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| IDT > SEC Filings for IDT > Form 10-Q on 11-Jun-2007 | All Recent SEC Filings |
11-Jun-2007
Quarterly Report
The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2006, as filed with the U.S. Securities and Exchange Commission.
As used below, unless the context otherwise requires, the terms "the Company," "IDT," "we," "us," and "our" refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," "plans," "intends," and similar words and phrases. Such forward-looking statements include, among other things, our plans to develop and market new products and services, improve our financial performance, enter new customer and geographic markets and the possible outcome of our litigation. Such forward-looking statements also include our expectations concerning factors affecting the markets for our products, such as changes in the U.S. and the international regulatory environment and the demand for telecommunications services. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and under Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2006. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in our reports filed with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for fiscal 2006.
Overview
General
We are a multinational holding company with operations that span several industries. Through our IDT Telecom subsidiary, we provide telecommunications services and products worldwide to the retail and wholesale markets, including prepaid and rechargeable calling cards, consumer local, long distance, prepaid wireless phone services, voice over Internet protocol, or VoIP, and wholesale carrier services. Our IDT Capital segment, which is primarily engaged in operating certain non-telecommunications businesses and developing new initiatives, consists of IDT Energy (our Energy Services Company, or ESCO, in New York State), Ethnic Grocery Brands (our grocery distribution business), IDT Local Media (which is primarily comprised of CTM Brochure Display and WMET radio), IDT Carmel (our receivables portfolio management and collection operation), IDT Global Services (which is primarily comprised of our call center operations), our Internet Mobile Group, our Net2Phone Ventures division, and other smaller initiatives and operations, including certain real estate investments. Our IDT Spectrum subsidiary holds our FCC fixed wireless spectrum license assets.
Dispositions
Sale of IDT Entertainment
In the first quarter of fiscal 2007, we completed the sale of our IDT Entertainment segment to Liberty Media Corporation for (i) 14.9 million shares of our Class B common stock and Liberty Media's approximate 4.8% interest in IDT Telecom, (ii) $229.5 million in cash, subject to certain working capital adjustments, for which we accrued a liability of $19 million as of April 30, 2007, pending final settlement, (iii) the repayment of $58.7 million of IDT Entertainment's intercompany indebtedness payable to IDT and (iv) the assumption of all of IDT Entertainment's other indebtedness. We are also eligible to receive additional consideration from Liberty Media based upon any appreciation in the value of IDT Entertainment over the five-year period following the transaction's close, or such shorter period under specified circumstances, equal to 25% of the excess, if any, of the net equity value of IDT Entertainment over $425 million.
IDT Entertainment consisted primarily of animation and live-action production operations as well as a home entertainment distribution business. Through studios based in the United States and Canada, IDT Entertainment developed and produced 2D and 3D animated content for distribution theatrically, on television, and direct-to-video/DVD. Production was focused on proprietary content and was also performed for third parties. IDT Entertainment was also involved in the development and production of live-action content for feature films, television and direct-to-video/DVD distribution.
The sale met the criteria to be reported as a discontinued operation and, accordingly, IDT Entertainment's results of operations for all periods presented are classified as part of discontinued operations. In the first quarter of fiscal 2007, we recognized a gain of $198.2 million in connection with the sale.
Sale of Corbina
In the third quarter of fiscal 2006, we consummated a sale of our Russian telecom business, Corbina Telecom ("Corbina"), to a Moscow based consortium of private equity investors, for net proceeds of $129.9 million in cash after banking and other transaction costs. Corbina operated a licensed full-service telecommunications business, offering a broad range of services throughout the 24 largest industrial areas in the Russian market. Corbina's operational results were historically included in our Consumer Phone Services and Wholesale Telecommunications Services segments. The sale of Corbina met the criteria to be reported as a discontinued operation and, accordingly, Corbina's results of operations for all periods presented are classified as part of discontinued operations. In the third quarter of fiscal 2006, we recognized a gain of $80.6 million in connection with the sale.
