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IDT > SEC Filings for IDT > Form 10-Q on 12-Mar-2014All Recent SEC Filings

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Form 10-Q for IDT CORP


12-Mar-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the accompanying 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, 2013, as filed with the U.S. Securities and Exchange Commission (or SEC).

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 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. 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 Item 1A to Part I "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended July 31, 2013. 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 in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the year ended July 31, 2013.

Overview

We are a multinational holding company with operations primarily in the telecommunications industry. We have three reportable business segments, Telecom Platform Services and Consumer Phone Services, which comprise our IDT Telecom division, and Zedge Holdings, Inc., or Zedge. Telecom Platform Services provides telecommunications services, including prepaid and rechargeable calling products and international long distance traffic termination, as well as various payment services. Consumer Phone Services provides consumer local and long distance services in the United States. Zedge owns and operates an online platform for mobile phone consumers interested in obtaining free and relevant, high quality games, apps, and personalization content, such as ringtones, wallpapers, and alerts. All other operating segments that are not reportable individually are included in All Other. All Other includes Fabrix Systems Ltd., or Fabrix, a software development company specializing in highly efficient cloud-based video processing, storage and delivery, our real estate holdings, and other smaller businesses.

IDT Telecom

Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom's businesses. IDT Telecom's revenues represented 98.7% and 98.9% of our total revenues from continuing operations in the six months ended January 31, 2014 and 2013, respectively.

Telecom Platform Services, which represented 99.3% and 99.0% of IDT Telecom's total revenues in the six months ended January 31, 2014 and 2013, respectively, markets and distributes multiple communications and payment services across four broad business categories, including:

Retail Communications provides international long-distance calling products primarily to immigrant communities worldwide, with its core markets in the United States. These products include our flagship Boss Revolution PIN-less product (an international calling service sold through our Boss Revolution payment platform) as well as other prepaid calling card products including traditional, disposable calling cards.

Wholesale Termination Services is a global telecom carrier, terminating international long distance calls around the world for Tier 1 fixed line and mobile network operators, as well as other service providers, through our network of 650-plus carrier interconnects.

Payment Services provides payment offerings including domestic and international airtime top-up sold both in traditional hard card format and over our Boss Revolution payment platform, gift cards sold in the United States and Europe, and our recently launched bill pay and international money transfer service. Payment Services also includes reloadable prepaid debit cards and Bank Identification Number (BIN) sponsorship services offered in Europe by our Gibraltar-based bank, IDT Financial Services Limited.

Hosted Platform Solutions provides customized communications services that leverage our proprietary networks, platforms and/or technology to cable companies and other service providers. The majority of Hosted Platform Solutions' revenue is generated by our cable telephony business.


Over the past few years, we have experienced a continued shift in demand industry-wide, away from traditional calling cards and into wireless products and Internet protocol (or IP)-based products, which, among other things, has, and continues to contribute to the gradual erosion of our pricing power. The continued growth of these wireless and IP-based services has adversely affected the sales of our traditional disposable prepaid calling card products as customers migrate from using cards to using these alternative services. We expect pricing of wireless and IP-based services to continue to decrease, which may result in increased substitution and increased pricing pressure on our prepaid calling card products' sales and margins.

To combat this trend, we have introduced in recent years new sources of revenue, such as Boss Revolution PIN-less and international airtime top-up that have now largely replaced revenues from our traditional disposable calling cards. Boss Revolution PIN-less allows users to call their families and friends overseas without the need to enter a personal identification number. International airtime top-up, which enables customers to purchase airtime for a prepaid mobile telephone in another country, appeals to residents of developed countries such as the United States who regularly communicate with or financially support friends or family members in a developing country. The addition of Boss Revolution PIN-less and international airtime top-up represent successful efforts to leverage our existing capabilities and distribution. Although Boss Revolution PIN-less and international airtime top-up generally have lower gross margins than our traditional disposable calling cards, customers tend to continue using these products over a longer period of time thereby allowing us to generate higher revenues and longer lifetime value per user. The Boss Revolution payment platform provides us with a direct, real-time relationship with all of our participating retailers, resulting in a cost-effective and adaptable distribution model that can rapidly respond to changes in the business environment. There can be no assurance that we will continue to grow our Boss Revolution PIN-less and international airtime top-up sales, or that we will be able to continue to generate new sources of revenue to offset the continuing decline in our traditional disposable calling card revenues.

