IDT Corporation

Good evening and welcome to the IDT Corporation's third quarter fiscal year 2022 earnings call. In today's presentation, IDT's management will discuss IDT's financial and operational results for the three-month period ended April 30th, 2022. During remarks by IDT's Chief Executive Officer, Shmuel Jonas, all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After Mr. Jonas' 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 Q&A 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 risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make, or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or in the Q&A session, IDT's management may make reference to non-GAAP measures including adjusted EBITDA, non-GAAP net income, and non-GAAP earnings or loss per share. A schedule provided in the IDT earnings release reconciles adjusted EBITDA, non-GAAP, net income, and non-GAAP earnings or loss 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 Corporation website. The earnings release has also been filed on a form 8K with the SEC. I will now turn the conference over to Mr. Jonas.

Thank you, Operator. Welcome to IDT's earnings conference call. I'm joined on the call by Marcella Fisher, IDT's Chief Financial Officer. We will both be available to answer questions after my remarks. My discussion today focuses on the third quarter of our fiscal year 2022. The three months ended April 30th. For a more detailed report and discussion on our financial and operational results, please read our earnings relief called earlier today and our form 10Q that we expect to file with the Securities and Exchange Commission on Thursday, June 9th. Since its inception over 30 years ago, IDT has generated IDT has generated shareholder value by incubating and growing promising business initiatives. We are currently leveraging our core strategic assets to scale three high-margin growth businesses, NRS, Netiphone, and Boss Revolution Money Transfer, while simultaneously benefiting from the significant cash generated by our traditional communications segment. Each of these Three high margin, high growth businesses had a very strong third quarter, helping us to again achieve solid levels of consolidated income from operations and adjusted EBITDA, consistent with our results from the first two quarters of our fiscal year. NRS added nearly 1,400 net POS terminals and 1,200 net payment processing accounts during the third quarter, maintaining the accelerated rate of acquisitions achieved in the second quarter. NRS recurring revenue increased 102% year-over-year, keyed by strong merchant service and advertising sales. Looking ahead, we expect that NRS will sustain robust high margin growth in the coming quarters. In particular, we expect advertising and data offerings to benefit from both long-term trends, such as the increasing allocation of advertising budgets to out-of-home venues, as well as from seasonal tailwinds, including increased political advertising heading into the second half of the calendar year. Nettofone's strategic focus on the SMB and small enterprise markets within North and South America, efficient execution, and acquisition of CCAS provider Integra all contributed to solid growth in the third quarter. Subscription revenue increased 42% year-over-year due primarily to the addition of approximately 22,000 seats during the quarter, including almost 7,000 seats from the Integra acquisition. Seed growth was again strongest in our Latin American markets, although our U.S. businesses performed very well as well. We will begin selling our CCAS offerings in North America in the current fourth quarter of our fiscal year and expect its expansion to gradually become a key driver of both seed growth and ARPU expansion. A month ago, we announced our decision to postpone the spinoff of Netaphone in light of market conditions. We believe that we can significantly enhance Netofone's value by continuing to grow the business and improving net margins. And, in fact, we are already making good progress. The Netofone UCAS segments lost from operations in the third quarter decreased to $2.3 million from nearly $4 million in the year-ago quarter. Segment CapEx in the third quarter was $1.4 million compared to $1.3 million a year earlier. Bust money, our international remittance business, increased revenue 51%, to $15.5 million, driven by a 27% year-over-year increase in transaction volumes and a comparably robust increase in revenue per transaction, including both transfer fees and revenue derived from foreign exchange. We continue to build out our disbursement networks, particularly in Africa and the Caribbean, and to fine-tune our direct-to-consumer pricing strategies to capture additional revenue and margins. In our traditional communications segment, Revenue decreased by $59.9 million, or 17%, to $285.9 million. The surge in demand for paid voice that we experienced during the COVID pandemic is now retreating and exacerbating the impact of the underlying revenue declines in retail calling and wholesale carrier services. Our mobile top-up business struggled this quarter, but we are investing in technology, marketing, and sales to improve its performance. Because traditional communications lost revenue overall with skewed to lower margin sales, income from operations from this segment decreased $3 million year over year to $17.4 million. On a consolidated basis, income from operations decreased $500,000 to $13.3 million, while adjusted EBITDA increased $100,000 to $18 million. To wrap up, all three of our high-margin, high-growth businesses had a strong quarter. Their expansion continues to offset the decline of the low-margin minute-based revenues within our traditional communications segment. We expect that as our growth business continues to expand, our consolidated bottom-line results in the coming quarters will increasingly reflect their contributions. Although we have postponed the spinoff of Net2Phone, we continue to believe that the spinoffs can be an attractive and appropriate strategy to help shareholders benefit more directly from the expansion of promising young businesses. whose assets and operations are readily separable from those of our other businesses. 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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Once again, that's star one if you have a question or comment.

