IDT Corporation

Good evening and welcome to the IDT's Corporation Second Quarter Fiscal Year 2021 Earnings Call. In today's presentation, IDT's management will discuss IDT's financial and operational results for the three-month period ending January 31st of 2021. During remarks by IDT's Chief Executive Officer, Shmuel Jonas, all participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After the prepared remarks, Marcelo Fisher, IDT's Chief Financial Officer, will join Mr. Jonas for Q&A. Any forward-looking statements made during this conference call, either in the prepared remarks or in the question-and-answer session, whether general or specific in nature, are subject to risk and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risk and uncertainties include but are not limited to Specific risk and uncertainties discussed in the report that IDT files periodically with the SEC, IDT assumes no obligation either to update any forelooking statements that have made or may make or to update the factors that may cause actual results to differ materially from those they forecast. In their presentation or in the question and answer session, IDT's management may take reference to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA-less CAPEX, non-GAAP net income and non-GAAP earnings per share. A schedule provided in IDT's earnings release reconciles adjusted EBITDA, adjusted EBITDA-less capex, non-GAAP net income and non-GAAP earnings per share to the nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT's Corporation website. The earnings release has been filed also on the Form 8K with the SEC. I would now like to turn the call over to Mr. Jonas. Please go ahead.

Thank you, Operator. Welcome to IDT's second quarter fiscal year 2021 earnings call, covering results for the three months ended January 31st, 2021. I'm joined today on the call by Marcella Fisher, IDT's Chief Financial Officer. For a detailed report on our financial and operational results, please read our earnings release file earlier today and our Form 10-Q, which we expect to file with the SEC on or about March 12th. IDT delivered another strong quarter, including significant year-over-year increases in consolidated revenue, income from operations, and EPS. Consolidated revenue increased $16 million to $340 million. It was our third consecutive quarter of year-over-year increases in revenue. and our sixth consecutive quarter of year-over-year increases in revenue less direct cost of revenue. Consolidated income from operations increased $11.6 million to $12.9 million this quarter, powered by $9 million year-over-year increase in revenue less direct cost of revenue. Consolidated SG&A expense meanwhile was substantially unchanged year-over-year. We are successfully reducing the overhead in our traditional communication segments and redeploying those resources support and accelerate the growth of our higher margin businesses in the FinTech and Nexflin UCAS segments. Fully diluted EPS increased to 51 cents from 4 cents in the year-ago quarter. The quarter's results were highlighted by year-over-year revenue expansion from our three higher margin businesses, National Retail Solutions, Foster Volution Money Transfer, and Nexflin UCAS. Within our FinTech segment, NRS added over 1,300 units to its PLS terminal network this quarter. In the year-ago quarter, we added less than 800 units. We've picked up the pace of network expansion significantly. On January 31st, NRS had over 13,700 billable units in the network. NRS's quarterly revenue increased by over 150% year-over-year to $5.2 million, led by growth in payment processing services and in digital out-of-home advertising sales. Although we are in the early stages of monetizing both of these offerings, They helped to drive a 50-plus percent increase in revenue per PLS terminal over the past year. Also within FinTech, our Boss Revolution money transfer service increased revenue 73% to $13.3 million. We continue to build out our global dispersion network, and this quarter passed an important milestone, opening corridors to Southern Asia with the addition of Pakistan and Nepal. Looking ahead, we are laying the groundwork for the first expansion of our origination markets. The reach of our disbursement network and significant transaction volumes into key destinations enable us to provide a highly competitive T2C service from a number of countries. We expect to launch our expansion by offering bus revolution money transfer in Canada and the UK in fiscal 2022. As we noted in our earnings release, our money transfer business continues to benefit from the unusual foreign exchange market conditions that drove strong growth in the second half of last year, but which diminished in the first two quarters of fiscal 2021 before dissipating by the end of the second quarter. In our net to phone UCAS segment, subscription revenue climbed 36% to $10.1 million. Growth has been solid in all of our markets, the U.S., Canada, South America, and Spain. Our continued growth validates our geographic strategy, but also reflects the accelerated rate at which we have been able to develop and deploy enhancements to the offering itself. most notably adding integrations with some leading CRMs and communications platforms. In the second quarter, we launched our integration with Slack, the leading channel-based messaging platform, building on previous integrations with Zoho and Microsoft Teams. More recently, we launched a powerful integration with Salesforce, the world's largest CRM. These integrations enable Metaphone to approach higher seat count customers and position us to strengthen per seat revenue without sacrificing growth. The increasing sophistication of our feature set and adaptability of our offerings prompted CIO Review, a publication for technology leaders, to name NetPhone as one of its top 20 companies providing transformative solutions for retail businesses. In our traditional communications segment, aggregate adjusted EBITDA less capex increased to $18.2 million, $4.6 million more than in the year-ago quarter. Strong year-over-year growth in international mobile top-up sales in combination with stable Boss Revolution calling revenue more than offset a decline in carrier students' revenue. Looking beyond our established businesses to new opportunities, we are preparing to relaunch the Boss Revolution mobile initiative. Our initial MVNO effort in partnership with Sprint struggled, but we are confident that this time around we will do much better. Across our businesses, the entrepreneurial spirit drives everything we do and will be a powerful source of value creation as we continue to build IGT. Now, Marcel and I would be happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Brian Warner, investor. Please go ahead.

