IDT Corporation

Good evening and welcome to the IDT Corporation's first quarter fiscal year 2023 earnings call. In today's presentation, IDT's management will discuss IDT's financial and operational results for the three-month period ended October 31, 2022. During remarks by IDT's Chief Executive Officer, Shmuel Jonez, 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 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. After my remarks, Marcella Fisher, IDT's Chief Financial Officer, will join me and we will be available to answer questions. My discussion today focuses on the first quarter of our fiscal year 2023. The three months ended October 31st. For a more detailed discussion of our financial and operational results, please read our earnings release filed earlier today and our Form 10-Q that we expect to file with the Securities and Exchange Commission by Monday, December 12th. This quarter, please note that our NRS business is now a separate reportable segment by greater visibility into its financial performance. The FinTech segment, which previously included NRS, now compromises Boss Money and several smaller financial service offerings and businesses that were previously included in our traditional communication segment. These include our Gibraltar-based bank and our awards-to-go gift cards. Within FinTech, we have continued to break out Boss Money revenue and KPIs for you. In the first quarter, we achieved our second consecutive quarter of record adjusted EBITDA. Our rapidly expanding NRS, Boss Money, and NetPhone businesses contributed 25% of our consolidated adjusted EBITDA in the period, and their continued expansion positions us for significantly enhanced profitability in the coming years. We are focused on improving the bottom line performances of all of our businesses. In this quarter, both NetPhone and the FinTech segment, which now primarily tracks the performance of our boss money remittance business, turned the corner, and generated positive adjusted EBITDA. NRS also had another very good quarter, more than tripling its adjusted EBITDA contribution compared to the year-ago quarter. As I discussed last quarter, NRS advertising and data sales, which contributed over half of NRS's first quarter recurring revenue, is always impacted by seasonal factors and, of course, industry-wide trends. In the first quarter, we benefited from sales of political advertising, and we expect to see a significant amount of holiday and year-end spending in the second quarter. However, January is usually a slower sales month, and we've begun to see the impact of macroeconomic headwinds that are buffeting the advertising market. Looking ahead, we are planning to increase our available advertising opportunities by expanding the number of screens in our network and by adding digital window signs in high-traffic areas, menu boards in busy food service establishments, and by opening a variety of other advertising venues, including across our various apps and websites, and of course, for NRS retailer sites that we manage. We expect to drive continued strong growth in SaaS and merchant services revenue by increasing our velocity of sales, as well as continuing to expand our offerings, as well as the sales channels. Over the next couple of months, we will launch our kiosk ordering and beta version of an app-downloadable POS for tablets, as well as POSs customized for specific retail verticals with significantly higher SAS monthly recurring charges than the level we realize with our current retail base. Thinking about longer-term NRS growth initiatives, we're also expanding our e-commerce offerings, which we conceived of to help NRS level the playing field for independent retailers who must compete against the expansion of national and regional retail chains. A key part of the effort is to help retailers expand their supply options and to provide them with remote ordering and home delivery capabilities. On the supply side, we just announced a B2B e-commerce initiative to help distributors and suppliers access NRS's extensive nationwide network of retailers while enabling NRS retailers to order the right items and the right amount of inventory to maximize sales and cash flows. On the B2C side, we recently announced a partnership with Uber to integrate with their delivery platform. Together, we're providing home delivery at no cost to our retailers when customers order through our BR Club app. This expansion of e-commerce ecosystem will help our retailers become more profitable and serve customers even when they're not in the store. Boss Money continued to perform very well in the first quarter, with solid year-over-year increases in transaction volumes, revenue, and revenue per transaction. This quarter, we beta launched a new digital wallet aptly named Wallet by Boss Money, which I'm personally very excited about. I hope you will agree it provides an amazing user experience for sending, spending, and saving money. I encourage you to download the app from either the Apple App Store or the Google Play Store and try it. Preferably, you'll also sign up for direct deposit to maximize the wallet's benefits Our wallet has tremendous potential, particularly for the immigrant communities we serve, and we expect it to become the ecosystem for many of our payments and financial service offerings over time. And we don't charge anything, so you have no excuse not to try it and give us feedback. NetPhone reached a significant milestone this quarter, achieving positive adjusted EBITDA even more quickly than we had expected. We've been able to outperform without slowing our pace of seat growth. In fact, we added over 18,000 seats this quarter, compared to 12,000 last quarter. NetDevon's strategic focus on the SMB market through channel partners continues to pay off. We have significantly simplified and streamlined the processes for our partners to onboard and provision their SMB customers, making the experience intuitive, quick, and hassle-free, while at the same time lowering our onboarding costs and their onboarding costs. In Q1, Netaphone sold approximately 1,000 cloud-based contact center seats, leveraging the CCaaS platform that we acquired earlier this calendar year, and about which we continue to be super excited. Because our CCaaS platform is telephony agnostic, we're able to sell CCaaS globally. During the quarter, we sold CCaaS to enterprise call centers and contact center customers in three new markets. We also released our Salesforce integration for contact centers. which will become a powerful tool. Turning now to our traditional communication segment, our IDT digital payments business, primarily our mobile top-up offerings, was again impacted by the decline of the key corridor. Removing the impact of that corridor, digital payments revenue would have increased 5% year over year. However, we are not satisfied with the results to date, and we are hard at work enhancing the product and, in some cases, changing team members to help ignite growth in this business. Boss revolution calling and IDC's global wholesale carrier revenue continued to decline, but we were able to substantially mitigate the bottom line impact. With our strong cash flows and our stock undervalued, we repurchased about $5 million of our Class B common stock in Q1. Over the past two quarters, we have repurchased about 3% of our outstanding Class B shares in the aggregate. The cash we expect to generate will build upon our very strong balance sheet, including $137 million in cash and current investments and no debt. That liquidity enables us to support our businesses with working and growth capital without resorting to increasingly expensive outside financing. And in fact, we are even earning positive net interest income. To wrap up, we continue to benefit from strong performances from our growth businesses. As a result, we are on track to continue to deliver healthy improvements in our bottom line results for the remainder of fiscal 2023 and God willing beyond. Now, Marcel and I will be happy to take your questions. And I'm sorry for the speed at which I read this. I'm just a little tired.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We will now pause momentarily to assemble our roster.