The first question comes from David Polanski with Immersion Investments. Your line is live.

Hey, guys. Thanks for taking my question. Obviously, great job as usual, especially with NRS. I wanted to ask, you know this is the second consecutive quarter you're putting up 1400 installs um which is kind of an accelerator rate from what you've been doing previously can you discuss through which channels you're seeing that nrs growth is it direct uh distribution call center can you talk about that a little bit please it's really um it's really

basically enhanced sales in each of the segments. So it's not coming from one in particular. They're all having an increased rate of sales. Okay.

And I know I've asked you this before, but given the fact that I think this is your first time giving any forward-looking commentary about NRS explicitly in a press release, which it seems like it's coming from the ARPU side of the equation rather than the new unit side. So I wanted to ask again, do you have any updated thoughts on where we think ARPU for NRS could go from here?

I don't have a specific number in mind, but I do believe that ARPU will go up. Okay.

And any reason to think that we can see 1,400 installs per quarter as a new normal, or should we still be thinking about this as a 1,000 units per quarter business?

I personally think that we can grow above the 1,400 new units per quarter. And we're One of the things that held us back this particular quarter was really shortages of equipment. But we spent a lot of money to bring in a lot of inventory and equipment so that we will not have that issue again. And we think that we're in good shape now to deploy more than we've been deploying.

Do you think you can get, so you said you might be able to do more than 1,400. Is that all coming from your traditional C-store bodega installs? Because I know in the past you've talked about initiatives to sell outside of that market. Is there any update you can give us on that?

I don't have anything at the tip of my fingertips. at this moment about what kind of stores the sales came from. Obviously, a large percentage came from what I would call our primary market. But we really had sales in lots of different areas, anything from dollar stores to liquor stores to quick service restaurants, et cetera.

To quick service restaurants? I think that's a new one. How long have you been selling a quick serve?

I don't know. The past, I would say, 12 months since we rolled out modifiers, we've been adding restaurants.

Okay. That's very meaningful. I mean, is that going to be a material portion of the business? Are you putting extra resources in that, or is that just Are you still solely focused on C-Store and Bodegas?

Again, I don't think that we're solely focused on it, but I would say that we're primarily focused on it. When we build new features and functionality like that is who we primarily have in mind. If other customers also see the benefits in those same features, then great. But we definitely do target our our development towards our core market. Okay.

Great. On the payment side, payment processing, can you disclose the proportion of new customers? So I think the last quarter you had 8,000, now you have 9,200. What percentage of that was from new installs? Was it substantially new customers or or are you making progress on penetrating your existing base?

I would say substantially new customers, but we are also making some progress in going after the base of existing POS customers.

Right, right. And I mean, how should we think about NRS and your payments business in particular in an inflationary environment? I mean, I think As taking a percentage of the swipe, I would think that at least on a dollar basis, you would keep up with inflation. I mean, how do we kind of think about that, I mean, given the current economic environment?