Hi. Thanks for taking my question. I have two questions. And the first is actually a two-part question, but considering I'm just wondering if I can get a little bit of insight into your thinking about maybe appropriate timing for a FinTech spinoff. what sort of metrics you might want to hit operationally before you think that's ready. And so the second part of the same question would be, when do you think the net-to-phone UCAS business might be ready for that? And then just finally, I'm wondering if you can give us a little color on your traditional phone business. You seem to – congratulations, by the way. Actually, all your businesses looked good. But I'm just wondering, in a traditional business where you seem to be showing better revenue growth and very tight on costs, can you give us sort of any sense on what you think the outlook for that business might hold? I mean, Discord you generated, I think, was over $18 million in essentially free cash flow there. And I'm just wondering what you think sort of the outlook for that business is.

Okay. This is Shmuel. I will try to remember everything and answer your questions. And Marcelo, feel free to either step in at any point or if you want to give better answers after I'm finished, you're welcome to do so as well. So I believe that our goal is to send off microphones sometime, I would say, before the end of the calendar year or possibly slightly after. You know, we've done quite a number of spin-ups, as you know, but they do take a lot of work. And, you know, pandemics and building businesses come first, unfortunately. But that is our goal. And, frankly, we don't really... have enough bandwidth to do two spin-offs all at once. I would say that we can't, you know, really even start to think about the second one until we finish the first one. But, you know, we're also, you know, building, you know, other new businesses, you know, in the background as well.

That sounds great.

I think that answers the first part. And then as far as, you know, your question about cash flow and what can you expect from, you know, the business going forward, or I'll call it the traditional business going forward. You know, again, you know, we don't, you know, give forecasts on what our results will be, but, you know, we feel that, you know, the business is doing very well. I mean, again, I don't know if some of it has to do with, you know, COVID and, you know, people wanting to, you know, stay in touch and share resources, you know, back home more than they would if the pandemic wasn't going on or if we're, you know, just doing a good job, you know, operating the business. You know, it's hard for me to give you, you know, much more insight because, frankly, I don't know. But, you know, all I can say is we come in every day and we try hard and, you know, we feel pretty confident in the strength of the traditional business going forward.

Okay. And some of the stuff that I've read on the traditional business, I guess I'm curious to what extent of the free services and the watch apps of the world maybe impacted that less than some people would have thought.

Well, I mean, maybe so. You know, again, I believe that free services – I've said this for many years, is our number one competitor. It's not other pinless companies or other companies. It's free. That is our biggest competitor. Again, I think that we provide a great service to our customers. The quality that you get with us versus versus free options are in some countries night and day. And in other countries, you know, frankly speaking, you know, the, you know, free really, you know, has basically, you know, made us uncompetitive. So it's really a market-by-market answer.

