IDT CEO Discusses F1Q2011 Results – Earnings Call Transcript
IDT Corporation (IDT)
F1Q2011 Earnings Call Transcript
December 09, 2010 5:15 pm ET
(Seeking Alpha)
seekingalpha.com
Bill Ulrey
Welcome to IDT Corporation’s first quarter fiscal 2011 earnings presentation. This is Bill Ulrey, IDT’s Investor Relations Officer. IDT’s Chairman and Chief Executive Officer, Howard Jonas and Chief Financial Officer, Bill Pereira, will be presenting IDT’s financial and operational results for the three months ended October 31, 2010.
We will follow the same announcement format as in prior quarters. Both this audio file consisting of management’s pre-recorded remarks and our earning release are available on the Investor Relations page of the IDT Corporation Web site www.idt.net. The earnings release has also been filed on a Form 8-K with the SEC.
If after listening to management’s presentation and reading the company’s earnings release, you have any questions from management related to the announced results, please email them to us at the following address, invest@idt.net, no later than the close of business on Monday, December 13th. Please include your name and firm name, if applicable, in your email.
If we can constructively answer your question, we will post your question along with your name, your firm’s name, and our answer on the Investor Relations page of the IDT Web site as early as next Thursday, December 16th, after market close.
We will also file a Form 8-K with the SEC containing the questions and answers.
Any forward-looking statements made during this audio presentation or in the written Q&A, whether generic or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those which we anticipate. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in reports that we file periodically with the SEC.
We assume no obligation either to update any forward-looking statements that we have made or may make, or to update the factors that may cause actual results to differ materially from those that we have forecast.
In this presentation and in our written responses to questions thereafter, we may make reference to adjusted EBITDA. Adjusted EBITDA for all periods discussed during our remarks is a non-GAAP measure representing operating income or loss from operations, exclusive of depreciation and amortization, restructuring and severance charges, and gains on settlements another net.
Adjusted EBITDA is one of several key financial metrics management uses to evaluate the operating performances of the company and its segments.
A schedule provided in the earnings release reconciles adjusted EBITDA to the nearest corresponding GAAP measure, income from operations for each of our segments and to both income from operations and net income for the company as a whole.
Now, to begin the discussion of our financial and operating results, here is IDT Corporation’s Chairman and CEO, Howard Jonas.
Howard Jonas
Thank you, Bill, and thank you everyone for listening and for your interest in IDT. The first quarter of IDT’s fiscal year 2011 was another strong quarter for the company and in several respects it was outstanding. Not only did we report net income of $15.6 million but we also achieved our fourth consecutive quarter of sequential revenue increases.
Unlike many companies we are improving bottom line results only by cost cutting our recent improvements have been directly related to increases in revenue and gross profit. In fact, our SG&A was virtually unchanged from the year ago quarter while our bottom line improved dramatically.
Revenues in the first quarter increased 9.2% year-over-year, and also rose sequentially to $357.4 million. We achieved that sequential revenue increase despite the fact that the three months that comprise our first quarter, August, September and October are typically relatively low level demand (inaudible) months in both the Telecom and Retail Energy businesses.
At IDT Telecom, minutes of use increased 30% year-over-year and 9% quarter-over-quarter, to 6.1 billion minutes. Year-over-year growth in minutes of use came from virtually every major line of business, helping Telecom’s revenues to increase 8.5% to $309.9 million. Revenues were also slightly higher compared to the prior quarter.
In the U.S. and elsewhere, we’re seeing a gradual continued erosion of our traditional prepaid calling card products, although at reduced rates of decline, increasingly offset by improved contributions from new products and services. I believe that trend will continue.
For example, we achieved very strong growth from our innovative Boss Revolution service and from our global reseller business this quarter. Looking ahead, we are testing international money transfer services. I believe that potentially could be a huge market for us.
At IDT Energy, we sold 4.5% more kilowatt hours of electricity this quarter, compared to the first quarter of 2010, which helped IDT Energy to increase revenues by 12.9% year-over-year. We’re continuing to acquire new customers in New Jersey and Pennsylvania, and I am cautiously optimistic we will begin to grow our aggregate customer base again during the current fiscal year.
We are growing revenues and profits organically, even as we work on a spin-off of Genie and deliver on other value building initiatives we announced there is a lot of planning, effort, and work going into the preparation and execution of these initiatives, and it’ll be very easy for management to become distracted.
