To all: Here is what the street acted on .......
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December 2, 1998
Tech Stocks
IDT Shares Tumble 18%
As Sales Miss Street Targets
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- A shortfall in fiscal first-quarter revenue and shrinking gross margins eclipsed solid profit performance from IDT, sending the telecommunications company's stock skidding 18% on Wednesday.
Shares of IDT, Hackensack, N.J., sank 3 5/8 to close at 16 3/4 on volume of 5.6 million shares on the Nasdaq Stock Market. Average daily volume for the stock is 580,000. Meanwhile, the Nasdaq Composite Index fell 8.55 to 1995.20, while Morgan Stanley's high-tech 35 index slipped 1.51 to 752.70.
IDT matched analysts' profit estimates of $4.9 million, or 14 cents a share, for the quarter, up from $2 million, or eight cents a share, in the year earlier period.
Revenue, on the other hand, missed some analysts' expectations. IDT said total revenue was $133.3 million, up 143% from $54.8 million in the comparable period in 1997. That was about 5% lower than the estimate of some analysts though, including Robert Pomeroy of Credit Suisse First Boston Corp., who cited a lack of sequential growth in one IDT business, sales of telecommunications service to other carriers, as a probable cause for the shortfall.
"While they the hit bottom line, the top line came in a bit lighter than what I was looking for," said another analyst, Riyad Said of Friedman Billings Ramsey & Co. "I think that probably has raised concerns about what the outlook is going forward."
IDT was a pioneer in offering international callback services, which let callers from abroad take advantage of cheaper U.S. phone rates by connecting international calls through the U.S. Now the company makes most of its revenue selling prepaid long-distance cards and selling time on its networks to other long-distance companies. The company is also known for its aggressive move into Internet telephony -- or placing phone calls over data switches instead of voice switches.
First-quarter gross margins, too, raised concerns. That figure fell to 24.2% from 27.4% in the prior period. Mr. Said believes margins suffered because IDT's calling card business tilted more toward sales of cards produced by third-parties. IDT distributes cards from other companies, as well as its own, but the third-party cards are less profitable.
Ilan Slasky, chief financial officer of IDT, said he wasn't surprised by the investor reaction to its announcement, though he emphasized the fact that IDT matched profit estimates. Indeed, IDT's investors have a history of pounding the stock even when the company beats profit forecasts. Last quarter, for example, the company exceeded earnings expectations by two cents a share but its stock sputtered in following sessions.
"The stock typically does this every quarter," said Mr. Slasky.
Still, some analysts showed increased skepticism about the future of IDT. "We view [IDT's] rising reliance on prepaid calling cards sales as a potential red flag for investors given the historical experiences of other vendors of both domestic and prepaid cards, which have culminated in write-offs for bad debt, strong pricing and margin compression and related problems," Vik Grover, an analyst at Kaufman Brothers LP, wrote in a research note.
Predictability, Mr. Grover has bearish view of IDT's stock, which he rates a "hold." His price target for it is 16. "We see significant downside risk and approach the stock with caution," he said. But views on the future prospects of IDT vary widely. Credit Suisse's Mr. Pomeroy, for example, rates IDT a "strong buy" based on his projection for fiscal 1999 that revenue will grow 89% and earnings before income, tax, depreciation and amortization -- or EBITDA -- will grow 51%.
In its announcement, IDT also said its plan to increase the value of its Internet telephony operations, which include a product called Net2Phone for making voice calls between computers. Mr. Slasky said IDT is considering taking an investment from outside companies in the telephony operations, pursuing an initial public offering, or a combination of the two approaches. Mr. Slasky said the company had "several offers on the table" for minority investments from other companies, including media firm with several Internet holdings that he declined to name.
Internet-telephony currently accounts for a meager 4% of IDT's overall revenue. Mr. Slasky said the firm wants to expand that business, but he said competing Internet companies have an advantage since Wall Street tends to tolerate aggressive marketing spending, a luxury IDT can ill afford, he said.
"The [Internet] business model seems to be at odds with the parent company," said Mr. Slasky. "We're trying to run IDT as a profitable company."
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