The wholesale carrier industry has numerous players competing for the same customers, primarily on the basis of price, products and quality of service. In our Wholesale Termination Services business, we have generally had to pass along all or most of our per-minute cost savings to our customers in the form of lower prices.

Discontinued Operations

On July 31, 2013, we completed a pro rata distribution of the common stock of our subsidiary Straight Path Communications Inc., or Straight Path, to our stockholders of record as of the close of business on July 25, 2013 (the Straight Path Spin-Off). At the time of the Straight Path Spin-Off, Straight Path owned 100% of Straight Path Spectrum, Inc., which holds, leases and markets fixed wireless spectrum licenses, and 84.5% of Straight Path IP Group, Inc., which holds intellectual property primarily related to communications over the Internet and the licensing and other businesses related to this intellectual property. As of July 31, 2013, each of our stockholders received one share of Straight Path Class A common stock for every two shares of our Class A common stock and one share of Straight Path Class B common stock for every two shares of our Class B common stock held of record as of the close of business on July 25, 2013. Straight Path and its subsidiaries met the criteria to be reported as discontinued operations and accordingly, their assets, liabilities, results of operations and cash flows are classified as discontinued operations for all periods presented.

We believe that the Straight Path Spin-Off will be tax-free for us and our stockholders for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code of 1986. We received an opinion from Pryor Cashman LLP on the requirements for a tax-free distribution. Specifically, the opinion concluded that the distribution (i) should satisfy the business purpose requirement of the Internal Revenue Code for a tax-free distribution,
(ii) should not be viewed as being used principally as a device for the distribution of earnings and profits of the distributing corporation or the controlled corporation or both, and (iii) should not be viewed as part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50 percent or greater interest in the distributing corporation or controlled corporation within the meaning of the relevant section of the Internal Revenue Code.

In connection with the Straight Path Spin-Off, we funded Straight Path with a total of $15.0 million in aggregate cash and cash equivalents.

We entered into various agreements with Straight Path prior to the Straight Path Spin-Off including (1) a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the spin-off, (2) a Tax Separation Agreement, which sets forth our and Straight Path's responsibilities with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods, and (3) a Transition Services Agreement, which provides for certain services to be performed by us to facilitate Straight Path's transition into a separate publicly-traded company. These agreements provide for, among other things, the allocation between us and Straight Path of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off, and provision of certain services by us to Straight Path following the spin-off, including services relating to human resources and employee benefits administration, finance, treasury, accounting, tax, internal audit, facilities, external reporting, investor relations and legal. In addition, we and Straight Path have entered into a license agreement whereby each of us, Straight Path and our subsidiaries granted and will grant a license to the other to utilize patents held by each entity.


Revenues, loss before income taxes and net loss of Straight Path, which is included in discontinued operations, were as follows:

                             Three months ended            Six months ended
                                 January 31,                  January 31,
                           2014           2013          2014           2013
                                              (in millions)
Revenues                   $   -       $       0.2      $   -       $       0.7

Loss before income taxes   $   -       $      (0.4 )    $   -       $      (1.9 )

Net loss                   $   -       $      (0.4 )    $   -       $      (1.9 )

520 Broad Street Building

At January 31, 2014, the carrying value of the land, building and improvements that we own at 520 Broad Street, Newark, New Jersey, after the impairment charge that was recorded in fiscal 2013, was $37.3 million. We are considering a range of options as to the future use or disposition of 520 Broad Street, some of which could result in an additional loss from a further reduction in the carrying value of the land, building and improvements and such loss could be material.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for fiscal 2013. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management's most 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, income and other taxes and regulatory agency fees, IDT Telecom direct cost of revenues-disputed amounts, and contingent liabilities. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. 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 2013.

Results of Operations

Three and Six Months Ended January 31, 2014 Compared to Three and Six Months Ended January 31, 2013

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.

IDT Telecom-Telecom Platform Services and Consumer Phone Services Segments

                     Three months ended                                   Six months ended
                         January 31,                 Change                  January 31,                Change
                      2014          2013          $            %            2014        2013         $            %
                                                             (in millions)
Revenues
Telecom Platform
Services           $    398.0      $ 402.8     $  (4.8 )      (1.2 )%   $   810.7     $ 794.8     $  15.9         2.0 %
Consumer Phone
Services                  2.9          3.7        (0.8 )     (23.3 )          5.9         7.7        (1.8 )     (24.1 )

Total revenues     $    400.9      $ 406.5     $  (5.6 )      (1.4 )%   $   816.6     $ 802.5     $  14.1         1.8 %