But I’m very pleased by the way that both our Energy and Telecom teams, as well as corporate management have kept their focus and managed to advance these initiatives without losing any of the energy put into our operations.
One of the people who have shouldered a substantial portion of the increased workload, our CFO Bill Pereira, will detail the quarter’s results for you in a minute, but before he begins, I want to step back a moment and address IDT’s strategic positioning.
In every industrial transformation and business trend, there is a high ground of opportunity available to the margin of a nimble. For example, we seized the high ground with VoIP technology and Net2Phone in the early 90s. I believe we’ve against seized position of extraordinary potential in our key business initiatives.
We all know that the world is moving to mobile communications. First voice, now smartphones, other handheld devices, and Web 2.0, Zedge.com, our mobile discovery content discovery platform is ahead of the curve.
Zedge had 33 million unique visitors in November and growing unique visitors at 5% to 10% each month. In television, the industry is moving from multicast to unicast video on-demand, not just on TVs, but on mobile devices from different networks. Again, we have the right solution to meet this need. (inaudible) not just cable companies but also telcos and over the top providers, and diversification of video delivery platform positions us for more wins as pay TV operators adopt their business models to address web-based video providers.
While we’re discussing Fabrix here is a quick update on recent developments. This past quarter was an exciting one. The MSO that licensed the fabric technology for their cloud DVR service is expecting to launch before the end of the year.
In addition, Fabrix is in final negations with a substantial North American operator that wants to employ its technology to support storage and streaming demands associated with the operators expanding video library. I look forward to sharing more details with you in the months ahead. It’s not just technology that’s moving ahead, but people too.
The international organization for migration estimates that there are now 214 million international migrants in the world. The international migrant population could reach 405 million within 40 years.
At IDT Telecom, our network platform and global distribution network, with operations on five continents is ideally suited to meet important needs of new immigrant groups around the world, possibly including, as I mentioned earlier, money transfer, and finally those oil shale. Why is oil shale the high ground? Well, is the world going to face another energy crisis? Certainly, the answer is yes. Are renewables alone capable of meeting the global thirst for oil? Not yet, and it doesn’t look like anytime soon.
The world is moving to unconventional carbon-based fuels in the meantime. Among these oil shale is potentially the largest, most environmentally feasible and most promising resource to meet the challenge in a meaningful timeframe.
I am pleased that we have achieved a preeminent role in oil shale development, alongside Shell, Chevron, Exxon and our partners at Total. As you know, I believe oil shale is going to fundamentally change the global outlook for energy. Wherever you look there are huge opportunities to meet. The emerging needs of our rapidly changing world and IDT and Genie will be there.
The first quarter of 2011 was by some measures the finest quarter we’ve had in some time and I’m expecting even better things to come, like Ronald Regan said America is too greater place for small grains, and now here is IDT’s Chief Financial Officer Bill Pereira.
Bill Pereira
Thank you, Howard. It was as you pointed out just a great quarter. Before I get into the results though I want to review the three recently announced initiatives we are taking to benefit our shareholders.
First events, IDT’s Board of Directors authorized a dividend for the first quarter of $0.22 per share on November 2nd which we paid on November 23. This week the Board declared a dividend for the second quarter, also $0.22 to be paid on December 28, 2010 to IDT shareholders of record as of the close of business on December 16.
Although our second fiscal quarter doesn’t end until January 31, 2011, the Board made a determination to pay the second quarter dividend in calendar 2010 as a result of the uncertainty in tax rates going into 2011. This decision was further bolstered by the strength of our results in Q1 which generated enough income to support $0.22 dividend for both Q1 and Q2.
Depending on our results and financial position we intend to pay regular quarterly dividends going forward. While we remain committed to building long-term growth and value, we’ll not hesitate to share the benefits of the company’s positive results with our shareholders.
Second, equity structure; the company has offered to exchange a share of our Class B common stock, ticker symbol IDT for each share of common stock, ticker symbol IDT.C outstanding. Unless extended, the exchange offer will end on Tuesday, January 4, provided that a majority of the shares of common stock held by non-affiliates are tendered.
It is likely that following a successful exchange, we will delist the common stock from the New York Stock Exchange and deregister IDT common stock with the SEC. Of course, IDT will remain subject to the SEC reporting requirements and our Class B common stock, which trades under the symbol IDT, will continue to be listed on the NYSE.
The rationale behind the exchange is straightforward. We want to simplify and rationalize IDT’s equity structure. Investors frequently remind us, that the existence of two publicly traded share classes make investing in IDT unnecessarily complicated.
