IDT Corporation – Results for Second Quarter Fiscal 2011

SECOND QUARTER FISCAL 2011 SUMMARY

$ in millions, except EPS	2Q11	1Q11	2Q10	YoY Change (%/$)
Revenues	$401.5	$357.4	$362.7	+10.7%
Gross profit	$72.2	$74.2	$74.2	(2.6)%
Gross margin percentage	18.0%	20.8%	20.5%	(250) basis points
Total SG&A expense (including R&D expense)	$62.4	$60.0	$56.5	+10.5%
Adjusted EBITDA	$9.8	$14.2	$17.7	(44.6)%
Income from operations	$8.1	$11.0	$7.6	+6.2%.
Net income attributable to IDT	$3.9	$15.6	$3.7	+6.1%
Diluted EPS attributable to IDT	$0.18	$0.70	$0.17	+$0.01
Net cash provided by operating activities	$23.9	$5.6	$13.0	+83.0%

 

NOTE: Adjusted EBITDA for all periods presented is a non-GAAP measure representing income (loss) from operations exclusive of depreciation and amortization, severance and other charges, and other operating gains, net.  It is one of several key metrics used by management to evaluate the operating performance of the Company and its individual business units.  See reconciliations provided below.

MANAGEMENT COMMENTS

Howard Jonas, IDT's Chairman and CEO, said, “IDT Telecom had an outstanding quarter with strong growth in minutes, revenue, gross profit and Adjusted EBITDA generated by our core TPS segment.   At IDT Energy, we continued to expand into new territories despite an increase in electric prices, which pressured margins downward this quarter. In the longer term, these new markets are a great growth opportunity and we have the flexibility to protect against future commodity cost increases by hedging some of our naturally short position.”

IDT's Chief Financial Officer, Bill Pereira said, “We grew net income by 6% year-over-year and generated over $23 million in cash from operating activities in 2Q11.  IDT also further strengthened its balance sheet and enhanced its liquidity, even while paying $10 million in dividends.  Cash, cash equivalents and certificates of deposit – increased to $262.8 million from $242.7 million at the close of the prior quarter.  We also continued to execute on several important initiatives to increase shareholder value including the spin-off to shareholders of both our VoIP related intellectual property and our Genie Energy division.  We expect to complete both spin-offs during calendar 2011.”

BALANCE SHEET AND CASH FLOW HIGHLIGHTS

At January 31, 2011, IDT reported $262.8 million of cash, cash equivalents and certificates of deposit, including $6.9 million of restricted cash and cash equivalents.  Current assets totaled $435.7 million, and current liabilities totaled $313.9 million.  Non-current liabilities totaled $46.5 million. 

Net cash provided by operating activities for the six months ending January 31, 2011 was $29.5 million, and capital expenditures totaled $6.1 million.  Net cash provided by operating activities during the comparable period a year ago was $15.3 million, and capital expenditures totaled $4.9 million.

OPERATING RESULTS BY SEGMENT

IDT TELECOM

IDT Telecom includes two reporting segments: Telecom Platform Services (TPS) and Consumer Phone Services (CPS).  TPS provides various telecommunications solutions, including prepaid and rechargeable calling cards, a range of Voice over Internet Protocol (VoIP) communications services and wholesale carrier services.  CPS provides both bundled (unlimited local and long distance) services as well as long distance-only services to consumers in the United States. 

IDT TELECOM:  Telecom Platform Services (TPS)

TPS – SECOND QUARTER FISCAL 2011 SUMMARY

$ in millions	2Q11	1Q11	2Q10	YoY Change
Revenues	$334.4	$302.5	$290.4	+15.2%
Minutes of use (in millions)	6,552	6,086	5,082	+28.9%
Gross profit	$55.1	$53.9	$51.2	+7.8%
Gross margin percentage	16.5%	17.8%	17.6%	(110) basis points
SG&A expense	$44.7	$43.6	$42.2	+5.8%
Adjusted EBITDA	$10.4	$10.2	$8.9	+16.9%
Income from operations	$9.4	$5.5	$1.0	+856.0%

 

TPS' revenues in 2Q11 were $334.4 million, a 15.2% increase compared to the second quarter of fiscal 2010, and a 10.6% increase sequentially.  Average revenue per minute declined 10.7% compared to the year ago period, but increased 2.6% sequentially.

