Samuel Jonas - Chief Executive Officer Marcelo Fischer - Principal Financial Officer and Senior Vice President of Finance.

Jay Srivatsa - Chardan Capital Markets, LLC, Research Division John Edward Rolfe - Argand Capital Advisors, L.L.C..

Good afternoon, and welcome to the IDT Corporation's Second Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] In today's presentation, IDT's Chief Executive Officer, Shmuel Jonas, will discuss IDT's financial and operational results for the 3-month period ended January 31, 2014.

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 the Q&A, the IDT's management may make reference to 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 at 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 over to IDT's Chief Operating Officer, Shmuel Jonas..

Thank you very much. This is my first earnings call since IDT's Board appointed me as a CEO, and I'm honored and humbled by it. I've had the best mentors that one could hope to have, not only while COO but throughout my life. I'm also blessed to be working with some of the talented, energetic and knowledgeable colleagues here at IDT.

My remarks this quarter will focus on a few key operational results and our business strategy and expectations. For a more comprehensive picture of our financial results, I urge you to read our earnings release in its entirety and when it is filed, our Form 10-Q.

Following my remarks, Marcelo Fischer, our Senior Vice President of Finance, as well as Jonathan Reich, from Zedge and I will take your questions. IDT has delivered steadily improved results over the several years, and this quarter was in line with that trend.

Adjusted EBITDA increased year-over-year and sequentially to $11.3 million, and for the first time in our recent history, adjusted EBITDA for the trailing 12 months topped $40 million. Starting with our telecom business, we continue to drive growth in Boss Revolution voice sales, which increased 27% year-over-year and 3.6% sequentially.

The increases reflect continued growth in the size of Boss Revolution's current customer base and the number of active U.S. retail locations, both of which reached new heights during the quarter. We increased U.S. retail locations by 5% sequentially this quarter and are now up to approximately 37,000 active retailers.

Our customer base grew by more than 1/3 year-over-year and by 12% on a sequential basis. Nevertheless, Boss Revolution's voice service is clearly becoming a mature product in some key markets, while facing intensifying competition in others.

The sequential increase also reflects in part the modest bump in traffic we typically see during the second quarter's holiday season.

In that regard, the Boss Revolution calling app continues to gain acceptance with our existing customer base and is making our PIN-less voice service even more convenient, and the customer relationship even stickier than before. Within Retail Communications, growth in Boss Revolution in U.S.

business was offset by decreases in sales with other communications products, particularly traditional prepaid calling cards sold both overseas and in the United States. In aggregate, retail communication revenues increased year-over-year to $169.8 million from $161.1 million, and decreased sequentially from $172.5 million.

Wholesale Termination Service's minutes of use in the second quarter totaled 4.7 billion, compared to 6.3 billion minutes in the year-ago quarter, while increasing slightly compared to the previous quarter.

Second quarter Wholesale Termination Services revenue were $167.8 million, a decrease from $182.2 million in the year-ago quarter and from $178.5 million in the previous quarter.

The year-over-year decreases in minutes and revenue largely reflect the impact of abrupt industry-wide rate changes that took effect in the third quarter of last year in certain Asian destinations, and the resulting decline in traffic to those countries. The sequential decrease in revenue has reflected the shift in our destination mix.

We carried significantly more traffic this quarter to lower revenue per minute destinations, so that revenue decreased even as minutes of use increased very slightly. At the same time, we have been able to drive down the cost per minute to the carry out traffic to these and other destinations.

This decrease has been the key driver of the overall improvement in telecoms growth profits over the same period. We have said many times that we manage this business to maximize the growth profit dollars not revenue, and encourage you to keep that in mind when you look at revenue as a performance indicator.

In addition, similar to what we experienced in prior quarters, Wholesale Termination Services continued to benefit from increased sales in South America as we once again took advantage of pricing shifts, resulting from disparities in certain currency exchange rates. This benefit is opportunistic and has an intermediate timeframe.

It could disappear tomorrow or continue for some time to come. Revenue for our Payment Services vertical increased year-over-year to $48.9 million from $46.6 million in the second quarter of last year, but decreased from $49.9 million in the prior quarter.

Payment Services' year-over-year growth was generated primarily from international and domestic air time top of sales. The sequential decrease reflects increased competition in this market, and a restructured resale agreement with a key mobile operator.

Also in Payment Services vertical, we continue to roll out our international money remittance business. After diligent effort, we have now obtained licenses to transact money remittances in 47 states, and have begun the process of signing up retailers in some of those states and the beta testing of that service.

To date, we have approved approximately 70 agents in 4 states. Later in the third quarter, we expect to launch the Boss Revolution money remittance service in a few other states including Texas and Illinois.

To give you a sense of the size of the market in those 2 states, customers there originate from $20 million remittances to Mexico alone each year.

We are simultaneously building out our remittance disbursement network which consists of over 20,000 locations in 15 countries throughout Latin America and the Caribbean, where recipients can receive payouts of transferred funds.

