Jun 4, 2015
Executives
Samuel Jonas - CEO Bill Pereira - CEO, President and Co-Chairman of IDT Telecom Marcelo Fischer - SVP, Finance
Analysts
Operator
Good day, and welcome to the IDT Corporation's Third Quarter Fiscal 2015 Earnings Conference Call. During management's prepared remarks all participants will be in listen-only mode.
[Operator Instructions]. After today's presentation by IDT's management there will be an opportunity to ask a question.
[Operator Instructions]. In today's presentation, Shmuel Jonas, CEO of IDT Telecom will discuss IDT's financial and operational results for the three month period ended April 30, 2015.
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 risks 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 that will follow, IDT's management may make reference to the non-GAAP measures, adjusted EBITDA, non-GAAP net income and non-GAAP EPS.
A schedule provided in the earnings release reconciles adjusted EBITDA, non-GAAP net income, and non-GAAP EPS 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, www.idt.net.
The earnings release has also been filed on a Form 8-K with the SEC. Finally, please note this event is being recorded.
I would now like to turn the conference call over to Mr. Jonas.
Sir, the floor is yours.
Samuel Jonas
Thank you very much. Welcome to the IDT's third quarter fiscal 2015 earnings conference call.
My remarks today will focus on key operational and financial results for the three months ended April 30, 2015. Throughout my remarks, unless otherwise indicated, this quarter's financial results are compared to the third quarter of fiscal 2014.
For a more comprehensive and detailed discussion of our results please read our earnings release, issued earlier today and our Form 10-Q that we file next week. Following my remarks, Marcelo Fischer IDT's Senior Vice President of Finance and IDT Telecom's Chief Financial Officer will join me and we will be glad to take your questions.
We generated $13.6 million in adjusted EBITDA during the third quarter, led by strong performance in our telecom business. That is a $300,000 increase compared to the year ago quarter and a $5.6 million improvement on the second quarter of this year, despite the fact that the third quarter had three fewer days than the second.
In fact the $13.6 million in adjusted EBITDA is the highest level we have achieved since before our spin-off of Genie Energy in 2011 Just as importantly some of the factors driving adjusted EBITDA growth should remain impactful going forward. First, Boss Revolution’s international voice calling service continues to grow both its revenues and gross profit.
Revenue was up 12.2% year-over-year on the strength of new customer growth and Boss Revolution’s contribution to Retail Communications’ gross profit was at its highest level ever. And while Boss Revolution’s international voice service growth is slowing as expected, it continues to add new users at an impressive clip.
Second, some of the lines of business within IDT Telecom that have been in decline for some time, such as our traditional prepaid calling card business and our consumer phone business are now quite small relative to Boss Revolution. As these businesses continue to decline their negative impact on our consolidated results is significantly less each quarter.
Third, during the third quarter we implemented a 7% reduction in our global workforce to streamline our operations and right size our overhead. We expect this cut to save us $10 million from our annual personnel compensation run rate.
The OpEx reduction kicked in for the last month of the third quarter but its full impact won’t be felt until the beginning of the fourth quarter. Finally, later this calendar year we expect to introduce some new services to Boss Revolution in order to drive additional growth.
In conjunction with our current retailer based international money transfer service we expect to begin offering a mobile web-based money transfer service for Boss Revolution customers with access to credit cards or bank accounts in early fall. Also we will be introducing instant messaging and free peer-to-peer voice calling to the Boss Revolution mobile app later this calendar year.
We expect these new features will accelerate adoption of the app, increase consumer engagement and make our customer relationships even stickier. While on the topic of long-term growth initiative I should point out that we continue to see strong growth from our money remittance businesses.
This business contributed $1.1 million to the third quarter revenues, even though at this early stage we have limited the business focus to 10 states as we refine the service. On a consolidated basis we achieved increasing adjusted EBITDA this quarter despite a decrease in revenue compared to the year ago and sequential quarters.
Consolidated revenue in the third quarter was $383.9 million compared to $403.8 million a year ago and $394.2 million in the prior quarter. It’s important to keep in mind that this decline in revenue was caused by factors that have little or no impact on the profitability of our core businesses going forward.