Wholesale carrier revenues increased 23.0% YoY and 15.1% sequentially, reflecting strong growth in minutes of use as a result of more successful sales and marketing efforts, as well as lower pricing per minute YoY that generated more traffic on IDT's network. 

Revenues from TPS' retail sales channel increased both YoY and sequentially.  In the United States, BOSS Revolution, IDT's international, pay-as-you-go calling service, and international mobile top-up (IMTU) cards led the YoY and sequential growth, far offsetting declines from the discontinuation of third party provided domestic mobile top-up card sales and from the sale of traditional, disposable IDT calling cards.  

Overseas, both YoY and sequentially, calling card revenues increased somewhat in South America, while falling in Asia. Calling card revenues in Europe declined YoY and increased slightly sequentially.  Revenues generated outside the United States were adversely impacted by declines of certain foreign currencies, particularly European, against the U.S. dollar. 

TPS' minutes of use rose to 6.6 billion, a 28.9% increase compared to 2Q10, and a 7.7% increase sequentially.  Increases in minutes of use were driven by both the wholesale carrier and reseller channel, while minutes generated by TPS' retail channel rose modestly.  Within Telecom's international retail operations, minutes of use growth in Europe both YoY and sequentially was in part offset by declines in Asia and South America. Minutes of use generated by retail offerings in the U.S., including cable telephony services, increased slightly sequentially and decreased slightly YoY.

TPS' direct costs rose 16.7% YoY and 12.3% sequentially to $279.3 million.

Gross profit at TPS was $55.1 million, a 7.8% increase compared to 2Q10 and a 2.4% increase sequentially.

TPS's gross margin was 16.5%, a 110 basis point decrease YoY and a 130 basis point decrease sequentially.  Product mix drove the trend, as revenues from sales of traditional, higher margin, IDT branded prepaid calling cards have declined, while revenue from relatively lower margin IMTU cards and wholesale carrier traffic have increased.

TPS' SG&A costs were $44.7 million, representing a 5.8% increase YoY and a 2.5% increase sequentially.  Compared to the year ago quarter, increases in compensation and in third party commissions, as well as in bad debt expenses, were only partially offset by decreases in consulting fees, and in facilities and equipment maintenance costs.

TPS' Adjusted EBITDA for 2Q11 was $10.4 million, a 16.9% increase YoY and a 2.1% increase sequentially. 

TPS' depreciation and amortization expense was $4.7 million in 2Q11, a 35.5% decline from the year ago period and a 0.4% decline sequentially.  The significant YoY decline reflects lower levels of capital expenditures in recent quarters and the reaching of full depreciation of older property, plant and equipment. Going forward, management expects more modest YoY reductions in depreciation and amortization expense. 

TPS' income from operations was $9.4 million, compared to $1.0 million in 2Q10 and $5.5 million in 1Q11. In addition to the improvement in Adjusted EBITDA and the decrease in depreciation and amortization expense noted above, income from operations in 2Q11 benefitted from a net gain of $4.6 million from the termination of a contractual agreement for cable telephony services partially offset by an adverse decision in a patent infringement lawsuit.

$ in millions	2Q11	1Q11	2Q10	YoY Change
Revenues	$6.9	$7.5	$9.9	(30.4)%
Gross profit	$3.8	$4.0	$5.3	(28.0)%
Gross margin percentage	55.6%	53.5%	53.8%	+180 basis points
SG&A expense	$1.8	$1.9	$2.2	(15.6)%
Adjusted EBITDA	$2.0	$2.1	$3.2	(36.6)%
Income from operations	$2.0	$2.0	$3.1	(36.6)%

CPS has been in “harvest mode” since fiscal 2006 – maximizing revenues from current customers while maintaining SG&A and other expenses at the minimum levels essential to operate the business. During 2Q11, CPS generally performed to expectations and results were consistent with long term historical trends.