Terrific. Yeah. Yeah.

How do you...

I'm sorry. Hi, Marcelo. Just a few comments on top of Schmuel's in terms of the spinoffs. Obviously, our focus right now is on Netaphone with all efforts on it. We haven't really now done much thinking about the feedback segment. And even when we start that process post-Netaphone, discussions will be held at that time as to whether a potential spin-off would occur of the entire fintech segment or just of the NRS part of the business. But that's to be determined probably a year plus from now, those discussions will take place. And in terms of the traditional business, so yes, you know, the business has shown stronger resilience than what we had expected. COVID has helped that process as well, particularly on our pinless business. The margins on pinless have improved as more of our recharges are shifting towards digital direct-to-consumer in terms of the mix with retail where we have better margins. Our IMTU business, It's doing extremely well. It continues to be very strong. And we believe that that will continue to grow in the coming years. And the combination of IMTU together with spinless will more than offset, we believe, or continue to offset declines that we see in our revenues and margins happening on the wholesale carrier side. have been affected by COVID, by the fact that more and more of the calling that goes on happens via IP over the top, video conferencing and other modes of communication. So we do expect also carrier revenue margins to continue to decline, but hopefully we'll be able to offset those declines with the strength of the other two businesses. And because of that, we are expecting that this strong cash flow generation that we have seen from the traditional communication business in the $40,000 to $45,000 range, when you look at EBITDA, Alaska Pax, that that trend could probably continue for quite a long time. I got you.

Okay, terrific. Thank you both so much.

Thank you.

The next question will come from James Smith, investor. Please go ahead.

Hi. Good evening. Thank you for taking the questions. I had two questions for you. Thank you. The first was mentioned in the prepared remarks, a roughly 50% revenue per terminal increase in the NRS business has been achieved in the last 12 months. If you think very directionally over the next year or two with the various initiatives you have going on to monetize that business. Do you have sort of a house view as to where revenue per terminal may head over the next year or two? And then the second question was specifically as regards UCAS, do you have a revenue figure in mind at which you think that business potentially breaks even at the EBITDA level? Thank you.

You know, I have, I guess, a fair amount of knowledge on the economics of, you know, how much each NRS terminal brings in. However, you know, it really does vary, you know, a tremendous amount. I mean, you know, hundreds of percent, you know, difference from what I'll call, you know, a store that is not doing merchant processing with us and is maybe in an area where advertisers aren't quite as interested at talking to consumers to an area where, you know, advertisers are interested in talking to the consumers there and, you know, where, you know, the merchant processing volume is quite high. So it's really hard for me to give you a very an exact answer? Like, you know, I mean, it's like saying, you know, you know, what does an average restaurant, you know, you know, give you in profit? I couldn't give it to you. I mean, it's going to depend, you know, I mean, you could have a restaurant in, you know, in Texas right now that, you know, that has no mess and is completely open and doing, or you can have, you know, a restaurant like, you know, in New York that's at, you know, I don't know, 25% or 35% capacity and, you know, and isn't doing any business. So there isn't a very good answer of what we aim for with each particular store. What I would say is that we expect over time our penetration for merchant services in stores to go up significantly. And we've already, you know, started to see that and we expect it to continue. And the amount of services and features that we provide our merchants is really unparalleled for the price. And we've done a lot on the pricing side to differentiate the price that you pay for those services when you get merchant services with it and the price when you don't get merchant services with it. So we're kind of unique in the sense that we don't force you into getting our merchant services. You can get our services without it, but you're going to pay significantly more for the software if you don't get our merchant services. So I hope that that answered your question a little bit. If it didn't, you're welcome to rephrase it. As far as, you know, the metaphone business, you know, it's a different answer. You know, I think that EBITDA, you know, profitability could come, you know, very quickly if we wanted to slow down, you know, sales. I think if we want to, you know, increase sales, you know, there's a cost, you know, for every new sale that we bring on and for, you know, ramping up those sales. And, you know, we try to strike, you know, I'll call it a healthy balance, you know, between, you know, investing in sales and technology and, you know, not, you know, being maybe too aggressive. Although some days, again, I wonder whether or not, you know, we should be investing more, you know, to grow quicker because, you know, we really are getting... you know, very, very good returns and very, very good retention. And frankly, we have, you know, the money to do so. So, and that's really the case in, you know, all of our growing businesses, you know, where the businesses are growing very, very well. And, you know, it's really just a question of how much, you know, gasoline we want to, you know, pour on them to have them grow quicker. And, you know, again, people, you know, I don't say people, I'll say investors want a balance. You know, they want a company, you know, to throw off earnings and, you know, to operate efficiently and at the same time, you know, grow. And, you know, we try to, you know, to do that balance. But some days I wonder whether or not, you know, we are choosing the correct balance or if we should be, you know, investing more to grow these businesses, you know, even faster.

