $404 million in the prior quarter. TPS's gross profit and gross margin also increased year over year, and EBITDA continued to increase coming in at $14.8 million compared to $11.9 million in the year-ago quarter and $13.4 million in the prior quarter.

Turning outside our telecom and payment services businesses, we continue to evaluate strategic options including a sale spinoff or public offering for Zedge and expect to decide on a strategic course of action early in calendar 2014. In the meantime, some recent transactions have highlighted the potential of this business. Most notably Sungy Mobile, a Chinese company that offers an app called GO Launcher for Android phones personalization, completed their IPO on NASDAQ at the end of November raising around $80 million and with a current market cap of approximately $470 million. The company reported having approximately 800 employees compared to 30 or so at Zedge and an annual revenue run rate of approximately $45 million, $20 million of which is generated by GO Launcher. That compares to Zedge's $6 million in revenue over the previous 12 months. What makes this especially interesting is that an overwhelming majority of Zedge's customer base reside in highly monetizable markets like the US and Europe, whereas a large percentage of Sungy's customers are in China.

In addition Zedge is available on Android, iOS, the web and mobile web and will likely be available on other platforms over time. Zedge's revenues increased 25% year over year to $1.4 million on the strength of continued growth in its customer base primarily on Android. Revenues decreased slightly quarter over quarter as seasonal factors and fewer game releases reduced advertising demand this quarter. We're very excited about the user growth and revenue growth that we expect going into calendar 2014.

Earlier today Zedge introduced its fourth-generation Android app which provides a complete overhaul of the user interface with new sections and improved recommendations making relevant high-quality game discovery and personalization content even more accessible than in the past. If you are not one of the 75 million plus people who have downloaded our app, then do so. And if you are, then update it. In addition, we have a major release planned for iOS before year-end. These rollouts will drive continued user growth, improve usage and increase revenues. Zedge's EBITDA continued to increase both year over year and sequentially to $400,000.

In the all other segment that is dominated by Fabrix and includes our real estate holdings, revenue generated in the first quarter climbed 20% year over year to $3.5 million from $2.9 million a year earlier and $3.2 million in the prior quarter reflecting additional customer wins in Europe and Asia for deep storage solutions and the continued rollout of Fabrix's remote DVR solution for a tier one cable customer here in the US. As I mentioned last quarter I am very bullish about Fabrix's opportunities including sales of its remote DVR solution to additional tier one operators. We are in the lab or through system integrators in discussions with many of the world's top providers and moving closer to decision time on some significant potential customers. Fabrix has significantly stepped up its product development and sales efforts over the past year and, reflective of this, all other reported an adjusted EBITDA loss of $800,000 for the quarter compared to a positive adjusted EBITDA of $300,000 in the year ago quarter and $1.1 million adjusted EBITDA loss in the prior quarter.

Overall the solid performance and strong cash generation power of IDT Telecom and IDT as a whole move the board to increase the quarterly dividend to $0.17 from $0.15. They believe as I do that the Company is executing well on its strategic priorities. That wraps up my remarks, and now Marcelo and I would be happy to take your questions. Operator, back to you.

As we begin the question and answer session, please note that Jonathan Reich, COO of Zedge, has also joined IDT's management to take your questions. (Operator Instructions)

Jay Srivatsa, Chardan Capital Markets.

First question, Boss Revolution, in terms of overall retail communication revenues, can you tell us what percentage it is now?

No. We don't break it out. And we're not planning to in the near-term.

Okay. Well, maybe you can clarify in terms of increased penetration you talked about how going forward growth may not be as strong as it was. In terms of revenues, can you share with us what level of growth you're seeing on a quarterly basis and what you expect to see going forward on Boss Revolution revenues?

Again, as I said, on a quarterly basis I'm not 100% sure. Definitely on a year-over-year basis we continue to see double-digit growth. It continues to grow quarter-over-quarter, but it has moderated especially because of the fact that we're really focusing a lot on introducing more products and more services into the retailers and distributors that we currently have. And, as we have said in the past, we don't want to be a one trick pony in terms of just being a pinless service. We want to be the go to portal for payment services as well as pinless.

Okay. You mentioned introducing Boss Revolution in Canada. What are some of the other countries that are in your radar that are potential future opportunities for you for Boss Revolution?

Most notably Asia, however, we're considering adding it for Argentina and possibly a couple of other locations.

Okay. Switching to payment services, can you give us an update on where you are with the payment transfer offerings, and when do you hope to start to see to roll it out in a nationwide basis?

Well, we're up to -- we're at -- over 40 states have licensed us to do money transmission. We will be starting to do it I would say throughout the state of New Jersey within the next three to four months. And we're expanding it to six other states over the course of the next six months.

