No risk, no payoff
IDT's foray into entertainment is a calculated move to increase value
nj.com
Wednesday, April 05, 2006
BY TOM JOHNSON
Star-Ledger Staff
In its relatively brief and tumultuous life, IDT has made a name for itself via the illuminated headquarters signs on the downtown Newark skyline and by snatching up faltering telecom companies and carving a niche in underserved markets.
Profits from its few successes have cushioned the losses the telecommunications and entertain ment company has posted as it branches out beyond the prepaid calling-card business and other telecom sectors, which face stiff competition.
Founded in 1990 as a business providing cheaper overseas phone calls, IDT is looking to diversify -- investing in areas such as making animated feature films, prepaid wireless phone service and selling of English-language instruction videos. Those units mostly generate losses, but IDT executives are banking on some of them one day ringing up enough sales to cover their costs plus a healthy profit margin.
"We are now known as a telecommunications company," said IDT Chief Executive Jim Courter. "I don't think that will be the case a few years down the road. It will be a larger company, it will be a profitable company operationally and it will be a more diversified company."
It is a strategy that some analysts view as risky.
"They're burning a lot of cash in films and their international operations," said Andy Baker, an analyst with Cathay Financial in New York, referring to their entertainment venture and effort to sell prepaid cell-phone service. "If they come up with a hit, it's large, but if they don't, they burn a lot of money."
It is a company with a lot of cash to burn. IDT, which has 5,000 employees, half of which are lo cated in New Jersey, is sitting on nearly $1 billion in cash and has little debt.
The company, which had 2005 revenue of $2.4 billion and posted a net loss of $43.8 million, is also a company not shy about taking risks. Hoover's, a business-information company, in its profile of IDT makes a tongue-in-cheek reference to those risks, saying the letters could stand for "Invest in Distressed Telecom" companies.
With AT&T sold to a San Antonio-based company and Lucent Technologies poised to move its headquarters to Paris via a merger, IDT remains one of the last standing New Jersey-based big players in the telecom sector. But the company is likely to move away from its core telecom business as change and consolidation ripple through the sector.
Over the years, IDT has purchased bankrupt and money-losing telecom businesses, occasionally turning a quick profit, but sometimes suffering huge losses.
Its smartest move was its launch of Net2Phone, an Internet phone company that attracted a $1.4 billion investment from a group led by AT&T in 2000. Net2Phone, however, never lived up to its promise, losing money be cause of stiff competition.
Earlier this year, IDT acquired the remaining shares of Net2Phone it didn't already own. By taking Net2Phone private, the company hopes to shed some of the reasons why it was not making a profit, Courter said, particularly by eliminating costly auditing and listing requirements of a public company.
"They were really too small to be a public company," he said. "It was costing them millions of dol lars."
IDT also shut down Winstar Communications, a mostly wireless business it acquired at the end of 2001 for $42.5 million. The unit, which sold phone service to businesses, never turned a profit, losing up to $250 million in 3 1/2 years. The acquisition of the ailing company was IDT's biggest misstep, al though the company hopes to turn a lemon into lemonade by eventu ally selling the unit's wireless spec trum to cell-phone carriers.
"We believe that spectrum will one day be worth a tremendous sum of money as the wireless carriers increase and exhaust their capacity," Courter said.
Robert Rosenberg, president of Insight Research in Boonton, a technology research firm, agreed. "Those frequencies are going to be very valuable," he said. "They've cut out some nice niches for themselves."
IDT's biggest money-maker is prepaid phone cards. It sold more than 400 million last year. Besides prepaid phone cards, IDT sells Internet phone service and targets underserved markets, such as the Hispanic community. The company also is exploring various financial services, such as offering prepaid charge cards, Courter said.
With Internet phone service taking off and with increased competition as cable television compa nies start to offer phone service, the company's traditional core business faces unrelenting pressure from additional rivals. Still, Courter said, even with the rapid consolidation rippling through the sector, it isn't certain whether IDT's core businesses will face added competition.
"We are not going to compete with them on data services and telephony to the Morgan Stanleys and other financial institutions," Courter said. "Maybe when it comes to prepaid calling cards and some of the destination in our wholesale business, particularly Latin America, they will just leave us alone. Who knows, within a year or two or three, the margins will be better."
But some analysts remain unconvinced.
"They can survive, but I don't think they can flourish," said Clay Moran, an analyst with the Stan ford Financial Group in Houston. "I don't see their core telecom business ever getting profitable." |
