IDT Corporation

Good evening and welcome to the IDT Corporation's third 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 April 30th, 2023. During remarks by IDT's Chief Executive Officer, Shmuel John S., 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 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 the Form 8K with the SEC.

I will now turn the conference over to Mr. Jonas. Hi, thank you very much, Operator.

Welcome to IDT's Earnings Conference Call. After my remarks, Marcella Fisher, IDT's Chief Financial Officer, will join me and we'll be available to answer questions. My brief remarks today focus on the third quarter of our fiscal year 2023. The three months ended April 30th. For 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 on Friday. For the third quarter of our 2023 fiscal year, IDT generated year-over-year increases in growth profits adjusted EBITDA and EPS, highlighted by the continued expansion of our three high-growth, high-margin businesses and by the relatively resilient cash flows from our traditional communications segment, even as revenue from this segment continued to decline. NRS added new POS terminals and payment processing accounts at a record pace this quarter, and achieved solid year-over-year increases in all three of its recurring revenue verticals, as well as in recurring revenue per terminal. Advertising revenue decreased sequentially due to seasonal reductions in demand and the advertising industry's pullback, particularly in the digital out-of-home segment. Behind the scenes, we're enhancing our advertising platform and diversifying our network partnerships pursue new opportunities, both within and outside of the digital out-of-home market. This foundational work should pay off when advertising demand rebounds. Given our success in accelerating the pace of new payment processing account sign-ups, increasing merchant services ARPU, and bringing new premium features to our platform, we expect that NRS will continue to perform extremely well. At NetDefone, we increase subscription revenue by 20% year-over-year while approaching cash flow break-even. In the coming weeks, we expect to launch exciting new offerings and features that will help to build our momentum, including NetDefone AI, which includes powerful analytical tools powered by artificial intelligence technology. At Boss Money Remittance, volume increased by 38% year-over-year, driving a 29% revenue increase. I'm especially pleased by the robust growth of Boss Money's retail channel over the past few quarters. Throughout the rest of the Boss ecosystem, the synergies between retail and direct-to-consumer drive better economics than we could achieve with a single approach. We believe that the same will be true for their money remittances. For that reason, we continue to focus on retail channel expansion as we invest to achieve scale and long-term profitability. With our diverse mix of businesses backed by a solid balance sheet and with no debt, IDT is positioned to continue delivering solid results across a wide variety of economic conditions while returning value to our stockholders. Before we move on to the Q&A, I want to thank our employees for their great work and thank our stockholders for putting their faith and their capital with us. Now, Marcelo and I will be happy to take your questions.

Thank you. 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 speaker, 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.

Okay, our first question comes from Alex Rohr.

Please announce your affiliation, then pose your question.

Hi, guys. Can you hear me? Yes, we can. Hi, guys. So just quickly, this morning the NRS Insights Report showed 25,000 terminals currently, which implies a really strong month of May, so like 1,000 net ads at the month of May. Just wondering... Was there anything particular going on in the month of May that would have led to unusual strength?

Yeah. Hi, Alex. It's Marcelo. So you're right. You're reading things carefully. It's mostly because of rounding. May have been our best month ever for adding POSs into the network. But it's mostly rounding. We added more like 632 new POSs and on that basis, but because of rounding, it makes it look like it was a thousand. But it was our largest increase ever of the month.

Understood. Thanks. And just shifting gears to mobile top-up, what's driving, I mean, Cuba, I think at this point is sort of, we've been dealing with this for a long time, but what's driving the continued declines in the business? And is there some point at which you would expect the business to resume growing year on year?

There's a bunch of factors that have driven it. One is we really focus on profitable growth, and we're not just in it to have volume. Some players have really come into the market and disrupted, really not looking for profitability. Maybe even they're losing money. And, you know, we've decided to sort of, you know, take a, I'll call it a wait and see approach and to see if, you know, they can afford to continue to, you know, subsidize the market. You know, at the same time, you know, our, our, you know, direct to consumer channel and our, you know, our retail channel have been, you know, relatively stable. So it's much more of a, you know, a situation in the wholesale side of the business than it is in, in those two. You know, but we have, you know, a bunch of new enhancements coming out, you know, both in retail and in direct-to-consumer that we expect to, you know, help increase growth as well as some new marketing campaigns. And our new Zended platform, you know, we hope will, you know, help with, you know, the deterioration that we've seen in wholesale.

Great. Thank you.

Okay, the next question is from David Polanski. Please announce your affiliation, then pose your question.

