Oct 6, 2008
Executives
James A. Courter - Vice Chairman of the Board, Chief Executive Officer Stephen R.
Brown - Chief Financial Officer, Treasurer Liore Alroy - Chief Executive Officer - IDT Telecom Unit
Analysts
Isaac Schwartz - Riboti & Company Mark Lunder - Lunder Capital Thomas Khan - Khan Brothers Brian Tuchenwick - Cross Management Howard Weber - Smith Barney Clay Moran - Stanford Group William Ostrand - Oppenheimer & Company Jeff Deegan - Milwaukee Private Wealth Management
Operator
Greetings and welcome to the IDT Corporation fourth quarter fiscal 2008 earnings report conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr.
Jim Courter, Chief Finance, Executive Officer and Vice Chairman. Thank you, Mr.
Courter. You may begin.
James A. Courter
Thank you very much and good afternoon. This is Jim Courter.
Steve and I will be recording this live as we are right now. Steve, our CFO, and I are here obviously to comment on our performance during the fourth quarter of our fiscal year 2008, which ended July 31st.
Before we begin, please recall that any forward-looking statements we may make during the course of the call, either in our prepared remarks or in the Q&A period that follows, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which we anticipate. These risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that we file periodically with the SEC.
We also assume no obligation to update any forward-looking statements that we have made or may make, or to update you on the factors that may cause actual results to differ materially from those that we forecast. Now let’s get started.
I’ll begin by addressing key shareholder concerns from a company-wide perspective. Steve will follow with an analysis of the performance of each of our businesses and then Liore Alroy, Steve Brown and myself -- Liore, the CEO of IDT Telecom and Chairman of our Executive Committee -- will join us to take our questions -- your questions, excuse me.
Upon reviewing our earnings release, those of you who are fans of Dickens may be inclined to classify this quarter’s returns as another edition of “bleak house” but I would counsel you that what’s going on here is better understood as really a tale of two cities -- that is, the bottom line numbers for this quarter look a lot like the previous quarter’s disappointing results, however our net loss this quarter reflects a host of one-time events, including legacy restructuring costs and write-downs related to current conditions in the credit markets. We recorded $45 million of restructuring and other legacy costs, $10 million of losses on disposition of non-core businesses, bad debt expenses of another $15.6 million relating to impairment of our receivable portfolio at IDT Carmel, and finally $7 million write-down of the value of our auction rate securities.
These events together overwhelmed our fundamental progress and accounted for a substantial portion of the $86.4 million net loss that we recorded. The underlying results of business operations, on the other hand, better in my mind reflect the progress we have made executing on our turnaround plan.
As Steve will point out, our adjusted EBITDA was a positive $8.1 million this quarter, versus a negative $36.5 million in the last quarter. We are on track to reach operating cash flow positive territory in the coming year.
There is still obviously work to be done and challenges remain. Unfortunately, the market is convinced that we are in a bleak house.
As you know only too well, our stock lost 90% of its value in the past year, our price per share is well below a dollar, compared to much better than $8 a year ago today. As a result of the plunge, the New York Stock Exchange has notified the company that we are out of compliance with their listing standards by virtue of our market capitalization and also with the exchange’s $1 minimum price rule.
Under the rules of the exchange, IDT has 45 days from receipt of the notification of non-compliance to file a plan with the exchange to meet, showing how it is going to meet the listing requirements. Our plan must satisfy the exchange that we are reasonably likely to raise our market capitalization over the required $100 million level within 18 months.
We also have six months to come into compliance with the share price minimums. Although we have not finalized the plan, a key element will be continued execution on our corporate turnaround strategy and program.
As of July 31st, we had $343 million in cash, marketable securities, and investments, roughly $4.50 a share. Clearly the market has decided that management cannot or will not stem the tide of red ink.
The market, in my considered opinion, is wrong. If we meet our turnaround goals over the next two quarters, we will begin to reverse the market’s judgment and I would expect a corresponding rebound of our share price, bringing us back into compliance.
Many of you listening have argued eloquently that we should be using at least a portion of our cash to buy back the company stock. Back in June, Howard Jonas comment that this is a very attractive proposition.
Since then, the share price has continued to slide and now we face the threat of de-listing. The rational for stock buy-back has never been stronger; however, let me tell you why we have not yet initiated a buy-back program and why we may not do so for some time to come.
For the last number of months, while we have been preparing our year-end financial reports, we have been restricted from purchasing stock on the open market, as you know. When that restriction expires in the next number of hours, we still have to consider our available cash resources and how they meet the company’s requirements for working capital, growth capital, and existing commitments.
Let me mention just some of these. First, we will have to pay the IRS $115 million less the $10 million already paid in July to meet our liability from the recently completed tax audit covering the years 2001 through 2004 inclusive.
We are continuing to discuss a payment schedule with the IRS. Second, approximately $75 million of our cash and marketable securities are currently restricted to finance operations of our growing energy and wholesale telecommunications operations.
Third, we have paid and will continue to pay, albeit at reduced levels, severance and other restructuring costs associated with downsizing the company. And fourth, approximately $40 million of our $343 million is in long-term investments, including hedge funds.
We are in the process of unwinding many of our positions but will not be able to fully liquidate them for perhaps a couple of years. Finally, we must, of course, as you know have adequate working capital to operate our businesses.
In sum, our discussion on whether to buy back stock is a fundamental question about the appropriate allocation of the company’s capital. If we do not immediately enter the market, no one should misinterpret this as reflecting management’s judgment about the stock’s current price or our company’s prospects for the future.
On the same point, I should note that during the second half of fiscal year 2008, members of senior management have purchased about $4.1 million in IDT stock in the open market. In addition, both Howard Jonas and I have decided to take IDT stock in lieu of our cash salaries.
Howard will be paid in IDT stock for the next five years. Let me repeat that -- Howard decided to take his pay in IDT stock for the next five years.
And I will be paid in stock during 2009 for the remainder of my current contract with the company. We have each taken this extraordinary step because we believe wholeheartedly in the company’s future and also want to align ourselves with the interests of our shareholders and share in their future success.