Case in point, Fabrix contributed $4.5 million in revenue and $3.8 million in gross profit in the year ago quarter. As many of you know Fabrix was sold last fall and deconsolidated in the first fiscal quarter of this year.
In our TPS segment the decline in revenue was led by the pricing arbitrage opportunity in South America, which we have discussed in the past. This alone accounted for $8.6 million of the year-over-year revenue reduction.
Since we began reporting on this we consistently cautioned that our participation was opportunistic; that its benefits would likely be temporary and it was not a component of our long-term plan. By the end of Q3 this opportunity has substantially evaporated and it is not likely to be a factor going forward, except in comparison to prior periods in which we benefited.
The $6.8 million balance of the year-over-year revenue decline is almost wholly attributable to the evolution of our traditional wholesale carrier business. As we have seen in recent quarters wholesale minutes and revenue tend to be volatile.
This volatility is frequently driven by short-term changes in market structure affecting a handful of the 230 plus countries we serve, rather than by sustainable long-term trends, though the continuously declining cost of telephone minutes chronically pressures revenue downward. Overall however our wholesale team has excelled at raising gross margins and gross profit over the past year despite losses in minutes and revenue.
They have done a wonderful job of increasing traffic to high margin destinations to replace lost minutes and revenue from lower margin destinations. It just so happens that many of these high margin destinations have a lower per minute cost which puts downward pressure on revenue.
Consequently from a gross profit perspective the declines in wholesale carrier’s revenue compared to the year ago and sequential quarters have been more than offset by increases in margin per minute. On a consolidated basis, revenue less direct cost in the third quarter was $67.4 million.
Although that is $4 million decrease from $71.4 million in the year-ago quarter it is a $2 million hit [ph] sequentially. SG&A expense in the third quarter was $53.8 million, a decrease from $55.5 million in the year-ago quarter.
The reduction reflects the sale of Fabrix which contributed $905,000 in SG&A expense in the year ago quarter; reduced corporate overhead and lower personnel expense arising from the workforce reduction partially offset by additional marketing and advertising expense. As I mentioned earlier the workforce reduction will be more impactful on our P&L starting in the fourth quarter.
Turning now to the bottom line we recorded three non-routine charges that impacted income from operations: A $6.2 million charge for severance associated with the workforce headcount reduction and a $1.6 million accrual from legal matters, partially offset by a $1.2 million gain on a sale of interest in Fabrix, from adjustments to Fabrix working capital and transaction costs. The one-time charges drove reduction of income from operations to $2.5 million from $9.2 million in the year ago quarter.
Net income attributable to IDT this quarter was $0.02 a share or $600,000 compared to $0.22 a share or $5 million a year ago. Non-GAAP EPS, which excludes depreciation and amortization and non-cash compensation as well as non-routine gains and losses including severance, the legal accrual on the gain the sale of Fabrix increased to $0.43 per diluted share from $0.37 per diluted share in the year ago quarter.
In light of these results the Board has declared a $0.18 per share dividend for the third quarter. One final note, after the quarter close we received $23.2 million in cash from the sale of Fabrix that was included on our balance sheet at April 30 as a receivable from the sale of interest in Fabrix Systems Limited.
That concludes my remarks for the quarters. We will be happy to take your calls right now.
Thank you.
Operator
Thank you sir. We will now begin the question-and-answer session.
[Operator Instructions]. The first question we have comes from Jay Srivastav of Southern Capital Markets [ph].
Please go ahead.
Unidentified Analyst
Yes, thanks for taking my question. Shmuel on the money remittance business, can you expand on what your plans are to get beyond the 10 states that you've initially started within.
When do you expect some of the ramps to dig in and the contribution to start flowing through?
Samuel Jonas
We're starting to expand to states that we're going to beyond the 10 states very soon. We are having additional ramps for a bunch of areas.
I would say that by the end of the calendar year we should be in over 20 states.
Unidentified Analyst
Okay, and then in terms of revenue, I know you don't provide guidance but Q4 has tended to be relatively strong quarter in the past three years, roughly about 4% sequential growth. Is that something you would expect this quarter or is there anything to be otherwise?
Marcelo Fischer
Yes, hi Jay. It's Marcelo.