That is very helpful and I appreciate all the colour. If I wouldn't mind rephrasing the NRS question slightly differently, I think you mentioned in the most recent 10K that the business is sort of servicing into the 35,000 merchants into which the traditional communications products have been distributed. You now call it 13,000, 14,000 merchants with the NRS product. Do you see a sort of ceiling on that business over the next year or two or three? How do you think about the addressable market in terms of number of merchants potentially?

Oh, not at all. I mean, I actually think that oftentimes people believe that, you know, that we only go after stores that have sold, you know, Boss Revolution, you know, in the past. And that's just not a reality. you know, so a large percentage of our customers, I will say originally, when we started, came from, you know, boss revolution stores. And still, to this day, obviously, you know, we have an easier time, you know, going into stores that we've been going into for years and selling them. But a huge number of our sales are coming from stores that never sold, you know, any IDT products before. So in terms of the In terms of the amount of stores that, you know, that we believe is the addressable market, you know, it's in the hundreds of thousands. It's not, you know, a 35,000 store number as our addressable market. But we have done phenomenally well getting, you know, into, you know, the stores that have been, you know, our customers for a long time because, you know, they know that we provide great service and a great product.

Thank you for all the color and good work. Thank you very much. Thank you.

The next question will come from Benjamin Merchant with Merchant Capital. Please go ahead.

Hi, congratulations on another great quarter. I just wanted to ask, like, what's differentiating the national retail solution from other point of sale companies such as Square? You know, they're obviously bigger companies. So just if you could provide a little bit of color on that, I would appreciate it.

It sounds like you're in the business. Maybe you can provide some color. But, you know, I would say that – I'm hearing an echo, so if you don't mind muting, I apologize. I would say that a couple things differentiate us. As I talked about just a minute or two ago, one thing that differentiates this is that we don't require you to get merchant services. You know, Square and Clover and Toast, I'll just use three examples. They require you to get their merchant services. And therefore, if a merchant is already in a contract or is hesitant about switching from the bank that they're currently using or any number of reasons why a merchant wouldn't feel comfortable, we don't force them to switch to our merchant services. We believe that we provide better pricing, better service, et cetera, than even some of our biggest competitors. You can actually get a human being on the phone when you call us. But that being said, we, I'll say, have a softer sell than some of our larger competitors, like the ones you mentioned. I think that our software is also actually, in a certain way, more purpose built for the types of stores that we currently serve. You know, that, I would say that we're, you know, we are planning to sort of augment that in the future in the sense that, like, you know, right now our terminals might not be the prettiest terminals, you know, that you can buy. But we are also, you know, coming out with, you know, a line of what I'll call higher end, you know, terminals, you know, that, you know, are more, you know, more aesthetically pleasing, you know, than the ones that we currently sell. which we think will fit a whole other segment of stores that might today not buy our terminals. So that doesn't mean that we're going to stop selling what we currently sell. That means we're going to have an additional line of hardware. The other thing is we are in the process of building out – you know, a similar, I'll call it, you know, way of getting customers to how Square does, which is, you know, you can, you know, just go and download our, you know, app from, you know, the app store and, you know, get one of our, you know, not dongles, but something, you know, in that sphere and, you know, start using our merchant services. You know, in my opinion, though, like our software is really, you know, in many respects, you know, better than theirs. I know that's, you know, a little bit maybe cocky, and in some respects, that is obviously not as good as theirs. But we really think that we have, you know, an excellent product. It's extremely reliable. I mean, we have, you know, you know, knocks on wood, as they say, but like zero outages. And, you know, it's... It's a quality product at a good price. That's really what it comes down to. And we have a great sales team selling it.

