IDT Corp (IDT) 2014 Q3 法說會逐字稿

Good day and welcome to the IDT Corporation's third-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 April 30, 2014. 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 may 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 in 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 to 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 call over to IDT's Chief Executive Officer, Shmuel Jonas. Mr. Jonas, the floor is yours, sir.

Thank you, operator. My remarks today will focus on key operational results and include some commentary on our business strategy and outlook. For a more comprehensive and detailed picture of our financial results, please read our earnings release and Form 10-Q filing. Following my remarks, Marcelo Fischer, our Senior Vice President of Finance and IDT Telecom's Chief Financial Officer, will join me and we'll take your questions including those regarding the details of our operational results.

IDT delivered a very good quarter, including another year-over-year revenue gain and a very solid adjusted EBITDA and bottom-line earnings growth. I am particularly pleased by the continued strength of our flagship Boss Revolution service and by the financial performance and cash generation of Fabrix, our cloud-based storage and computing platform, optimized for media and big data processing, and by our continued fiscal discipline.

Year-over-year, consolidated revenue increased 1.7% to $403.8 million. This was the 16th quarter out of the last 17 that we delivered a year-over-year revenue increase. The growth was led by Boss Revolution Pinless, which increased a solid 18.3% year-over-year and 3.3% sequentially. The sequential increase is notable because the third quarter is typically the weakest of our fiscal year, with three fewer days than the second quarter and no major holidays to spur traffic.

Revenue in our retail communications vertical, of which Boss Pinless is the largest component, increased 4.3% year-over-year and 1.6% sequentially to $172.5 million. Also at IDT Telecom, we are continuing our soft launch of Boss Revolution's international money transfer service. Early results suggest that the Boss Revolution brand is sufficiently powerful and well-regarded to attract customers in this field.

Though the business is still embryonic and has a way to go before it will be a meaningful contributor to IDT Telecom's financial results, we have also made excellent progress building out the business's disbursement network in Latin America. As we continue to execute, this business has the potential to become a meaningful contributor to our bottom-line performance.

In another exciting new development for our telecom business, during the quarter we acquired the assets of HDmessaging, an over-the-top provider of white label messaging and texting services based out of the US and Finland. Although the purchase price was not material to IDT, HDmessaging's technology could very well become important assets to both our retail and wholesale businesses over the long run. HD messaging, now labeled IDT Messaging, also provides contextually relevant content with its messaging, acting as a proactive search solution and provider of sponsored content, thus offering our customers a highly popular and engaging new service with a potential path to revenue monetization.

Wholesale revenue increased a slight 0.8% year-over-year to $160.6 million and decreased 4.3% sequentially. Overall, revenue for our TPS segment was $396.4 million, a 1.4% increase year-over-year and a 0.9% decline sequentially. In our all other segment, we continued to benefit from strong revenue growth and cash generation by Fabrix. Fabrix has found increasing traction in the marketplace and now has 10 clients in North America and Europe for its deep storage and remote DVR solutions. All other's revenue, which is generated primarily by Fabrix, with a modest contribution by our real estate holdings, was $4.9 million, the highest level in its history, and a hefty increase compared to $3 million in the year-ago quarter and $3.7 million in the prior quarter.

Cash collections by Fabrix from the sale of software licenses and support services was also very strong this quarter, totaling $5.4 million. The Fabrix technology team continues to develop new market-leading features and give world-class support. Their solutions are winning marketplace acceptance and we are looking to Fabrix to deliver additional sales and revenue growth in the coming quarters.

Last quarter, we said that we were pursuing a spin-off to our shareholders of Zedge, our popular online platform, including apps for sharing mobile device personalization content. Based on what we have learned through the process, and in the face of slower growth in Zedge's revenue than we anticipated, we have decided to postpone the spin-off, as well as the pursuit of other strategic options. Zedge has promising new features and product in development that may substantially accelerate user and revenue growth and we prefer to wait and see how these play out before renewing our active search for a value creative divestment.

On a consolidated basis, IDT's adjusted EBITDA increased to $13.3 million, compared to $10.1 million in the year-ago quarter, and $11.3 million in the prior quarter. This was IDT's ninth consecutive quarter of year-over-year adjusted EBITDA increases. In addition to an increasing contribution from Fabrix, we have been able to improve over time the gross margin on Boss Revolution Pinless and we have been diligent about controlling SG&A expense. Corporate SG&A decreased to $3.3 million this quarter, the lowest since the first quarter of FY13.

On a non-GAAP basis, exclusive of tax-adjusted depreciation and amortization expenses, non-cash compensation, and other gains and losses, EPS this quarter was $0.37 compared to $0.33 in the year-ago quarter and $0.28 in the prior quarter. With this quarter's results behind us and our positive outlook in mind, IDT's Board of Directors has declared a dividend of $0.17 for the third quarter. The dividend will be paid on or about June 27 to stockholders of record as of the close of business on June 20.

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

(Operator Instructions)

The first question we have comes from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Thanks for taking my question. Congratulations on the good quarter, Shmuel and Marcelo. Couple of questions from me. Last quarter, Shmuel, you were a little bit cautious on the Boss Revolution growth, but looks like it's been tracking pretty nicely during the quarter. Can you give us a little bit of color on what changed or what contributed to the sequential growth?

Our team has done a really good job executing in the field. That's really what it comes down to. Some of the -- we'll call it, trepidation -- I have, in general, is still warranted, but they have done a really excellent job executing and continue to do so.

All right. Then in terms of the acquisition, the HDmessaging part of it, do you see that as a separate service or do you see that layering on top of Boss Revolution or (technical difficulty) business? Help us understand how that fits into the puzzle?

