UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2015

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-16371

 

 

IDT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware		22-3415036
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
520 Broad Street, Newark, New Jersey		07102
(Address of principal executive offices)		(Zip Code)

 

(973) 438-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒      No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ☐     No ☒

 

As of March 9, 2015, the registrant had the following shares outstanding:

 

Class A common stock, $.01 par value:		1,574,326 shares outstanding (excluding 1,698,000 treasury shares)
Class B common stock, $.01 par value:		21,890,447 shares outstanding (excluding 2,979,800 treasury shares)

 

 

 

IDT CORPORATION

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION		3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	28
Item 4.	Controls and Procedures	28
PART II.  OTHER INFORMATION		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
SIGNATURES		31

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.     Financial Statements (Unaudited)

 

IDT CORPORATION

CONSOLIDATED BALANCE SHEETS

 

		January 31, 2015				July 31, 2014
		(Unaudited)				(Note 1)
		(in thousands)
Assets
Current assets:
Cash and cash equivalents		$	133,141			$	153,823
Restricted cash and cash equivalents—short-term			69,197				65,706
Marketable securities			19,041				12,873
Trade accounts receivable, net of allowance for doubtful accounts of $6,123 at January 31, 2015 and $11,507 at July 31, 2014			55,796				69,330
Receivable from sale of interest in Fabrix Systems Ltd.			28,290				—
Prepaid expenses			16,253				21,799
Deferred income tax assets, net—current portion			2,026				2,953
Other current assets			10,377				12,381
Total current assets			334,121				338,865
Property, plant and equipment, net			86,235				81,760
Goodwill			14,446				14,830
Other intangibles, net			1,490				1,742
Investments			11,376				10,008
Restricted cash and cash equivalents—long-term			—				2,763
Deferred income tax assets, net—long-term portion			14,733				16,248
Other assets			18,002				14,715
Total assets		$	480,403			$	480,931
Liabilities and equity
Current liabilities:
Revolving credit loan payable		$	—			$	13,000
Trade accounts payable			30,186				42,135
Accrued expenses			137,920				142,528
Deferred revenue			87,753				101,165
Customer deposits			64,555				62,685
Income taxes payable			401				732
Notes payable—current portion			6,492				271
Other current liabilities			4,119				5,468
Total current liabilities			331,426				367,984
Notes payable—long-term portion			—				6,353
Other liabilities			1,829				5,430
Total liabilities			333,255				379,767
Commitments and contingencies
Equity:
IDT Corporation stockholders’ equity:
Preferred stock, $.01 par value; authorized shares—10,000; no shares issued			—				—
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at January 31, 2015 and July 31, 2014			33				33
Class B common stock, $.01 par value; authorized shares—200,000; 24,849 and 24,587 shares issued and 21,869 and 21,653 shares outstanding at January 31, 2015 and July 31, 2014, respectively			248				246
Additional paid-in capital			399,325				392,858
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,980 and 2,934 shares of Class B common stock at January 31, 2015 and July 31, 2014, respectively			(100,545	)			(99,841	)
Accumulated other comprehensive (loss) income			(192	)			3,668
Accumulated deficit			(152,950	)			(196,725	)
Total IDT Corporation stockholders’ equity			145,919				100.239
Noncontrolling interests			1,229				925
Total equity			147,148				101,164
Total liabilities and equity		$	480,403			$	480,931

 

See accompanying notes to consolidated financial statements.

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands, except per share data)
Revenues		$	394,173			$	406,423			$	807,051			$	827,093
Costs and expenses:
Direct cost of revenues (exclusive of depreciation and amortization)			328,737				335,258				672,544				685,577
Selling, general and administrative (i)			57,394				57,285				114,392				115,040
Depreciation and amortization			4,440				4,059				8,845				7,955
Research and development			—				2,597				1,656				4,873
Severance			351				—				1,899				—
Total costs and expenses			390,922				399,199				799,336				813,445
Gain on sale of interest in Fabrix Systems Ltd.			484				—				75,629				—
Other operating gains, net			—				350				—				1,209
Income from operations			3,735				7,574				83,344				14,857
Interest (expense) income, net			(40	)			105				(131	)			80
Other income (expense), net			967				(3,065	)			2,290				(3,614	)
Income before income taxes			4,662				4,614				85,503				11,323
Provision for income taxes			(1,905	)			(1,641	)			(2,392	)			(4,300	)
Net income			2,757				2,973				83,111				7,023
Net income attributable to noncontrolling interests			(247	)			(438	)			(445	)			(965	)
Net income attributable to IDT Corporation		$	2,510			$	2,535			$	82,666			$	6,058
Earnings per share attributable to IDT Corporation common stockholders:
Basic		$	0.11			$	0.12			$	3.63				$ 0. 28
Diluted		$	0.11			$	0.11			$	3.57			$	0.27
Weighted-average number of shares used in calculation of earnings per share:
Basic			22,818				21,572				22,783				21,305
Diluted			23,225				22,743				23,155				22,827
Dividends declared per common share		$	0.82			$	0.17			$	1.67			$	0.17
(i) Stock-based compensation included in selling, general and administrative expenses		$	2,172			$	1,632			$	3,020			$	4,127

 

See accompanying notes to consolidated financial statements.

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

  

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
Net income		$	2,757			$	2,973			$	83,111			$	7,023
Other comprehensive (loss) income:
Change in unrealized gain on available-for-sale securities			8				—				15				—
Foreign currency translation adjustments			(2,119	)			518				(3,977	)			1,182
Other comprehensive (loss) income			(2,111	)			518				(3,962	)			1,182
Comprehensive income			646				3,491				79,149				8,205
Comprehensive income attributable to noncontrolling interests			(247	)			(438	)			(445	)			(965	)
Comprehensive income attributable to IDT Corporation		$	399			$	3,053			$	78,704			$	7,240

 

See accompanying notes to consolidated financial statements.

 

 

IDT CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

		Six Months Ended January 31,
		2015				2014
		(in thousands)
Operating activities
Net income		$	83,111			$	7,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			8,845				7,955
Deferred income taxes			2,441				2,614
Provision for doubtful accounts receivable			35				548
Gain on sale of interest in Fabrix Systems Ltd.			(75,629	)			—
Gain on proceeds from insurance			—				(571	)
Realized loss on marketable securities			54				—
Interest in the equity of investments			(1,459	)			(852	)
Stock-based compensation			3,020				4,127
Change in assets and liabilities:
Restricted cash and cash equivalents			(7,912	)			(19,077	)
Trade accounts receivable			3,285				3,465
Prepaid expenses, other current assets and other assets			5,787				(2,119	)
Trade accounts payable, accrued expenses, other current liabilities and other liabilities			(7,478	)			(23,300	)
Customer deposits			8,193				22,777
Income taxes payable			(292	)			665
Deferred revenue			(1,047	)			5,873
Net cash provided by operating activities			20,954				9,128
Investing activities
Capital expenditures			(13,946	)			(7,847	)
Proceeds from sale of interest in Fabrix Systems Ltd, net of cash and cash equivalents sold.			36,039				—
Purchase of investments			(125	)			—
Proceeds from sale and redemption of investments			43				1,019
Proceeds from insurance			—				571
Purchases of marketable securities			(18,382	)			(11,631	)
Proceeds from maturities and sales of marketable securities			12,104				10,094
Net cash provided by (used in) investing activities			15,733				(7,794	)
Financing activities
Dividends paid			(38,891	)			(5,754	)
Distributions to noncontrolling interests			(750	)			(626	)
Purchases of stock of subsidiary			—				(1,133	)
Proceeds from exercise of stock options			2,896				528
Proceeds from revolving credit loan payable			—				30,000
Repayments of revolving credit loan payable and other borrowings			(13,132	)			(36,187	)
Repurchases of Class B common stock			(703	)			(955	)
Net cash used in financing activities			(50,580	)			(14,127	)
Effect of exchange rate changes on cash and cash equivalents			(6,789	)			(646	)
Net decrease in cash and cash equivalents			(20,682	)			(13,439	)
Cash and cash equivalents at beginning of period			153,823				151,600
Cash and cash equivalents at end of period		$	133,141			$	138,161
Supplemental schedule of non-cash investing and financing activities
Net liabilities excluding cash and cash equivalents of Fabrix Systems Ltd. sold		$	14,333			$	—
Adjustment to liabilities in connection with the Straight Path Spin-Off		$	—			$	1,624

 

See accompanying notes to consolidated financial statements.