In case you missed it, on Friday we also announced that the Board of Directors asked Howard Jonas to assume the CEO position upon my retirement. Longtime shareholders will recall that Howard not only founded IDT and also the international call-back business, but also initiated Net2Phone and continues to this day to be the prime mover behind many of our business initiatives.
He is truly in my mind one of America’s great business visionaries. The board has asked me to see the current turnaround program through to completion and that is where I will be focusing my efforts during the coming year.
Now I want to discuss the progress we are making on that turnaround. During our last quarter call, we announced the four-part program to achieve positive operational cash flows during fiscal 2009.
We expect that our operating cash flow will move into positive territory before the end of the second quarter and that the third and subsequent quarters will show operating cash flow positive returns. Our turnaround plan, as you know, has four elements: one, selling, spinning off, or shutting down nearly all businesses that won’t help us meet our goal; two, reducing corporate overhead; three, streamlining our core businesses; and four, making modest investments in very limited number of closely managed growth opportunities on our own or with strategic partners.
We are very serious about divesting ourselves of businesses that won’t help us build value for shareholders. During the current quarter, we shed our call center business in Israel and two or three other small businesses.
These and others we exited during fiscal 2008 had operating losses of over $20 million in fiscal 2008. Still, we are intent upon accelerating our progress in this area.
To that end, we have retained Jefferies & Company to provide financial advisory services, specifically to assist with the monetization of our non-core businesses, explore opportunities in the capital markets to finance the growth of our core businesses, and to advise the company with respect to strengthening our core businesses through strategic partnerships. We expect this will enhance our effort to narrow the company’s strategic focus.
This is not an indication that our core businesses or IDT as a whole are being considered for sale at all. Second, we continue to work hard to cut our corporate overhead and have made much progress on this front in recent quarters.
During Q3 of 2008, we eliminated a variety of executive positions, including that of COO and our entire corporate development department. We have negotiated lower professional fees for attorneys, lobbyists, other consultants.
Over the past year, we have reduced the size of our corporate staff by almost 50%. In all, we expect to reduce IDT corporate operating expenses, excluding such items as severance, by more than $20 million per year.
The third leg of our strategy is to streamline our core operating businesses. Let me talk about Telecom.
Telecom, as you know, represents 80% of our revenue. As a whole, Telecom’s adjusted EBITDA was positive for fiscal 2008 and was the largest positive contributor to consolidated EBITDA.
Our wholesale segment carried a record number of minutes for third-party customers, both for the year and for the fourth quarter. Revenues from third-party customers were at record levels and overall gross margins increased compared with fiscal 2007.
Our international operations have been the focus of our growth, particularly Africa. This business remains very challenging as are all our telecom businesses these days, but we are doing more than holding our own.
We’re actually gaining. On the prepaid side, revenue has substantially stabilized for the past five months at about $46 million per month in the United States, plus another $10 million internationally.
Our aggressive effort to alert law enforcement and regulators to the massive fraud perpetrated by many of our competitors and their own lawsuit against six competitors have helped in the effort to level the playing for IDT. Attorney Generals in Florida, Texas, California, Illinois, New York, New Jersey, and other states have launched investigations into the industry.
At the federal level, the Federal Trade Commission has begun a nationwide crackdown on companies who distribute fraudulent cards. More over, IDT has been supporting state and federal legislation to protect calling card consumers.
Last month, the U.S. House of Representatives passed landmark legislation to reform the calling card industry by empowering the FTC to prosecute calling card fraud and similar legislation is pending in the United States Senate.
We continue to streamline the business aggressively. We significantly reduced our telecom connectivity and network costs during fiscal 2008 on top of considerable reductions achieved in fiscal 2007.
We streamlined our wireless operations, saving about $10 million annualized. We’ve consolidated European operations and merged all of our call centers.
Another streamlining target is our debt collection business. For the second quarter in a row, IDT Carmel did not add to its debt portfolio.
Additionally, we recognized a $15.6 million bad debt expense as Carmel’s new management team reexamined our portfolios. We have attracted leaders with extensive industry experience and under their direction, we are rapidly bringing state-of-the-art technologies and performance metrics online.
IDT Carmel did generate positive operating cash flow in every quarter of fiscal 2008 and we expect improvements in near-term performance as we implement additional cost-cutting measures. I should also mention that IDT Energy is performing on target -- actually, above target, contributing earnings and cash flow.
During the quarter, we added customers at a record pace and meters are up 25% from one year ago. Company wide, our headcount has been brought down by a third from July 2007 to July 2008.
Management’s fourth task is to look to the future and modestly fund a few businesses which in our judgment represent truly extraordinary opportunities. Our free mobile content destination site, Zedge, our shale oil investment, and the defense, of course, of our intellectual property.
We are spending about $5 million a quarter on these opportunities in the aggregate. These ventures offer potentially extraordinary gains that do not appear to be recognized in the current market valuation.
In July, Zedge, our free mobile content destination business, surpassed the formidable 0.5 billion download mark by its members. Currently the site averages approximately 13 million web and mobile page views and close to 2 million downloads per day.
Zedge’s 10% month-to-month growth remains entirely viral, with no significant market expenditures. That’s especially noteworthy because the United States free mobile content market, which trails much of Europe and Asia by 18 months, is poised we believe for explosive growth and Zedge is well-positioned to grow with it.
We are focused on initiatives that translate Zedge’s substantial and rapidly growing customer base into ad revenue. We believe we’ve achieved a critical mass for direct advertising sales and we are exploring ways to aggregate with other content providers to provide an appealing global demographic.
What YouTube is to video, Zedge is becoming to mobile content. We believe that we will be creating considerable value here over the next three to four years.
We discussed our American Shale oil company subsidiary, AMSO, at length in the last two calls. We continue to execute on our operational plan.
We have received most of the requisite permits and approvals and expect to begin drilling to characterize the site this fall. As Howard mentioned during his call with you in July, we are seeking a partnership with a major oil company who can lend expertise to this venture and provide a share of the capital needed to see this project through to commercialization.
