IDT Corp (IDT) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to the IDT Corporation second-quarter FY14 earnings conference call.

(Operator Instructions)

In today's presentation, IDT's Chief Executive Officer, Shmuel Jonas, will discuss IDT's financial and operational results for the three-month period ended January 31, 2014. Any forward-looking statements made during this conference call, either in the prepared remarks or 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 obtain 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 non-GAAP measurements, 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 this event is being recorded. I would now like to turn the conference over to IDT's Chief Operating Officer (sic - see press release and see above, "Chief Executive Officer"), Shmuel Jonas.

Thank you very much.

This is my first earnings call since the IDT's Board appointed me the CEO. And I'm honored and humbled by it. I have had the best mentors that one could hope to have, not only while CEO, but throughout my life. I'm also blessed to be working with so many talented, energetic and knowledgeable colleagues here at IDT.

My remarks this quarter will focus on a few key operational results and our business strategy and expectations. For a more comprehensive picture of our financial results, I urge you to read our earnings release in its entirety, and when it is filed, our Form 10-Q. Following my remarks, Marcelo Fischer, our Senior Vice President of Finance, as well as Jonathan Reich from Zedge, and I will take your questions.

IDT has delivered steadily improving results over the past few years, and this quarter was in line with that trend. Adjusted EBITDA increased year over year and sequentially to $11.3 million. And for the first time in our recent history, adjusted EBITDA for the trailing 12 months topped $40 million.

Starting with our Telecom business, we continued to drive growth in Boss Revolution voice sales, which increased 27% year over year and 3.6% sequentially. The increases reflect continued growth in the size of Boss Revolution's current customer base in a number of active US retail locations, both of which reached new highs during the quarter.

We increased US retail locations by 5% sequentially this quarter, and are now up to approximately 37,000 active retailers. Our customer base grew by more than one-third year over year, and by 12% on a sequential basis.

Nevertheless, Boss Revolution's voice service is clearly becoming a mature product and in some key markets, while facing intensifying competition in others. The sequential increase also reflects in part the modest bump in traffic we typically see during the second quarter's holiday season. In that regard, the Boss Revolution calling app continues to gain acceptance with our existing customer base, and is making our PINless voice service even more convenient, and the customer relationship even stickier than before.

Within Retail Communications, growth in Boss Revolution's US business was offset by decreases in sales of other communications products, particularly traditional prepaid calling cards from both overseas and in the United States. In aggregate, Retail Communication revenues increased year over year to $169.8 million from $161.1 million, and decreased sequentially from $172.5 million.

Wholesale Termination Services minutes of use in the second quarter totaled 4.7 billion, compared to 6.3 billion minutes in the year ago quarter, while increasing slightly compared to the previous quarter. Second-quarter Wholesale Termination Services revenues were $167.8 million, a decrease from $182.2 million in the year-ago quarter, and from $178.5 million in the previous quarter.

The year-over-year decreases in minutes and revenue largely reflect the impact of abrupt industry-wide rate changes that took effect in the third quarter last year in certain Asian destinations, and the resulting decline in traffic to those countries. The sequential decrease in revenues reflects a shift in our destination mix. We carried significantly more traffic this quarter to lower revenue-per-minute destinations, so that revenue decreased even as minutes of use increased very slightly.

At the same time, we have been able to drive down the cost per minute to carry our traffic to these and other destinations. This decrease has been a key driver of the overall improvement in telecom's gross profits over the same period.

We have said many times that we manage this business to maximize the gross profit dollars, not revenue. And encourage you to keep that in mind when you look at revenue as a performance indicator.

In addition, similar to what we experienced in prior quarters, Wholesale Termination Services continued to benefit from increased sales in South America as we once again took advantage of pricing shifts resulting from disparities in certain currency exchange rates. This benefit is opportunistic and has an intermediate timeframe. It could disappear tomorrow or continue for some time to come.

Revenue for our Payment Services vertical increased year over year to $48.9 million from $46.6 million in the second quarter of last year. But decreased from $49.9 million in the prior quarter.

The Payment Services year-over-year growth was generated primarily from international and domestic airtime top-up sales. The sequential decrease reflects increased competition in this market, and a restructured resale agreement with a key mobile operator.

Also in Payment Services vertical, we continue to roll out our international money remittance business. After a diligent effort, we have now pinned licenses to transact money remittances in 47 states, and have begun the process of signing up retailers in some of the states, and the beta testing of that service. To date we have approved approximately 70 agents in four states.

Later in the third quarter, we expect to launch the Boss Revolution money remittance service in a few other states, including Texas and Illinois. To give you a sense of the size of the market in those two states, customers there originate from 20 million remittances to Mexico alone each year.