We are pleased with the progress we have made to date and are seeing positive indications that our popular and highly regarded Boss Revolution brand should translate into consumer acceptance in the money remittance business, and aid us in the complex process of on boarding qualified retail merchants.

As we have discussed previously, establishing a presence in the payments business is an essential element of our long-term growth strategy. Consistent with that goal, we continue investing heavily to develop a suite of payment capabilities and products that will be marketed and sold under the Boss Revolution brand.

The airtime top up and the money remittance business have been the first of these initiatives. Later this fiscal year, we expect to beta launch 2 additional products that will complement our existing offerings. The first of these is a virtual visa. This is a product with the functionality of a gift card but without the need for a physical card.

It enables unbanked customers to purchase with up to $200 in cash or prepaid Visa PIN number that can be used for shopping online or by phone anywhere Visa is accepted. We also will begin offering a Boss Revolution general-purpose reloadable card, or GPR card.

This card will provide the unbanked customer with the functionality associated with the checking account linked to a reloadable debit card. Consumers can load cash or deposit payroll payments or other checks directly to the card, and cardholders can make purchases online or in person, pay bills and even write virtual checks from their account.

These products will more fully transition Boss Revolution into the payments arena and provide our customers with the same functionality that the fully-banked consumers enjoy.

By combining voice and payment products and services under a single highly regarded brand, and by providing consumers with a unified platform for their voice and payment transactions, we intend to create a powerful synergistic suite of offerings to serve immigrants and/or unbanked communities.

In all, IDT telecom's TPS segment delivered adjusted EBITDA of $15.5 million this quarter compared to $13.3 million in the second quarter of fiscal 2013, and $14.8 million in the first quarter of this fiscal year. TPS's adjusted EBITDA has increased in each of the last 3 quarters and in 9 of the last 10.

Outside of the core telecom business, we continue to be very excited about the prospects of Zedge and Fabrix. Zedge, again, reported strong user growth. The Zedge app is closely surpassing 100 million installs. User engagement is improving, especially since the December release of the next generation of the app.

Zedge's focus on mobile games distribution is proving to be quite successful. Game publishers have been very pleased with the quality of the game installed that Zedge generates. Zedge's revenue is $1.7 million this quarter, a 20.2% increase over the prior quarter.

The Zedge team is working hard to accelerate the growth of the business and introduce new and complementary products. We previously said that we are looking at various options, unlock value[ph] at Zedge.

We view Zedge's market position as being quite strong, and have now determined that its 2014 spinoff is the most attractive alternative to maximize Zedge's value for our shareholders, pending appropriate tax driven market conditions and continued performance by Zedge.

Looking at comparables, Zedge view Sungy mobile, a Chinese company, which IPO'd in the U.S. last quarter and is trading with a market cap of close to $1 billion, as being a somewhat reasonable proxy for value. I personally believe it could be high.

Sungy's leading product, GO Launcher, is an Android app that allows users to customize their wallpaper icons and the layout of their screen. Unlike Zedge, this customer base is primarily based in the U.S.

and Europe, Sungy's customers are mostly located in the emerging markets, which are more difficult to monetize and less attractive to advertisers and partners. Sungy has the capital structure that is somewhat opaque, while Zedge's will be totally transparent.

Zedge continues growing at a healthy clip, and I'm pretty confident that Sungy's investors will take note of these factors and value Zedge appropriately.

Finally, our all other business grouping which has dominated by Fabrix, but also includes our real estate holdings, generated revenue of $3.8 million in the first quarter, a 14% increase year-over-year and a 9.7% increase sequentially. Our main variable issue about Fabrix is opportunity.

As I mentioned last quarter, we are in testing with 3 system integrators in discussions with many of the world's top providers. Fabrix has ramped up its product development team and its sales efforts over the past year.

As a result of the additional R&D and other cost that Fabrix has been incurring, the all other business grouping reported an adjusted EBITDA loss of $1.1 million for the second quarter, compared to an adjusted EBITDA loss of $200,000 in the year-ago quarter, and $800,000 in the prior quarter.

We expect to deliver a lot of positive news on Fabrix in the very near future. Before we move on to Q&A, I should point out that IDT's Board of Directors has declared a dividend of $0.17 for the second quarter. The dividend will be paid on or about March 28 to stockholders of record as of the close of business on March 21. That concludes my remarks.

And now Marcelo and I would be happy to take your questions. Operator, back to you for the Q&A. Thank you..

[Operator Instructions] Our first question comes from Jay Srivatsa at Chardan Capital Markets..

Shmuel, you mentioned the rate changes in South Asian countries.

Can you expand on that? Is this something that you see ongoing? Or is it more like a one-quarter phenomenon? Help us understand that and how you hope to battle it going forward?.

You know, it's not a one-quarter phenomenon. I mean it happened last quarter, as well. But again, as I stated in my remarks, it could go on for a while or it could end abruptly. I mean it's still continuing as we speak..

Okay. And then, typically, Q2 you see a little bit of improvement in your revenue line that didn't quite happen this quarter.