As you know our Q3 usually has 3% less days than the other quarters. I would guide you to assume that Q4 will be 3% higher in revenues at least.
Unidentified Analyst
Okay and then in terms of margins looks like you've got both gross margins and the gross profit line being higher and then I think Shmuel you referred to that being sustainable. So is that just the trend you see going forward over the near term or is it more of a longer term margin profile that you would expect?
Samuel Jonas
I mean, I think it's a little bit of both. I mean we definitely expect this to continue for some time.
Again the margins have been strong in both retail and wholesale and we expect them to stay strong.
Unidentified Analyst
Okay. And then a last question from me in terms of the cost reductions efforts, is it all done and you will see the full effect in Q4 or is there more retrenchment still going through this fiscal?
Samuel Jonas
We try to be very cost conscious in general. We don’t have any large scale plans but we always try to stay cost conscious as well as also grow the business.
I mean to roll out to additional 10 states will be additional headcount to grow out the ramp [ph] base in those areas as well as services required to add more customers.
Unidentified Analyst
Okay maybe one last question. As you look beyond just this year to next year, I mean this year just by what you’ve guided for Q4 it’s going to be down roughly about 4% year-over-year.
Looking ahead to 2016 where do you see the growth coming from for the business?
Samuel Jonas
I didn’t exactly understand the question, I apologize.
Unidentified Analyst
The question is if you look forward toward 2016 where do you see -- which segments or aspects of the business do you see contributing to revenue growth for the next year?
Samuel Jonas
I see a lot of growth from BR overall and I see a lot of growth in money remittance as well. Again I do believe that some of our products that are little bit delayed, like the new version of our app is going to be a tremendous success and I think money remittance direct to consumer is going to be a very large success.
That’s obviously not only being rolled out to 10 states but entire United States. So we are very optimistic that things are going to do quite a bit better.
Unidentified Analyst
All right maybe one follow-up on the money remittance side, looks like some of your competitors are lining up to do similar types of offerings. What is your read on the overall business?
Do you think there is enough consumer interest for several players to play in and be successful?
Marcelo Fischer
Yeah, hi Jay. Yeah I mean there is a lot out there in terms of new players coming into the industry.
You have to realize that we are also new player in the industry. So for us every market share point that we get is new market share for us.
We closed the month of May, which we think is a strong month for us. We did more than 50,000 transactions in May.
So we continue to ramp up our business. A lot of what’s on the news in terms of digital remittances will lead to domestic remittances.
We are focusing a lot more on international remittance. We are focusing a lot more on our niche customer base, which still is predominantly a cash-to-cash type of customer base that not necessarily has access for digital remittances.
So I think there is room and opportunity for us to take away share from some of the more entrenched players in the market right now.
Unidentified Analyst
Thank you.
Operator
Next we have Louis Moser of Mayfax [ph] Investors.
Unidentified Analyst
Hi, I am sorry. I caught you just at the end of your remarks and I heard you mention, was it $300,000 figure or a figure from trade receivables or something of that nature, I didn’t quite get it.
Could you repeat that, it was the last thing you said in your closing remarks?
Samuel Jonas
The last thing I said, let me -- I can’t recall [ph] right now. I’m sorry.
Yes, we received $23.2 million in cash from the sale of Fabrix. That was included in our balance sheet at April 30th as a receivable from the sale of interest in Fabrix Systems.
Unidentified Analyst
Okay. So that’s not a non-GAAP earnings, that figure?
Samuel Jonas
No.
Unidentified Analyst
No and was it, once again I apologize, was there anything in terms of forward guidance that you gave during your presentation?
Samuel Jonas
We don't give forward guidance per se. I mean if you listened to Jay questions, I mean our answer I think that we guide towards the fact that things are going well and continue to go well.
Unidentified Analyst
Right, okay, thanks. Those are all the questions, appreciate it.
Samuel Jonas
Thanks.
Operator
[Operator Instructions]. So with no further questions this will conclude our question-and-answer session and conference call.
We would like to thank the management team for their time today and we thank you all for attending today's presentation. At this time you may disconnect your lines.
Thank you. Take care and have a great day everyone.