IDT Corporation (NYSE: IDT, IDT.C) announced that its Chairman, Howard Jonas, has authored a white paper explaining his view of certain strategic approaches of the company and discussing some initiatives that reflect those approaches, as well as IDT’s plans for building long-term value. The white paper can be viewed on IDT’s website by clicking here, and is reprinted below for your convenience. The views expressed in the white paper are those of Mr. Jonas and do not necessarily reflect the views of IDT, its board of directors or other members of IDT’s management.
Fuel for the Future: IDT’s Current Position and Strategic Outlook
A White Paper by Howard Jonas, Chairman of IDT Corporation
As I write this, IDT‘s share price is under $7. Four years ago, it was roughly three times as much. For those of you who have stuck with us through this long, painful slide, I am honored by your loyalty. But I am also determined to do better for you.
I‘m writing this paper for two reasons. First, to tell you why I believe that the market is fundamentally underestimating IDT‘s underlying value, and second, to share with you our vision for IDT‘s future, including two of our most interesting new projects.
I believe that our GAAP financial statements fundamentally understate IDT’s true value and financial performance. This situation is not unique to IDT: GAAP requires full expensing of investments in intangible assets, including items such as process improvements, advertising and sales promotion, employee training, and numerous other outlays that GAAP views as operational expenses but more accurately represent investments in strategic assets. Therefore, companies that invest heavily in intangibles in order to generate positive future cash flow may have difficulty showing positive current earnings.
GAAP‘s treatment of spending intended to build strategic value was based on the assumption that there was little correlation between such expenditures and future revenue. Yet a variety of studies have since shown that an economically meaningful association does exist between these outlays and subsequent earnings. Put another way, these investment expenditures can actually be indicators of higher future cash flows. Broadly, then, among companies that invest heavily in their own future, current negative earnings fail to convey the full picture of performance or the true value of equity.
I am not alone in this view of the shortsightedness of GAAP. Several academics have in the past criticized GAAP’s policy of expensing investments in intangible assets. They claim that investors often fail to fully realize the value relevance of these expensed investments. This undervaluing of investments in R&D and like expenditures results in market inefficiency as the true value of equity is not fully recognized. Worse still, it creates incentive to reduce spending on discretionary intangible investments in order to enhance short term performance. According to some academics, the damaging influence of this mentality is so pervasive that it represents a fundamental flaw in the entire financial accounting model.
At IDT, we have always shunned the temptation to increase short term performance by sacrificing long term economic health. Rather, we continue to invest millions of dollars a year on activities that directly add value to our incubating businesses. These strategic investments are the building blocks for our future business units and the sources of future cash flows and value for our shareholder. We have spent millions of dollars positioning and defending our intellectual property. We build high-growth businesses that are going to be important asset plays – including the costly market share building activities for Zedge, IDW Publishing, and IDT‘s New York energy supply company (ESCO). We know that in the long term, these investments will return multiples of the amounts invested to our shareholders when we monetize these dynamic and growing businesses.
Our investments in Zedge, for example, have generated explosive growth. Our zedge.net website now has six and a half million registered users, and is one of the fastest growing mobile content providers in the world. IDT Energy began with a small acquisition in 2005. By investing significantly in marketing and customer acquisition, the company has grown to over 320,000 meters, placing us among the largest independent residential ESCOs in New York State.
Were we to eschew these investments into our future – the millions spent defending our IP, the market-building activities in Zedge and IDT Energy, and all similar strategic investments – our company would likely show current net profit. Yet with an eye to the latent value we believe results from our pattern of investing in our own future, we will continue to make strategic investments to incubate dynamic, promising, asset play businesses. As we continue to grow and seek monetization opportunities, the underlying value of the company will emerge.
One prime example of IDT’s commitment to investing in its future is our IDT Carmel receivables management business, in which we invest in financial assets – receivable portfolios – with proven independent value. We have been making significant, periodic investments in these portfolios, and expect to continue doing so. Expanding our debt management portfolio through regular investment is a prudent strategy that will yield significant cash and healthy rates of return in a three to five year time frame. For many years, our prepaid calling card business generated positive cash flow that allowed IDT to make strategic investments in longer term asset plays. We believe that IDT Carmel will serve this function for years to come.
Now, let‘s talk more about the future.
Since I founded IDT in 1990, we have never been shy about challenging the status quo. Our initial business – callback – successfully defied the incumbent telecoms‘ monopoly on overseas calling. Net2Phone, our pioneering VoIP provider, helped to open all voice communication to competition. IDT Entertainment leveraged new technologies to significantly cut the cost of film animation. When the corporate establishment fails the consumer, we find opportunity.
Today we remain dedicated to finding new ways to undercut the powers-that-be to deliver better services to American consumers at a lower cost.
IDT has recently embarked on two ventures aimed right at the heart of business-as-usual in America.
America pays an astounding price for our dependence on foreign oil. In 2007, we shelled out $331 billion for oil imports. But even that astounding figure represents only a fraction of the true cost. The defense costs – both in terms of American troops‘ lives lost overseas and in dollars spent defending our oil supply – are heavier still. At home, the cost of imported oil is hobbling our economy. It sucks away capital from investment, slows economic growth, hampers job creation, and slows productivity gains. America‘s economy is staggering under the burden of our foreign oil addiction.