We are simultaneously building out our minutes disbursement network, which consists of over 20,000 locations in 15 countries throughout Latin America and the Caribbean, where recipients can sit receive payouts of transferred funds. We are pleased with the progress we have made to date, and are seeing positive indications that our popular and highly regarded Boss Revolution brand should translate into consumer acceptance in the money remittance business. And aid us in the complex process of on-boarding qualified retail merchants.

As we have discussed previously, establishing a presence in the payments business is an essential element of our long-term growth strategy. Consistent with that goal, we continue investing heavily to develop a suite of payment capabilities and products that will be marketed and sold under the Boss Revolution brand. Airtime top-up and the money remittance have been the first of these initiatives.

Later this fiscal year, we expect a beta launch to additional products that will complement our existing offerings. The first of these is a virtual Visa. This is a product with the functionality of a gift card, but without the need for a physical card. It enables unbanked consumers to purchase with up to $200 in cash a prepaid Visa PIN number that can be used for shopping online or by phone anywhere Visa is accepted.

We also will begin offering a Boss Revolution general-purpose re-loadable card, or GPR card. This card will provide the unbanked customer with the functionality associated with a checking account link to a re-loadable debit card. Consumers can load cash or deposit payroll payments or other checks directly to the card. And the card holders can make purchases online or in person, pay bills, and even write virtual checks from their account.

These products will more fully transition Boss Revolution into the payments arena, and provide our customers with the same functionality that the fully banked consumers enjoy. By combining voice and payment products and services under a single, highly regarded brand, and by providing consumers with a unified platform for their voice and payment transactions, we intend to create a powerful synergistic suite of offerings to serve immigrants and/or unbanked communities.

In all, IDT Telecom's TPS segment delivered adjusted EBITDA of $15.5 million this quarter, compared to $13.3 million in the second quarter of fiscal 2013, and $14.8 million in the first quarter of this fiscal year. TPS's adjusted EBITDA has increased in each of the last 3 quarters, and in 9 of the last 10.

Outside of the core telecom business initiatives, we continue to be very excited about the prospects of Zedge and Fabrix. Zedge again reported strong user growth. The Zedge app is close to surpassing 100 million installs.

User engagement is improving, especially since the December release of the next-generation of the app. Zedge's focus on mobile games distribution is proving to be quite successful. Game publishers have been very pleased with the quality of the game installs that Zedge generates.

Zedge's revenue is $1.7 million this quarter, a 20.2% increase from the prior quarter. The Zedge team is working hard to accelerate the growth of the business and introduce new and complementary projects.

We previously said that we are looking at various options to unlock value at Zedge. We view Zedge's market position as being quite strong, and have now determined that its 2014 spinoff is the most attractive alternative to maximize Zedge's value for our shareholders, pending appropriate tax treatment market conditions and continued performance by Zedge.

Looking at comparables, Zedge views Sungy Mobile, a Chinese company which IPOed in the US last quarter and is trading with a market cap of close to $1 billion, as being a somewhat reasonable proxy for value. I personally believe it to be high.

Sungy's leading product, GO Launcher, is an Android app that allows users to customize their wallpaper, icons and the layout of their screen. Unlike Zedge, whose customer base is primarily based in the US and Europe, Sungy's customers are mostly located in the emerging markets, which are more difficult to monetize and less attractive to advertisers and partners.

Sungy has a capital structure that is somewhat opaque, while Zedge's will be totally transparent. Zedge continues growing at a healthy clip, and I'm pretty confident that savvy investors will take note of these factors and value Zedge appropriately.

Finally, our All Other business grouping, which is dominated by Fabrix but also includes our real estate holdings, generated revenue of $3.8 million in the first quarter, a 14% increase year over year, and a 9.7% increase sequentially. Our main variable [issue] about Fabrix is opportunity. As I mentioned last quarter, we are testing our through system integrators in discussions with many of the world's top providers.

Fabrix has ramped up its product development team and its sales efforts over the past year. As a result of the additional R&D and other costs that Fabrix has been incurring, the All Other business grouping reported an adjusted EBITDA loss of $1.1 million for the second quarter. Compared to an adjusted EBITDA loss of $200,000 in the year-ago quarter, and $800,000 in the prior quarter. We expect to deliver a lot of positive news on Fabrix in the very near future.

Before we move on to Q&A, I should point out that IDT's Board of Directors has declared a dividend of $0.17 for the second quarter. The dividend will be paid on or about March 28 to stockholders of record as of the close of business on March 21.

That concludes my remarks. And now Marcello and I would be happy to take your questions. Operator, back to you for the Q&A. Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Jay Srivatsa at Chardan Capital Markets.

Shmuel, you mentioned the rate changes in South Asian countries. Can you expand on that? Is that something that you see ongoing? Or is it more a one-quarter phenomenon? Help us understand that, and how you hope to battle it going forward.

It's not a one-quarter phenomenon. It happened last quarter, as well. But again, as I stated in my remarks, it could go on for a while or it could end abruptly. It's still continuing as we speak.