Was it because of these rate changes? Or were there other factors in play?.

It had -- it did have, it somewhat had to do with rate changes. I mean rates continue to go down to most destinations. But it also had to do with I mean weakness in traditional prepaid calling cards, as well as sales in Europe..

Okay.

Can you talk also about the disparities in currency exchange? Is there a way for you to hedge against this set going forward? Or is it something you just start to play by ear quarter-over-quarter?.

I'm going to let Marcelo answer that question..

Yes. The changes in foreign currency exchange that you saw affecting the P&L are mostly to do with the fact that IDT purchases most of our minutes in U.S. dollars with our U.S. entities, and then we sell those minutes to our various subsidiaries across the globe.

So those subsidiaries in foreign countries usually carry a trade payable, and the company trade payable, with IDT in the function of currency.

And when they have to revalue the numbers for reporting, they -- now in a situation like in the past quarter, where you saw many of the foreign currency like for example the Mexican peso, the Brazilian real was down about 9%, the Argentinian peso was down about 26%, 27%, the Euro was down a little bit, also the U.S. dollars.

So when you revalue those currencies, those payables in the balance sheet, that figures a foreign exchange transaction loss for accounting purposes. And we usually don't try to hedge this type of accounting movements. We'd like to focus our hedging on cash flow movements..

Okay, in terms of your Payment Service, how has the reception been so far as you start rolling out in certain areas? And what are some of the challenges as you plan on a more nationwide launch?.

I mean I think everything has challenges in terms of scaling it. I mean right now, we're still in the process of making sure that we're doing it right, those in terms of how the customer experience is, how the retailer experience is, how it affects -- how the cash pickup is in a foreign country, how our reporting is handled, et cetera.

And so far, we've made a lot, a lot of progress on that front, to the point that this weekend, we didn't have any problems at all. Everything's sort of flowed perfectly. And now it's going to start to be about really building it up as quickly as we can.

And again, we're going to launch aggressively in 2 states in the coming quarter, and you'll hear a lot and see a lot more about money remittance and going forward..

Okay.

And then last question for me, I know you don't give guidance, but looking ahead to the next quarter and for the rest of the year, you expect to be able to achieve the EBITDA growth and/or net profit -- gross profit growth? Or do you see further challenges in terms of some of the rate changes and stuff affecting your business, near-term?.

I mean I'll answer it a little bit, but I'll also let Marcelo answer that. I mean currently speaking, I don't see any major challenges. But we live in a very competitive market, and we -- you never know what next month will bring. But I mean, so far so good..

Yes, Jay, a few things to consider as you think ahead for our Q3 and even beyond. Number one, as you probably know, Q3, which includes the month of February, if you leave out only quarter of the fiscal year that has usually 89 days as opposed to 92 days, so it's a 2% reduction in the number of business days.

And therefore, by definition, you should expect on the daily average to be smaller because of less days.

That being said, even though we have seen revenue per minute to a lot of destinations to be lower because we have been targeting a lot more some of the lower revenue per minute destinations, when it comes to gross margins, and therefore to EBITDA, a lot of these lower revenue per minute destinations in actuality actually generate for IDT higher per minute profits.

And so both on the whole, primarily on the wholesale telecommunications services segment, and even to some extent on our retail segments. Even though you see the revenue being impacted a little bit by the rate shifts, when it comes to gross margins, gross profits, we have been seeing expansion of those of the profitability.

Because at the same time that some of the revenue per minute might be going down, our carrier group in trying to buy and purchase our domination minute have been quite aggressive and successful in lowering our cost per minute domination, so that net-net we have seen an expansion on the profit per margin, on the profit per minute, overall.

So we believe that those gradual will likely continue, that the gross profit will continue to be at the same level so we could see some expansion in it.

And therefore, that translates into EBITDA growing over time because at the same time, we are keeping our SG&A very much in check, and basically our SG&A has not grown much at all in absolute terms as the business has grown. So all of those statuses should be okay, for us in 2014 ongoing profit..

Our next question comes from John Rolfe at Argand Capital..

Just one clarification.

The $3.1 million of other expense, below the operating income line, is that all related to the foreign exchange payable translation that you referenced earlier?.

Yes. It's predominantly the FX on revaluation of the company balances..

Okay. Okay, great. And the 2 states that you plan on launching the money remittance in, I heard you mentioned you mentioned Texas.

What was the other one? Is it New Jersey?.

No, Illinois..

Okay, so Illinois and Texas.

And where have you been beta testing to-date?.

We have done Florida, New Jersey, Connecticut. Those are the 3 that I know of off the top of my head..

Okay, but are those states also going to be....

Yes. Those states are also going to go live, but we view that Texas and Illinois are particularly attractive for us. So those are going to be our like most aggressive ones, even though we're going to continue expanding retailers, obviously, in the other 3 states..

[Operator Instructions] This concludes our question-and-answer session, and it also concludes today's conference call. Thank you for attending. You may now disconnect..