It's a combination of factors. I would say that our next iteration of our app is going to have messaging included in it, as well as our white label products for other carriers. There's also some pieces of their service, specifically what we call MagicWords, that are separate pieces, and their messaging piece of the business is also sold as a separate service to carriers as well. So it's a combination thereof. I don't think it has a -- not specifically for money transfer or specifically for Pinless. We think that it's good overall.

Okay. And then in terms of Zedge, it looks like the revenues are running right around $1.5 million a quarter, give or take. What type of revenue run rate are you looking for before you proceed with the spin-off?

That's a good question. We had them budgeted for over $10 million for the year and unfortunately it hasn't quite hit that. But I have seen some of the products that will be coming out of there and we're quite hopeful that they'll get there soon.

And then, last question from me, I know you don't provide guidance, but Q4 tends to be a relatively stronger quarter sequentially compared to Q3. Given the strength in Q3, what are your expectations for Q4?

I expect the same thing that you do (laughter).

I'm sorry--?

I also expect stronger results, as is typical, we'll call it. I'll let Marcelo--

Hi, Jay. We believe that Q4 will be better than Q3 for the reasons that you had mentioned -- i.e., the fact that Q4, we are back to the 92 days run rate. We believe the Boss Revolution will continue to grow year-over-year in the upper teens. Wholesale revenues is always something that's hard to guess, but so far, based on how the month of May came about, we think that the wholesale will perform on a steady base. So we'll definitely have a repeat of Q2 revenues in Q4, hopefully a little more than that.

Very good. Thank you. Nice work.

(Operator Instructions)

The next question we have come from John Rolfe of Argand Capital.

Good afternoon or good evening. I was hoping you guys could just maybe give a little bit more color in terms of some of the milestones that passed during the quarter in payment remittance. I know last quarter, you were beta testing in Florida and New Jersey and you expected to go live in Texas and Illinois. Can you let us know if that happened, what markets might be next?

You had also talked previously about developing a virtual Visa product, and as well, a card with some checking account-like functionality. Are all those still things that are on the table? Have you made progress on any of them? And just broadly or roughly speaking, what sort of ramp would you hope to see for this business, over what time frame would you hope to get it scaled up to the point where it really could be a meaningful contributor to the bottom line? Thanks.

Okay. I'll try to answer all those questions. If I forget one, you're welcome to continue the question. We've done probably in the neighborhood of about 15,000 transactions so far this year, I believe, maybe a little more. And again, considering we do millions and millions of transactions in Pinless and IMTU, it's a very, very small number, but we've really done them without many hitches and it is a completely new business to us and, again, we could grow it exponentially already. But we're really choosing to make sure that we have all the, we'll call it, the kinks out of the system before we really put it into super charge. That's my answer on money remittance.

As far as some of the other products you mentioned, such as Virtual Visa and our GPR products, the main thing that we're waiting for is something that we call aggregation, and that has to do with government requirements that you basically are able to track every type of transaction somebody does and make sure you know who's doing it and that they don't go over any combined limits. That should be ready in about September time and that will then allow us to launch Virtual Visa and GPR throughout the country.

Okay. Okay. Great. Just one follow-up then. In terms of payment remittance, based on the run rates you're seeing there in terms of transactions you're actually processing and the fact that you said you're continuing to be cautious until you're confident that the kinks are worked out, at what point could we see that growth really start to kick in there? A couple of quarters out or how does -- what does the runway look like there in terms of assuming things continue to go well there on the processing side, when could we really see that begin to be a contributor?

I definitely think that it's a couple quarters out before it becomes really meaningful. A lot of it has to do with the number of agents that we bring on. We have brought on some extremely successful agents that are really doing phenomenal. If we can have 100 like them in every state, we'd be like a real, real player in the market.

But I would say that, again, till it has meaningful impact on our bottom line, you're talking more than a year out. I would say probably two to three years still. But before you really start to see it in our numbers, I would say it's probably two to three quarters out.

Okay. Okay. Great. Thanks very much.

Next we have Matthew Greenblatt of Leerink Investment Partners. Please go ahead.

I was just wondering if you could expand a little more on some of the initiatives related to Zedge that you think will help growth accelerate going forward and get you closer to the run rate numbers you're looking for?

Sure. We have a couple of new, we'll call it product lines, that they're adding on, both from emojis, as well as app icons, and we're also launching, basically a new part to Zedge, that we call Zedge X, which is going to be a centralized place where you go no matter which over-the-top or native messaging app you're using to store your content. We believe that those two pieces combined are going to lead to them hitting their numbers.

Great. Thank you very much.

The next question we have comes from [Wayne Brown], investor.

Good evening, gentlemen. I had a question regarding the Fabrix business. How would you characterize the market potential of what that business is going after and characterize the lumpiness, so to speak, of the income in that business currently? Do you have a budgeted number for this year?

We do not have a budgeted number yet for Fabrix for next year. That's the first thing. I actually -- I don't really know the answer to that question. As we've discussed in previous quarters, we have clients that have done over $25 million with us in bookings, we'll call it, in total. So in North America it's probably a $500 million a year business, give or take, but I really -- I don't know the answer to that question.

One quick follow-up, if I may. I'm just looking at obviously the trepidation, for lack of a better term, on Management not participating in any more buybacks. Is there a perspective on the lack of using any more of the capital that you have on-hand for the remaining 5 million shares?

No, there's not a trepidation, per se. We definitely do talk about purchasing more shares back. We always wish we purchased more shares a year ago. We wish we doubled or tripled or quadrupled the amount that we bought then. But the answer is that, if I were guessing on what we would do more of, we would probably raise the dividend before we increased share buybacks, at least in the short term.

Okay. Thank you.

At this time, we have no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Management for any closing remarks. Gentlemen?

We have no closing remarks. Thank you very much for participating.

We thank you, sir, for your time today. The conference call is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a great day, everyone.