Revenues, (loss) income before income taxes and net (loss) income of IDT Entertainment and Corbina, which are included in discontinued operations, are as follows:
Nine months ended
Three months ended April 30,
April 30, ----------------------
2006 2007 2006
-------------------- -------- ---------
(in thousands)
Revenues:
IDT Entertainment $ 41,841 $ 17,905 $ 138,428
Corbina 6,114 - 43,766
--- ---------------- - - ------ - - ------- -
$ 47,955 $ 17,905 $ 182,194
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(Loss) income before income taxes:
IDT Entertainment $ (2,225 ) $ (6,995 ) $ (2,334 )
Corbina (1,323 ) - 7,107
--- ---------------- - - ------ - - ------- -
$ (3,548 ) $ (6,995 ) $ 4,773
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Net (loss) income:
IDT Entertainment $ (3,759 ) $ (7,165 ) $ (7,218 )
Corbina (1,583 ) - 5,429
--- ---------------- - - ------ - - ------- -
$ (5,342 ) $ (7,165 ) $ (1,789 )
--- ---------------- - - ------ - - ------- -
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Sale of Toucan
In the first quarter of fiscal 2007, we completed the sale of our United Kingdom-based consumer phone services business, Toucan, to Pipex Communications plc, in exchange for $38.4 million in cash (including the assumption of inter-company obligations owed to IDT and its subsidiaries) and 43.2 million Pipex ordinary shares, which were later sold for $7.9 million.
Toucan was launched in November 2003 and marketed local, long distance, broadband, and wireless communications services in the United Kingdom. Pursuant to the terms of the agreement, Pipex assumed Toucan's existing customer base and those employees supporting its operations. Toucan's historical results of operations are included in our Consumer Phone Services segment. We provide Toucan with termination, call center and other support services. As a result of these continuing services, the sale did not meet the criteria to be reported as a discontinued operation. Our results of operations for the nine months ended April 30, 2007 and 2006 included revenues generated by Toucan's operations of $16.4 million and $46.8 million, respectively, and loss from operations of $2.6 million and $14.9 million, respectively. We recognized a gain of $44.7 million in connection with the sale.
Purchase of Debt Portfolios
On January 9, 2007, FFPM Carmel Holdings I, LLC, which is 99% owned by IDT Carmel Portfolio Management, LLC, a subsidiary of our IDT Capital division, and 1% owned by First Financial Portfolio Management, Inc. ("FFPM"), committed to purchase 12 monthly forward flow credit card debt portfolios from a major commercial bank. Our total investment will depend on the size of the portfolios provided by the selling bank, to a maximum commitment of $125 million for the 12-monthly portfolios. FFPM is to manage the portfolios, subject to IDT Carmel's approval rights over major decisions. During the nine months ended April 30, 2007, (i) we purchased $47.3 million of debt portfolios, including $32.5 million of credit card debt through FFPM Carmel Holdings I, and (ii) principal collections and proceeds from resale of debt portfolios, net of revenues, totaled $14.4 million.
Outlook
Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom's businesses. IDT Telecom's revenues represented 85.9% of our total revenues from continuing operations in the nine months ended April 30, 2007, compared to 92.7% in the nine months ended April 30, 2006.
In our IDT Telecom businesses, competitors continue to aggressively price their services. In addition, with particular regard to our calling card business, there has been a gradual shift in demand away from calling cards and into wireless products, which has further eroded pricing power. In our wholesale markets as well, we have generally had to pass along portions of our per-minute cost savings to our customers in the form of lower prices.
These trends have impacted our telecom businesses, and as a result, we have generally experienced declines in both our revenues and overall per-minute price realizations. At times, though, we have chosen to raise prices, particularly within our calling card business, in an effort to increase per-minute price realizations, which generally results in a negative impact on minute volumes, thereby reducing revenue. During the second half of fiscal 2006, and continuing through part of the first quarter of fiscal 2007, we took this approach, and instituted selective price increases on our calling cards in the United States and Europe. As a result, we experienced improved revenue-per-minute price realizations, which resulted in declines in minutes-of-use and overall revenues. However, in October 2006, we began instituting selective price decreases on certain cards, in an attempt to regain share in certain markets in both the U.S. and Europe. Despite this strategy our revenues have continued to deteriorate in the second quarter of fiscal 2007 and our gross margins declined.
In the second quarter of fiscal 2007, the global calling card business carried 3.35 billion minutes as compared to 4.40 billion minutes in the second quarter one year ago. The declines in minutes predominantly in our U.S. calling card business occurred despite the implementation of price cuts to several destinations, which began towards the end of the first quarter. Historically, there has been an inverse relationship between pricing and volume. However, during the second quarter, we did not experience an increase in minutes-of-use or sales of new cards, despite our more aggressive pricing.
The breakdown in this price/volume relationship in our U.S. calling card business and a concurrent analysis of our major markets led us to investigate the cards of major competitors of ours. We discovered that they were significantly overstating the number of minutes to be delivered by their cards. Accordingly, on March 8, 2007, we filed a civil anti-fraud action in the federal district court in Newark, New Jersey, claiming that these competitors have been misleading calling card customers, and as a result, negatively impacting our market share, resulting in a reduction of our gross revenues and profits. Although the judge decided not to grant the preliminary injunction we requested, we have appealed that decision to the appellate court and intend to continue with the lawsuit until we reach an acceptable resolution that rectifies the inequities created when one party is operating by the rules and others are not. We are uncertain, even with the potential of fair competition, whether we will be able to regain revenues lost over the past number of quarters.