Well, thank you very much.

The next question will come from Brian Warner with Private Investor. Go ahead.

Hi. If I could just give a follow-up on the NRS business. If you think about that business at some point in the future, call it maybe three or five years, and you think of sort of a reasonably healthy merchant in a reasonably healthy market, and if you take bucket merchant services for somebody who takes it, and then another bucket, I guess, is advertising, and maybe a third is analytics, can you give any sort of color on that? proportionally the size of the opportunities in your mind and what a typical merchant like that might look like in terms of a revenue split between those segments?

I really can't give you a clear answer. I mean, you know, as I said, it's really, you know, there's so many different dependencies. I mean, you know, again, from an advertising point of view, you know, like, It could be you have a store that, you know, has 3,000 people come into it a day, and for whatever reason, you know, advertisers aren't particularly interested in the city, you know, or the street or the demographics, you know, of, you know, the community in that area. And, you know, and advertising is low. You know, and, you know, could be, you know, the same thing for, you know, for the data. It could be that, you know, I don't know, you know, a beer company really wants to know how their, you know, competitors are doing in a specific market because, you know, their sales have declined in that market and therefore they're willing to pay us, you know, a lot of money for, you know, for data insights into what's going on in that market and, you know, in a big market where they might be doing really well, they just don't care because they think that they're, you know, doing a good job. You know, on the merchant services, it's much easier, obviously, to model because, you know, there's, you know, an approximate amount that we, you know, expect to make, you know, per, you know, per dollar swiped, I'll call it, or tapped or however, you know, you do it nowadays. But, And, again, you know, that's improved over time as we, you know, get bigger and better at it. And, you know, we expect that to, you know, again, I can't give you – I hope I'm sort of answering your question. I mean, we don't get questions very often, but to me this is like an exciting night. You know, usually I'm off the call in nine minutes after reading my speech. So, yeah, I mean, if you want, if you have a follow-up question to it, I mean, but again, in terms of the market, I think the market is, as I said, enormous. Like, I mean, I really think that we've barely scratched the surface. And I think that, you know, MRF one day is going to be, you know, way more valuable than IDP is today. And, you know, if you're buying into IDP today, you're getting a great deal because you're, you know, you're getting... you know, three, you know, huge opportunities that already exist, you know, for... Right.

So, Brian, as Shmuel said, it's hard to predict what the mix will be down the road, but one thing is for certain. As we continue progressively trying to go the tide in our analytics and our merchant services, those three channels obviously have significantly higher margins than just... of selling the terminal unit and the amount of recurring fees that you get on that. So one thing that probably will be very likely is that as NRS continues to grow, both network and these services, is that the gross margins and net margins on this business will continue to increase.

Yeah, I mean, I'll just add one more piece of color. I mean, you know, as I said, they talked about a little bit earlier, you know, we've changed, you know, the pricing with our software so that, you know, you're incentivized to go with merchant services. You know, that being said, we've also, you know, added a ton of features and even customers that, you know, are getting our merchant services are now adding, you you know, more revenue to us than they ever have before because, you know, they're able to, you know, buy higher plans that include, you know, more features. And that's really something that's only, you know, happened very, very recently.

Sounds great, guys. Thanks for all the talk. I appreciate it.

Again, if you have a question, please press star, then 1. As there are no more questions, this concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.