GENIE ENERGY

Genie Energy is comprised of IDT Energy and Genie Oil and Gas.  IDT Energy operates an energy services company that resells electricity and natural gas to residential and small business customers in New York State, New Jersey and Pennsylvania. Genie Oil and Gas consists mainly of (1) American Shale Oil Corporation (AMSO) which holds and manages Genie's interest in American Shale Oil, LLC (AMSO, LLC), a shale oil initiative in Colorado, and (2) Genie's interest in Israel Energy Initiatives, Ltd. (IEI), a shale oil initiative in Israel.

GENIE ENERGY:  IDT Energy

IDT ENERGY – SECOND QUARTER FISCAL 2011 SUMMARY

$ in millions	2Q11	1Q11	2Q10	YoY Change
Revenues	$57.8	$45.5	$60.7	(4.8)%
Gross profit	$11.3	$14.7	$16.3	(30.8)%
Gross margin percentage	19.6%	32.4%	26.9%	(730) basis points
SG&A expense	$5.9	$5.9	$4.5	+32.1%
Adjusted EBITDA	$5.4	$8.8	$11.9	(54.5)%
Income from operations	$5.4	$8.8	$11.8	(54.2)%

IDT Energy's revenues in 2Q11 were $57.8 million, a 4.8% decrease compared to 2Q10, primarily reflecting lower revenue per therm (THM) sold as a result of lower market rates for natural gas.  Revenues increased 27.1% sequentially primarily as the result of the seasonal increase in gas consumption which more than offset a seasonal decline in electric consumption.

As of January 31, 2011, IDT Energy served approximately 373,000 meters (211,000 electric and 162,000 natural gas) compared to 366,000 meters as of January 31, 2010 and 365,000 meters as of October 31, 2010. 

The average rates of annualized energy consumption for all IDT Energy meters served, as measured by residential customer equivalents (RCEs), are presented (as revised) in the chart below.  (An RCE represents a natural gas customer with annual consumption of 100MMBtus or an electricity customer with annual consumption of 10 MWhrs.)  

The increases in RCEs reflect a gradual shift in IDT's customer base to customers with higher electric consumption per meter as a result of targeted customer acquisition programs.  Because different customers have different rates of energy consumption, RCEs are a useful metric for evaluating the consumption profile of IDT Energy's customer base.

 

IDT Energy –Revised RCEs at End of Quarter (in thousands)
	2Q11	1Q11	4Q10	3Q10	2Q10
Electricity customers	124	122	117	103	98
Natural gas customers	91	87	88	88	87
Total	215	209	205	191	185

 

Electric revenues in 2Q11 were $29.6 million, a 1.8% YOY increase.  Electric revenues declined 23.4% sequentially reflecting seasonal reductions in consumption and a decline of 17.8% in average revenue per kWh.  Compared to the year ago quarter, kWh sold increased 2.8% partially offset by a decline of 1.0% in average revenue per kWh.  At January 31, 2011, IDT Energy served approximately 211,000 electric meters, representing 124,000 RCEs, compared to approximately 208,000 meters, representing approximately 98,000 RCEs, at January 31, 2010.

Natural gas revenues in 2Q11 were $28.2 million, a 10.8% decline YoY.  Sequentially, natural gas revenues increased 315.0% reflecting the seasonal increase in gas consumption for heating.  Average revenue per THM decreased 10.1% compared to the year ago quarter while THM sold decreased 0.7%.  At January 31, 2011, IDT Energy served approximately 162,000 gas meters, representing  91,000 RCEs, compared to approximately 158,000 meters, representing approximately 87,000 RCEs, at January 31, 2010.