Before we announced the exchange offer, the common stock consistently traded at a discount to the Class B, despite the identical equity rights of the shares.
The exchange will ensure that the holders of our common stock get a fair deal and don’t own shares that trade at a discount. Through the exchange offer, they will be able to achieve parity with Class B shareholders, while simplifying our capital structure and saving us some money in the process.
The third significant announcement this quarter was that the company intends to spin-off its Genie Energy division for shareholders. Genie Energy consists primarily of our interest in IDT Energy and our two oil shale ventures, IEI and AMSO. IDT Telecom and our interest in Zedge and the Fabrix business will remain with IDT Corp.
While there are still many moving parts to the spin-off process, such as finalizing three-year audits of the businesses to be spun-off, completing and filing an information same on the SEC, applying for an exchange listing. In planning the operational separation of Genie, we expect to execute the spin-off before the end of the fiscal year.
Leading up to the spin-off, IDT will host an Investor Day in New York City, and will be meeting with investors in New York and elsewhere to promote a better understanding of our businesses, and to answer shareholder questions.
We will announce the time and location for the New York Investor Day in coming weeks, and for those of you who are unable to make it in person or listen to it via the web, we will provide copies of material distributed through the IDT Investor Relations webpage.
Now, let’s look at the first quarter’s financial results, IDT generated net income of $15.6 million, marking the fourth consecutive quarter in which we have reported net income. We also reported strong year-over-year improvements in revenue, adjusted EBITDA, and earnings.
IDT’s revenue increased 9.2% year-over-year to $357.4 million, an increase 0.4% sequentially. Most of the increase was in our core IDT Telecom segment Telecom Platform Services, where revenue grew 9.9% to $302.5 million on the strength of a solid performance from our wholesale carrier group.
Wholesale carrier accounts for nearly half of Telecom Platform Services revenues. Throughout fiscal 2010, revenues from the wholesale carrier business had been overall flat, reflecting the very tough competitive marketplace in which it operates.
Despite this, our wholesale carrier group had an excellent quarter, growing revenues by 10% year-over-year and 12% sequentially. It is too early to tell whether we benefited from underlying competitive changes in the wholesale carrier marketplace, or if it was from non-recurring factors. Though we are pleased with the results and let you know if there are positive trends to be exploited going forward.
Revenues from prepaid services, the other large business component within the Telecom Platform Services segment, increased 4% year-over-year. Within prepaid services, increasing revenues generated from the sale of traditional prepaid calling cards and online prepaid calling card products, more than compensated for revenue loss as a result of our decision to discontinue selling domestic third party mobile top-up cards during the fourth quarter of fiscal 2010.
Quarter-over-quarter, total IDT telecom revenues grew by 0.6% as the increase in wholesale carrier revenues was almost completely offset by a decline in prepaid services, particularly in sales of traditional prepaid calling cards in the U.S., and the discontinuation of the domestic third-party mobile top-up sales.
At IDT Energy revenues in the first quarter were $45.5 million, a 12.9% increase year-over-year reflecting higher electric prices and higher electric consumption per meter. The increase in electric revenue was partially offset by a decline in gas sales due to a decline in gas usage per meter.
Sequentially, revenues declined 2.1% primarily as the result of a seasonal decrease in both electric prices and volume of sales as we exited the peak conditioning season.
Electric revenues in Q1 were $38.7 million, an 18% increase year-over-year driven by 13% increase in average revenue per kilowatt hour and 4.5% increase in kilowatt hour sold. The increase in kilowatt hour sold resulted from an increase in consumption per meter which was partially offset by a 2.6% decline in electric meter served.
As of October 31, 2010 IDT Energy served approximately 207,000 electric meters compared to approximately 213,000 at October 31, 2009.
Commencing with the current quarter, we will start reporting on another metric for IDT Energy called residential customer equivalents or RCEs. RCEs are a standard measure of throughput for the current customer base. Increasing RCEs an annual measure of a customers historical consumption imply a higher consumption potential for the customer base on a go forward basis. We have decided to include this metric going forward because our traditional reporting have just meter counts was no longer properly reflecting the performance of the business.
The electric RCEs totaled 95,175 at October 31, 2009 and 129,169 at October 31, 2010. It is noteworthy, that despite the 2.6% decline in electric meter counts, the company had a 35.7% increase in electric RCEs year-over-year, and a 5% increase sequentially. A more thorough description of RCEs, including historical performance, can be found in our earnings release.