We’ve also been heartened by the bipartisan support for oil shale research development demonstration lease program under which AMSO operates. At least for now, both democrats and republicans agree that this RD&D program should proceed so that the shale oil industry can develop and test specific shale extraction processes, including different approaches to protecting air and water quality.
As a result, we are hopeful that AMSO will be able to continue to perform on its plan of operations under the next administration regardless of the outcome of this coming November’s election. We are also investing modestly in [Fabrics TV], a promising new technology platform providing media storage, processing, and delivery tools to satellite, cable, telco, and Internet service providers.
Fabrics scalable architecture supports a variety of next generation video streaming applications, including remote storage DVR, real-time targeted advertising, video-on-demand, and over-the-top delivery. We are excited by the trials we have underway and look forward to sharing our progress with you in the coming quarters.
In conclusion, we are making good progress in our efforts to turn IDT around. Although restructuring and non-recurring costs made for poor numbers this quarter, we’ve made great progress and we look forward to making even greater progress in the future.
Now here’s IDT Chief Financial Officer, Steve Brown. Steve.
Stephen R. Brown
Thank you, Jim. I’m going to put this on speaker.
I hope the quality of the call stays consistent. Hold on a second.
Again, I’m going to be repeating a lot of what Jim already said but I’ll give you my insights from the financial side. While we do note with concern the large operating growth this quarter, the purpose of the forthcoming analysis will hopefully give you a better picture and some better insight of what happened this quarter, especially to the extent that we continue to improve operational EBITDA of our core businesses.
This quarter in particular has been negatively impacted by the shrinkage of our core businesses operations as we’ve been right-sizing them and this caused us to incur certain impairments, such as severance costs, which are cash impairments, as well as non-cash impairments, such as large write-offs of existing good will. In addition, IDT, like most of corporate America, is not immune to the effects of the bad global economy and as a result, we have also taken sizable hits as a result.
This quarter we incurred restructuring and impairment charges totaling $45.5 million, of which $15.7 million relates to the reduction in our workforce and $29.8 million related to write-downs of good will, primarily in our telecom business units, and this the result of our annual assessment we do every year as required under generally accepted accounting principles under FAS-142. Of course, for the most part, these charges are non-cash related.
We also incurred a $15.6 million impairment as Jim talked about on our inventory asset of purchased receivables, lowering the asset on our balance sheet from $79 million to $63 million. I will discuss this in much more detail when I get to the segment analysis talking about IDT Carmel, our debt collection business.
And finally, we incurred a $9.6 million loss on the sale and shut-down of certain non-telecom foreign divisions, most notably our Israel call center, which was sold to its management, and the Puerto Rico call center. Below the line, we took a $7.2 million expense, writing down investments in auction rate securities which were backed by preferred by preferred stock in Fannie Mae.
While we hope in the long-term that we eventually will be made whole on this security, GAAP certainly requires us to mark-to-market the investments. In addition, in the following quarter which is Q1 2009, which is the quarter ending October 31st, we expect to record an additional $6.3 million expense to further write-down the auction rate securities as a result of the September 2008 announcement of the takeover of Fannie Mae by the U.S.
Government. To return to my original point about operational improvements, eliminating the impairment charges of $45.5 million that we talked about, depreciation and amortization of $16.7 million, the $9.6 million loss on the sale of the non-core businesses, and the $15.6 million impairment of the Carmel portfolio recorded as a bad debt expense, our adjusted EBITDA was positive $8.1 million this quarter, which is significantly better than last quarter, where we recorded a $36.5 million EBITDA loss.
And even taking into account that our operating results were enhanced this quarter by about $12 million due to positive reversal of net accruals due to various disputes that were resolved favorably this quarter, net net this quarter is a strong indication of the beginning of the operational turnaround that Howard talked about in his call to investors a couple of months ago. The biggest improvement operationally most notably came from, and most importantly, came from our telecom segment with EBITDA improving to $13 million this quarter, from a negative $1 million last quarter.
This quarter saw robust revenue growth in our wholesale business with an 11.6% increase to $175.7 million, our largest revenue quarter ever, and we were able to maintain the gross margin rate with a small 20 basis point drop this quarter to a healthy 12.6%. Our telecom numbers were enhanced again by approximately net $6 million of the accrual reversals.
While not at the point we desire but not un-encouragingly, prepaid calling card revenues increased quarter over quarter for the first time in the last 11 quarters. Even though this is only a 1% increase, we are very encouraged that the basic business seems to have stabilized and we are cautiously optimistic that over time, we can regain our market share.
SG&A expenses in telecom’s operations continued to decline with a 5% decrease quarter over quarter to $70.6 million, as we continue to streamline our operations, particularly in non-profitable segments, such as the prepaid wireless segment and our overseas operations. The next business unit is IDT Energy, our ESCO business, and that continues to impress.
Its $75.5 million revenue quarter was 13.8% higher than last quarter and of course our largest revenue quarter yet in this segment. Gross margins remained very strong this quarter at 12.2%.
SG&A increased $1.8 million this quarter but that’s a very healthy increase because that increase was totally due to increased marketing expenditures and the cost of customer acquisitions. Of course, this should lead to continual higher revenues and profits, all subject to the seasonality of the business.
And EBITDA this quarter was a healthy $1.6 million for this quarter. We are very encouraged this past quarter that we added 33,000 net meters, our most successful period of growth to date.
While the immediate impact of this growth hurts earnings, as I just stated, because of the immediate impact of the customer acquisition charges, the long-term profitability of the business is greatly enhanced. IDT Carmel, the debt recovery business, on the other hand, had another disappointing quarter, including a second impairment, this one for $15.6 million.
To date, IDT Carmel has purchased and collected on portfolios of charged off consumer credit card debt with a face value of $1.8 billion and we spent $148 million to purchase these portfolios. After reducing the portfolios for the amounts that we collected on, and for the impairments, the remaining amount is inventory on balance sheet at July 31st is $63.1 million, of which $14.7 million is included in the current assets under other current assets, and $48.4 million is included in the other line item on long-term assets.
The impairment is mainly due to the result of two factors. First, and not to understate, the mismanagement by our partners who have managed the JV that controls the HSBC [overflow], which equals approximately two-thirds of our purchases.