 

 

IDT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

Note 1—Basis of Presentation

The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended January 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2015. The balance sheet at July 31, 2014 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2014, as filed with the U.S. Securities and Exchange Commission (“SEC”).

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2015 refers to the fiscal year ending July 31, 2015).

In the consolidated statements of cash flow, $4.6 million previously included in “Restricted cash and cash equivalents” at July 31, 2013 was reclassified to “Cash and cash equivalents” to conform to the current year’s presentation.

Note 2—Sale of Interest in Fabrix Systems Ltd.

On October 8, 2014, the Company completed the sale of its interest in Fabrix Systems Ltd. (“Fabrix”) to Telefonaktiebolget LM Ericsson (publ) (“Ericsson”). The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. The Company owned approximately 78% of Fabrix on a fully diluted basis. The Company’s share of the sale price was $68.0 million, after reflecting the impact of working capital and other adjustments. As of January 31, 2015, the Company had received cash of $36.0 million and had aggregate receivables of $32.0 million, of which $28.3 million was classified as “Receivable from sale of interest in Fabrix Systems Ltd.” and $3.7 million was included in “Other assets” in the accompanying consolidated balance sheet. The Company and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in two tranches over a period of 18 months. In the three months ended January 31, 2015, the Company recorded gain on the sale of its interest in Fabrix of $0.5 million, which represented the Company’s share of working capital and other adjustments. In the six months ended January 31, 2015, the Company recorded a gain on the sale of its interest in Fabrix of $75.6 million.

Fabrix’ income (loss) before income taxes and income (loss) before income taxes attributable to the Company, which is included in the accompanying consolidated statements of income, were as follows:

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
(Loss) income before income taxes		$	—			$	(993	)		$	917			$	(1,676	)
(Loss) income before income taxes attributable to IDT Corporation		$	—			$	(878	)		$	1,325			$	(1,482	)

Note 3—Marketable Securities

The following is a summary of marketable securities:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(in thousands)
Available-for-sale securities:
January 31, 2015:
Certificates of deposit*		$	12,394			$	—			$	—			$	12,394
Municipal bonds			6,640				8				(1	)			6,647
Total		$	19,034			$	8			$	(1	)		$	19,041
July 31, 2014:
Certificates of deposit*		$	10,375			$	—			$	—			$	10,375
Equity securities			31				—				(9	)			22
Municipal bonds			2,475				1				—				2,476
Total		$	12,881			$	1			$	(9	)		$	12,873

 

* Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker and may be sold in the secondary market.

 

Proceeds from maturities and sales of available-for-sale securities were $5.3 million and $4.0 million in the three months ended January 31, 2015 and 2014, respectively, and $12.1 million and $10.1 million in the six months ended January 31, 2015 and 2014, respectively. The gross realized losses that were included in earnings as a result of sales were $14,000 and nil in the three months ended January 31, 2015 and 2014, respectively, and $54,000 and nil in the six months ended January 31, 2015 and 2014, respectively. The Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of marketable securities.

The contractual maturities of the Company’s available-for-sale debt securities at January 31, 2015 were as follows:

		Fair Value
		(in thousands)
Within one year		$	15,920
After one year through five years			3,121
After five years through ten years			—
After ten years			—
Total		$	19,041

 

The following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not been recognized:

 

		Unrealized Losses				Fair Value
		(in thousands)
January 31, 2015:
Municipal bonds		$	1			$	1,230
July 31, 2014:
Equity securities		$	9			$	22

 

At January 31, 2015 and July 31, 2014, there were no securities in a continuous unrealized loss position for 12 months or longer.

Note 4—Fair Value Measurements

The following tables present the balance of assets measured at fair value on a recurring basis:

		Level 1 (1)				Level 2 (2)				Level 3 (3)				Total
		(in thousands)
January 31, 2015:
Available-for-sale securities		$	—			$	19,041			$	—			$	19,041
July 31, 2014:
Available-for-sale securities		$	—			$	12,873			$	—			$	12,873

 

(1) – quoted prices in active markets for identical assets or liabilities

(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities

(3) – no observable pricing inputs in the market

 

At January 31, 2015 and July 31, 2014, the Company did not have any liabilities measured at fair value on a recurring basis.

At January 31, 2015 and July 31, 2014, the Company had $10.9 million and $9.5 million, respectively, in investments in hedge funds, of which less than $0.1 million and $0.1 million, respectively, were included in “Other current assets” and $10.9 million and $9.4 million, respectively, were included in “Investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds are accounted for using the equity method or the cost method; therefore investments in hedge funds are not measured at fair value.

Fair Value of Other Financial Instruments

The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

Cash and cash equivalents, restricted cash and cash equivalents—short-term, other current assets, revolving credit loan payable, customer deposits, notes payable—current portion and other current liabilities. At January 31, 2015 and July 31, 2014, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents—short-term were classified as Level 1 and other current assets, revolving credit loan payable, customer deposits, notes payable—current portion and other current liabilities were classified as Level 2 of the fair value hierarchy.

Restricted cash and cash equivalents—long-term. At July 31, 2014, the carrying amount of restricted cash and cash equivalents—long-term approximated fair value. The fair value was estimated based on the anticipated cash flows once the restrictions are removed, which was classified as Level 2 of the fair value hierarchy.

Other assets, Notes payable—long-term portion and other liabilities. At January 31, 2015 and July 31, 2014, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.

The Company’s investments at January 31, 2015 and July 31, 2014 included investments in the equity of certain privately held entities and other investments that are accounted for at cost. It is not practicable to estimate the fair value of these investments because of the lack of a quoted market price for the shares of these entities, and the inability to estimate their fair value without incurring excessive cost. The carrying value of these investments was $1.6 million and $1.8 million at January 31, 2015 and July 31, 2014, respectively, which the Company believes was not impaired.

Note 5—Equity

Changes in the components of equity were as follows: 

		Six Months Ended January 31, 2015
		Attributable to IDT Corporation				Noncontrolling Interests				Total
		(in thousands)
Balance, July 31, 2014		$	100,239			$	925			$	101,164
Dividends declared ($1.67 per share)			(38,891	)			—				(38,891	)
Restricted Class B common stock purchased from employees			(279	)			—				(279	)
Repurchases of Class B common stock through repurchase program			(424	)			—				(424	)
Exercise of stock options.			2,896				—				2,896
Stock issued for matching contributions to the 401(k) Plan			134				—				134
Other			—				9				9
Sale of interest in Fabrix Systems Ltd.			102				538				640
Distributions to noncontrolling interests			—				(750	)			(750	)
Stock-based compensation			3,438				62				3,500
Comprehensive income:
Net income			82,666				445				83,111
Other comprehensive loss			(3,962	)			—				(3,962	)
Comprehensive income			78,704				445				79,149
Balance, January 31, 2015		$	145,919			$	1,229			$	147,148

 

Dividend Payments

In the six months ended January 31, 2015, the Company paid aggregate cash dividends of $1.67 per share on its Class A common stock and Class B common stock, or $38.9 million in total. The aggregate cash dividends included special dividends of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively. In March 2015, the Company’s Board of Directors declared a dividend of $0.18 per share for the second quarter of fiscal 2015 to holders of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about March 27, 2015 to stockholders of record as of the close of business on March 20, 2015.

Stock Repurchase Program

The Company has a stock repurchase program that authorized the repurchase of up to an aggregate of 8.3 million shares of the Company’s Class B common stock. In the six months ended January 31, 2015, the Company repurchased 29,675 shares of Class B common stock for an aggregate purchase price of $0.4 million. There were no repurchases under the program in the six months ended January 31, 2014. As of January 31, 2015, 5.0 million shares remained available for repurchase under the stock repurchase program.