Revenues. IDT Telecom revenues decreased in the three months ended January 31, 2014 compared to the similar period in fiscal 2013 due to decreases in both Telecom Platform Services and Consumer Phone Services revenues. IDT Telecom revenues increased in the six months ended January 31, 2014 compared to the similar period in fiscal 2013 due to an increase in Telecom Platform Services revenues, which more than offset a decline in Consumer Phone Services revenues. As a percentage of IDT Telecom's total revenues, Telecom Platform Services revenues increased from 99.0% in the six months ended January 31, 2013 to 99.3% in the six months ended January 31, 2014, and Consumer Phone Services revenues decreased from 1.0% in the six months ended January 31, 2013 to 0.7% in the six months ended January 31, 2014.

Telecom Platform Services' revenues, minutes of use and average revenue per minute for the three and six months ended January 31, 2014 and 2013 consisted of the following:

                      Three months ended                                     Six months ended
                          January 31,                  Change                   January 31,                 Change
                       2014          2013          $/#          %             2014         2013         $/#          %
                                                   (in millions, except revenue per minute)
Telecom Platform
Services Revenues
Retail
Communications      $    169.8     $  161.1     $    8.7          5.4 %    $  342.3     $  314.7     $   27.6          8.8 %
Wholesale
Termination
Services                 167.8        182.2        (14.4 )       (7.9 )       346.3        363.8        (17.5 )       (4.8 )
Payment Services          48.9         46.6          2.3          4.9          98.8         90.4          8.4          9.4
Hosted Platform
Solutions                 11.5         12.9         (1.4 )      (10.9 )        23.3         25.9         (2.6 )      (10.3 )

Total Telecom
Platform Services
revenues            $    398.0     $  402.8     $   (4.8 )       (1.2 )%   $  810.7     $  794.8     $   15.9          2.0 %

Minutes of use
Retail
Communications           2,401        2,352           49          2.1 %       4,799        4,682          117          2.5 %
Wholesale
Termination
Services                 4,742        6,250       (1,508 )      (24.1 )       9,417       12,367       (2,950 )      (23.9 )
Hosted Platform
Solutions                  211          233          (22 )       (9.1 )         421          472          (51 )      (11.0 )

Total minutes of
use                      7,354        8,835       (1,481 )      (16.8 )%     14,637       17,521       (2,884 )      (16.5 )%

Average revenue
per minute
Retail
Communications      $   0.0707     $ 0.0685     $ 0.0022          3.3 %    $ 0.0713     $ 0.0672     $ 0.0041          6.1 %
Wholesale
Termination
Services                0.0354       0.0291       0.0063         21.4        0.0368       0.0294       0.0074         25.0

Retail Communications revenue (42.2% and 39.6% of Telecom Platform Services' revenue in the six months ended January 31, 2014 and 2013, respectively) grew 5.4% and 8.8% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013. The growth was led by penetration and acceptance of Boss Revolution within our U.S. retail distribution network, partially offset by continued declines in sales of traditional disposable calling cards and retail sales in Europe.

Wholesale Termination Services revenue (42.7% and 45.8% of Telecom Platform Services' revenue in the six months ended January 31, 2014 and 2013, respectively) decreased 7.9% and 4.8% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013, which was due to a change in the destination mix.

Payment Services revenue (12.2% and 11.4% of Telecom Platform Services' revenue in the six months ended January 31, 2014 and 2013, respectively) grew 4.9% and 9.4% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013. The increase was driven by the success of our international airtime top-up offerings. Future growth will be, in large part, contingent upon our ability to enter into new international airtime top-up partnerships with wireless providers, as well as continued growth of international airtime top-up volume within existing relationships and the introduction of new payment offerings through the Boss Revolution payment platform. In the third quarter of fiscal 2013, we launched our domestic bill payment services in partnership with a licensed domestic bill pay provider. In addition, in the first quarter of fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution payment platform after obtaining the requisite licenses.

Hosted Platform Solutions revenue (2.9% and 3.2% of Telecom Platform Services' revenue in the six months ended January 31, 2014 and 2013, respectively) declined 10.9% and 10.3% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013. The decline was partially due to a decrease in revenue from our cable telephony business which is in harvest mode. The decline was also due to decreases in revenues from managed services and from call shops outside the U.S. Call shop revenues decreased due to price competition and migration to alternative wireless and IP-based services.