The second cause of the impairment was of course the general downward trend of the economy. We have dealt with both ends.
On both fronts we have taken strong and decisive actions. To deal with both matters, we have brought in seasoned executives, led by Carmel’s new President and COO Mark [Meisenbacher], to turn around the operations, and additionally we have brought court action to take over the management of the HSBC portfolio away from the underperforming partners, and we are giving with the -- we are optimistic the court will turn over the management to Mark and his team.
At the same time, we also hope to recover damages for the mismanagement. IDT Capital’s results were a conglomeration of the following: revenues were derived by the following components: $7.5 million from CTM and the local media business; $3.4 million from Zedge and IDW; and $3.9 million from various other initiatives.
The main drivers of capital EBITDA loss was a $3.9 million loss expense from Net2Phone ventures, mostly spent on legal fees and the like in the protection of Net2Phone’s intellectual property, and our call center business, though sold at the end of the quarter, during the quarter lost $1.6 million. Slightly offsetting these losses were gains from CMT and IDW.
IDT corporate expenses posted an EBITDA loss of $3.7 million this quarter, included -- that enhanced -- that lowered, actually lowered the loss, we recorded a $4 million positive reversal of our approval for the [Alfred Vess] legal case, because it was settled for a lower amount than the court had awarded by the previous jury decision. We also received an employee work force grant from the State of New Jersey this quarter for $2.3 million.
And then, of course, as promised, the infrastructure continues to get lower and -- there was at least a $2 million reduction this quarter from the smaller workforce. Now, I’m sure there’s a lot of questions, people want to know about liquidity, capital needs, and our balance sheet, so I’m going to give a lot more detail on these matters than I have done in the past.
Firstly, as Jim has discussed earlier, we have been considering buying back stock but we continually must weigh the obvious merits of a buy-back against our capital liquidity needs. In particular, the payment schedule for our tax liabilities at this time is still unresolved.
We owe the U.S. Government approximately $105 million after settling the IRS for the years 2001 through 2004.
We plan to pay another $20 million shortly and we have begun discussions to determine the timing of future payments. We are also evaluating the merits of financing this liability.
On our balance sheet, our cash and cash equivalents of $169 million consisted of cash sitting in checking accounts around the world, money market funds, and short-term government funds. Given the recent market turbulence today, or as of -- certainly as of the -- as of September 30th, we are predominantly in cash and short-term government funds.
Our marketable securities of $111.5 million at July 31st consisted of $58 million in a variety of federal home loan bank notes and $46 million in structured notes and bonds, backed by a variety of issuers, most notably Merrill Lynch, [DMP], and Federal Home Loan Bank. Most of these structured instruments were called or sold after the end of our fiscal year, so as of September 30th, our portfolio contained only $14 million of structured notes, $9 million of these were issued by the Federal Home Loan Bank and $5 million are issued by [DMP].
Our marketable securities also included auction rate securities with a carrying value of $7.1 million. As I talked about earlier, in Q1, unless anything specific happens, we expect to write-down an additional $6.3 million on the auction rate securities as a result of the September 2008 announcement of the takeover of Fannie Mae by the U.S.
Government. Our short-term investments included $22.6 million, which consists of $10.10 million in hedge funds and $11.4 million in a structured membership interest with Liberty Media.
We have recently liquidated these investments and we expect to receive the proceeds before the end of our second quarter of this fiscal year. Our long-term investment of $40.3 million consisted mainly of $38 million of hedge funds.
We are continuing to evaluate the opportunity to liquidate these positions in an orderly manner. In addition, the major components of other key current assets are $14.7 million of purchased debt portfolios, as I mentioned earlier, the Carmel short-term portfolio; $17.7 million of inventory from the telecom and energy business; and $27.9 million of miscellaneous from various receivables that will be turned into cash during the current fiscal year.
And as I discussed earlier, included in our long-term assets under other is $48.4 million of the purchased debt portfolio inventories that we consider long-term. At this time, I would like to turn the call over for questions.
Operator
(Operator Instructions) Our first question comes from Mr. Isaac Schwartz with [Riboti] & Company.
Isaac Schwartz - Riboti & Company
I was just wondering how much total investment you’ve made in the consumer finance, the consumer receivables business.
Stephen R. Brown
Again, I’ll refer to these numbers in the report -- to date, we’ve invested $148 million. The -- obviously as we collect, based on the expected rate of -- the expected ROI or the expected curve, we write down a certain portion of what we collect to get the inventory, so out of that $148 million, 31 has been impaired and the remaining amount to get you to $62 million has been collected on.
So we are sitting today with $62 million of remaining portfolio that we are collecting on.
Isaac Schwartz - Riboti & Company
Okay, so the total -- and what’s the time period? When did you -- what’s the time period over which you made the investments?
Stephen R. Brown
Pretty much a three-year period.
Isaac Schwartz - Riboti & Company
Over three years, the gross dollar amount that you invested was $148 million, you impaired 31, you collected and you have $62 million net on the balance sheet?
Stephen R. Brown
That’s correct.
Isaac Schwartz - Riboti & Company
Okay, thanks.
Operator
Thank you. Our next question comes from Mr.
Mark [Lunder] with [Lunder] Capital.
Mark Lunder - Lunder Capital
Good afternoon. I had a question, Jim -- previous call, you had mentioned that employees would not be -- you would not be giving them a lower strike price on their options.
Does the stock in lieu of cash compensation plan apply to any other employees, consultants, or service providers of IDT?
James A. Courter
No, it doesn’t. It’s Howard Jonas’ five years and myself until the end of my contract.
Mark Lunder - Lunder Capital
Right, so it doesn’t apply to anybody else then?
James A. Courter
No, I mean, if people want to step forward, I suppose we’d entertain them but we didn’t really think about it and didn’t ask.
Mark Lunder - Lunder Capital
Right. Could you help me understand a little bit, Howard, as far as your thought process on this -- you say the stock is absurdly low.
You had --
Stephen R. Brown
Well, I just want to correct you -- Howard is not on this call. It’s just Jim, myself, and Liore Alroy.
