IDT Corp (IDT) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the IDT Corporation's first-quarter FY15 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 Executive Officer, Shmuel Jonas, will discuss IDT's financial and operational results for the 3 and 12 month period ended October 31, 2014. Any forward-looking statements made during this conference call either in 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 to either update any forward-looking statements they have made or make, or to update the factors that may cause actual results to differ materially from that they forecast. In their presentation or Q&A IDT's management may make reference to the non-GAAP measures, adjusted EBITDA, non-cash 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'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 Executive Office, Schmuel Jonas, please go ahead.

Thank you very much. My remarks today will focus on key operational and financial results for the first quarter of our FY15, the three months ended October 31, 2014. Throughout my remarks, unless otherwise indicated, the financial results I discuss are for that quarter and are compared to the first quarter of FY14. For a more comprehensive and detailed discussion of our results, please read our earnings release issued later today, and our form 10-Q which should be filed later this week.

Following my remarks, Marcelo Fischer, IDT Telecom's Chief Financial Officer will join me and will be glad to take your questions. As most of you know we closed on the sale of our stake in Fabrix this quarter and reported a $75.1 million gain as a result. Subsequently, our Board declared a special dividend of $0.68 per share. In addition and in light of our recent results, we have raised our quarterly dividend to $0.18 per share from the $0.17 per share we paid quarterly in FY14.

As I mentioned last quarter, we are looking at several options for the remaining cash from the sale including acquisitions, stock buybacks and additional special dividends to shareholders. We will provide more information when developments warrant.

Turning now to our operational results for the first quarter of FY15. Revenue on a consolidated basis was $412.9 million, compared to $420.7 million in the first quarter of FY14. At IDT Telecom which accounted for 98.4% of our total revenue, revenue was $406.1 million compared to $415.8 million.

Boss Revolution's PIN-less continued on a solid growth trajectory, revenues increased 17.2% year over year and 2.9% sequentially. We continue to enjoy healthy customer growth, offset somewhat by declining ARPU, driven by declining permanent rates and costs. For the remainder of the fiscal year we continue to expect year-over-year double digit revenue growth.

Boss Revolution PIN-less comprises the majority of retail communications' revenue. As in prior quarters its growth was partially offset by revenue decreases in other retail communications products, including sales of traditional calling cards here in the US and overseas. Overall, retail communications revenue increased by $10.1 million to $182.6 million.

Wholesale termination services revenue was $159.7 million compared to $178.6 million in the year ago quarter. Minutes of use increased over 3% but on average we carried more minutes to lower revenue per minute destinations than we did in the year ago quarter. We also generated significantly less revenue from the pricing shift opportunities in Latin America that we previously discussed.

Payment services revenue increased year over year to $51.2 million from $50.1 million a year ago. International mobile tablet sales which are the dominant component of this vertical, continued to grow modestly but are under intense margin pressure. Although money transfer is not yet a meaningful contributor to payment services revenue, we continue to achieve robust growth in number of transactions, in dollar volume and active customer base. We are launching aggressive promotions during this holiday season intended to further gain name recognition in this space and market share.

Elsewhere in the Company, Zedge increased revenue to $2 million from the $1.4 million in the year ago quarter, an increase of 40.9%. Several positive trends are at work here. Zedge continues to improve its user experience and as a result is growing its Android daily average users rapidly, up 60% year over year, while gaining incremental revenue from its games channel.

In addition, Zedge has significantly refined and improved its ability to monetize its mobile offerings, and will continue to rollout several significant additional monetization focused enhancements in the year ahead. Zedge contributed $577,000 in adjusted EBITDA in the first quarter. The first time also that it has surpassed a $2 million annual run rate mark. Looking ahead, Zedge is on track for a strong year.

Returning now to IDT on a consolidated basis. SG&A decreased from $57.8 million to $57 million on reduction in corporate overhead and SG&A expense in our all other vertical, which more than offset increases at Zedge and IDT Telecom. IDT Telecom's SG&A increased mostly due to higher personnel cost including expansion of our internal salesforce and more aggressive Boss Revolution marketing.

We are, however, intent on restraining growth in SG&A expense in our core telecommunications business. Accordingly at the end of the first quarter we implemented some large cuts to our sales and administrative personnel in Europe. By the way, corporate G&A expense has now declined for the fourth consecutive quarter and our corporate run rate is under $12 million a year, compared to $14.8 million in FY14.

IDT's adjusted EBITDA increased slightly year over year to $10.4 million from $10.3 million, consistent with our forecast of steady to slight growth during FY15. IDT Telecom's adjusted EBITDA decreased to $11.4 million from $15.3 million, but improvements at Fabrix and Zedge, declining corporate G&A more than made up the difference.

