IDT Corp (IDT) 2015 Q4 法說會逐字稿

Good morning, and welcome to the IDT Corporation's fourth quarter and full FY15 earnings conference call. During Management's prepared remarks, all participants will be in listen-only mode.

(Operator Instructions)

In today's presentation, Shmuel Jonas, CEO of IDT Corporation, will discuss IDT's financial and operational results for the three months and 12-month periods ended July 31, 2015.

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 in the Q&A that will follow, IDT's Management may make reference to the non-GAAP measures adjusted EBITDA, non-GAAP net income, and non-GAAP diluted EPS. A schedule provided in the earnings release reconciles adjusted EBITDA, non-GAAP net income and non-GAAP diluted 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 over to Mr. Jonas.

Thank you very much. Welcome to IDT's fourth quarter and full FY15 earnings conference call. My remarks today will focus on key operational and financial results for the 3- and 12-month periods ended July 31, 2015. Throughout my remarks, unless otherwise indicated, the fourth quarter and full-year financial results are compared to the comparable periods in FY14. For a more comprehensive and detailed discussion of our results, please read our earnings release issued earlier today and our Form 10-K that we will file tomorrow. Following my remarks, Marcelo Fischer, IDT's Senior Vice President of Finance and IDT Telecom's Chief Financial Officer, will join me and we will be glad to take your questions.

Overall, the consolidated results for the fourth quarter and full FY15 reflected the resilience of our business and were substantially in line with our expectations and recent trends. Sales of our Boss Revolution international long distance calling service continued to grow year-over-year and sequentially. The rate of Boss Revolution's growth has slowed significantly in recent quarters. However, we have saturated the market to some key destinations and industrywide, rates have declined significantly in our largest corridor, the US to Mexico.

Despite these trends, Boss Revolution's growth in combination with our ongoing efforts to streamline operations and reduce costs, help us to deliver healthy increases in adjusted EBITDA and income from operations compared to the year-ago quarter. For the full year, our adjusted EBITDA came in slightly below the FY14's record level. The sale of Fabrix earlier this year pushed our full-year income from operations and our earnings to their highest level in years.

Turning now to revenue. Fourth quarter consolidated revenue decreased to $405.8 million, a decline of $14.9 million compared to the fourth quarter last year. For the full year, consolidated revenue totaled $1.597 billion, a decrease of $54.8 million. But for an apples-to-apples comparison, note that Fabrix, which we sold in the first quarter of FY15, generated $5.9 million in revenue in the fourth quarter last year. For the full year, Fabrix' revenue was $4.2 million in FY15, and $16.6 million in FY14.

Now, let's look at Telecom's key business verticals. Revenue generated in our Retail Communications vertical continue to climb, increasing $1.8 million to $182.9 million for the quarter. Within Retail Communications, revenue generated by sales of Boss Revolution's pinless international calling service, which accounts for the substantial majority of retail communication sales, grew more strongly, increasing 7.6% year-over-year.

I'm encouraged that Boss Revolution's revenue continued to increase at a double-digit pace to many of our most important destinations in Latin America. The impact of these increases was partially offset, however, by a decrease in revenue from our largest corridor, the US to Mexico. Last year, the Mexican government significantly lower termination rates. In response to the ensuing decreases in competitors' calling rates to Mexico, we have focused on minimizing the gross profit impact, even at the expense of the top line.

Within the Retail Communications vertical, Boss Revolution's growth was mitigated by continued declines in conventional calling card sales both in the US and overseas. These declines were exacerbated by the strength of the dollar against the euro and most other major currencies. For the full FY15, retail communication revenues increased $33.3 million to $729.1 million as Boss Revolution's pinless revenue grew 12.7% year-over-year. Looking ahead, we expect that Boss Revolution pinless revenue will continue to increase in FY16, although the year-over-year rate of growth will likely slow to single digits.

Fourth quarter revenue from our Wholesale Carrier service vertical decreased $11.3 million year-over-year, to $153.6 million. Our Wholesale Carrier service revenue declined as minutes of use increased 6.6% year-over-year, to 5.04 billion minutes. The decrease in average revenue per minute of use reflects the continued decline in termination rates globally and in the US-to- Mexico corridor in particular. Reflecting the same trend, Wholesale Carrier service revenue for FY15 decreased $75.5 million compared to FY14, to $596.8 million, while minutes of use increased 1.4% to 19.47 billion. I want to emphasize, as we have in the past, that we manage our wholesale business to maximize gross profit, not revenue. This strategy can result in considerable topline volatility.

It's also worth mentioning that Payment Services revenue in the fourth quarter grew 4.7% to $55.7 million and for the full year increased 3% to $208.3 million, primarily because of stronger sales of our international airtime top-up offerings.

Before moving down the income statement to discuss SG&A expense, I want to mention several of the most important strategies we are employing to spur long-term Retail Communications revenue growth. At Boss Revolution pinless, we are diversifying our sales and marketing programs to focus on ethnic communities outside of our traditional stronghold in the Hispanic market. Immigration into the US continues to be robust. However, the [paths] of immigration are changing rapidly. Although more immigrants still arrive from Mexico than any other country, the number of Mexican immigrant arrivals is decreasing. Meanwhile, the proportions of immigrants from Asia, notably China and India, and Africa, are increasing. Today, immigrants from Asia comprise about 40% of new immigrants. There are abundant opportunities to grow our market share in these surging foreign-born communities and we intend to pursue them more aggressively.