Hey, I'm from David Polanski from Immersion Investment. Thanks for taking my question, guys. I want to start big picture talking about NRS and poking kind of around how big this thing can get. I mean, we've been sitting on sort of a unit TAM figure for NRS at about 200,000 retail locations. And just looking at market share data for a lot of your states, so I think New York and California, I think you have roughly a 25% market share. And I think New Jersey, I mean, correct me if I'm wrong, but I think it's somewhere in the 30% to 40% range. So is there a reason to think that we can't get to like a 25% share figure nationwide, which would put you somewhere in sort of the 50,000 unit range?

Well, I mean, I think two things just from walking around, I don't feel like we have a 25 or 30%, um, you know, market share yet, but I hope to be there one day. Um, you know, that's in the New York, New Jersey area where I, you know, walk around more frequently. Again, the 200,000 number is really a very hard number to put our finger on. Again, more and more we sell into stores that I wouldn't have thought would have been typical for NRS locations, whether or not it's beauty stores or dollar stores or general stores. So, you know, auto parts stores, et cetera. And so I think, like, you know, the TAM is a little bit of a moving target. So I don't know if that's really, you know, our gating factor is what percentage of, you know, of that number we'll get. You know, I think, you know, we have to continue to, you know, provide, you know, you know, great service and great new products, and we'll continue to grow, you know, and continue to expand our sales channels. And, you know, again, we're doing that aggressively. You know, you can see a little bit of that in the SG&A, and we expect that to, you know, see the number of units increasing, you know, quite substantially over the next couple of months. And hopefully, you know, long past it. But I think you'll start to see that, you know, May number ramp up.

Great. And does that, you mentioned, I mean, you're seeing increasing success in areas outside of your core C-Store bodega channel. Is that, I mean, how material is that at this point? Are you willing to discuss, like, you know, is that like, 10% of the 1500 to 1600 that you're doing? I mean, is it, is it really material?

I don't know the exact number. Um, I would say that it's greater than 10%, but I don't know the exact, I didn't come here prepared today to, you know, to know from the sales recently, how many of them are outside of our traditional stores. So I don't want to give you an answer. Um, but you know, definitively.

Okay. And then on, apologies for the mundane question, but could you, Marcella or Shmuel, could you help us understand sort of the seasonality in the NRS business? Like, will Q3 EBITDA margin always be lower than Q2? Is Q4 going to be like Q1 and Q2? I mean, Q just sort of I guess directionally help us out? Or do you think that this quarter was sort of an aberration in terms of the last couple of quarters?

I mean, I think two things happened. I mean, one is, you know, we had, you know, a relatively weak advertising quarter. Um, and you know, you know, advertising is, you know, our highest, um, you know, margin, you know, uh, contributor at NRS. Um, so that, that definitely, you know, hurt, hurt this quarter in particular. Yeah, I do think that there is some seasonality to the numbers. It's not dramatic, but there is some. And again, sometimes we sell more accounts than come online. So I think this particular quarter, we had a very strong quarter in terms of merchant processing sales. But a lot of that actual volume probably doesn't come on until this quarter. So, you know, I think you'll see a much better number next quarter. And again, you know, our sales are increasing. So, you know, that will continue to be, you know, better and better.

Great. And I have to ask on the capital market side, it seems like things have calmed down a little bit, at least year to date. Is there anything we can be expecting in the near term on sort of net-to-phone or NRS monetization, or is that sort of a wait and see?

For the time being, it's a wait and see. I mean, again, you know, we're continuing to, you know, make those businesses significantly more mature than they were, and hopefully at the right time, you know, great value will be achieved.

All right. Great. Thanks, guys.

The next question is from Brian Warner. Please announce your affiliation, then pose your question.

Hi, guys. Private investor. Actually, David pretty much asked one of my questions, and that was really around the total available market. I'm wondering, just as an aside on that question, do you view the restaurant area as – as a potentially large area, and I'm wondering what progress and what you might call out as any areas that are particularly enticing in terms of what sort of the size of the market and where you think you can get good economics. And then just one final question. NRS, you seem to be reporting monthly sales that are certainly low to mid-single digits, better than the industry, which seems to... be recurring with a lot of frequency. I'm wondering if what you think that is from and if that's sort of become a selling point for you guys or if you think it's more of an anomalous thing.