Restricted Stock

On March 11, 2015, the Compensation Committee of the Company’s Board of Directors approved an equity grant of 0.3 million restricted shares of the Company’s Class B common stock to its employees, including executive officers. The shares are expected to vest 50% in January 2017 and 50% in July 2018.

Note 6—Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.

The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
Basic weighted-average number of shares			22,818				21,572				22,783				21,305
Effect of dilutive securities:
Stock options			52				132				40				109
Non-vested restricted Class B common stock			355				1,039				332				1,413
Diluted weighted-average number of shares			23,225				22,743				23,155				22,827

 

The following outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the stock option was greater than the average market price of the Company’s stock during the period:

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
Shares excluded from the calculation of diluted earnings per share			16				16				16				42

 

Note 7—Revolving Credit Loan Payable

The Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum, at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 150 basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31, 2017. At January 31, 2015 and July 31, 2014, there was nil and $13.0 million, respectively, outstanding under the facility. The principal outstanding at July 31, 2014 incurred interest at a rate of 1.65% per annum. In August 2014, IDT Telecom repaid the $13.0 million loan payable. The Company intends to continue to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of 0.375% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries may not exceed $90.0 million. At January 31, 2015 and July 31, 2014, there were no amounts utilized for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances to affiliates and subsidiaries was $88.0 million and $73.7 million, respectively.

Note 8—Severance Expense

Severance expense of $0.4 million and $1.9 million in the three and six months ended January 31, 2015, respectively, was due to a downsizing of certain IDT Telecom sales and administrative functions in Europe and the U.S. Approximately 20 employees were terminated in the six months ended January 31, 2015 as a result of the downsizing. At January 31, 2015, there was accrued severance of $0.5 million for this downsizing included in “Accrued expenses” in the accompanying consolidated balance sheet.

In February and March 2015, the Company completed a reduction of approximately 7% of its global compensation costs. The cost-cutting initiative is expected to reduce the Company’s current selling, general and administrative expense run rate by approximately $10 million per year. As a result of this reduction in headcount, the Company expects to incur severance expense of approximately $6.6 million in the third quarter of fiscal 2015.

Note 9—Accumulated Other Comprehensive Income

The accumulated balances for each classification of other comprehensive income (loss) were as follows: 

		Unrealized Gain (Loss) on Available- for-Sale Securities				Foreign Currency Translation				Accumulated Other Comprehensive Income
		(in thousands)
Balance, July 31, 2014		$	(8	)		$	3,676			$	3,668
Sale of interest in Fabrix Systems Ltd.			—				102				102
Other comprehensive income (loss) attributable to IDT Corporation			15				(3,977	)			(3,962	)
Balance, January 31, 2015		$	7			$	(199	)		$	(192	)

 

Note 10—Business Segment Information

The Company has two reportable business segments, Telecom Platform Services and Consumer Phone Services. Operating segments that are not reportable individually are included in All Other. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

The Telecom Platform Services segment provides retail telecommunications and payment offerings as well as wholesale international long distance traffic termination. The Consumer Phone Services segment provides consumer local and long distance services in certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise the IDT Telecom division. Beginning in the three months ended January 31, 2015, All Other includes Zedge Holdings, Inc. (“Zedge”), which owns and operates a platform for mobile phone consumers interested in obtaining free, high quality games, apps, and mobile phone customization including ringtones, wallpapers, and notification sounds. Comparative results have been reclassified and restated as if Zedge was included in All Other in all periods presented. All Other also includes the Company’s real estate holdings and other, smaller, businesses. Until the sale of Fabrix in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery. Corporate costs include certain services, such as compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, and other corporate-related general and administrative expenses including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. IDT Telecom depreciation and amortization are allocated to Telecom Platform Services and Consumer Phone Services because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments. 

Operating results for the business segments of the Company are as follows:

(in thousands)		Telecom Platform Services				Consumer Phone Services				All Other				Corporate				Total
Three Months Ended January 31, 2015
Revenues		$	388,970			$	2,243			$	2,960			$	—			$	394,173
Income (loss) from operations			6,870				306				(602	)			(2,839	)			3,735
Gain on sale of interest in Fabrix Systems Ltd.			—				—				484				—				484
Three Months Ended January 31, 2014
Revenues		$	398,103			$	2,850			$	5,470			$	—			$	406,423
Income (loss) from operations			12,392				421				(1,333	)			(3,906	)			7,574
Six Months Ended January 31, 2015
Revenues		$	792,758			$	4,554			$	9,739			$	—			$	807,051
Income (loss) from operations			12,540				662				75,936				(5,794	)			83,344
Gain on sale of interest in Fabrix Systems Ltd.			—				—				75,629				—				75,629
Six Months Ended January 31, 2014
Revenues		$	810,922			$	5,866			$	10,305			$	—			$	827,093
Income (loss) from operations			24,298				841				(1,799	)			(8,483	)			14,857

 

Note 11—Legal Proceedings 

On May 5, 2004, the Company filed a complaint in the Supreme Court of the State of New York, County of New York, seeking injunctive relief and damages against Tyco Group, S.A.R.L., Tyco Telecommunications (US) Inc. (f/k/a TyCom (US) Inc.), Tyco International, Ltd., Tyco International (US) Inc., and TyCom Ltd. (collectively “Tyco”). The Company alleged that Tyco breached a settlement agreement that it had entered into with the Company to resolve certain disputes and civil actions among the parties. The Company alleged that Tyco did not provide the Company, as required under the settlement agreement, free of charge and for the Company’s exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement) (“Wavelengths”) on a global undersea fiber optic network that Tyco was deploying at that time. In June 2004, Tyco asserted several counterclaims against the Company, alleging that the Company breached the settlement agreement and is liable for damages for allegedly refusing to accept Tyco’s offer regarding the Wavelengths referenced in the settlement agreement and for making a public statement that Tyco failed to provide the Company with the use of its Wavelengths. On August 19, 2008, the Appellate Division of the State of New York, First Department, granted summary judgment in favor of Tyco dismissing the complaint and remanded the matter to the Supreme Court for further proceedings. On October 22, 2009, the New York Court of Appeals issued an Order denying the Company’s appeal and affirming the Appellate Division’s order. On or about November 17, 2009, the Company demanded that Tyco comply with its obligations under the settlement agreement. After further discussions and meetings between the parties regarding Tyco’s obligations under the settlement agreement, including its obligation to provide the use of the Wavelengths for fifteen years in a manner fully consistent with that described in the settlement agreement, the Company filed a complaint on November 24, 2010 in the Supreme Court of the State of New York, County of New York, against Tyco based upon the failure to comply with the obligations under the settlement agreement, to negotiate the terms of an indefeasible right to use the Wavelengths in good faith, and to provide the Company with the Wavelengths. The complaint alleges causes of action for breach of contract and breach of duty to negotiate in good faith. On January 6, 2011, Tyco filed a motion to dismiss the complaint, which was granted. On July 22, 2011, the Company filed a notice of appeal. After briefing was completed, oral argument was held on April 2, 2012. On December 27, 2012, the Appellate Division issued an opinion and order reversing the order of the Supreme Court that granted Tyco’s motion to dismiss the Company’s complaint. On April 30, 2013, Tyco filed a motion for reargument or, in the alternative, leave to appeal to the Court of Appeals, which the Company opposed. On February 8, 2013, Tyco filed an answer with a counterclaim. On May 21, 2013, the Appellate Division denied Tyco’s request for reargument but granted its request for leave to appeal to the Court of Appeals. On July 30, 2013, Tyco filed its opening brief, the Company filed its response brief on September 16, 2013, and Tyco filed its reply on October 11, 2013. Oral argument was held on April 29, 2014. On June 5, 2014, the Court issued its decision, and reversed the order of the Appellate Division, and ordered that the order of the Supreme Court should be reinstated. On July 7, 2014, the Company filed a motion for reargument with the Court of Appeals, which Tyco opposed. On September 11, 2014, the Court denied the Company’s motion. The Company is evaluating its options going forward.