Gas revenues in the first quarter were $6.8 million, a 9.5% decline year-over-year, as consumption measured in terms sold decreased 14.3% primarily as a result of a decline in meters and term sold per meter.
The number of gas meters declined by just under 1% from approximately a 159,000 at October 31, 2009 to 158,000 at October 31, 2010. Gas RCEs increased 1.5% year-over-year, and declined 1.6% sequentially.
IDT Energy served approximately 365,000 total meters as of October 31, 2010. That is 1.9% below the year ago level and 1.2% below the prior quarters level. Total RCEs at October 31, 2010 were 216,778. That is a 19.5% increase over the prior year, and a 2.2% increase sequentially.
The increase in RCEs, especially electric RCEs is primarily attributable to the acquisition of higher usage meters in the New Jersey and Pennsylvania markets. You may recall that for last two quarters, we have been carefully testing the deregulated retail markets in New Jersey and Pennsylvania.
In Q1, we continued a measured customer acquisition program in both states, but not at acquisition levels sufficient to completely offset net meter churn in New York State. Our churn rate for the quarter was 4.7% compared to 2.7% in the year ago quarter, and 3.5% sequentially.
Moving onto our margins, gross profit at IDT rose to $74.2 million in the first quarter, increasing 7.3% year-over-year, and 1.4% sequentially. IDT Telecom’s gross profit was $57.8 billion in the first quarter, an 8.5% increase compared to the first quarter of fiscal 2010, but a 4.6% decrease compared to the prior quarter.
IDT Energy’s gross profit was $14.7 million, a slight 0.6% increase year-over-year, but a substantial 31.9% increase sequentially, largely as a result of declining commodity costs, which provide us opportunities for increased gross profit margins.
IDT’s gross margin was 20.8% for the quarter, a decrease of 40 basis points year-over-year, but a 20 basis point increase sequentially. Gross margin at IDT Telecom was 18.7%, which was substantially unchanged year-on-year, although our core Telecom Platform Services gross margin of 17.8% was 60 basis points higher year-on-year, with both prepaid services and wholesale carrier contributing improved margins.
The margin generated by prepaid services benefited from the discontinuation of relatively low margin domestic third-party mobile top-up sales. Sequentially, Telecom Platform Services gross margin declined 80 basis points, partially as a result of several non-routine factors, which favorably impacted margins in the fourth quarter of 2010, and partially as a result of product mix in Q1.
IDT Energy’s gross margin was 32.4%, a 390 basis point decline year-over-year. Gross margin for electric sales was 33.4%, a 540 basis point decrease. Gross margin for gas sales was 26.5%, a 100 basis point increase. Sequentially, gross margin increased 830 basis points, led by a 96.9% increase in gas margins.
IDT’s SG&A was virtually flat year-over-year, declining just 0.1% to $57.6 million, but increasing 3.1% sequentially. Within SG&A, corporate overhead was $3.7 million, a 32.8% decline year-over-year, but an 84.1% increase sequentially, primarily again as a result of non-routine adjustments in Q4 2010, making that quarter’s results abnormally low.
As I mentioned in my Q4 remarks, we anticipate an annualized run rate for corporate SG&A of approximately $15 million in line with Q1 performance.
IDT Telecom’s SG&A was $45.6 million, a 1.3% increase year-over-year and a 1.6% decrease sequentially. Year-over-year reductions in card printing costs, facilities and equipment maintenance and consulting fees were partially offset by increases in bad debt expense, employee compensation and third-party commissions incurred partially as a result of the continuing expansion of IDT Telecom’s global distribution network.
IDT Energy’s SG&A expense was $5.9 million, a 44% increase year-over-year, primarily reflecting increases in customer acquisitions cost incurred in expanding into new territories in New Jersey and Pennsylvania.
Gross meter acquisitions in the first quarter were 42,000 compared to 13,600 in the same period a year ago and we expensed our acquisition costs.
Purchase of receivables our POR program costs incurred in New York also increased significantly because of the higher electric revenues and increases in the POR fees charged by some utilities. Sequentially, SG&A increased 7.9%.
IDT generated $14.2 million in adjusted EBITDA for the quarter, a 49.2% year-over-year increase driven by higher revenues and gross profits. Sequentially, adjusted EBITDA declined 5.4% reflecting the sequential increase in SG&A which outstripped revenue and gross profit growth.