Mark Lunder - Lunder Capital
Oh, that wasn’t Howard who just asked?
James A. Courter
No, that was me. I’m sorry.
Mark Lunder - Lunder Capital
Okay. So I’m trying to understand the thought process -- you say the stock is absurdly low, you issue stock in lieu of cash compensation, but yet you have money sitting in hedge funds and as of right now, you say you don’t have a lot of excess cash to be able to go in and buy stock back.
Am I missing something or could you help me understand that?
James A. Courter
You know, Steve can help me on the answer to the question but I thought I walked through it pretty clearly in my prepared remarks.
Mark Lunder - Lunder Capital
Right. I guess what I’m trying to understand is if it is absurdly low like you say, and I take you at you word, why wouldn’t you look to exit some of the hedge funds and use some of that money to reduce the dilutive effect of issuing stock to you and Howard?
James A. Courter
Steve will answer that. We are trying -- you know, I forgot the technical word.
We are trying to liquidate the hedge funds as we speak. We are monitoring closely our conversations with the IRS because we haven’t really -- although we settled the total amount that we owe them plus interest, we don’t know whether we can pay that over 12 months, two years, three years, so those negotiations are still up in the air and we want to make sure that when the IRS calls and they want cash, we can give them cash.
Stephen R. Brown
Again, obviously the -- with the stock being low it is something that we are strongly evaluating. We are in discussions with the IRS about possibly paying off the liability over a longer period of time, or looking at other options, for the very reason because there is liquidity needs.
The telecom business does require a certain amount of working capital available. The energy business most particularly does require a lot of working capital available for us to get the favorable rates that we need to get and we are taking all these things into consideration and -- you know, [we’re where you are at].
We do think that the stock is grossly undervalued and we are trying to figure out the best way to run the business, at the same time do the smart things.
James A. Courter
Let me just add to that -- I mean, if we were not buying stock and we are not doing anything else, I suppose those facts would belie our statement that we think it’s undervalued but we are not buying back because of our conservative nature in making sure we can continue to operate the business and pay our short-term obligations to the IRS but also by virtue of the fact that I and other executives have purchased on the open market over $4 million of stock and that I and Howard Jonas, and Howard for five years and me for one year, are accepting stock in lieu of cash, you know, confirms or underlies our statement that we believe personally that the stock is undervalued.
Stephen R. Brown
All right. Let me just address one more thing.
I know we are covering a lot but on the hedge funds, we have liquidated everything that could be liquidated without -- with ensuring to make sure that the principal amount has not been damaged. And as I said, there’s about $38 million left and we are going to try to liquidate those in a timely manner but it just doesn’t make sense to take it to -- to take a big hit.
Operator
Thank you. Our next question comes from Thomas Khan with Khan Brothers.
Thomas Khan - Khan Brothers
Two questions -- first question is where is Howard? I would have expected Howard would be on the call.
I know we are approaching the Jewish holiday but certainly you’re on the call and Howard is a control shareholder and going to be the new CEO. And the second question is Mr.
Alroy, if we could hear from him what his business background is, what his current role is in the company, and what his role might be or he might think might be going forward. For example, is he going to be the COO of the company going forward?
I think it would be useful for us to hear something from him because he should understand that a lot of water has gone over the dam and a lot of things have been said which have not happened or have not come true, so it would be useful for him to speak a little.
James A. Courter
Liore will speak to the second question. I don’t mean to speak for Howard but as you know, he was -- you know, I look at it, it is quite extraordinary for Howard to get on a call to investors two months ago.
I mean, it’s something he doesn’t do and hasn’t done for years and I have been the spokesperson on these calls for the company along with Steve Brown and other operating executives, so he basically consisted with past patterns is allowing other executives to handle these earnings calls. And I should -- certainly as the time approaches that he becomes the CEO, you know, he is going to want to address people on these calls in his own way but right now, his pattern is quite consistent over various years.
Thomas Khan - Khan Brothers
Well, the consistency is not adequate, Jim, and I don’t think it’s right. We’re in extraordinary times and as you know, the company is -- some people consider it an extremis and in a death spiral and what you have done in the past in unusual times is something one shouldn’t be doing currently.
James A. Courter
Well, let me, before Liore just jumps on, in defense of IDT, number one, I think our comments today and the fact that we have done a substantial amount in the turnaround and restructuring, indicates that we are not in a death spiral. That’s number one.
Number two, I remember when I started with the company, there was a whole host, probably 15 telecommunications companies that were competitors of ours -- emerging multinational carriers. We are the lone person standing.
They all are out of business, they all went bankrupt. Also to defend where we are, no one -- you probably or anybody else, could possibly have thought six months ago that Bear Stearns would be out of business, Merrill Lynch would be sold, Lehman Brothers would be going out of business, AIG would be in the problem they are, and IDT would still be here.
So in defense --
Thomas Khan - Khan Brothers
Jim, I don’t want to get into a conversation of you defending your --
James A. Courter
I’m just answering the question.
Thomas Khan - Khan Brothers
-- work as the CEO. It’s me making comments.
James A. Courter
We’ve done reasonably well and --
Thomas Khan - Khan Brothers
I think the stock price essentially tells the whole story and I think we should hear from Liore.
James A. Courter
Okay. It’s nice to have you on the call.
I don’t remember the last time you’ve been on the call. Howard many years ago when he became the Chairman and Jim became the CEO, he said he wasn’t going to be on these calls anymore but I guess if he knew you were going to be on this call, maybe he would have made an appearance.
Thomas Khan - Khan Brothers
Well, he’s lost the most amount of money, I don’t know how many hundred million dollars and he is the teed up CEO and he has a lot of interest and I don’t want to get into a discussion. I know he doesn’t feel comfortable on the call but I want you to know that in unusual times, he should certainly be available on every call.
He’s very engaged and I’m -- (Multiple Speakers) I interrupted Liore, so let’s --
James A. Courter
-- sitting in the office and listening but he should be available for shareholders to talk.
Liore Alroy
Good afternoon, Mr. Khan.
I think you asked two things -- you asked about my business background and then you asked about the role that foresee for myself.