IDT Energy's gross margin in 2Q11 was 19.6%, a 730 basis point decline YoY and a 1,280 basis point decline sequentially.  Gross margin for electric sales was 17.2%, a 1,420 basis point decline YoY, while the gross margin for natural gas was 22.0% in 2Q11, a 70 basis point decline YoY. 

Gross margin was pressured by several factors including an increase in the cost per kWh of electricity, which increased 19.5% YoY and 2.2% sequentially.  IDT Energy chose to absorb a significant portion of the increases in electric costs and accept lower gross margins for several reasons including increasing rate based competition in New York State, the expansion into new territories in New Jersey and Pennsylvania where some gross margin was sacrificed to facilitate customer acquisitions, and an effort to manage churn throughout the customer base.

SG&A expense in 2Q11 was $5.9 million, a 32.1% increase YoY but a 0.4% decrease sequentially. The YoY  increase reflects higher sales and marketing costs associated with the expansion into New Jersey and Pennsylvania, which we began in 3Q10.  Gross meter acquisitions in 2Q11 were approximately 47,000 compared to 28,000 in the same period a year ago.   

IDT Energy generated $5.4 million in Adjusted EBITDA in 2Q11, a decline of 54.5% YoY and 38.6% sequentially.  Income from operations was also $5.4 million, a decline of 54.2% YoY and 38.6% sequentially.

GENIE ENERGY:  Genie Oil and Gas

IDT accounts for Genie's 50% stake in AMSO, LLC using the equity method.  IDT's equity in the net loss of AMSO, LLC – $0.9 million in 2Q11 – is included in “Other (expense) income, net” in IDT's consolidated statement of operations. 

During 2Q11, AMSO, LLC continued advanced stage construction work on the surface oil and gas processing facilities.  AMSO expects to drill pilot wells this spring and conduct the pilot test during the second half of calendar 2011. The pilot test is intended to confirm the accuracy of several of the key underlying assumptions of AMSO, LLC's proposed in-situ heating and retorting process. 

Genie Oil and Gas' operating expenses consist primarily of costs incurred by IEI.  Genie Oil and Gas reported a loss from operations of $3.1 million during 2Q11, including $1.8 million in research and development (R&D) expense.  In the year ago quarter, the loss from operations was $1.1 million including $0.8 million in R&D expense.

During 2Q11, IEI continued working on the resource appraisal and characterization study phase of the project, which IEI expects to finalize during calendar 2011. To date, the results from the appraisal process confirm IEI's expectations as to the attractiveness of the oil shale resource in the license area from the standpoint of richness, thickness and hydrology. 

IEI is also continuing permitting and other preparatory work required prior to construction of a pilot plant and operation of a pilot test. If not delayed by permitting, regulatory action or pending litigation, pilot test construction could begin during the second half of calendar 2011, and pilot test operations could begin as early as calendar 2012.  

In future quarters, management anticipates continued, significant increases in operating costs for Genie Oil and Gas reflecting the costs of facility construction, drilling and operations of the AMSO and IEI pilot tests as well as further staffing for operations and new business development activities.

OTHER RECENT DEVELOPMENTS

In November 2010, Lord (Jacob) Rothschild and Rupert Murdoch separately purchased equity interests in Genie Oil and Gas equal to a cumulative 5.5% interest for an aggregate of $11.0 million, of which $10.0 million was paid in cash and a promissory note was issued for the remaining $1.0 million. In addition, in connection with these transactions, in November 2010, warrants were issued to purchase up to an aggregate of 1% of the common stock outstanding of Genie Oil and Gas at an exercise price of up to $2 million that are exercisable through November 12, 2011.

In December 2010, IDT received $14.4 million in cash from Bresnan Broadband Holdings, LLC (“BBH”), a former cable telephony customer.  BBH terminated its cable telephony agreement with IDT after BBH was acquired by Cablevision and paid IDT pursuant to the terms of their commercial agreement for telephony services.