I'll say two or three things. I mean, first on the, you know, on the restaurant industry POS world, I'll call it. I mean, we do not have any intentions of trying to become, you know, a toast for, You know, or something like it like that. That is not our goal at NRS. You know, we do have a goal of, you know, serving, you know, small restaurants, you know, that wouldn't be maybe the best, you know, fit for, you know, for a solution, you know, like toast. As well as to, you know, serve, you know, convenience, you know, stores that sort of have, you know, restaurants in the back of their Again, it's not something you see if you're in the New York, New Jersey area very often, but if you start getting, I'll call it Virginia and beyond, you'll start to see a lot of stores that have a restaurant component to it. And we definitely do intend to continue to serve that market better and better. We're in the process of making a small acquisition that hopefully will help us with that. As far as your question, regarding, you know, sort of, you know, sales at our stores being better than, you know, than in the market generally. Listen, I don't know enough about, you know, same-store sales everywhere else to know exactly how they compare, but it does seem to me like what you said is correct, just based on what I hear on the radio. And what I would say is that, I mean, listen, I think... Our stores are very resilient. Some of that is from help they get from us, but other factors of it is the fact that we've always felt that when people stop going to a grocery store and getting their orders delivered to their house, that's the customer that that grocery store really loses most of the time. Maybe they come in there one out of every three times they would have gone. but they end up needing small stores like the ones that we serve even more often because now they're depending on them for items that they didn't beforehand. So I think that that has something to do with it. Marcelo also has some thoughts on it from speaking to people at NRS.

Yeah, I mean, obviously we also look at the national data and compared to the NRS data, we also kind of scratch our heads somehow a little bit. And I think we speculate that also Our customers, they are going into this independent retail store to buy a lot more of what their needs are, basic needs type of goods, and therefore do the more recurring transactions for the necessities. So maybe that's also what's triggering why the growth is a little higher.

Thanks very much. I appreciate it.

Have a good day.

The next question is from Adam Wilk. Please announce your affiliation, then pose your question.

Hi, guys. This is Adam Wilk with Greystone Capital. Can you hear me?

We can hear you well. How are you, Adam?

Doing well, thanks. How about yourself?

Thank God. Better than I deserve.

Good. I just had a few or maybe one question wrapped, a couple questions wrapped up into one for NetDefone. Really strong results. there once again, and I'm just wondering, I know there was a good amount of focus on this at the annual meeting, and I'm sure not much has changed, but I just wanted to touch on maybe the sources of operating leverage that you're seeing, if anything has changed over the last year to date, I'll say, and then Maybe you can talk a little bit about Bridgepoint. Is there a channel partner, correct? And then maybe, you know, kind of what you're seeing in line with additional opportunities there in terms of channel partners and maybe the ability to drive more margin or leverage moving forward. And then maybe one quick follow-up, but we can start with those.

Okay. I mean, I don't think that much has changed since, you know, the annual meeting in terms of our focus. that we described for NetZone then quite thoroughly. Again, I think that the team at NetZone has really executed very well, and they've really made the cash flow generation a very big part of what they focus on. You know, at the same time, you know, they've really, you know, taken, you know, the bull by the horn and focusing, you know, on areas, you know, that, you know, we see, you know, massive growth, you know, coming down the line, whether or not that's, you know, AI that everyone is talking about or CCAS products, you know, even for, you know, CCAS for small, you know, customers, you know, have those kinds of needs as well. And we have a product, you know, coming out specifically for them. So I think that you're going to see, you know, you know, we try to take some of the learnings that we've seen sort of also, you know, in other parts of the business. So at NRS, like, we've been very good at, you know, selling into stores, you know, with a very, you know, low price, you know, easy offering to, you know, take into the store. And then, you know, upselling them into higher plans and, you know, other services and funding, et cetera, et cetera, you know, that we provide. And we're really trying to now do that same, you know, type of a sale, you know, at NetDefone as well, where we, you know, come in there, you know, being, you know, we'll say, you know, a relatively low-cost provider, you know, for their UCAS services, but then, you know, adding on all of these, you know, much higher tier, I'll call, Um, you know, products, you know, again, whether or not it's, you know, he cast or, you know, you know, call intelligence or, um, you know, et cetera, et cetera. Um, so that that's kind of been, I would say the only thing that's changed is maybe more of a focus on, on growing the base with, with more, you know, revenue rather than on just growing the number of customers. Now, in terms of, you know, answering, you know, your question, you know, about, you know, our channel partner, you know, listen, we're a channel-based, you know, business in Net-to-Phone, you know, as opposed to, you know, at NRS where we have really a very diverse strategy of, you know, direct channel, you know, as well as through, you know, IDT salespeople. At Net-to-Phone, it really is, With the exception of, you know, Canada, it's really, you know, a channel of business. And, you know, that's not changing. But, you know, when it comes to, you know, adding on, you know, revenue onto the, you know, onto the customers, you know, some of that does become a direct, you know, sale, you know, from Netaphone, depending on, you know, whether or not the channel partner feels, you know, I'll say sufficiently, you know, trained in being able to sell it. So, you know, some of our newer products really, you know, require, you know, a different type of a sale than some of our channel partners traditionally have done. I mean, you know, UCAS and CCAS are not necessarily sold by the same people, if that would be a way to explain it easily.