In addition to the foregoing, the Company is subject to other legal and employment-related proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Note 12—Commitments and Contingencies

Purchase Commitments

The Company had purchase commitments of $5.5 million as of January 31, 2015, which includes commitments related to the renovations of the first four floors of the Company’s building located at 520 Broad Street, Newark, New Jersey.

Letters of Credit

As of January 31, 2015, the Company had letters of credit outstanding totaling $3.3 million for collateral to secure mortgage repayments and for IDT Telecom’s business. The letters of credit outstanding as of January 31, 2015 expire in the twelve month period ending January 31, 2016.

Performance Bonds

IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At January 31, 2015, the Company had aggregate performance bonds of $11.0 million outstanding.

Customer Deposits

As of January 31, 2015 and July 31, 2014, “Customer deposits” in the Company’s consolidated balance sheets included refundable customer deposits of $64.6 million and $62.7 million, respectively, related to IDT Financial Services Ltd., the Company’s Gibraltar-based bank.

Substantially Restricted Cash and Cash Equivalents

The Company treats unrestricted cash and cash equivalents held by IDT Payment Services and IDT Financial Services Ltd. as substantially restricted and unavailable for other purposes. At January 31, 2015 and July 31, 2014, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of $15.5 million and $12.9 million, respectively, held by IDT Payment Services and IDT Financial Services Ltd. that was unavailable for other purposes.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consist of the following:

		January 31, 2015				July 31, 2014
		(in thousands)
Restricted cash and cash equivalents-short-term
Related to letters of credit		$	3,206			$	665
IDT Financial Services customer deposits			65,745				64,415
Other			246				626
Total short-term			69,197				65,706
Restricted cash and cash equivalents-long-term
Related to letters of credit			—				2,763
Total restricted cash and cash equivalents		$	69,197			$	68,469

 

 

Estimated Liability to Straight Path Communications Inc.

On July 31, 2013, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Straight Path Communications Inc. (“Straight Path”), to the Company’s stockholders (the “Straight Path Spin-Off”). The Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off. The Separation and Distribution Agreement includes that the Company is obligated to reimburse Straight Path for the payment of any liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off. The following table summarizes the change in the balance of the Company’s estimated liability to Straight Path, which is included in “Other current liabilities” in the accompanying consolidated balance sheet:

 

		Six Months Ended January 31, 2015
		(in thousands)
Balance, beginning of period		$	1,860
Additional liability			1,532
Adjustments			(540	)
Payments			(1,136	)
Balance, end of period		$	1,716

Note 13—Other Operating Gains, Net

The following table summarizes the other operating gains, net by business segment:

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
Telecom Platform Services-gain related to legal matters		$	—			$	350			$	—			$	650
All Other-gain on insurance claim (a)			—				—				—				571
All Other-other			—				—				—				67
Corporate-loss related to settlement (b)			—				—				—				(79	)
Total		$	—			$	350			$	—			$	1,209

 

(a) In the six months ended January 31, 2014, the Company received proceeds from insurance of $0.6 million related to water damage to portions of the Company’s building and improvements at 520 Broad Street, Newark, New Jersey. The damage occurred in a prior period. The Company recorded a gain of $0.6 million from this insurance claim.

(b) In the six months ended January 31, 2014, the Company incurred a loss of $0.1 million in connection with the June 2013 settlement of outstanding claims and disputes with the former Chief Executive Officer of Straight Path Spectrum, Inc. and his related parties.

Note 14—Other Income (Expense), Net

 

Other income (expense), net consists of the following:

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2015				2014				2015				2014
		(in thousands)
Foreign currency transaction gains (losses)		$	322			$	(3,157	)		$	1,089			$	(4,362	)
(Loss) gain on investments			(455	)			117				1,402				853
Other			1,100				(25	)			(201	)			(105	)
Total other income (expense), net		$	967			$	(3,065	)		$	2,290			$	(3,614	)

 

Note 15—Recently Issued Accounting Standard Not Yet Adopted

In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. The Company will adopt this standard on August 1, 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company is evaluating the impact that the standard will have on its consolidated financial statements.

 

 

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, 2014, 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, 2014. 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, 2014.

 

Overview

 

We are a multinational holding company with operations primarily in the telecommunications and payment industries. We have two reportable business segments, Telecom Platform Services and Consumer Phone Services. Telecom Platform Services provides retail telecommunications and payment offerings as well as wholesale international long distance traffic termination. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise our IDT Telecom division. Operating segments not reportable individually are included in All Other. All Other includes Zedge Holdings, Inc., or Zedge, which owns and operates a platform for mobile phone consumers interested in obtaining free, high quality games, apps, and mobile phone customization including ringtones, wallpapers, and notification sounds. All Other also includes our real estate holdings and other, smaller, businesses. Until the sale of Fabrix Systems Ltd., or Fabrix, in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery.

 

Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 98.8% of our total revenues in the six months ended January 31, 2015 and 2014.

 

Telecom Platform Services, which represented 99.4% and 99.3% of IDT Telecom’s total revenues in the six months ended January 31, 2015 and 2014, respectively, markets and distributes multiple communications and payment services across four broad business verticals:

 

●

Retail Communications provides international long-distance calling products primarily to foreign-born communities worldwide, with its core markets in the United States;

 

●

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;

 

●

Payment Services provides payment offerings, including international airtime top-up and international money transfer sold over our Boss Revolution platform and other channels; and

 

●

Hosted Platform Solutions provides customized communications services that leverage our proprietary networks, platforms and/or technology to cable companies and other service providers.

 

Over the past few years, the telecommunications industry has experienced a continued shift in demand away from traditional calling cards and into wireless and Internet protocol (or IP)-based products and services, 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 products’ sales and margins. Further, the rate of change to new offerings to meet consumers’ communications needs has accelerated in recent years and we must continue to develop and offer new products and services to meet these needs and replace revenues from outdated offerings.

 

 

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 our customers to call 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, infrastructure and distribution network. Although Boss Revolution PIN-less and international airtime top-up generally have lower gross margins than our traditional disposable calling cards, we believe that 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 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 or possible future declines in Boss Revolution PIN-less or other sources of revenue.

 

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 historically had to pass along all or most of our per-minute cost savings to our customers in the form of lower prices.

 

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 2014. 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 taxes and regulatory agency fees, and IDT Telecom direct cost of revenues—disputed amounts. 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 2014.

 

Recently Issued Accounting Standard Not Yet Adopted

 

In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards, or IFRS. The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. We will adopt this standard on August 1, 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. We are evaluating the impact that the standard will have on our consolidated financial statements.

 

Results of Operations

 

Three and Six Months Ended January 31, 2015 Compared to Three and Six Months Ended January 31, 2014

 

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 January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Revenues
Telecom Platform Services		$	389.0			$	398.1			$	(9.1	)			(2.3	)%		$	792.8			$	810.9			$	(18.1	)			(2.2	)%
Consumer Phone Services			2.2				2.9				(0.7	)			(21.3	)			4.5				5.9				(1.4	)			(22.4	)
Total revenues		$	391.2			$	401.0			$	(9.8	)			(2.4	)%		$	797.3			$	816.8			$	(19.5	)			(2.4	)%

 

Revenues. IDT Telecom revenues decreased in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 due to decreases in both Telecom Platform Services’ and Consumer Phone Services’ revenues. As a percentage of IDT Telecom’s total revenues, Telecom Platform Services revenues increased from 99.3% in the six months ended January 31, 2014 to 99.4% in the six months ended January 31, 2015, and Consumer Phone Services revenues decreased from 0.7% in the six months ended January 31, 2014 to 0.6% in the six months ended January 31, 2015.