One moment, please.

And our first question is coming from David Polanski with Immersion Investments. Your line is live.

Hey, guys. Thanks for taking my questions. I thought the performance was excellent, and I loved seeing the buybacks. I mean, that's great to see. So I want to talk about NRS first. Shmuel, you've spoken about offering something like a B2B marketplace in the past. Can you talk big picture about what it means to your retailers? Why is it important? And then, obviously, any potential financial impact to the NRS business?

Yeah, I'll try to give you, I'll call it a 50,000-foot view of what I think would like to see the B2B opportunity become. To start with, we already have an NRS marketplace, which again, is not a huge business for us, but we do tens of thousands of dollars already through it. We already have a couple of distributors signed up through our new B2B platform. And again, we also do tens of thousands of dollars you know, in addition every month with those partners to date. And this is really an expansion upon what we've already been beta testing sort of in New Jersey. Basically from a 50,000 foot view, there's a couple of problems that our retailers have. One is that they're unable to buy the amount of volume that you need to order from some of the largest Distributors because their minimums are way higher than what you know a corner store You know can do so one of one of our plans is to sort of group together Stores in in a market and let them buy their inventory together and then share that inventory across their stores so that they would be able to meet those minimums and Again, this is not an exact number, but we expect that that will save retailers anywhere from 10% to 20% on the cost of their goods, which will help with their margins. For other retailers, they have different problems. Some retailers have a problem that they need stuff from lots of different distributors. They might carry a wider array of products, and they don't want them coming with 17 different trucks. Let's just use that as an example. So they might essentially want to deliver to one point and then have all those delivers brought to the store. And that's really where our cinch part of the business comes in and we're able to sort of get all the deliveries to one spot and then bring them to the store so that they don't have to have multiple orders and you know, through EDI integrations, you know, will basically be able to immediately update all of their inventory as soon as they get delivery. So from a tracking standpoint and from tracking their cost standpoint, it will give them immediate access to that data. It also just generally speaking opens up, you know, their eyes, I'll say, and I mean the retailer's eyes, to the fact that there's lots of different suppliers that they can get products from. I do believe in general that when you have a competitive market, that's good for customers, and in this case, retailers, because their costs get brought down by the fact that there's more suppliers available to them, and more opportunities for goods that they never carried before, which is another big thing. Some of these stores haven't really changed, I'll say at least dramatically, what they've carried over the past 10 years, while markets in terms of what customers want, have changed. So people want healthier for you, natural, organic, gluten-free, this, that, the other thing. And a lot of the stores that we encounter don't carry those types of products. So this is really also a chance to introduce new types of products to our stores that they wouldn't otherwise necessarily choose on their own. But if we show them that these are popular in their area, it gives them a reason to then want to carry them. And eventually we have lots of, you know, I'll say grander ideas that we think could be layered on top of this. But we first have to get through, I'll call it the basics, before we get to the grander vision. So I hope that that answers your question to some degree. It does, for sure.

Is there, how is NRS being, how are you going to be compensated on this? I mean, how does this, How does this help us?

Basically, we charge a small percentage to the distributors for facilitating these orders for them. And we also do their merchant processing for the retailers, which we also then make a small margin on. And again, it also enhances just the ecosystem in general. So even though it might not be our biggest profit generator in the near term, it really will help. We believe, you know, stores over the long term, which again helps us, you know, the better our stores do, the better we do.