On November 23, 2010, IDT paid a cash dividend of $0.22 per share for the first quarter of fiscal 2011 to shareholders of record at the close of business on November 15, 2010. On December 28, 2010, IDT paid a cash dividend of $0.22 per share for the second quarter of fiscal 2011 to shareholders of record at the close of business on December 16, 2010. The aggregate dividends paid were $10.0 million. IDT has stated its intention to continue paying quarterly dividends based on operating performance and available resources, at least through the consummation of the planned spin-off of Genie Energy.

On February 15, 2011, a jury in the U.S. District Court for the Eastern District of Texas awarded Alexsam, Inc. $9.1 million in damages for an alleged infringement by IDT of two patents related to the activation of phone and gift cards over a point-of-sale terminal.  IDT does not expect that the decision will have a material impact on its future business operations.

On February 28, 2011, following the successful completion of its exchange offer, IDT issued a Notice of Special Meeting of Stockholders to be held on April 4, 2011 to consider a proposal to amend its certificate of incorporation so that each remaining share of Common Stock will be converted and reclassified into one share of Class B Common Stock. If the amendment is approved and the related recapitalization is consummated, IDT will no longer have any shares of Common Stock authorized or outstanding and will only have two classes of common stock remaining – Class A Common Stock and Class B Common Stock. IDT.C will then be deregistered and only IDT Class B common stock (NYSE: IDT) will be publicly traded. 

Although IDT has no employees or physical assets in Japan, our hearts and our prayers are with all the victims of the recent tragic events there.

IDT EARNINGS ANNOUNCEMENT & SUPPLEMENTAL INFORMATION

Management's discussion of IDT's financial and operational results is posted in an audio file on the IDT website at https://www.idt.net/about/ir/overview.asp.  The audio file (in MP3 format) may be played directly from the website or downloaded for later playback.

An archived copy of this audio file will be available on the Investor Relations page of the IDT website, under the “Presentations” heading, for at least one year after the webcast.

Copies of this release – which includes a reconciliation of the Non-GAAP financial measures that are both used herein and referenced during management's discussion of results – are available in the Investor Relations portion of IDT's website, at https://www.idt.net/about/ir/overview.asp.

Q&A will be in a written format.  Investors and others interested in IDT are invited to e-mail questions for management to invest@idt.net.  IDT will accept questions received through the close of business on Friday, March 18, 2011. Questioners must identify themselves by name and (if applicable) firm. When management can constructively answer the question, the initial question, the questioner's name and firm, and management's response will be posted in a document available on IDT Corporation's website and in a Form 8-K filing as early as Wednesday, March 23, 2011 following the market close.

ABOUT IDT CORPORATION

IDT Corporation (www.idt.net) is a consumer services company with operations primarily in the telecommunications and energy industries.  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 in which we use 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.  While these forward-looking statements represent our current judgment of what may happen in the future, actual results may differ materially from the results expressed or implied by these statements due to numerous important factors, including, but not limited to, those described in our most recent report on SEC Form 10-K (under the headings “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations”), which may be revised or supplemented in subsequent reports on SEC Forms 10-Q and 8-K.  These factors include, but are not limited to, the following: potential declines in prices for our products and services; our ability to maintain and grow our calling card business, our wholesale telecommunication businesses and our retail energy business; availability of termination capacity to particular destinations; our ability to maintain carrier agreements with foreign carriers; our ability to obtain telecommunications products or services required for our products and services; the business and regulatory evolution of and competition and unfair business practices in, the energy services business in New York State, New Jersey and Pennsylvania; financial stability of our major customers; our ability to maintain our income and improve our cash flow; impact of government regulation; effectiveness of our marketing and distribution efforts; and general economic conditions.  We are under no obligation, and expressly disclaim any obligation, to update the forward-looking statements in this press release, whether as a result of new information, future events or otherwise.

Contact:

IDT Corporation Investor Relations

Bill Ulrey

william.ulrey@idt.net

973-438-3838