 

Telecom Platform Services’ revenues, minutes of use and average revenue per minute for the three and six months ended January 31, 2015 and 2014 consisted of the following:

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$/#				%				2015				2014				$/#				%
		(in millions, except revenue per minute)
Telecom Platform Services Revenues
Retail Communications		$	181.3			$	169.8			$	11.5				6.8	%		$	364.0			$	342.3			$	21.7				6.3	%
Wholesale Termination Services			147.8				167.8				(20.0	)			(11.9	)			307.5				346.4				(38.9	)			(11.3	)
Payment Services			50.0				48.9				1.1				2.2				101.1				99.0				2.1				2.2
Hosted Platform Solutions			9.9				11.6				(1.7	)			(14.8	)			20.2				23.2				(3.0	)			(13.0	)
Total Telecom Platform Services revenues		$	389.0			$	398.1			$	(9.1	)			(2.3	)%		$	792.8			$	810.9			$	(18.1	)			(2.2	)%
Minutes of use
Retail Communications			2,422				2,401				21				0.9	%			4,854				4,791				63				1.3	%
Wholesale Termination Services			4,925				4,759				166				3.5				9,772				9,451				321				3.4
Hosted Platform Solutions			185				199				(14	)			(7.2	)			388				406				(18	)			(4.6	)
Total minutes of use			7,532				7,359				173				2.3	%			15,014				14,648				366				2.5	%
Average revenue per minute
Retail Communications		$	0.0749			$	0.0707			$	0.0042				5.9	%		$	0.0750			$	0.0714			$	0.0036				5.0	%
Wholesale Termination Services			0.0300				0.0353				(0.0053	)			(14.9	)			0.0315				0.0367				(0.0052	)			(14.2	)

 

 

 

Retail Communications’ revenue grew 6.8%and 6.3% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014. Retail Communications’ minutes of use increased 0.9% and 1.3% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014, driven by the volume growth in the U.S., which more than offset the decrease in minutes of use in Europe and Asia. Retail Communications’ minutes of use in South America increased in the three months ended January 31, 2015 compared to the similar period in fiscal 2014 and decreased in the six months ended January 31, 2015 compared to the similar period in fiscal 2014. Retail Communications’ revenue and minutes of use growth was led by increased penetration 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. Retail sales in South America and Asia increased in the three months ended January 31, 2015 compared to the similar period in fiscal 2014 and decreased in the six months ended January 31, 2015 compared to the similar period in fiscal 2014. Boss Revolution continues to attract new customers, and we are working to sustain that momentum by increasing our sales and marketing efforts in fiscal 2015. In fiscal 2014, we acquired the assets of an over-the-top messaging provider, and we expect to introduce messaging within the Boss Revolution app in the second half of calendar 2015. Retail Communications’ revenue comprised 45.9% and 42.2% of Telecom Platform Services’ revenue in the six months ended January 31, 2015 and 2014, respectively.

 

Wholesale Termination Services’ revenue decreased 11.9% and 11.3% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014 although minutes of use increased 3.5% and 3.4% in the same comparable periods. The revenue decreased because the traffic mix in the three and six months ended January 31, 2015 tilted towards lower revenue per minute destinations compared to the similar periods in fiscal 2014. In addition, in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014, arbitrage pricing opportunities in Latin America resulting from disparities in local currency exchange rates continued to decline, and revenue denominated in foreign currencies, particularly the Euro, were negatively impacted by the stronger U.S. dollar. Wholesale Termination Services’ minutes of use increased in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 due to an increase in minutes of use from carrier sales. In addition, in the three months ended January 31, 2015 compared to the similar period in fiscal 2014, the increase in Wholesale Termination Services’ minutes of use included an increase in minutes of use from our web-based prepaid termination service. The increase in Wholesale Termination Services’ minutes of use in the six months ended January 31, 2015 compared to the similar period in fiscal 2014 was partially offset by a decrease in minutes of use in our web-based prepaid termination service. Wholesale Termination Services’ revenue comprised 38.8% and 42.7% of Telecom Platform Services’ revenue in the six months ended January 31, 2015 and 2014, respectively.

 

Payment Services’ revenue increased 2.2% in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 due to an increase in international and domestic airtime top-up revenue, as well as an increase in revenue from our international money transfer service. 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 platform. In fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution platform. As of January 31, 2015, we had money transmitter licenses in 45 of the 46 states where they are required and we have applied, as well as in Puerto Rico and Washington, D.C. Payment Services’ revenue comprised 12.8% and 12.2% of Telecom Platform Services’ revenue in the six months ended January 31, 2015 and 2014, respectively.

 

Hosted Platform Solutions’ revenue declined 14.8% and 13.0% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014. The decline was due to decreases in revenues from managed services and from our cable telephony business. Within our cable telephony business, we renewed multi-year contracts with key cable telephony customers in the second half of fiscal 2014, but at lower rates, reflecting the long-term decline in the underlying costs of hosted telephony services.  In addition, several of our other hosted managed services operators are continuing to experience attrition in their subscriber customer base. Hosted Platform Solutions’ revenue comprised 2.5% and 2.9% of Telecom Platform Services’ revenue in the six months ended January 31, 2015 and 2014, respectively. Hosted Platform Solutions’ minutes of use decreased 7.2% and 4.6% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014, 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 meaningful metric for evaluating that business’ performance.

 

Consumer Phone Services’ revenues declined 21.3% and 22.4% in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014 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 5,600 as of January 31, 2015 compared to 6,900 as of January 31, 2014. 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 25,300 as of January 31, 2015 compared to 31,900 as of January 31, 2014. We anticipate that Consumer Phone Services’ customer base and revenues will continue to decline. 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.

 

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Direct cost of revenues
Telecom Platform Services		$	327.4			$	333.1			$	(5.7	)			(1.7	)%		$	669.0			$	681.4			$	(12.4	)			(1.8	)%
Consumer Phone Services			1.1				1.3				(0.2	)			(18.3	)			2.1				2.7				(0.6	)			(20.6	)
Total direct cost of revenues		$	328.5			$	334.4			$	(5.9	)			(1.8	)%		$	671.1			$	684.1			$	(13.0	)			(1.9	)%

  

		Three months ended January 31,												Six months ended January 31,
		2015				2014				Change				2015				2014				Change
Direct cost of revenues as a percentage of revenues
Telecom Platform Services			84.2	%			83.7	%			0.5	%			84.4	%			84.0	%			0.4	%
Consumer Phone Services			47.3				45.6				1.7				46.5				45.4				0.1
Total			84.0	%			83.4	%			0.6	%			84.2	%			83.7	%			0.5	%

 

Direct Cost of Revenues. Direct cost of revenues in Telecom Platform Services decreased in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014. Direct cost of revenues as a percentage of revenues in Telecom Platform Services increased 50 and 40 basis points in the three and six months ended January 31, 2015, respectively, compared to the similar periods in fiscal 2014 primarily because of the loss of revenue from the relatively high margin Latin American arbitrage opportunity, the decline in margin contribution from the cable telephony business, and pricing pressure on airtime top-up offerings.

 

Direct cost of revenues in our Consumer Phone Services segment decreased the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 primarily as a result of the declining customer base.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Selling, general and administrative expenses
Telecom Platform Services		$	50.4			$	49.5			$	0.9				1.9	%		$	101.6			$	99.2			$	2.4				2.4	%
Consumer Phone Services			0.9				1.1				(0.2	)			(22.6	)			1.8				2.4				(0.6	)			(24.7	)
Total selling, general and administrative expenses		$	51.3			$	50.6			$	0.7				1.3	%		$	103.4			$	101.6			$	1.8				1.8	%

 

Selling, General and Administrative. The increase in selling, general and administrative expenses in our Telecom Platform Services segment in the three months ended January 31, 2015 compared to the similar period in fiscal 2014 was primarily due to an increase in marketing and advertising costs as well as higher levels of expenditures in our international money transfer service business. The increase in selling, general and administrative expenses in our Telecom Platform Services segment in the six months ended January 31, 2015 compared to the similar period in fiscal 2014 was partially due to increases in employee compensation and internal commissions, which was the result of annual payroll increases for a larger workforce, as well as expansion of our retail direct sales force in the U.S. The increase was also due to an increase in marketing and advertising costs. The increase was partially offset by decreases in stock-based compensation and costs associated with certain legal matters. As a percentage of Telecom Platform Services’ revenue, Telecom Platform Services’ selling, general and administrative expenses increased to 13.0% from 12.4% in the three months ended January 31, 2015 and 2014, respectively, and increased to 12.8% from 12.2% in the six months ended January 31, 2015 and 2014, respectively.