Okay. Zedge, you talked about looking at alternatives and potential spinoff opportunities. But in the meantime looks like revenues from Zedge seems to have dropped off on a quarterly basis. Can you give us some reasons -- the reasons for why the drop off is and what you expect it going forward?

Yes. As I just read from my speech, basically, advertising is a little slow in August and September -- October to begin with. We also rely a lot on games. And there was fewer releases of new games from the publishers that we deal with during the quarter. If you have -- if you want a more elaborate answer I can let Jonathan answer as well. He's on the line.

Okay, Jonathan?

I think that Shmuel pretty much summed it up correctly. End of summer beginning of September, lighter demand for advertising. And with our focus on game discovery, the game publishers are -- save their goods -- their wares for the end of the calendar year holiday season and the like when customers are buying new cell phones and are going into the marketplace looking for compelling, interesting and fun games to play.

Okay. On that, it looks like the number of installs of Zedge has gone up quite a bit. Just realistically your expectation going into next year on where you can be in terms of number of installs as you look at spinning off Zedge into a separate company?

Well, again we haven't determined exactly what we're doing with Zedge. We have multiple options on the table. However, we believe that we will definitely be over $100 million in early calendar 2014.

Okay. Thank you.

(Operator Instructions)

[Aaron Wilhelm, LG Capital].

Congratulations, Shmuel, on your upcoming promotion.

Thank you. I don't know if it's well-deserved, but I will try to do a good job.

Couple questions on Fabrix and Zedge. Just on Fabrix quickly, looks like we're seeing increased R&D spend at Fabrix the past couple quarters. Can you talk a bit about what's driving that?

Again, building stuff for customers that you don't have yet is expensive especially when you can't offset it with revenues from them. So we continue to expect them to increase the amount of engineers that they're hiring, et cetera, et cetera over the next six months quite a bit. So it actually might increase before -- it won't decrease, but before revenue increases, it might -- the loss might continue to increase depending on how quickly they're able to bring on more engineers and as they expand into other verticals besides remote storage DVR.

Got it. Okay. Your press -- and maybe this is a question more for Jonathan, but your press release today talks about some significant product upgrades in the second quarter for Zedge. Could you talk a bit about what they are and what kind of impact you think that might have?

Sure. So today as Shmuel said we released our fourth-generation version of our Android app. It has an entirely new user interface which has been geared towards making content much more easily accessible to users as well as with the goal of increasing user engagement. And on the revenue side of things we've introduced a set of new advertising units that will help us in terms of propelling the growth of the Company. And then we expect that before the end of this quarter as well, hopefully before the end of the calendar year, that we will be releasing our 2.0 generation of our iOS app which will include integration of ring tones on top of simply wallpapers. Wallpapers have been the primary focus of the iOS app since we released it back in December of 2012.

And then going into 2014, we will turn on the monetization spigot for our iOS. IOS today we don't monetize on. Our belief is that we want to reach a critical mass of users before we actually turn on that monetization spigot accordingly. So that's all on the front end, and then in terms of the backend we continue to invest heavily in our recommendation technology which ultimately provides relevant content recommendations whether it be games, ring tones, wallpapers to our user -- to our users on a more personalized basis. And that is something which is very important to the user experience. Helps maintain that customer interest, because they're getting the stuff that there really interested in. And from a revenue perspective that's important, because our advertisers are able to reap the benefits of having their messages targeted to users that are likely to act upon that advertising message.

Got it. Okay. And Jonathan or Shmuel, you mentioned a moment ago Sungy as a transaction in this space. And I guess using mentioned some advantages that Zedge has over Sungy namely that their customer base is more easily monetized. Are you viewing Sungy as a proxy for Zedge value? And --

I wish.

You wish?

I mean, I don't think that we have -- I don't think that Zedge has a $470 million valuation today, but I'm hoping that we can build it to be somewhere near as big.

Got it. Okay. All right. Thanks very much, guys.

[Adam Cyrus, Tavistock Group].

I just have one question. I noted the year-on-year decline in quarterly cash flow and was curious if you could give any color as to what drove approximately the $5 million decline there.

Sure. Yes. As you can see, our cash flow from operations was about $50 million this quarter compared to about $20 million the same quarter one year ago. And main reason is because, if you may recall, in the quarter a year ago that's when we got that big proceeds from the statement of work we did with Fabrix. So we got that quarter growth to $10 million during Q1. So just timing of cash and recognition of deferred revenue at the time that caused this. If you take that out of cash this quarter, it is actually higher than a year ago.

Okay. Great. Thank you.

At this time there are no further questions, so this concludes our question-and-answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.