Yeah, Adam, I think to the operational leverage, when we decided to postpone the NetoFoam spin-off about one year ago, and we mentioned at the time that the focus was going to be to turn around and demonstrate that NetoFoam can be a growing and profitable company. So this past year, there was tremendous focus by the NetoFoam team on making the yield efficiency, on trying to show that we're going to be able to bring the company be cash flow positive, and God willing, we will start a new year being cash flow positive, you know, even covering all the cap-back expense of the banker. And now that we have achieved that, or are going to achieve that, the focus, as Shmuel mentioned, is going to be more towards, you know, bringing to market new products. C-CAD will play a bigger role as time goes by. It will help to drive ARCUS slightly higher, you know, and become a bigger part of the mix. So I think that's going to be the focus for this coming year. You know, the team is right now working on the budget for this coming year, and I think, you know, that will continue to be now a growing company but also a cash flow generator, you know, in the next year.

Okay, yeah, that's really helpful, and I appreciate the comments on cash flow, which is interesting just given the, growth runway and reinvestment potential, I think, that sits in front of you. One quick question just from your combined answers. Is the U.S., for you guys, who are kind of less on the enterprise side, is that more of a channel market for you, or is that more direct as you kind of increase your efforts there?

Yeah, I mean, the U.S. has been almost, until recently, a channel business. We have very little direct sales. Most recently, we started a new group to sell directly to larger enterprises. We just started about a few months ago. We are going to be adding more resources into that group as we go into this coming year. And that group has already brought in about one client with about 4,000 seats. So going forward, we're going to have a direct group for trying to onboard larger enterprises.

Okay, great. And then just in terms of Mexico, this may be jumping the gun, but there's a lot of talk about near-shoring opportunities or reshoring opportunities. And I think just... I think there's a lot of bullish commentary just regarding the growth of that country in general in terms of the economy. And I'm curious as that takes place, does that sort of increase the opportunity set for you guys there? Or is anything changed on that front for that specific geography? Is there anything to sort of share at this point?

It's interesting. I mean, you know, Marcelo is sort of smiling as you're asking that question because we were talking about it this morning. And, you know, again, I do think that that's going to be, you know, a big, you know, area of growth. It has been already, but I think it will continue to be even bigger. You know, the nearshoring definitely, you know, helps net the phone. There's no question about it, particularly when it's done in Mexico. Although, you know, we are looking to expand to other, you know, I'll call them nearshore markets.

Okay, great. I appreciate that. That's it for me. Thanks a lot. I appreciate it.

Thank you. Have a nice night.

We have a follow-up coming from Brian Warner. Brian, your line is live.

Hi, just a quick question. You guys seem to have pulled the rabbit out of the hat a lot of times with traditional communications, and despite the obviously significant revenue headwinds, the EBITDA has held up. remarkably well for what is generally viewed as you know a rapidly shrinking ice cube and i'm just wondering if there's any reason to think that uh you can't continue to milk that business for for quite a few years or or if you think you know maybe there's a over the next couple years if there's anything to sort of watch out for that could sort of be a cliff in your cash flow there um and a follow-up question if you want to be generous with a thought i'm I'm wondering where you think Neptune or, for that matter, a well-run UCAS company at maturity, and you can define it or not, what sort of EBITDA margin do you think that business is? Is it 20% or is it something significantly different than that in your mind? Just curious about the thought you might share.

Again, we have a model on the NetPhone business that shows something a little better than that over time. We're not getting there next year, that's for sure. But again, it will be better than that. As far as our traditional business, Listen, we have to continue to make painful cuts to sustain the cash flow from that business, and that's never fun. And at the same time, we need to continue to develop features that keep our customers willing to pay for our services when oftentimes they can get it. you know, free somewhere else. And, you know, that's a struggle that we, you know, deal with every day. You know, you've seen the, you know, the reality in the numbers. So, you know, we can, you know, we will, we do our best to continue it going as long as we can.

Right. But we do expect, now as we look ahead, for our long-distance voice revenues to continue to decline, most likely at the current pace. We don't see any turnaround in that trend. At Shmuel Mesh, we're trying as hard as we can to manage the cost structure, to try to alleviate the impact of the bottom line, but that becomes harder and harder as time goes by. So I do expect the gross profit EBITDA for Long Distance Voice to continue to decline. you know, at the same rate and maybe even an accelerated rate as time goes by. And we hope to be able to offset some of that decline with a stronger performance by digital payments, you know, with our mobile top-up offerings and other digital offerings.

Got you. Thanks very much. Congratulations. You guys have done a great job.

Yeah. Thanks. Have a nice night.

Again, if you have a question, please press star then one. 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.