 

 

Selling, general and administrative expenses in our Consumer Phone Services segment decreased in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 as the cost structure for this segment continued to be right-sized to the needs of its declining revenue base.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Depreciation and amortization
Telecom Platform Services		$	3.9			$	3.4			$	0.5				15.0	%		$	7.7			$	6.7			$	1.0				16.1	%
Consumer Phone Services			—				—				—				(76.8	)			—				—				—				(76.8	)
Total depreciation and amortization		$	3.9			$	3.4			$	0.5				15.0	%		$	7.7			$	6.7			$	1.0				16.1	%

 

Depreciation and Amortization. The increase in depreciation and amortization expense in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Severance expense
Telecom Platform Services		$	0.3			$	—			$	0.3				nm			$	1.9			$	—			$	1.9				nm
Consumer Phone Services			—				—				—				—				—				—				—				—
Total severance expense		$	0.3			$	—			$	0.3				nm			$	1.9			$	—			$	1.9				nm

 

nm—not meaningful

 

Severance expense. Severance expense in the three and six months ended January 31, 2015 was due to a downsizing of certain Telecom Platform Services’ sales and administrative functions in Europe and the U.S. Approximately 20 employees were terminated in the six months ended January 31, 2015 as a result of the downsizing.

 

Other Operating Gain. The Telecom Platform Services segment’s income from operations in the three and six months ended January 31, 2014 included gains of $0.4 million and $0.7 million, respectively, related to a legal matter.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Income from operations
Telecom Platform Services		$	6.9			$	12.4			$	(5.5	)			(44.6	)%		$	12.5			$	24.3			$	(11.8	)			(48.4	)%
Consumer Phone Services			0.3				0.4				(0.1	)			(27.2	)			0.7				0.8				(0.1	)			(21.4	)
Total income from operations		$	7.2			$	12.8			$	(5.6	)			(44.0	)%		$	13.2			$	25.1			$	(11.9	)			(47.5	)%

  

 

All Other

 

Currently, we report aggregate results for all of our operating businesses other than IDT Telecom in All Other. Beginning in the second quarter of fiscal 2015, Zedge is included in All Other. Comparative results have been reclassified and restated as if Zedge was included in All Other in all periods presented. In addition, Fabrix was included in All Other until it was sold in October 2014, therefore the results of operations only includes two months in fiscal 2015 compared to three and six months in fiscal 2014.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Revenues		$	3.0			$	5.5			$	(2.5	)			(45.9	)%		$	9.7			$	10.3			$	(0.6	)			(5.5	)%
Direct cost of revenues			(0.3	)			(0.9	)			0.6				66.5				(1.4	)			(1.5	)			0.1				6.1
Selling, general and administrative			(3.3	)			(2.7	)			(0.6	)			(18.6	)			(5.2	)			(5.0	)			(0.2	)			(2.5	)
Depreciation			(0.5	)			(0.6	)			0.1				20.9				(1.1	)			(1.3	)			0.2				12.6
Research and development			—				(2.6	)			2.6				100.0				(1.7	)			(4.9	)			3.2				66.0
Gain on sale of interest in Fabrix Systems Ltd.			0.5				—				0.5				nm				75.6				—				75.6				nm
Other operating gain			—				—				—				—				—				0.6				(0.6	)			(100.0	)
(Loss) income from operations		$	(0.6	)		$	(1.3	)		$	0.7				54.9	%		$	75.9			$	(1.8	)		$	77.7				nm

 

nm—not meaningful

 

Gain on Sale of Interest in Fabrix Systems Ltd. On October 8, 2014, we completed the sale of our interest in Fabrix to Telefonaktiebolget LM Ericsson (publ), or Ericsson. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was $68.0 million, after reflecting the impact of working capital and other adjustments. We and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in two tranches over a period of 18 months. In the three months ended January 31, 2015, we recorded gain on the sale of our interest in Fabrix of $0.5 million, which represented our share of working capital and other adjustments. In the six months ended January 31, 2015, we recorded a gain on the sale of our interest in Fabrix of $75.6 million.

 

Other Operating Gain. In the six months ended January 31, 2014, we received proceeds from insurance of $0.6 million related to water damage to portions of our building and improvements at 520 Broad Street, Newark, New Jersey. The damage occurred in a prior period. We recorded a gain of $0.6 million from this insurance claim.

 

Following is the results of operations of Fabrix, which was included in All Other until it was sold in October 2014:

  

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
Fabrix		(in millions)
Revenues		$	—			$	3.3			$	(3.3	)			(100.0	)%		$	4.2			$	6.3			$	(2.1	)			(33.4	)%
Direct cost of revenues			—				0.6				(0.6	)			(100.0	)			0.9				1.1				(0.2	)			(16.8	)
Selling, general and administrative			—				1.1				(1.1	)			(100.0	)			0.6				1.9				(1.3	)			(68.8	)
Depreciation			—				0.1				(0.1	)			(100.0	)			0.1				0.2				(0.1	)			(61.7	)
Research and development			—				2.6				(2.6	)			(100.0	)			1.7				4.9				(3.2	)			(66.0	)
(Loss) income from operations		$	—			$	(1.1	)		$	1.1				100.0	%		$	0.9			$	(1.8	)		$	2.7				154.0	%

 

 

Corporate

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
General and administrative expenses		$	2.8			$	3.9			$	(1.1	)			(27.3	)%		$	5.8			$	8.4			$	(2.6	)			(30.9	)%
Other operating loss			—				—				—				—				—				0.1				(0.1	)			(100.0	)
Loss from operations		$	2.8			$	3.9			$	(1.1	)			(27.3	)%		$	5.8			$	8.5			$	(2.7	)			(31.7	)%

 

Corporate costs include compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, and other corporate-related general and administrative expenses, including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.

 

General and Administrative. The decrease in Corporate general and administrative expenses in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 was primarily due to decreases in stock-based compensation, payroll and benefits expense and legal fees. In addition, the decrease in Corporate general and administrative expenses in the six months ended January 31, 2015 compared to the similar period in fiscal 2014 was due to a decrease in the charitable contributions accrual. Corporate general and administrative expenses in the three and six months ended January 31, 2015 and 2014 are net of amounts billed to our former subsidiaries Genie Energy Ltd., or Genie, which was spun-off in October 2011, and Straight Path Communications Inc., or Straight Path, which was spun-off in July 2013. The fees charged to Genie, net of amounts charged by Genie to us, were $0.8 million and $1.1 million in the three months ended January 31, 2015 and 2014, respectively, and $1.5 million and $1.7 million in the six months ended January 31, 2015 and 2014, respectively. The fees charged to Straight Path were $0.3 million in both the three months ended January 31, 2015 and 2014 and $1.1 million and $0.6 million in the six months ended January 31, 2015 and 2014, respectively. As a percentage of our total consolidated revenues, Corporate general and administrative expenses was 0.7% and 1.0% in the three and six months ended January 31, 2015 and 2014, respectively.

 

Consolidated

 

In February and March 2015, we completed a reduction of approximately 7% of our global compensation costs. The cost-cutting initiative is expected to reduce our current selling, general and administrative expense run rate by approximately $10 million per year. As a result of this reduction in headcount, we expect to incur severance expense of approximately $6.6 million in the third quarter of fiscal 2015.

 

The following is a discussion of our consolidated stock-based compensation expense, and our consolidated income and expense line items below income (loss) from operations.

 

Stock-Based Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expenses was $2.2 million and $1.6 million in the three months ended January 31, 2015 and 2014, respectively, and $3.0 million and $4.1 million in the six months ended January 31, 2015 and 2014, respectively. At January 31, 2015, unrecognized compensation cost related to non-vested stock-based compensation, including stock options and restricted stock, was an aggregate of $4.7 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in December 2020.