Total minutes of use for Telecom Platform Services decreased 16.8% and 16.5% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013. Minutes of use relating to our Consumer Phone Services segment is not tracked as a meaningful business metric as the domestic traffic generated by this segment is not carried on our network, and the international traffic generated by this segment, though carried on our own network, is insignificant. Within Telecom Platform Services, minutes of use relating to Wholesale Termination Services decreased 24.1% and 23.9% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013, which included a significant decrease from our web-based prepaid termination service. Minutes of use from Retail Communications increased 2.1% and 2.5% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013, which was driven by the volume growth in the U.S., which more than offset the decrease in minutes of use in Europe and Asia. Hosted Platform Solutions minutes of use decreased 9.1% and 11.0% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013, primarily as a result of the decline in minutes of use from managed services and cable telephony customers. In general, since our Hosted Platform Solutions business' revenues and cash flows are driven far more by the number of existing subscribers in the form of a per-subscriber fee rather than by subscriber minutes of use, we do not view Hosted Platform Solutions minutes of use as a very significant metric.

Consumer Phone Services revenues declined 23.3% and 24.1% in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013 as we continued to operate the business in harvest mode. This strategy has been in effect since calendar 2005 when the FCC decided to terminate the UNE-P pricing regime, which resulted in significantly inferior economics in the operating model for this business. The customer base for our bundled, unlimited local and long distance services business was approximately 6,900 as of January 31, 2014 compared to 9,200 as of January 31, 2013. We currently offer local service in the following 11 states: New York, New Jersey, Pennsylvania, Maryland, Delaware, Massachusetts, New Hampshire, West Virginia, Maine, Rhode Island and California. In addition, the customer base for our long distance-only services was approximately 31,900 as of January 31, 2014 compared to 40,600 as of January 31, 2013. We anticipate that Consumer Phone Services' customer base and revenues will continue to decline.

                     Three months ended                                   Six months ended
                        January 31,                  Change                 January 31,                 Change
                      2014          2013          $            %            2014        2013         $            %
                                                             (in millions)
Direct cost of
revenues
Telecom Platform
Services           $    333.0      $ 342.2     $  (9.2 )      (2.7 )%   $   681.2     $ 675.1     $   6.1         0.9 %
Consumer Phone
Services                  1.3          1.7        (0.4 )     (24.9 )          2.7         3.4        (0.7 )     (21.4 )

Total direct
cost of revenues   $    334.3      $ 343.9     $  (9.6 )      (2.8 )%   $   683.9     $ 678.5     $   5.4         0.8 %



                            Three months ended                              Six months ended
                                January 31,                                    January 31,
                           2014             2013          Change           2014           2013          Change
Direct cost of
revenues as a
percentage of
revenues
Telecom Platform
Services                      83.7 %           85.0 %         (1.3 )%         84.0 %         85.0 %         (1.0 )%
Consumer Phone
Services                      45.6             46.5           (0.9 )          45.4           43.9            1.5

Total                         83.4 %           84.6 %         (1.2 )%         83.8 %         84.6 %         (0.8 )%

Direct Cost of Revenues. Direct cost of revenues in Telecom Platform Services decreased in the three months ended January 31, 2014 compared to the similar period in fiscal 2013 and increased in the six months ended January 31, 2014 compared to the similar period in fiscal 2013 mainly due to the similar trends in Telecom Platform Services' revenues. Direct cost of revenues as a percentage of revenues in Telecom Platform Services decreased 130 and 100 basis points in the three and six months ended January 31, 2014, respectively, compared to the similar periods in fiscal 2013 due to shifts in the destination mix in Wholesale Termination Services, the relatively higher contribution of higher-margin Retail Communications revenues compared to Wholesale Termination Services, and overall lower network connectivity costs.

Direct cost of revenues in our Consumer Phone Services segment decreased the three and six months ended January 31, 2014 compared to the similar periods in fiscal 2013 primarily as a result of the declining customer base.


                      Three months ended                                   Six months ended
                         January 31,                  Change                 January 31,                 Change
                     2014            2013          $            %           2014         2013         $            %
                                                              (in millions)
Selling, general
and
administrative
expenses
Telecom Platform
Services           $    49.5       $   47.3     $   2.2         4.6 %   $     99.2     $  94.4     $   4.8         5.1 %
Consumer Phone
Services                 1.1            1.6        (0.5 )     (27.0 )          2.4         3.3        (0.9 )     (28.5 )

Total selling,
general and
administrative
expenses           $    50.6       $   48.9     $   1.7         3.6 %   $    101.6     $  97.7     $   3.9         3.9 %

. . .

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