Okay. And then, typically in Q2 you see a little bit of improvement in your revenue line. That didn't quite happen this quarter. Was a because of the rate changes? Or were their other factors in play?

It did have -- it somewhat had to do with rate changes. Rates continue to go down to most destinations. But it also had to do with weakness in traditional prepaid calling cards, as well as sales in Europe.

Okay. And you talk also about the disparities in currency exchange. Is there way for you to hedge against this shift going forward? Or is this something you just have to play it by ear quarter over quarter?

I'm going to let Marcelo answer that question.

The changes in foreign currency exchange that you saw back in the P&L are mostly to do with the fact that IDT purchases most of our minutes in US dollars with our US entities. And then we sell those minutes to our various subsidiaries across the globe.

So those subsidiaries in foreign countries usually carry a trade payable and a company trade payable with IDT into functional currency. And when they have to revise those numbers for reporting, in a situation like in the past quarter, like you saw many of the foreign currencies, like for example the [Phillippine] peso.

The Brazilian real was down about 9%. The Argentine peso was down about 26%, 27%. The euro was down a little bit, also US dollars. So when we divided those currencies -- those payables in the balance sheets, that produced a foreign exchange transaction loss for accounting purposes.

And we usually don't try to hedge this type of accounting movement. We like to focus our hedging on cash flow movements.

Okay. In terms of your payment service, how has the reception been so far as you start rolling out in certain areas? And what are the some of the challenges as you plan on a more nationwide launch?

I think everything has challenges, in terms of scaling it. I mean right now, we're still in the process of making sure that we're doing it right, both in terms of how the customer experience is, how the retailer experience is, how it affects -- how the cash pick-up is in a foreign country, how our reporting is handled of it, et cetera.

And so far, we've made a lot of progress on that front, to the point that this weekend, we didn't have any problems at all. Everything flowed perfectly. And now it's going to be start to be about really building it up as quickly as we can. And again, we're going to launch aggressively in two states in the coming quarter. And you will hear a lot and see a lot more of about money remittance going forward.

Okay. And then, last question for me. I know you don't give guidance, but looking ahead to the next quarter and for the rest of the year, do you expect to be able to achieve EBITDA growth and/or gross profit growth? Or do you see further challenges in terms of some of the rate changes and stuff affecting your business near-term?

I will answer it a little bit, but I will also let Marcelo answer that. Currently speaking, I don't see any major challenges. But we live in a very competitive market, and you never know what next month will bring. But so far so good.

Jay, a few things to consider as you think ahead for Q3, and even beyond. Number one, as you probably know, our Q3, which includes the month of February, is usually our only quarter of the fiscal year that has usually 89 days, as opposed to 92 days.

So it's a 2% reduction in the number of business days. And therefore, by the definition, you should expect the daily average to be smaller, because of less days.

That being said, even though we have seen revenue per minute to a lot of the destinations to be lower because we have been targeting a lot more some of the lower-revenue-per-minute destinations. When it comes to gross margins, and therefore to EBITDA, a lot of these lower-revenue-per-minute destinations in actuality, they actually generate for IDT higher per-minute profit.

So both on the net on the wholesale telecommunication services segment -- and even to some extent, on our retail segments -- even though you see the revenue being affected a little bit by the rate shift, when it comes to gross margin/growth profits, we have been seeing expansion of the profitability. Because at the same time that some of the revenue permitted might be going down, our carrier group in trying to buy and purchase termination limits, have been quite aggressive and successful in lowering our cost-per-minute termination.

So that net-net, we have significant expansion on the profit per margin -- on the profit per minute, overall. So we believe that those trends will likely continue. That the gross profit will continue to be at the same levels. Hopefully, we will see some expansion in it.

And therefore, that translates into EBITDA growing over time. Because at the same time, we are keeping our SG&A very much in check. And the [typical] SG&A has not grown much at all in absolute terms as the business has grown. So all of those sectors should be okay for ongoing profit.

Understood. Thank you.

Our next question comes from John Rolfe at Argand Capital.

Just one clarification. The $3.1 million of other expense below the operating income line, is that all related to the foreign exchange payable translation that you referenced earlier?

Yes. It's predominantly the effects on evaluation of inter-Company balances.

Okay, great. And the two states that you plan on launching the money remittance in, I heard you mention Texas. What was the other one? Is it New Jersey?

No, Illinois.

Okay, so Illinois and Texas. And where have you been beta testing to date?

We have done Florida, New Jersey, Connecticut. Those are the three I know of off the top of my head.

Okay. But aren't those states also going to be --

Yes, those states are also going to go live. But we view that Texas and Illinois are particularly attractive for us. So those are going to be our most aggressive ones, even though we are going to continue expanding retailers, obviously, in the other three states.

Okay, great. Thanks very much.

(Operator Instructions)

This concludes our question-and-answer session. And it also concludes today's conference call. Thank you for attending. You may now disconnect.