Looking beyond Boss Revolution pinless, our growth initiatives include exciting new offerings on the Boss Revolution retailer portal. We recently added domestic and international gift cards from dozens of popular retailers, enabling our customers to send gifts instantly to their recipients' mobile phones both here and in the USA and overseas. We have also begun beta testing online money remittance, which allows customers to use their bank account, credit card or debit card to send money to friends and family.

Pardon the brief pause while we attempt to reconnect our speaker. We will put the call on brief hold while we reconnect our speaker. Thank you for your patience.

Thank you for that brief break. Our speaker has been reconnected. Mr. Jonas, you may continue.

Sorry. I apologize. We've also began beta testing online money remittance which allows customers to use their bank account, credit card or debit card to send money to friends and family from around the world directly from their computer, tablet, or Smartphone.

Finally, over the last few months we will be incorporating messaging with our MagicWords contextual search capability into Boss Revolution's app. While messaging is not intended to generate revenue directly, in the near-term it will drive further adoption of the Boss Revolution app.

Please bear with us while we take a short intermission. Thank you. Mr. Jonas, you may continue. I'm sorry. We are going to have Marcelo Fischer continue. Mr. Fischer, would you like to continue the call?

Yes, sure. I apologize for the difficulty. We have also begun beta testing online money remittance, which allows customers to use their bank account, credit cards, or debit cards to send money to friends and family from around the world directly from their computer, tablet or Smartphone.

Finally, over the next few months, we will be incorporating messaging with our MagicWords contextual search capability into our Boss Revolution app. While messaging is not intended to generate revenue directly, in the near-term it will drive further adoption of the Boss Revolution app and other Boss Revolution services.

To wrap up the discussion of revenue, it is important to consider the impact of the sale of Fabrix earlier this year for the purposes of year-over-year comparison. We continue to increase Retail Communication's revenue powered by Boss Revolution pinless growth, though the rate of growth is slow. And while revenue from our Wholesale Carrier vertical declined, the decrease had a limited impact on gross profit.

Maintaining fiscal discipline has been a strategic focus at IDT in [this particular year] and in this quarter, that discipline was again apparent. Consolidated SG&A expense in the fourth quarter was $54.1 million, a $4.3 million decrease from the year-ago quarter. For the full year, SG&A expense totaled $222 million, a $6.7 million decrease compared to FY14.

Looking ahead, we expected a headcount reduction we implemented earlier this calendar year and other cost control initiatives we instituted will help us to achieve a modest reduction in full-year SG&A expense for 2016 compared to 2015. In the fourth quarter, the fiscal discipline helped us to deliver $12.4 million in adjusted EBITDA, compared to $10.4 million in the fourth quarter of 2014. For the full year, we delivered adjusted EBITDA of $44.5 million, compared to [$45.3] million in FY14.

Turning now to the consolidated bottom line, fourth quarter fully diluted EPS was $0.05 per share, compared to $0.33 in the fourth quarter last year. The decline primarily reflects a shift in our tax obligations. The provision for income taxes was $3.8 million this fourth quarter, compared to a net benefit from taxes of $3.9 million in the year-ago quarter, when IDT recorded a gain on the reversal of a valuation allowance applied against an overseas subsidiary deferred income taxes.

For the full year, the sale of Fabrix helped to boost fully diluted EPS to $3.63 per share, from $0.82 per share in FY14. All in all, this was a very good quarter, in line with recent results and consistent with our commitment to maintain or improve current levels of adjusted EBITDA.

Before I turn the call back to the operator, I want to touch on the strategic reorganization recently announced by our Board. Zedge, which reported a very strong quarter including revenue nearly 40% to $2.4 million, while contributing $0.5 million in adjusted EBITDA, will be spun off to stockholders. In addition, we will also separate and spin off to our stockholders a second entity comprised of real estate and some small business holdings, as well as a significant portion of our cash assets. IDT Telecom will, following the spin-offs, operate as a more focused, standalone Company. The spin-offs that are still subject to final approvals, are designed to achieve several complementary objectives that we believe will increase overall stockholder value.

Spinning off Zedge will position that Company to capitalize on its abundant growth opportunities, while likely resulting in a more favorable valuation than it receives within IDT. The cash that will be held by the second spun-off entity will be utilized, in part, to fund promising business initiatives such as our nascent Retail Solutions business that will hopefully become the spin-offs of tomorrow. Nevertheless, we expect this business will be managed to carefully preserve and protect shareholder value. Finally, IDT Telecom will become a pure play. As such, will be significantly easier for investors to understand and to value.

We are currently doing the considerable work required for the spin-offs, including the preparation of audited financial statements for each entity. This work will take some time, so that the spin-off likely will be completed next year. We will keep you updated on our progress in these quarterly calls.