Thomas Khan - Khan Brothers
Yes, that’s right. I mean, I was under some impression from Steve Brown or Howard that you were the heir apparent in terms of COO and that we had thought that Mark would be a good foil and a good accountant and a good reality check person and I had him in this room where I’m sitting now for lunch and of course I was very unhappy when he left.
And the company has had sort of a revolving door of people and now you are the new man, so we want to hear a little from you.
Liore Alroy
All right. Business background -- my working career starts I guess in 1993 as an attorney.
I was at [inaudible] for about five years, mostly doing tax work, transactional tax work. I then went on to private practice elsewhere, including on my own.
Did a little bit of advising and consulting as a sort of quasi-finance, quasi-tax advisor to some people and then came to IDT through that consulting role, eventually took a job working for IDT as a - with responsibilities for what was called mergers and acquisitions and then later called strategic initiatives, it was basically a corporate development role. And then subsequently took the job as CEO of Net2Phone in the fall of 2004 and stayed with Net2Phone until my ascension to the role of CEO of IDT Telecom, which is a good place to segue into my view of the future.
To be honest, I am arms, legs, and body, and a good part of my head, into telecom right now, so I don’t really -- there’s so much to do and I’m keeping so busy with it, I don’t think too much about what my next role is. I do have this other title, Chairman of the Executive Committee, which means that I know a good deal about what goes on elsewhere in the company.
I occasionally voice my opinion, mostly about things like compensation and about cost of capital and keeping some discipline on the way the various units are organized but 90%-plus of my time is on telecom and I see that as occupying my time for the foreseeable future.
Thomas Khan - Khan Brothers
But you have not been a CEO of any profitable business venture where you bring a background of being the CEO of a successful business venture to the IDT environment. In other words, one of my concerns has always been that there are too many lawyers and too many people with 160 IQs running around IDT but there are not enough people who have been out working elsewhere and have demonstrated track records of running successful, profitable businesses.
Now I’m sure you are doing a fine job where you are but I would like you to pinpoint and give me -- maybe you can e-mail me the names of some people who are in the top upper echelons of IDT who have run successful businesses on the outside that have made money and grown and yada yada yada, because I’d be interested in knowing who is in the inner sanctum who meets that standard. Steven knows my e-mail address.
Thank you.
Operator
Thank you. Our next question comes from Mr.
Brian [Tuchenwick] from Cross Management.
Brian Tuchenwick - Cross Management
Okay. Thank you.
I’m not sure how to make this real simple, like layman’s terms -- Jim, you stated we have $343 million in cash -- $115 million has to go to the IRS, whenever that may be; $75 million is restricted for finance operations; $40 million is tied up in hedge funds. So I’m looking pretty much to run the business, we have $113 million in cash.
Is that a correct statement?
James A. Courter
One thing, your premise, we did pay the IRS 10, so we owe them 105 but I’ll let Steve Brown, our CFO -- it’s a numbers question, if that’s okay with you, for Steve to --
Brian Tuchenwick - Cross Management
I’m just saying like ball park, we’re looking at whatever, it’s $103 million or $113 million.
James A. Courter
Right. Steve is best capable of answering that question.
Thank you for the question.
Stephen R. Brown
Your assessment of July 31st is not incorrect.
Brian Tuchenwick - Cross Management
Okay, so we’re talking $113 million and this is why you aren’t looking to buy back stock --
Stephen R. Brown
But we also have negative working capital after that, so we have to also make sure that we have sufficient capital to pay as the remaining liabilities are larger than the remaining current assets.
Brian Tuchenwick - Cross Management
All right, and you are expecting further restructuring, further severance pay, [which is again going to come into that] --
Stephen R. Brown
No, I mean, most of it is real business liabilities. It just happens that the way most of -- the telecom business has been run, the payables have exceeded the receivables, especially in the prepaid calling card business.
Brian Tuchenwick - Cross Management
Yeah, because they are the ones, you know, howling to buy back stock, there really isn't any money to buy back stock.
Stephen R. Brown
Again, we’re making the -- it’s something that we are considering. A lot has to take into account, again the type of deal we would do with the IRS if we would do a deal with the IRS, and taking into account to make sure that our working capital does not go below a certain amount that would force a lot of the relationships we have to go from the 30 days or 60 days that we would have to start repaying them.
Again, we’ve been in business for a long time and there’s a short-term opportunity over here but we don’t want to take advantage of a short-term opportunity that’s going to have a long-term detriment effect on the business so we’ve got to really approach this in a very rational manner but we see the same things you see.
Brian Tuchenwick - Cross Management
Okay, now we met over the summer. I think you are a very sharp individual.
I was kind of concerned though that you didn’t -- you personally are not taking advantage of taking stock in lieu of cash for salary.
Stephen R. Brown
It’s something I don’t feel appropriate to address on this call but I will say I fully agree both with the Chairman and CEO of IDT that it’s a -- I think the stock is undervalued.
Brian Tuchenwick - Cross Management
Okay, now would you be willing to make a projection on what you think the cash burn rate would be for the current quarter, this current first quarter that ends I believe October 31st and the second quarter?
Stephen R. Brown
It’s not something that we’ve discussed and I don’t think it would be appropriate at this point. The only thing that -- I think everything that has gone on will get us to the point of what Howard talked about, that we would be operationally cash flow positive from the quarter November 1st on, which is our second quarter.
The first quarter, we do expect will be better than last quarter and that’s sort of the guidance that we’ve gotten. You know, we have to be consistent with what we’ve put out in paper, as well how we address the call.
Operator
Thank you. Our next question comes from Mr.
Howard [Weber] with Smith Barney.
Howard Weber - Smith Barney
A couple of questions -- if you could go back for a minute to the auction rates and where you are holding with that. You had given some numbers.
You said you took a further write-down on that this quarter. I would like to know face value, where are you holding on that and what type of methods are you using on the write-down on that?
Stephen R. Brown
Okay. The write-down is basically what the fair market value of the security is.
It’s basically backed by preferred Fannie Mae. We have to go by what the going rate was at July 31st, so it was a $14.6 million purchase that we were holding for a considerable period of time.