I don't have, you know, a real answer to you. I would say that our stores, you know, have been doing well. You know, their average, I'll call it check size or ticket has grown. And, you know, by that happening, you know, the average, you know, credit card volume has grown, you know, along with that. You know, what effects, you know, inflation, you know, in specific has to do with that, I can't give you an answer. But I don't expect that to have a material answer, although maybe Marcel has more to add on that.

No, David, you're high. Hi, David, Marcel. You're head on, okay? I mean, you know, being that our payment processing is really more of a variable component of the total cost or the total charge, now we are kind of inflation protected, okay, from that perspective. So we ride the inflation wave on this.

All right. Yep. Last one for me. Is there any desire to make an acquisition on the NRS side, something maybe in the payment space, data space, just something to sort of accelerate your growth? I mean, your growth is obviously fantastic, but I'm still looking at NRS within the larger IDT house, right? Yes. I'm trying to think about what attracts people to the stock. And, you know, with traditional, with that EBITDA kind of going down and looking at flat year-on-year growth, it's like, you know, it's fine and your growth is great, but I would want, I really want to see people focusing on this NRS piece. And so I'm just curious if there's anything that we can do to kind of accelerate that in any way, or what are you thinking about that?

I'll say two things. One is we look at lots of things. Some of them are outside of our comfort zone. And for that reason alone, we do not do them. I would say that we are conservative by nature. On the other hand, I would say that I believe that organic growth is going to be very, very strong. And when you do an acquisition, it does take a lot of effort and time from management of integrating that acquisition into your business. And we're a little bit hesitant to throw a monkey wrench into something that's working well. So I would say that if the right opportunity comes along, we're definitely open to acquisitions in particular areas for NRS, but we are not by any means in need of an acquisition to help us continue to grow both stores and ARPU.

All right, great. Thanks, guys. I'll sign off.

Okay, the next question is coming from Adam Wilk with Greystone Capital Management. Your line is live.

Hey, guys, how are you? Thanks for taking my questions. Great job. Really strong quarter. Just one for me. An update on mobile top-up would be helpful, I think, especially as I believe last quarter you talked a little bit about competition and wholesale and the potential negative effects from that. Yeah. So anything you'd like to add would be really helpful. Thank you.

You know, I don't want to give away anything to our competitors that also listen to the calls. But, you know, I would say that, listen, a bunch of our competitors have gotten, you know, large investments into them, into their mobile top-up businesses. And I think to, you know, to maybe please their investors, they're focusing, you know, more on revenue growth than on, on profitable growth. And we try to focus on both. This quarter, unfortunately, we didn't do maybe a good enough job focusing on the revenue side of the business. But I do believe that a lot of the products that we have in the pipeline are going to make our offerings much stickier and therefore the revenue from them much more predictable and profitable.

Okay, great. Yeah, that was it for me. Thank you for the color. I appreciate it.

Okay, the next question is coming from Sean Berger with Adirondack Retirement.

Your line is live. Hi, congratulations on a great quarter and particularly NRS. I just have one other question. Actually, I've got two quick ones. One is with regard to NRS, and I'm wondering about the expansion possibility. So again, it's kind of land and expand. You sell an active terminal and then you get more services. And I'm wondering on the services side, have you, I guess without giving away too much, thought about or given, have a strategy with regard to expansion? So like more NRS pay adoption and On the on the NRS side and then the other the other quick question was with regard to the net to phone spin off if if you have a new target date for that as well. I know that it's been postponed. I talked to Marcelo about it having been postponed this quarter and not going to happen by the July 30th time because the market conditions which I which I think was wise. But just wondering if you have a new target date on that.