 

On March 11, 2015, the Compensation Committee of our Board of Directors approved an equity grant of 0.3 million restricted shares of our Class B common stock to our employees, including executive officers. The shares are expected to vest 50% in January 2017 and 50% in July 2018.

 

		Three months ended January 31,								Change								Six months ended January 31,								Change
		2015				2014				$				%				2015				2014				$				%
		(in millions)
Income from operations		$	3.7			$	7.6			$	(3.9	)			(50.7	)%		$	83.3			$	14.8			$	68.5				461.0	%
Interest (expense) income, net			(0.1	)			0.1				(0.2	)			(138.1	)			(0.1	)			0.1				(0.2	)			(263.8	)
Other income (expense), net			1.0				(3.1	)			4.1				131.5				2.3				(3.6	)			5.9				163.4
Provision for income taxes			(1.9	)			(1.7	)			(0.2	)			(16.1	)			(2.4	)			(4.3	)			1.9				44.4
Net income			2.7				2.9				(0.2	)			(7.3	)			83.1				7.0				76.1				nm
Net income attributable to noncontrolling interests			(0.2	)			(0.4	)			0.2				43.6				(0.4	)			(0.9	)			0.5				53.9
Net income attributable to IDT Corporation		$	2.5			$	2.5			$	—				(1.0	)%		$	82.7			$	6.1			$	76.6				nm

 

nm—not meaningful

 

Interest (Expense) Income, net. The change in interest (expense) income, net in the three and six months ended January 31, 2015 compared to the similar periods in fiscal 2014 was due to a decrease in interest income as well as an increase in interest expense.

 

Other Income (Expense), net. Other income (expense), net consists of the following:

		Three months ended January 31,								Six months ended January 31,
		2015				2014				2015				2014
		(in millions)
Foreign currency transaction gains (losses)		$	0.3			$	(3.2	)		$	1.1			$	(4.4	)
(Loss) gain on investments			(0.4	)			0.1				1.4				0.9
Other			1.1				—				(0.2	)			(0.1	)
Total other income (expense), net		$	1.0			$	(3.1	)		$	2.3			$	(3.6	)

 

Income Taxes. The $75.6 million gain on the sale of our interest in Fabrix in the six months ended January 31, 2015 was recorded by a wholly-owned non-U.S. subsidiary. The gain is not taxable in the subsidiary’s tax domicile and is not subject to U.S. tax until distributed. There is no plan to distribute the proceeds of sale. The increase in income tax expense in the three months ended January 31, 2015 compared to the similar period in fiscal 2014 was primarily due to an increase in income earned in jurisdictions with higher tax rates in the three months ended January 31, 2015 compared to the similar period in fiscal 2014. The decline in income tax expense in the six months ended January 31, 2015 compared to the similar period in fiscal 2014 was primarily due to the decrease in income before income taxes excluding the gain on the sale of our interest in Fabrix in the six months ended January 31, 2015 compared to the similar period in fiscal 2014.

 

Net Income Attributable to Noncontrolling Interests. The decrease in the net income attributable to noncontrolling interests in the three months ended January 31, 2015 compared to the similar period in fiscal 2014 was due to the decrease in net income of certain IDT Telecom subsidiaries and the change in Zedge’s results of operations from net income to net loss, partially offset by the effect of the deconsolidation of Fabrix in October 2014. The decrease in the net income attributable to noncontrolling interests in the six months ended January 31, 2015 compared to the similar period in fiscal 2014 was due to the decrease in net income of certain IDT Telecom subsidiaries, the increase in Fabrix’ net loss and the change in Zedge’s results of operations from net income to net loss.

 

 

Liquidity and Capital Resources

 

General

 

We currently expect our cash from operations in the next twelve months and the balance of cash, cash equivalents and marketable securities that we held as of January 31, 2015 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements during the twelve month period ending January 31, 2016.

 

As of January 31, 2015, we had cash, cash equivalents and marketable securities of $152.2 million and working capital (current assets in excess of current liabilities) of $2.7 million. As of January 31, 2015, we also had $10.9 million in investments in hedge funds, of which less than $0.1 million was included in “Other current assets” and $10.9 million was included in “Investments” in our consolidated balance sheet.

 

We treat unrestricted cash and cash equivalents held by IDT Payment Services and IDT Financial Services Ltd. as substantially restricted and unavailable for other purposes. At January 31, 2015, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $15.5 million held by IDT Payment Services and IDT Financial Services Ltd. that was unavailable for other purposes.

 

As of January 31, 2015, we had restricted cash and cash equivalents of $69.2 million, all of which was included in “Restricted cash and cash equivalents—short term” in our consolidated balance sheet. Our restricted cash and cash equivalents primarily include restricted balances pursuant to banking regulatory and other requirements and customer deposits related to IDT Financial Services Ltd., our Gibraltar-based bank.

 

		Six months ended January 31,
		2015				2014
		(in millions)
Cash flows provided by (used in):
Operating activities		$	21.0			$	9.1
Investing activities			15.7				(7.8	)
Financing activities			(50.6	)			(14.1	)
Effect of exchange rate changes on cash and cash equivalents			(6.8	)			(0.6	)
Decrease  in cash and cash equivalents		$	(20.7	)		$	(13.4	)

 

Operating Activities

 

Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable.

 

Our Separation and Distribution Agreement with Straight Path includes, among other things, our obligation to reimburse Straight Path for the payment of any liabilities of Straight Path arising or related to the period prior to the spin-off. In the six months ended January 31, 2015, we paid $1.1 million in connection with this obligation. At January 31, 2015, our estimated liability for this obligation was $1.7 million.

 

Investing Activities

 

Our capital expenditures were $13.9 million and $7.8 million in the six months ended January 31, 2015 and 2014, respectively. We currently anticipate that total capital expenditures for the twelve month period ending January 31, 2016 will be approximately $20.3 million, which includes expenditures for the renovations of the first four floors of our building located at 520 Broad Street, Newark, New Jersey. We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents and marketable securities on hand.

 

On October 8, 2014, we completed the sale of our interest in Fabrix to Ericsson. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price was $68.0 million, after reflecting the impact of working capital and other adjustments. As of January 31, 2015, we had received cash of $36.0 million and had aggregate receivables of $32.0 million, of which $28.3 million was classified as “Receivable from sale of interest in Fabrix Systems Ltd.” and $3.7 million was included in “Other assets” in our consolidated balance sheet. We and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in two tranches over a period of 18 months. In the six months ended January 31, 2015, we recorded a gain on the sale of our interest in Fabrix of $75.6 million.

 

 

In the three months ended January 31, 2015 and 2014, we used cash of $0.1 million and nil, respectively, for additional investments.

 

We received $43,000 and $1.0 million in the six months ended January 31, 2015 and 2014, respectively, from the sale and redemption of certain of our investments, including investments in hedge funds.

 

Proceeds from insurance of $0.6 million in the six months ended January 31, 2014 related to water damage in our building at 520 Broad Street, Newark, New Jersey that occurred in a prior period. We recorded a gain of $0.6 million from this insurance claim in the six months ended January 31, 2014.

 

Purchases of marketable securities were $18.4 million and $11.6 million in the six months ended January 31, 2015 and 2014, respectively. Proceeds from maturities and sales of marketable securities were $12.1 million and $10.1 million in the six months ended January 31, 2015 and 2014, respectively.

 

Financing Activities

 

In the six months ended January 31, 2015, we paid cash dividends of $1.67 per share on our Class A common stock and Class B common stock, or $38.9 million in total. In the six months ended January 31, 2014, we paid cash dividends of $0.25 per share on our Class A common stock and Class B common stock, or $5.8 million in total. In March 2015, our Board of Directors declared a dividend of $0.18 per share for the second quarter of fiscal 2015 to holders of our Class A common stock and Class B common stock. The dividend will be paid on or about March 27, 2015 to stockholders of record as of the close of business on March 20, 2015.

 

We distributed cash of $0.8 million and $0.6 million in the six months ended January 31, 2015 and 2014, respectively, to the holders of noncontrolling interests in certain of our subsidiaries.