Yet, America could transform herself into an energy self-sufficient nation by exploiting its untapped and unconventional energy resources. The explosive growth of Canada‘s Athabasca oil sands operations is a case in point. Bitumen production in Athabasca has risen from nominal levels to over one million barrels a day in the past five years. By 2030, production could reach five million barrels daily. Moreover, the efficiency of these operations has improved rapidly as new extraction processes and techniques have been developed and applied.
America‘s unconventional fuel treasure lies in the Green River Formation in Colorado, Utah and Wyoming. The Formation contains the largest fossil energy reserves in the world. Most of it is in the form of oil shale with proven reserves sufficient to supply America‘s domestic oil needs for the foreseeable future.
IDT recently purchased a 75% stake in EGL Oil Shale. Along with Shell and Chevron, EGL was one of three companies awarded oil shale Research, Development and Demonstration leases on 160 acre tracts in Western Colorado by the Bureau of Land Management. If EGL‘s proprietary in-situ retorting technology proves economically viable and environmentally responsible, the company will be awarded the right to operate commercially on an adjacent 4,960 acre Preference Right Lease Tract. Recovery rates on portions of the tract could be as high as 2 million barrels per acre.
It would be difficult to overstate the risk of this venture. It is, of course, highly speculative and long term. Big oil has spent billions to open up the Formation’s Green River Basin to large scale oil shale production and still does not have a commercially viable method of extracting the oil. The technological, environmental, economic and regulatory hurdles are substantial. But it is even more difficult to imagine that America will not exploit its oil shale reserves sometime within the next few decades. The multi-trillion dollar question is, “When will the country start fighting for its energy independence?“
As the only independent lease holder pursuing in-situ extraction technologies, our American Shale Oil (AMSO) subsidiary is in a prime position to harness the technological genius of America. Big oil will always pursue the cheapest global resources first. But for our nation, unlocking our domestic oil shale reserves is the best hope for energy independence. I am determined that AMSO will become the catalyst for a truly national, collaborative and open approach to unlock the oil shale reserves and help the nation achieve energy independence in an environmentally responsible way.
The other IDT initiative I want to discuss is the Depot USA online store. Depot USA cannot be compared to our oil shale initiative in terms of its potential impact on the global economy. Oil shale production could transform America from a net oil importer to an exporter, and thereby reshape the world‘s geo-political balance. Nor is Depot USA comparable to AMSO in terms of its potential value to investors. Nevertheless, both ventures represent potential breakthrough entrepreneurial approaches to address critical vulnerabilities in the U.S. economy.
America has lost one quarter of the nearly twenty million jobs manufacturers provided in 1979. During those same years, the American middle class has, by most measures, been in a corresponding decline. The rich have done very well, while the “middle class squeeze“ has pushed millions of families nearer poverty. This is no coincidence. Manufacturing had long been the lynchpin of middle class prosperity.
The decline of manufacturing in the United States has been aided and abetted by the national big-box retail chains. They have developed global supply chains with a single-minded devotion to cutting costs, but a mindless lack of regard for the ultimate welfare of their American customers.
Conventional wisdom has it that the decline of the “Made in the USA“ movement in the early 1990‘s and the continuing struggles of the Big Three automakers are further proof that American consumers‘ purchase decisions are based on perceived value over country of origin. That may be true for many folks. But it is also indisputably true that a very large number of Americans want to buy American. The big box retailers do not speak to these folks. They deliberately focus the buyers‘ decision exclusively on price while downplaying products‘ country of origin.
But imagine a world where consumers can easily find, identify and purchase high quality American made goods at competitive prices. Imagine how different consumer‘s choices would be if the intrinsic value of buying American was explained and reinforced in the marketplace. That‘s the idea behind “Depot USA“, IDT‘s online store now in development.
“Depot USA“ is a long term, developmental project that will begin by offering American made apparel, and then gradually expand into other lines of product. We will market to and build a following among the American consumers who prefer American made products.
Taken together, Depot USA and AMSO are two very interesting ventures. Both are based on the premise that Americans and their government must find new solutions to deliver a stronger, more secure economic future. If we can contribute to the fight for energy independence by opening the country‘s oil shale reserves, and boost American manufacturing by giving American consumers online access to domestically manufactured goods, then we will help change America for the better, while doing very well for our shareholders.
About IDT Corporation:
IDT Corporation is an innovative and opportunity seeking multinational holding company with operations that span various industries. Through its Telecom subsidiary, IDT provides telecommunications services worldwide to the retail and wholesale markets. IDT Energy operates an Energy Services Company (ESCO) in New York State. IDT subsidiary American Shale Oil Corporation (AMSO) manages IDT‘s oil shale ventures. IDT’s Capital division incubates newer businesses, and the Company’s Spectrum subsidiary holds its spectrum license assets. IDT Telecom provides retail and wholesale telecommunications services and products, including pre-paid and rechargeable calling cards, consumer local, long distance, and wireless phone services, and wholesale carrier services. Under the Net2Phone brand name, the Company also provides a range of voice over Internet protocol (VoIP) communications services. IDT Capital’s operations include receivables portfolio management and collection, ethnic food distribution, brochure distribution, Internet Mobile Group, Net2Phone Ventures and other initiatives. IDT Corporation’s Class B Common Stock and Common Stock trade on the New York Stock Exchange under the ticker symbols IDT and IDT.C, respectively.
In this press release, all statements that are not purely about historical facts, including, but not limited to, those with the words “believe,““anticipate,““expect,““plan,““intend,““estimate,““target“ and similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to IDT as of the date thereof, and IDT assumes no obligation to update any forward-looking statements or risk factors.