IDT's depreciation amortization expense was $4.4 million compared to $3.9 million, reflecting higher rates of capital expenditures in recent quarters as we invest more heavily in developing new products and capabilities. Consolidated income from operations, which includes the $75.1 million gain on the sale of Fabrix, jumped to $79.6 million compared to $7.3 million in the year ago quarter. This quarter's results were also impacted by severance expense of $1.5 million, resulting from the layoffs I mentioned earlier.

Meanwhile in the year ago quarter we had a $900,000 net gain, mostly from legal matters and insurance proceeds. Net income attributable to IDT increased to $80.2 million from $3.5 million in the year ago quarter, and diluted EPS increased to $3.47 from $0.15. The impact of the Fabrix sale and deconsolidation October has materially impacted our quarter end balance sheet dated October 31. Let me quickly highlight some of these changes for you now.

We added a net $36 million in cash and reported an increase in short term and long term receivables relating to proceeds from the Fabrix sale of $31.5 million. These receivables include approximately $8.5 million being held in escrow for certain contingencies, as well as roughly $23 million waiting to be released to IDT by a mutually appointed escrow agent upon acknowledgment of the tax-free status of the Fabrix sale transaction by the Israeli tax authority.

Because Fabrix was deconsolidated, trade accounts receivable net declined by $5.5 million. Accrued expenses decreased by $4.5 million and deferred revenue decreased by $11 million, among other changes. The net of all of it is that our balance sheet which has been strengthening quarter over quarter for a few years now was significantly bolstered by the sale of Fabrix. In that regard it is worth noting that the Company's net book value per share grew in the last quarter from $436 million as of July 31, 2014, to $692 million as of October 31, a 59% increase. That concludes my discussions of results this quarter.

Before taking your questions, I want to touch on a few of the new products and features that we are bringing online in which we hope will be enhancing results in the periods to come. On our Boss Revolution platform, we recently introduced two flat rate calling services. Our call me service provides customers here in the US with a local number back home in any of the 22 countries, including Mexico. Their friends and family back home can now reach from here in the US by dialing that local number, thus avoiding international calling charges.

In addition, just last week, we launched Boss Revolution Unlimited. Boss Revolution Unlimited customers can make unlimited calls to any of 50 countries, including to land lines in Mexico for just $5 a month. Both of these flat rate services will be featured on the launch of our new Boss Revolution web and mobile site which is set to go live tomorrow morning. And of course they are available at any of our retail locations around the country.

We also continue to expand our payment products portfolio with the launch earlier this month of virtual gift cards. Our customers can now purchase electronic gift cards to some of the country's best known retail chains and send them to friends and family anywhere in the US. Early next year we will be introducing Presto, an exciting free messaging service utilizing the technology we obtained earlier this year through the acquisition of HD Messaging, since rebranded as IDT Messaging.

IDT Messaging engine will also be a large part of the new and much improved version of the Boss Revolution App to be launched towards the end of our Fiscal Year. The new App will have lots of added functionality including messaging and peer to peer calling and we expect it will become a go to resource that will drive new customer growth.

Innovation is not limited to the retail side of our business. Our wholesale business recently executed its first three deals to provide a white labeled Boss Revolution-like App to telecom providers in Asia and Africa and there's a lot of potential for this business.

Also on the wholesale side, we will be deploying our portal early next year which will allow telecom and service providers overseas to offer customized white labeled international mobile top up services for their customers. That concludes my remarks and now Marcelo and I would be happy to take your questions. Operator back to you for Q&A, thank you.

(Operator Instructions) Our first question comes from Jay Srivatsa of Chardan Capital Markets.

Thanks for taking my question. Shmuel, I know you don't provide guidance but your Q2 has tended to be roughly flat sequentially from Q1 in the past. Is that still the trend you expect or is there anything to change the pattern?

I don't think there's anything to change it dramatically. Business is increasing but not dramatically.

Hi, Jay it's Marcelo. Just to remind you that in Q1, we still had two months of activity of Fabrix which of course will not repeat itself in Q2. So if you want to look apples-to-apples you have to remove those two months of activities from Fabrix.

Understood. Shmuel, in the previous earnings call you'd commented about how the increase in SG&A could potentially depress the EBITDA for next year. Now that you believe that SG&A expenses have been done, is there any change to your expectation for EBITDA for FY15?

I mean, I don't expect it to be quite as strong as 2014 was on the top line for telecom, but I expect it will be a little better than we had budgeted for.

Okay, and then in terms of the money remittance business, can you give us an update on where -- how many states you have licenses now, how many agents and retailers have you signed up and is there any change in the timeline in terms of when it can become meaningful?

I'm going to let Marcelo answer that question.