Yeah, absolutely. It's great. I mean, I don't think any, I, at least I don't know of anyone in the market doing what you do that's offering this product. So that's fantastic.

And Dave, as you know, we got the question all the time about how, We do this as a competition. This initiative and the other ones that we announced recently just come to demonstrate that NRS is different. NRS is not just selling a POS, fancy cash register solution. We really try to fully understand the need of our retailers, participate in all the problems, kind of own the store, the supply concerns, the delivery concerns, create that level of stickiness

dependency and do that relationship that there's no match to us yeah I mean again I think we view ourselves really as a trusted partner you know like through good times and bad times you know when when a retailer is struggling you know we're there to help them with their cash flow you know when we see problems that they're having we want to come in and solve them that that's our goal and I think that that's the reason why we succeed and yes we're not embarrassed that we want to make money you know but by providing you know, value to our stores, but you know, we, you know, we're there for them in good times and bad times.

Great. Fantastic. So are there any, uh, are there any early learnings from the Uber partnership or is it kind of too early to tell?

The Uber partnership actually hasn't like officially, I'll say really launched. I mean, we, we, we signed the deal with them, but you know, it doesn't start rolling out, I would say until I believe early, um, I believe early in January, right after the holiday season. We didn't want to launch it during the holidays when things are harder to manage. But again, I have no doubt that the Uber partnership is going to be a major benefit for these stores. I mean, for one, it's by far the cheapest option to do delivery other than possibly doing it yourself and only if you have a lot of deliveries. And again, most of our stores don't have a lot of deliveries. So this is really a great option. It's a great option for customers as well because, again, we're not really trying to make a lot of money on this specific product. Again, this is another example of us doing something that retailers need where we will make a profit, but again, we won't make a ton of profit. Our goal is not to, like in Uber Eats, to mark stuff up 30%. Our goal is to bring it to them for as close to the cost that they pay for it in the store and allow retailers to sell stuff to customers even when they're not in the store. That is our goal, and that's what we intend to do.

That's fantastic. I want to jump to Net2Phone. I think we were initially thinking about Net2Phone being closer to EBITDA break-even at the end of this fiscal year. And that's obviously tracking well ahead of what we initially anticipated. So I love to see that. But is there anything we should be aware of from like anything one time or do you think it's sustainably going to be profitable from here? I just wanted a little bit of color on that.

I mean, listen, my personal opinion is it's sustainable. I mean, listen, you know, the beauty of the NetPhone business is it has very, very low churn, and its revenue is pretty predictable. So the more lines you sign, the more revenue you have and the more profit. And as long as you manage your costs well, which, again, I think that we are really good at, you're going to see continued improvement in the bottom line from that business. Not to mention the fact that me personally, I'm extremely excited about you know, the CCAS business that they acquired and its potential to really, you know, bring up the ARPU of the entire business as well as, you know, enhance the product overall. So I think that it's, you know, I think it's really headed in a great direction and I'm happy that we own more of it for longer, although that was not the plan.

yeah yeah david uh no we went to them to know to them to the models um and uh it's just very good performance right now churn is doing very well uh output is doing great and we are really focused on how we are deploying capital acquiring customers in the countries that generate most roi so yeah q1 was a good surprise you know for us we thought we're going to be positive end of the year. We are now EBITDA positive now. And I believe this is now the new baseline. So hopefully, you know, if we continue this way, you know, we'll be able to be coming back to calls later this year and start saying when we're going to become actually free cash flow positive, not just EBITDA positive. Because, you know, you know, net fund spends are Large number of dollars in capex acquiring the IP phones that we give to our customers But the rate at the rate of going we might be talking already fiscal 24 about becoming free cash from poverty 23 you never know Every day we really again like we focus on optimizing and

you know, the business to make sure that, again, we're bringing on customers for the right price and the right kind of customers in the right areas where we get the right paybacks. And, you know, as Marcelo said to you already, like, you know, we think it will only get better from here.

It's great to see that the business is still spending about $20 million a year or so acquiring customers, and they are very close to be completely self-funding.

Well, that leads into my next question, which is I think multiples in UCAS, well, and in point of sale, too. So across basically everywhere that you're competing, multiples have come down quite a lot. So as you get closer to being self-sustaining, that obviously opens up the door to have sort of self-funding M&A. So I'm curious, should we be thinking about anything on the horizon as it relates to M&A?

We don't have any big M&A plans in the works, I can tell you that much for sure. I'm always open to looking at things that I think will be synergistic and will enhance our bottom line. That being said, I also think that M&A can have the effect of taking your eye off the ball. Again, we're not, thank God, in any rush to do anything, and right now we're focused on Improving the business and you know when valuation, you know do come back We think it'll be even a much more valuable company than it would have been That's great, thank you for all the color on all my questions I'll hop back into the queue and let someone else take it All right.

Thank you, David Again if you have a question, please press star then one and

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.