 

In August 2013, both Fabrix and a wholly-owned subsidiary of ours purchased shares of Fabrix for aggregate cash of $1.1 million. The shares were purchased from holders of noncontrolling interests in Fabrix representing 2.8% of the equity in Fabrix.

 

We received proceeds from the exercise of our stock options of $2.9 million and $0.5 million in the six months ended January 31, 2015 and 2014, respectively.

  

Our subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum, at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 150 basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31, 2017. In the six months ended January 31, 2015 and 2014, IDT Telecom borrowed nil and $30.0 million, respectively, and IDT Telecom repaid $13.0 million and $36.1 million, respectively. We intend to continue to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of 0.375% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries may not exceed $90.0 million. At January 31, 2015, there were no amounts borrowed or utilized for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances to affiliates and subsidiaries was $88.0 million.

 

Repayments of other borrowings were $0.1 million in both the six months ended January 31, 2015 and 2014.

 

In the six months ended January 31, 2015 and 2014, we paid $0.3 million and $1.0 million, respectively, to repurchase 16,330 and 31,182 shares of Class B common stock, respectively, that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares are repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.

 

We have a stock repurchase program that authorized the repurchase of up to an aggregate of 8.3 million shares of our Class B common stock. In the six months ended January 31, 2015, we repurchased 29,675 shares of Class B common stock for an aggregate purchase price of $0.4 million. There were no repurchases under the program in the six months ended January 31, 2014. As of January 31, 2015, 5.0 million shares remained available for repurchase under the stock repurchase program.

 

 

Changes in Trade Accounts Receivable and Allowance for Doubtful Accounts

 

Gross trade accounts receivable decreased to $61.9 million at January 31, 2015 from $80.8 million at July 31, 2014 primarily due to a $14.7 million decrease in IDT Telecom’s gross trade accounts receivable balance and due to the sale of our interest in Fabrix. At July 31, 2014, Fabrix’ gross trade accounts receivable balance was $4.8 million. The decrease in IDT Telecom’s gross trade accounts receivable balance was primarily due to collections in the six months ended January 31, 2015 in excess of amounts billed during the period, accounts receivable written-off and the effect of changes in foreign currency exchange rates.

 

The allowance for doubtful accounts as a percentage of gross trade accounts receivable decreased to 9.9% at January 31, 2015 from 14.2% at July 31, 2014 as a result of accounts receivable write-offs in the six months ended January 31, 2015 that reduced the IDT Telecom allowance for doubtful accounts and gross trade accounts receivable balances.

 

Contractual Obligations and Other Commercial Commitments

 

The following tables quantify our future contractual obligations and commercial commitments as of January 31, 2015:

 

Contractual Obligations

 

Payments Due by Period (in millions)		Total				Less than 1 year				1–3 years				4–5 years				After 5 years
Operating leases		$	10.5			$	4.4			$	4.3			$	1.6			$	0.2
Purchase commitments			5.5				5.5				—				—				—
Note payable (including interest)			6.7				6.7				—				—				—
Total contractual obligations		$	22.7			$	16.6			$	4.3			$	1.6			$	0.2

 

Other Commercial Commitments

Payments Due by Period (in millions)		Total				Less than 1 year				1–3 years				4–5 years				After 5 years
Standby letters of credit (1)		$	3.3			$	3.3			$	—			$	—			$	—

 

(1)

The above table does not include an aggregate of $11.0 million in performance bonds due to the uncertainty of the amount and/or timing of any such payments.

 

Off-Balance Sheet Arrangements

 

We do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, other than the following.

 

In connection with our spin-off of CTM Media Holdings, Inc., or CTM, in September 2009, we and CTM entered into a Tax Separation Agreement, dated as of September 14, 2009, to provide for certain tax matters including the assignment of responsibility for the preparation and filing of tax returns, the payment of and indemnification for taxes, entitlement to tax refunds and the prosecution and defense of any tax controversies. Pursuant to this agreement, among other things, we indemnify CTM from all liability for taxes of CTM and its subsidiaries for periods ending on or before September 14, 2009, and CTM indemnifies us from all liability for taxes of CTM and its subsidiaries accruing after September 14, 2009.

 

In connection with our spin-off of Genie Energy Ltd., or Genie, in October 2011, we and Genie entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Genie after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Genie 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. Pursuant to the Separation and Distribution Agreement, among other things, we indemnify Genie and Genie indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, we indemnify Genie from all liability for taxes of ours with respect to any taxable period, and Genie indemnifies us from all liability for taxes of Genie and its subsidiaries with respect to any taxable period, including, without limitation, the ongoing tax audits related to Genie’s business.

 

In connection with our spin-off of Straight Path Communications Inc., or Straight Path, in July 2013, we and Straight Path entered into various agreements prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Straight Path after the spin-off, and a Tax Separation Agreement, which sets forth the responsibilities of us and Straight Path 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. Pursuant to the Separation and Distribution Agreement, we indemnify Straight Path and Straight Path indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, we indemnify Straight Path from all liability for taxes of Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending on or before the spin-off, from all liability for taxes of ours, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes due to the spin-off.

 

IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At January 31, 2015, we had aggregate performance bonds of $11.0 million outstanding.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Foreign Currency Risk

 

Revenues from our international operations were 30% and 31% of our consolidated revenues for the six months ended January 31, 2015 and 2014, respectively. A significant portion of these revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated by our ability to offset a portion of these non U.S. Dollar-denominated revenues with operating expenses that are paid in the same currencies. While the impact from fluctuations in foreign exchange rates affects our revenue and expenses denominated in foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period is generally not material.

 

Investment Risk

 

In addition to, but separate from our primary business, we hold a portion of our assets in marketable securities and hedge funds for strategic and speculative purposes. As of January 31, 2015, the carrying value of our marketable securities and investments in hedge funds was $19.0 million and $10.9 million, respectively. We liquidated most of our investment in hedge funds in recent years. Much of the remaining balances in these funds are subject to time restrictions. We may consider liquidating such remaining balances when their restrictions lapse. Investments in marketable securities and hedge funds carry a degree of risk, and depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability. Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon redemption.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of January 31, 2015.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Legal proceedings in which we are involved are more fully described in Note 11 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

 

Item 1A. Risk Factors

 

There are no material changes from the risk factors previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the year ended July 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information with respect to purchases by us of our shares during the second quarter of fiscal 2015:

 

		Total Number of Shares Purchased				Average Price per Share				Total Number of Shares Purchased as part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
November 1-30, 2014 (2)			3,105			$	17.12				—				5,035,117
December 1-31, 2014			—				—				—				5,035,117
January 1–31, 2015 (2)			4,588			$	19.94				—				5,035,117
Total			7,693			$	18.80				—

 

(1)

Under our existing stock repurchase program, approved by our Board of Directors on June 13, 2006, we were authorized to repurchase up to an aggregate of 8.3 million shares of our Class B common stock and, until April 2011, our common stock, without regard to class. On December 17, 2008, our Board of Directors (i) approved a one-for-three reverse stock split of all classes of our common stock which was effective on February 24, 2009, and (ii) amended the stock repurchase program to increase the aggregate number of shares of our Class B common stock and common stock, without regard to class, that we are authorized to repurchase from the 3.3 million shares that remained available for repurchase to 8.3 million shares.

(2)

Consists of shares of Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date and the proceeds utilized to pay the taxes due upon such vesting event.

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

None

 

  

Item 6. Exhibits

 

Exhibit Number		Description
10.01 (1)		Employment Agreement, dated January 12, 2015, between IDT Telecom and Bill Pereira.
31.1*		Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed or furnished herewith.

 

(1)

Incorporated by reference to Form 8-K, filed January 14, 2015.

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	IDT Corporation
March 12, 2015	By:	/s/    Shmuel Jonas
		Shmuel Jonas Chief Executive Officer
March 12, 2015	By:	/s/    Marcelo Fischer
		Marcelo Fischer Senior Vice President of Finance (Principal Financial Officer)

 

 

 

31