Given our drastic reductions in SG&A over the past couple of years, it is inevitable that we would face some upward pressure on SG&A, particularly as we’re now experiencing some top line growth.
However, we are ever mindful of this situation and will endeavor to keep SG&A as a percentage of revenues near current levels. IDT Telecom contributed $12.3 million in adjusted EBITDA in the first quarter, a 47.3% increase year-over-year, but a 14.5% decline sequentially.
IDT Energy contributed $8.8 million in adjusted EBITDA in the first quarter, a 16.4% decline year-over-year but a 55.2% increase compared to the prior quarter, largely as a result of the improvement in gross margins.
Depreciation and amortization expense companywide was $ 5.7 million, $4.8 million of which was incurred by IDT Telecom. At IDT Telecom D&A expense declined 43.1%, compared to the year ago period and 32.1%, compared to the fourth quarter of fiscal 2010, reflecting the increase in IDT Telecoms fully depreciated fixed assets and the impact of lower CapEx spent in recent years.
Research and development expense totaled $2.4 million in the first quarter, a 15.8% increase year-on-year, and then 8.6% increase sequentially. Our R&D cost related to IEI, our shale initiative in Israel, and Fabrix TV.
IDT reported other operating gains of $2.5 million, primarily reflecting insurance and legal settlements. Income from operations was $11 million, compared to less than $200,000 in the year ago quarter.
Income from operations increased by 41% compared to the prior quarter. Net income attributable to IDT was $15.6 million for the first quarter as I mentioned before or $0.70 per diluted share. That is compared to a net loss attributable to IDT up $3.5 million or $0.17per share in the year ago quarter, and net income of $7.5 million or $0.33 per diluted share in the prior quarter.
The quarter’s strong operational results helped to further strengthen our balance sheet and enhance our liquidity. As of October 31, 2010, we had $242.7 million of cash, cash equivalents, and certificates of deposit, including $11.1 million of restricted cash and cash equivalents. That is an $8.6 million increase over the last quarter.
Current assets at October 31, 2010 totaled $397.7 million, and current liabilities totaled $289.7 million, improving our working capital by $12 million over the last quarter.
Net cash provided by operating activities was $5.6 million in the first quarter, compared to $2.2 million during the year ago quarter. The increase in net cash this quarter was generated despite the fact that we paid employees annual bonus totaling $8.7 million during the quarter.
CapEx in the first quarter totaled $3.4 million, compared to $2.8 million in the year ago quarter. Our cash position was also impacted by several significant non-routine events during the quarter.
As I mentioned in my remarks last quarter, during the first quarter we received cash of $5.7 million in exchange for our auction rate securities holdings, after settling an arbitration claim with the seller, which is net of our legal and settlement costs.
The securities had a carrying value on our books of just $200,000 at July 31, 2010. As a result, we recorded a gain of $5.4 million, which is included in other income expensed net in our consolidated statement of operations.
Also, during the quarter, we received a $2.7 million payment from our insurance carrier as a result of claims we made related to water damage at our headquarters building here in Newark. The payment resulted in an other operating gain of $1.9 million during the quarter.
Finally, we received the amount due to us from the settlement of IT litigation with eBay and Skype during the first quarter, but we are prevented by the terms of the settlement agreement from disclosing the amount; though I will say that it was not material to IDT.
The $11 million aggregate investment made by Lord Jacob Rothschild and Rupert Murdoch, who separately purchased an aggregate 5.5% equity position in Genie Oil and Gas will be reflected in our second quarter’s financial statement.
Overall, I want to emphasize a point that Howard made just before. We are pleased with the results we delivered this quarter, but we are particularly pleased with the fact that we’ve now delivered several quarters of solid positive performance. We emerged from our turnaround program a linear, stronger and more disciplined company.
We have addressed many of the major issues impacting us in the industries in which we operate and continue to work on those that remain, including dealing with our exposure to factors outside of our control. We believe that these steps will enable us to more effectively deal with turbulent times and any as yet unforeseen challenges that we may encounter.
I’ll conclude by reminding our shareholders that we welcome the opportunity to answer your questions whether about the results this quarter or the company in general. Please email them to us at invest@idt.net by the close of business on Monday, December 13th, along with your name and firm name. Where we can provide a constructive answer, we will post our response on the Investor Relations page of the IDT Web site and by filing a Form 8-K with the SEC as early as Thursday, December 16th, following the market close.
Again, thank you for your interest in IDT and happy, joyful holidays to you and your families. |