The market value of the underlying preferred security was $7.1 million at July -- or $7.5 million at July 31st, causing us to write mark-to-market to that amount. Since then, the underlying security now is worth about $1 million, so we are going to make the valuation on October 31st, which is the end of the next quarter, see what the underlying market value of the auction rate security is, and mark it down to that amount, which should be about a further reduction of about $6 million.
Now, I mentioned in my remarks even though GAAP requires us to mark to market and we have to conservative, and the balance sheet is going to reflect that conservative amount and obviously the income statement, I would go on a limb and say the environment right now is that these firms, you know, this was a legitimate firm, clearly sold us something and did not inform us properly when it was sold. I think the Attorney Generals, most particularly in New York and Massachusetts, have gone a long way to have individuals recover a full amount.
We think companies our size may be able, once the Attorney Generals finish with their negotiations with these investment banks and banks, I think companies our size should be able to recover if not all of it, a sizable amount and at the very least, I think we have a strong legal case. So we’re not ready to give up the $13 million or $14 million -- the $13 million plus that we will have written off on October 31st if things don’t change, but I would not bet against us being able to recover a good percentage of this.
Howard Weber - Smith Barney
Is that the total amount you have invested in the [inaudible] preferreds?
Stephen R. Brown
That’s correct.
Howard Weber - Smith Barney
So out of all the other cash, you are saying only $14 million out of the 300 is in auction rates?
Stephen R. Brown
That’s correct, yes.
Howard Weber - Smith Barney
And the other securities that the money is in?
Stephen R. Brown
There was -- again, if you would listen to the prepared remarks, there was great detail. I was reading from a sheet and the reason I was reading from a sheet is because I was talking about where we were July 31st and where we are today.
We had a large amount of structured notes, I think about $58 million. Most of those structured notes have been sold from July 31st to date.
So for the most part, the cash and marketable securities has very little exposure. Most of it is sitting in cash market funds or things backed by government securities.
Howard Weber - Smith Barney
Okay, so only the 14 is the issue here at this point?
Stephen R. Brown
That is correct, yes. Again, we have $38 million in long-term hedge funds.
The short-term hedge funds, we are going to monetize at the amount that we put on the balance sheet, so the long-term hedge funds we think are very safe and secure and we are working with -- the funds are working with us to figure out how to cash out the rest, but that’s going to take a while.
Howard Weber - Smith Barney
Okay. In relation to other businesses that you guys said you would be winding down or getting out of, I would think it shouldn’t be that difficult from that to generate $7 million, $8 million, $10 million with the stock at $0.70.
You could guy back 10% of the company for next to nothing here. I certainly would hope you guys would give some serious consideration to doing that based on the myriad different kinds of assets you have and some remaining value that should come from some of these things, that are [inaudible] of operations.
Stephen R. Brown
I understand 100% your comments.
James A. Courter
It’s a topic of discussion we often have. Thank you.
Howard Weber - Smith Barney
Okay.
Operator
Thank you. Our next question comes from Mr.
Clay Moran with Stanford Group.
Clay Moran - Stanford Group
Thank you. I have a couple of questions.
I think Steve mentioned adjusted EBITDA for the quarter, I think he said $8.7 million. Maybe you could walk us through how you get there.
You didn’t put the quarterly results in the press release and I can’t get there based on the numbers you’ve provided. Steve, could you just let us know sort of from the revenues down to EBITDA, what the inputs there and how you get to a positive number?
Stephen R. Brown
I don’t have a calculator with me but let me take the -- let me pull out the press release and just give you some -- we have a loss from operations of $79 million, so the numbers that come out of that: the loss on the sale of the business is $9.6 million is taken out of adjusted EBITDA; restructuring and impairment charges of $45.5 million is excluded; and depreciation of amortization of $16.7 million is not included. And for the purposes of analysis to understand how the business [is going forward], I also did not include the $15.6 million impairment from the Carmel receivable that’s included in bad debt.
Clay Moran - Stanford Group
Okay. I’ll try to work with you on that.
Stephen R. Brown
Okay.
Clay Moran - Stanford Group
A couple of other questions -- as of last quarter, you had tax assets of like I think it was $230 million, tax liabilities of 330. This quarter you only have it looks like the short-term tax liability, whatever it is, 115.
So does that mean that this 115 is a clean number and everything and that sort of brings you even with the IRS? Or I mean because there was also some assets in there, some other liabilities, have you cleaned all that up in some type of settlement?
Stephen R. Brown
Again, the reason why the liability was more complicated is because there were liabilities that were being offset by net operating losses. Until we reached an agreement with the IRS, we didn’t offset one against the other because there was no settlement.
Once that was settled, we offset. We now have a clean liability and not 100%, since we are taxed in other regions, there are small amounts of other liabilities besides the IRS in there that are included in that number but obviously the large, large majority of that is the IRS and it’s all in current liabilities, which means we expect to pay in cash the full amount over the next 12 months.
That said, again we talked about we are exploring the opportunity of taking a portion of the IRS liability and seeing if we could work out a deal to pay over, but until anything is worked out, it stays in current liabilities.
Clay Moran - Stanford Group
Okay, so the amount is settled and closed. The only thing open for discussion is when.
Stephen R. Brown
Yes.
Clay Moran - Stanford Group
Okay. And then getting back to the question on the payment in stock, the press release says Howard Jonas will receive 3.5 million shares and Jim Courter I think 0.9 million.
Is that the total and how does that vest over the four to five years? And can you give us a sense of -- I think that’s about 6% dilution.
Can you give us a sense of the annual cash savings that you are -- what you are saving to give up that 6% of the company?
James A. Courter
I’ll let Steve do the math with regard to the shares but the vesting is for me, cliff vesting after a year and for Howard, cliff vesting after three years with respect to the first tranche and then cliff vesting after an additional two years for the second tranche. So he will not vest until the end of the three years, some of it and the balance of it at the end of five years, and I of course at the end of my contract.
Clay Moran - Stanford Group
Okay, and his total is 3.5 million, roughly. Do you know what the first tranche is so we can plug that into our models?