All in all, we think this move will end up being very accretive to shareholder value. Just as our prior spin-offs, including Straight Path Communications, Genie Energy and IDW Media, which was formerly known as CTM Media, have been.

That wraps up our discussion of the quarter and full-year results. Now, we will be happy to take your questions. Operator, back to you for Q&A.

(Operator Instructions)

John Rolfe of Argand Capital.

A few questions for you. I was hoping you could give me the share count at quarter end. It looked like you had repurchased about $10 million worth of stock in the quarter. And, as an additional bit of color there, could you maybe give a little bit of detail around the decision to repurchase $7.5 million of shares from Howard?

Hi, John, it is Marcelo. First of all, let me apologize for the fact that Shmuel got cut off on the line. He is actually traveling to the West Coast today, so he is on the West Coast and I'm actually at the headquarters. I don't even know what happened to his connection.

So, you are right. IDT did repurchase in Q4, roughly about $10 million worth of shares. Our share count at the end of July, of July 31, was 23.3 million shares. And the reason why IDT bought back the shares from Howard is because we wanted to make sure that the [key standing] of shares will not impact the volumes and the prices of the stock. We structured it as a private purchase not to create too much of a large number of shares being sold at the same time, and affecting the stock price in a visible way.

Okay. Okay. I guess you've given a bit of -- a few data points around expectations for FY16. If I've got these right, you are expecting Boss Revolution to continue to grow somewhere in the single digits. And I guess that now accounts for most of your Retail Communications piece.

On the wholesale side, it seems like you said you are continuing to manage that for gross margins. So I guess I would assume that to mean sort of stability in terms of gross margin contribution from wholesale. Then layered on top of that, you said that you expected continued modest reduction in the SG&A line.

So when I put all those pieces together, is it fair to assume, then, that you would expect continued stability? Or even sort of modest growth in your EBIDTA for the full fiscal year, compared to the year that you just finished? Again, ignoring the spin-offs for now, just looking at the business on a consolidated basis?

Yes. Your review was pretty accurate. Let me take them one at a time with a little more detail. In terms of Retail Communications, yes, we are seeing a deceleration on Boss Revolution growth because of the maturity of that business. We do still expect to achieve single-digit growth for Boss Revolution as we go into 2016.

One of the big uncertainties that we are still facing, as we have commented on on our earnings release, is the fact that we are seeing a decline on one of our key corridors, the US-to-Mexico corridor. Because of that, it makes it a little bit more difficult to forecast exactly the rate of growth for Boss Revolution as a result of that.

Despite of the fact that we are seeing a decline on that corridor, here at IDT, we are doing a lot of different things inclined to mitigate the impact of that decline to Mexico by making changes in other parts of the Boss Revolution and retail business, in terms of our price deck, in terms of our cost savings to other areas of cost, of cost of sales, et cetera. We [did go] trying to preserve the margins and the gross profits that retail segment generates.

In terms of the Wholesale Carrier business, as you had mentioned earlier, our goal has always been to manage our wholesale business towards maximization of gross profit and utilizing it as a vehicle for purchasing minutes in the most effective manner and taking advantage of some of those purchase prices to sell some of that into the wholesale marketplace. And that continues to be our goal in managing that business and energizing our wholesale operation with our retail operations.

We did accomplish significant SG&A savings during 2015, the fiscal year, in the areas of compensation and some other areas. We're still going to see benefits from those initiatives, now, during FY16, and we have other initiatives, in terms of cost management being contemplated all the time. Our goal, as we had said earlier, is to, indeed, try to manage our adjusted EBITDA number so that it could continue to deliver similar EBITDA to what we have been delivering, close to what we have been delivering in the past few quarters.

Okay. And any expectations -- I know CapEx was elevated this year for a number of reasons. Any expectations on CapEx for the coming year?

Yes. CapEx was unusually high in FY15, because we invested close to $10 million to refurbish our headquarters building here in Newark. That cost, obviously, will not repeat itself as we go into 2016. So, for FY16, our CapEx will be roughly about $10 million less than what you saw in 2016 -- 2015.

Okay. Great. My last question, can you give an update in terms of the money remittance? Have your expectations regarding the potential of that business changed at all? Have your expectations on timing changed at all? I guess, when do you think we might start to see that become something meaningful from a revenue standpoint?

Sure. We expect, at this point, to probably be growing the money remittance business at a faster clip than what we have been doing for the past few months. Unfortunately, we have had a little bit of a challenge in hiring some of the retail salespeople to go out and sign up productive agencies. That has been -- in the process of being remediating.

That doesn't really change our prospects for the long-term. We still feel that this is going to be a growth business, a business that will be accretive in a few years from now. On the positive side, we're just beta testing right now and getting ready to launch on a full scale, our online direct-to-consumer money remittance offering so that our consumers could initiate and complete a money remittance transfer directly from their computer devices as opposed to having to go through a retailer agent. We are still very much focused and committed into growing that business.

Okay. Great. Thanks very much. Appreciate it.

(Operator Instructions)

Seeing no further questions, this concludes our question-and- answer session and the conference call. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day. Thank you very much.