Gross margins in our global calling card business increased to 20.5% in the third quarter of fiscal 2007 as compared to 17.6% in the second quarter of fiscal 2007. This margin increase, the bulk of which relates to the U.S. calling card business, was mainly the result of selective price increases.
The organizational integration into IDT Telecom of our Voice over IP business, which through fiscal 2006 was reported as a separate segment, began during the first quarter of fiscal 2007, and, as such, the relevant portions of our Voice over IP business are now reported as part of the Prepaid Products, Consumer Phone Services and Wholesale Telecommunications Services business segments for all periods presented. We continue to sell VoIP communications products and services under the Net2Phone brand name to resellers, consumers and cable operators worldwide.
IDT Capital has been a growing contributor to company-wide revenues as several of its initiatives have developed. During the nine months ended April 30, 2007, IDT Capital generated revenues of $212.9 million compared to $118.5 million in the nine months ended April 30, 2006, primarily from our IDT Energy business. In the next 12 months, we expect to see continued growth in IDT Capital and particularly in the IDT Carmel business.
Critical Accounting Policies
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 1 to the July 31, 2006 consolidated financial statements included in our Annual Report on Form 10-K for fiscal 2006. Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill, valuation of long-lived and intangible assets, and income taxes and regulatory agency fees. For additional discussion of our critical accounting policies, see our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2006.
Three and Nine Months Ended April 30, 2007 Compared to Three and Nine Months Ended April 30, 2006
Results of Operations
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, income and expense line items below income (loss) from operations are discussed only on a total IDT consolidated basis.
Consolidated
Three months ended Nine months ended
April 30, Change April 30, Change
---------------------- ----------------- --------------------- ------------------
2007 2006 $ % 2007 2006 $ %
---------- -------- ------- ----- --------- --------- -------- -----
(in millions)
Revenues
IDT Telecom $ 407.4 $ 504.0 $ (96.6 ) (19.2 )% $ 1,306.6 $ 1,549.0 $ (242.4 ) (15.6 )%
IDT Capital 77.8 42.9 34.9 81.3 212.9 118.5 94.4 79.6
IDT Spectrum 0.2 0.3 (0.1 ) (32.7 ) 0.7 3.4 (2.7 ) (79.4 )
-- ------- -- ----- - ----- - ----- -- - ------- - ------- - ------ - ----- --
Total revenues $ 485.4 $ 547.2 $ (61.8 ) (11.3 )% $ 1,520.2 $ 1,670.9 $ (150.7 ) (9.0 )%
-- ------- -- ----- - ----- - ----- -- - ------- - ------- - ------ - ----- --
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Revenues. The decrease in consolidated revenues in the three and nine months ended April 30, 2007 compared to the similar periods in fiscal 2006 is mainly due to a decline in IDT Telecom revenues, partially offset by an increase in IDT Capital revenues. The decrease in IDT Telecom revenues of $96.6 million and $242.4 million in the three and nine months ended April 30, 2007, respectively, resulted primarily from lower calling card sales in both the United States and in Europe, the decline in Consumer Phone Services revenues in the United States, and the sale of our United Kingdom-based consumer phone services business. IDT Telecom minutes of use declined 16.8% (excluding minutes related to our Consumer Phone Services business, as the portion of such minute traffic carried in our network is insignificant), from 6.216 billion in the third quarter of fiscal 2006 to 5.173 billion in the third quarter of fiscal 2007, and 11.4% from 18.915 billion in the nine months ended April 30, 2006 to 16.757 billion in the nine months ended April 30, 2007. The increase in IDT Capital revenues in the three and nine months ended April 30, 2007 compared to the similar periods in fiscal 2006 was driven by the significant growth in the customer base of IDT Energy and the acquisition of our Ethnic Grocery Brands business in March 2006.