James A. Courter
Steve will get back to you on that. If he doesn’t have it off the top of his head, he will do the math for you but I can’t right now.
I don’t know.
Stephen R. Brown
Right. I mean, it should be in the press release but we’ll get back to you.
James A. Courter
We’ll get back to you on that.
Clay Moran - Stanford Group
Okay, and you don’t have the -- roughly what the annual cash savings --
James A. Courter
Yeah, mine -- by the way, mine is right. It’s about 0.9.
I recall that and mine is not so complex because it’s only one tranche. With regard to the savings in cash, it’s about $1.6 million for ’09 and then I’m guessing after that, because no one really knows what compensation would be in ‘010 but I’m guessing about at least -- if it’s just Howard, it’s about $1 million a year in cash savings as we go forward every year.
Clay Moran - Stanford Group
Okay, and then one last question -- you have to set aside some cash for the wholesale telecom business that you have in restricted cash. Have any of your carrier providers come back and requested more?
And if not, do you think that -- is that a risk going forward?
Stephen R. Brown
On the telecom side, the cash that is set aside is really for equipment leases that were backed by letters of credit. The largest part that Jim -- is on the, our purchase of our energy needs is backed by a letter of credit, so --
Clay Moran - Stanford Group
But you don’t have those -- like, you used to have historically the requirements to deposit for the wholesale relationships. You don’t really have that anymore, it’s not meaningful?
Stephen R. Brown
I’m not -- Liore, I’m not exactly sure what he’s referring to here.
Liore Alroy
I don’t know exactly what you are referring to.
Clay Moran - Stanford Group
Your carrier providers, or let’s say in the business, the wholesale business in general, that used to require deposits up-front.
Liore Alroy
Yeah, I don’t think any -- I don’t remember you covering us back in ’95 because I think that was the last, ’95-96 was the last --
Clay Moran - Stanford Group
Well, I was in the business --
Liore Alroy
I understand the question. It has not risen to the level of materiality that has come to my attention in that way.
I mean, I’m sure that from time to time there are some conversations about such things and frankly, the concern that you expressed is a reasonable concern, given the credit environment out there. On the whole, our affiliation with IDT Corporation is healthy and I think it is something which we can draw and to distinguish ourselves from some of our smaller competitors in that business.
But yes, it’s a reasonable thing to be mindful of.
Clay Moran - Stanford Group
Okay. Thank you.
Operator
Thank you. Our next question comes from Mr.
William [Ostrand] with Oppenheimer & Company.
William Ostrand - Oppenheimer & Company
Good afternoon, gentlemen. A quick question regarding some of the liquidations that we know are taking place during the month.
It was previously announced that several large funds, including Southeastern Asset Management, et cetera, would be liquidating by October 31st. If that’s still the case, I haven’t seen any filings.
Stephen R. Brown
I don’t have update information and obviously there’s been a lot of downward pressure on the stock, mostly from a lot of large funds that were selling that IDT was such a small amount of their total portfolio that they didn’t -- they couldn’t care less what their price was. The fact that we don’t have that pressure, that same pressure the last couple of weeks, I -- [I’m hopeful] but I don’t have any accurate information on that.
William Ostrand - Oppenheimer & Company
Okay and relating to some of what Howard said on the operations call a couple of months ago, what is the status like or can you comment at all on some of the ongoing work towards partnering with either the shale oil and telecommunications businesses, either in a joint venture or some sort of investment, from another company?
James A. Courter
Yeah, I mean, it’s forward-looking statements. One, with regard to the telecom, Howard and others have been speaking to one or more well-known international carriers that you would know.
But they -- there’s such turmoil out there economically and the major carriers I certainly know from experience in dealing with them on the termination side when I started with IDT, take a long time. They are very deliberative.
They take months, sometimes years, so that is certainly worth the effort but it’s a very future-oriented thing. With respect to the energy side with regard to oil shale, it’s much closer at hand, although we are dealing and we are speaking with a very major energy company.
Those conversations have been going on a long period of time, much more focused and we expect -- we expect, we don’t know -- we expect something will happen in the next couple of months.
Operator
Thank you. We only have time for one final question.
Our last question comes from Mr. Jeff [Deegan] with [Milwaukee] Private Wealth Management.
Jeff Deegan - Milwaukee Private Wealth Management
Good afternoon. There was a time recently when you announced some shale oil exploration in Israel and I haven’t heard much about that since but wondered if you could comment on your progress there, as well as the special skill set that IDT had that allowed them to win that contract and what you might expect as a result of your work over there.
James A. Courter
As to how we did it, you know, it’s -- you know, we are noted as a company for being innovative, technologically advanced and one of the factors that weighed into the Israeli decision by the Department -- well, I would call it the Department of Interior but they call it I think the Department of Infrastructure in Israel -- was the fact that we are involved in the United States in Colorado in oil shale, so we are one of basically three companies that have a lease in Colorado and therefore by its very nature, we came to their attention. And also, we are a company that is not conflicted when it comes to the production of energy in Israel and some of the major international companies are, so that had -- that was a factor as well.
We’ve not talked that much about it. It’s in its fairly early stages but we have received, as you probably read and if you read Israeli sources, a three-year lease agreement on 150 square kilometers of land in the central part of Israel to do some research and development in oil shale.
So it’s similar to Colorado but I would make the argument that Israel is going to be there a lot more quickly than the United States because Israeli security concerns are extraordinarily important in a basically hostile part of the world. So Israel I think is going to pursue the production of oil and gas from oil shale more quickly than the effort in the United States and we’re gratified that we are on the ground floor.
Jeff Deegan - Milwaukee Private Wealth Management
It strikes me that conceivably in collaboration with the Israelis or independent of more stringent environmental regulations in the United States, there may be the potential for some breakthrough technologies that could then be imported, if you will, back to the U.S. Is that a fair statement or understanding?
James A. Courter
That is certainly fair, although for various reasons, our effort in Israel and the effort in Colorado are going to be distinct efforts.
Jeff Deegan - Milwaukee Private Wealth Management
Okay.
James A. Courter
Thank you. Very good question.
Thank you very much and we’ll talk to you next quarter.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time.
Thank you for your participation.