Sure. In terms of states we are licensed, today we are licensing every state except for the State of New York for which we are still waiting to receive a license, we keep on following up every few weeks and we are just waiting for that license to come. So from a license standpoint, we are able to go anywhere we want right now and launch the product. But for this fiscal year, we have limited ourselves to launch this service only to 20 states and the time to execute on that plan for the time being.

Some of the more trophy states like California and eventually New York will be deferred until the next fiscal year. In terms of number of agents, we keep on adding new agents at a fast pace. At this point, we have more than 350 active agents and we keep on adding anywhere between 10 to 40 every week depending -- 10 to 30 every week, so it's ramping up and the transactions are ramping up as well.

All right last question for me. In the past, you had looked at staying off Zedge. Any progress to that and any update there, please?

We don't have any updates yet. I think Zedge is really starting to blossom, but rather than I guess over promise and under deliver I'd rather under promise and over deliver. But we're very excited about where Zedge is going.

Thank you.

Our next question come from John Rolfe of Agrim Capital.

Hi guys a few questions for you. I think you said that you were still expecting double digit year to year revenue growth in retail communications for this fiscal year. And that's versus, if my numbers are right, what was about 6% growth in the first quarter here. So you're expecting I guess an acceleration in the growth rate and the remainder of the year and at the same time, you mentioned that you had actually laid some salespeople off so I'm just trying to reconcile those two counter vailing trends there. Is the growth in the remainder of the year being driven in large part by some of those new products that you talked about?

Hi, John. Thanks for joining us on the call tonight. Our guidance has been that Boss Revolution PIN-less will continue to grow double digits year-over-year. We have started the path of total recommunications which includes also our traditional card which are actually in decline, that will probably continue to grow at the low single digits. So our guidance hasn't really changed and the results in Q1 are very consistent to the guidance that we have provided. In terms of your comment on some of the cuts that we have made, that was a strategic decision.

It affected primarily our retail business in Europe which has seen a lack of growth for quite a while, so we decided to downsize it a bit to make sure that that business continues to be profitable for us. We impacted the US just a little bit and we are the opposite even in the US when it comes to the, in terms of salesforce, we continue to add account managers to run that business to expand Boss Revolution's footprint into other states. And to hire more specialized account managers in the payments area and we continue to do so at the same rate that they have been doing thus far.

Okay got it, and just a couple more questions. I think I heard you say now that you were expecting with respect to EBITDA sort of flattish EBITDA to possibly a slight increase. A, is that what I heard you say earlier in the call in your prepared remarks and secondly if so, were you talking about EBITDA on a consolidated basis or in TPS or what exactly were you referring to?

First of all, we need to realize that the EBITDA on a consolidated basis will go down because of the deconsolidation of Fabrix. Fabrix used to bring roughly about $1 million of EBITDA on a quarterly basis, so now you have to adjust the EBITDA download a little on a consolidated basis for the lack of Fabrix. Excluding Fabrix, our objective is to continue to deliver EBITDA probably at the same levels that we are at right now.

Obviously if we see more opportunities to grow especially our payments businesses a little faster, we may increase some SG&A spending behind marketing and some other promotional activities which may have done a relatively small impact to EBITDA. But if you decide to do so, it's because we really believe that it's going to get good MPV on that investment and we will look forward if you have to reduce it a bit in order to grow that business a little faster.

Okay, so just to confirm what you just said then, absent seeing ability to invest more on the sales and marketing side, the current quarter run rate for EBITDA is a reasonable sort of proxy going forward? Again, subsequently adjusting for, I would with assume in this quarter what you had two months of Fabrix so I need to take the current quarter run rate, back out a little bit of EBITDA because Fabrix disappeared and your goal would be to sort of maintain that run rate for the year is that correct?

That's correct. The size in this quarter, Fabrix delivered $1 million of EBITDA to IDT.

In this current quarter it delivered $1 million?

Yes, in Q1 yes.

Okay, got it. So then when I look at the consolidated EBITDA for the quarter which was, what are my numbers here, about $10.5 million you're saying ex Fabrix it was closer to $9.5 million and that's sort of the run rate?

$9.4 million to be precise, yes.

Okay got it. And last of all, I think when you had, when you had talked about some of the acquisition opportunities you were looking at on the last call, you had said there was one that could be reasonably material in size and in addition there were a number of smaller opportunities. Are all of those sort of still alive? Have any of them dropped away at this point? Has anything really changed in terms of the range of opportunities that you were looking at last quarter?

I would say that the largest one we were looking at is looking a little bit further off than we would hope. However, a bunch of the smaller ones we're looking at are still there and we're still looking at them.

Okay, great. Thanks very much.

(Operator Instructions)

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