So I'll answer your second question first. We do not have a new target date on it as of yet. You know, again, as we stated, you know, both in, I guess, my remarks today as well as in, you know, our press release related to delaying the spinoff, you know, we are very focused on, you know, improving NetPhone's bottom line as well as, you know, expanding their base of customers. And we think that, you know, when the right time, you know, reoccurs, which it will, that, you know, Netflix will be a much more valuable company at that point in time. As far as your question, you know, regarding, you know, land and expand relating to NRS, I would say that that is definitely, you know, a big part of our strategy. And, you know, we had a, you know, well, I would say we didn't have a great quarter expanding merchant services into existing stores. We did have a very good quarter expanding the software side of the business into new, I'll say expanding the software offerings that we offer into into existing stores, so upselling them into higher software programs. And our software programs and our merchant service programs are actually aligned in the fact that if you take our merchant services, you get significantly lower pricing on our software services. And that has definitely been a reason why so many of our customers have taking merchant services from the beginning, and now we need to do, you know, also a good job of going back out to some of our stores and, you know, retelling them the reasons why they need to switch to our merchant services and to take more software solutions from us. So we will continue doing that in the coming quarters.

Okay. Thank you, and congratulations on a great quarter.

Thank you.

Okay, the next question is coming from Tim Delaney with Immersion Investments.

Hey, guys. Thanks for taking my call. The absolute beast with NRS, obviously. So my question is about Net2Phone. It's nice to see that North America growth is happening in there. Give us any color around that and your expectations going forward, particularly around North America.

You know, I would say that, you know, I think that the level of sales that we achieved, you know, this quarter in North America, we feel, you know, pretty confident that we can, you know, achieve at least, you know, those level of sales going forward, you know, if not quite a bit higher. And again, as I remarked also, you know, during the prepared remarks, you know, we are adding our CCAS solutions beginning this quarter, you know, and I'm already, you know, starting to see some sales coming through from that. And that will lead to, you know, both higher ARPU, you know, as well as, you know, higher margins.

Great. That's awesome. Thank you so much.

Okay. The next question is coming from Jason Luftig. With Jay Goldman, your line is live.

Hey, guys. Thanks for the question. I'd just like to start off by building on what David asked earlier on NRS. But what would it take to get to, you know, call it 2,000 net ads from the current 1,400?

One or two good months.

Switch to a four-month quarter.

No, I mean, I think that, again, I can't say that we are – we don't give forward guidance, and I want to be careful, you know, not to give forward guidance. But I do believe that we are going to get to those kind of numbers, you know, relatively soon. Okay. And again, it comes from multiple channels. It's not from any one specific channel. It comes from having success from all the different channels that we sell through.

Okay. And what was NRS EBITDA on the quarter, Marcelo?

The EBITDA was, if you exclude some one-time non-cash compensation items, it was about $1.9 million EBITDA for NRS. Okay.

And switching to Netaphone, can you just elaborate a little bit on the plan for improving the bottom line there?

Yeah, I mean, I guess it's a variety of things. You know, it's, you know, being more careful on marketing spend, being more careful on, you know, only keeping productive salespeople. It's being, you know, more careful about, you know, which customers you decide to you know, to work with and what size deals, you know, you go after. You know, it's really a lot of, you know, I would say it's focusing on the details. And I think Marcelo has something to add.

Yeah, I mean, it's also focusing on geographies, right? You know, as you know, we operate in a number of countries. Some countries are growing at a much faster clip than others. We are looking at our customer acquisitions in a much more disciplined way in terms of allocating that capital to the geographies that are getting the highest return. Mexico's growth is exploding right now, for example, although all the markets are growing. So they're going to be more focused in targeted investments so we get the capital going to the highest IRR generating customer positions. A very, very deep look at the cost structure. And at the same time, continue to grow the top line. And let me tell you, as the business continues to grow, the scale matters significantly. and Q3 was a great quarter for us in Epiphone, and if it continues to scale this way, I would really hope that going to next year, that you're gonna see an Epiphone business which is strong, still growing 20% perhaps more on the top line, and getting very close to profitability, if not already being even that creative.

Okay. Thank you for the questions. Yep.

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.