Three months ended Nine months ended
April 30, Change April 30, Change
---------------------- ----------------- --------------------- ------------------
2007 2006 $ % 2007 2006 $ %
---------- -------- ------- ----- --------- --------- -------- -----
(in millions)
Costs and expenses
Direct cost of revenues $ 395.6 $ 470.0 $ (74.4 ) (15.8 )% $ 1,205.9 $ 1,350.9 $ (145.0 ) (10.7 )%
Selling, general and
administrative 115.4 137.1 (21.7 ) (15.8 ) 339.4 422.5 (83.1 ) (19.7 )
Depreciation and amortization 20.5 20.8 (0.3 ) (1.4 ) 60.5 67.1 (6.6 ) (9.8 )
Restructuring and severance
charges 1.8 5.3 (3.5 ) (66.0 ) 8.1 6.9 1.2 17.4
-- ------- -- ----- - ----- - ----- -- - ------- - ------- - ------ - ----- --
Total costs and expenses $ 533.3 $ 633.2 $ (99.9 ) (15.8 )% $ 1,613.9 $ 1,847.4 $ (233.5 ) (12.6 )%
-- ------- -- ----- - ----- - ----- -- - ------- - ------- - ------ - ----- --
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Direct Cost of Revenues. The decrease in direct cost of revenues in the three and nine months ended April 30, 2007 compared to the similar periods in fiscal 2006 is due primarily to the decline in IDT Telecom's revenues, partially offset by an increase in IDT Capital direct cost of revenues. The decrease in direct cost of revenues in IDT Telecom is also due to a $48.1 million regulatory fee accrual that we recorded in the third quarter of fiscal 2006, as a result of an audit of our U.S. calling card business for calendar years 2000 through 2004. The increase in IDT Capital direct cost of revenues in the three and nine months ended April 30, 2007 compared to the similar periods in fiscal 2006 is a result of the rapid growth of its retail energy operations, the acquisition of our Ethnic Grocery Brands business in March 2006 and the growth of our IDT Carmel business. As a percentage of total revenues, direct costs decreased to 81.5% and 79.3% in the three and nine months ended April 30, 2007, respectively, compared to 85.9% and 80.9% in the three and nine months ended April 30, 2006, respectively, due primarily to higher gross margins in our calling card business.
Selling, General and Administrative. The decrease in selling, general and administrative expenses in the three and nine months ended April 30, 2007 compared to the similar periods in fiscal 2006 was due primarily to the sale of our U.K.-based consumer phone services business, cost savings resulting from the integration of Net2Phone within IDT Telecom, and lower compensation and other expenses as a result of the cost savings program we initiated in the third quarter of fiscal 2006. The decrease in the nine months ended April 30, 2007 compared to the similar period in fiscal 2006 also reflects a reduction of $23.5 million in selling, general and administrative expenses for IDT Spectrum primarily as a result of a $10.0 million settlement reached with Lucent Technologies, Inc. that was recorded in the second quarter of fiscal 2006. This overall decrease was partially offset by increases of $3.1 million and $13.6 million in selling, general and administrative expenses in IDT Capital in the three and nine months ended April 30, 2007, respectively, compared to the similar periods in fiscal 2006, primarily due to the addition of our Ethnic Grocery Brands business and higher expenses due to the growth of our retail energy operations. As a percentage of total revenues, selling, general and administrative expenses decreased from 25.1% and 25.3% in the three and nine months ended April 30, 2006, respectively, to 23.8% and 22.3% in the three and nine months ended April 30, 2007, respectively, as selling, general and administrative expenses declined faster than did total revenues.
Stock-based compensation expense included in selling, general and administrative expenses, primarily relating to the vesting of restricted stock grants, was $1.5 million and $5.9 million in the three and nine months ended April 30, 2007, respectively, compared to $6.6 million and $20.1 million in the three and nine months ended April 30, 2006, respectively. In April 2007, options to purchase an aggregate of 2.2 million shares of our Class B common stock were granted to certain of our executives and senior managers. These options were granted as a result of a reevaluation of our compensation policy to replace a portion of current cash compensation with stock options. The stock-based compensation expense for these options that will be charged to selling, general and administrative expenses over three years is approximately $4.1 million.
Restructuring and Severance Charges. Towards the end of the third quarter of fiscal 2006, we initiated a company-wide cost savings program designed to better align our infrastructure to our current and anticipated
near-term business needs. As of April 30, 2007, the program resulted in the termination of approximately 570 employees, of which more than 270 were customer service related. These terminations resulted in $1.8 million and $8.1 million in restructuring and severance charges in the three and nine months ended April 30, 2007, respectively. In May 2007, approximately 300 additional positions were eliminated through attrition and terminations, which substantially completed this program. As a result, we expect additional severance charges of approximately $12.0 million in the fourth quarter of fiscal 2007. Restructuring and severance charges in the three and nine months ended April 30, 2006 include severance related charges of $5.2 million and $4.7 million, respectively, primarily related to the elimination of customer service and certain other positions, and real estate network reduction charges of $0.1 million and $1.5 million, respectively, related to the IDT Spectrum network.
Three months ended Nine months ended
April 30, Change April 30, Change
----------------------- ------------------ ---------------------- ------------------
2007 2006 $ % 2007 2006 $ %
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(in millions)
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