Bill Pereira - CEO, President, and Co-Chairman of IDT Telecom Marcelo Fischer - SVP, Finance.

Analysts:.

Good day, and welcome to the IDT Corporation's Second 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 questions. [Operator Instructions].

In today's presentation, Bill Pereira, CEO of IDT Telecom will discuss IDT's financial and operational results for the three month period ended January 31, 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 for the Q&A, 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. Pereira. Mr. Pereira the floor is yours sir. .

Thank you, operator. Welcome to the call everyone. Our remarks today will focus on key operational and financial results for the second quarter of our fiscal year 2015, the three months ended January 31, 2015. Throughout my remarks unless otherwise indicated, this quarter's financial results are compared to the second 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 which we expect to file later this week. Shmuel Jonas asked me to be on the call today to provide more focus on IDT Telecom.

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.

As you evaluate our results for the second quarter of 2015 please keep in mind that IDT sold its stake in Fabrix Systems during the first quarter thus our second quarter results do not include Fabrix's operating results.

But since the sale of Fabrix is not qualified for discontinued operations treatment for accounting purposes Fabrix's operating results are still included in all comparative prior period results including the year ago quarter.

Also results from Zedge, our popular mobile phone personalization platform which had been reported as a separate segment are now aggregated with the other operations reported in the all other segment. Now let’s review the results. Consolidated revenue in the second quarter was $394.2 million, a decrease of $12.3 million year-over-year.

I want to spend some time on the three primary causes of the revenue decline as to a large extent they do not reflect the strength of our core businesses. First, in the all other segment as explained above, Fabrix contributed $3.3 million in revenue in the year ago quarter but nothing in the recently completed second quarter following its sale.

Second in IDT Telecom where revenue was $391.2 million compared to $401 million in the year ago quarter, the pricing arbitrage opportunities in Latin America for our wholesale carrier business which we’ve discussed on previous calls generated less than half the revenue compared to the year ago quarter as the underlying market opportunity continued to dissipate.

In prior quarters we consistently advise that this opportunity will likely be temporary and that our participation in it was wholly opportunistic. Over the course of the past year we have seen the arbitrage opportunity narrow with decreased revenue and gross profit contribution.

Third, we have also observed in the past that we manage our wholesale carrier business to maximize gross profit and their revenue volatility often does not correlate with the gross profit generated by the business.

Year-over-year exclusive of the South American pricing arbitrage result, the gross profit contribution and the minutes terminated by our wholesale carrier business actually increased despite the revenue decline.

Within our TPS segment, revenues in our retail communications vertical increased 6.8% year-over-year driven by a 14.3% increase in revenues from our Boss Revolution calling service. Consistent with our earlier forecast we expect double digit year-over-year growth for Boss Revolution Pinless through the remainder of fiscal 2015.

It’s worth noting that the Boss Revolution App now accounts for approximately 10% of Boss Revolution calling usage and is fast approaching 2 million downloads. As Smartphone adoption rates continue to climb in our target demographic, the Boss Revolution App will become an ever more important component of our business.

To leverage this opportunity we continue investing in App development and we will be bringing exciting new features to the App throughout this calendar year starting with free messaging sometime this summer.

These new services and features are designed to drive significant increases in the App user base and customer engagement and should translate into new revenue opportunities as well. Wholesale carrier revenue declined 12% in the second quarter to $147.8 million while minutes grew 3.6% to 4.9 billion minutes.

As I mentioned earlier more than half of that revenue decrease resulted from the contracting South American arbitrage opportunity. The remainder reflects a shift in the minutes carried from relatively higher revenue lower margin to lower revenue higher margin destinations as well as the declining revenue per minute trends we been seeing for years.

I want to emphasize that the volume mix shift and declining revenue per minute trend did not have a negative impact on our profitability. As a matter of fact the gross profit generated by the wholesale carrier business exclusive of the South American opportunity actually increased by 5.4% year-over-year.

While we are on the subject of our wholesale business, following the quarter close IDT reached an agreement with ETECSA, the Cuban national telecom to establish a direct connection to carry international long distance traffic between our two companies. The FCC subsequently reviewed the agreement and has allowed it to become effective.

Currently IDT is the only U.S. based telecom interconnected directly with Cuba. I want to take a moment to thank and congratulate our team that worked on this for quite a while. They put in a great effort and did a terrific job. While we are proud to be the first and to date the only U.S.

carrier terminating calls directly to and from Cuba, we do not expect that this agreement will have a significant financial impact on our wholesale or our retail businesses. Other non-U.S. based carriers provide comparable services and we do not have a significant competitive advantage.

However, we are excited about the longer-term potential afforded by liberalization of telecommunications in Cuba and are hopeful that this agreement opens the door for IDT and ETECSA to provide our respective customers additional telecommunications and payment services down the road.

Turning now to our payment services vertical, we generated revenue of $50 million in the second quarter, a 2.2% increase from $48.9 million in the year ago quarter. The increase reflects more competitive pricing for our airtime top up products which are becoming increasingly commoditized and are generating decreasing margins.

Our international money transfer business is also included within the payment services vertical though it is not yet a material contributor to the company's revenues. We continue to see strong month-over-month growth in both the number of transactions and in our network of origination agents.

It bears repeating that although we are enthusiastic about the long-term potential of this business it will require sustained investment over the next three to four years before it begins to contribute positively to our bottom line.

Outside of our telecom and payments businesses, our all other segment consisting of Zedge, our real estate holdings, and a handful of other very small initiatives generated $3 million in revenue compared to $5.5 million in the year ago quarter when Fabrix's results were included.

Excluding Fabrix, revenues in the all other segment grew by nearly 35% driven by a very strong performance at Zedge. All other reported negative adjusted EBITDA of $556,000 in the second quarter compared to negative adjusted EBITDA of $708,000 in the second quarter of fiscal 2014. Zedge is user based and revenues continue to grow strongly.

But its results this quarter were impacted by a onetime non-cash compensation expense of $1.1 million reflecting a revaluation of outstanding options. On a go forward basis we expect this segment to benefit from ongoing improvements as Zedge continues growing its customer base and invest in a host of new and exciting user engagement initiatives.

On a consolidated basis, gross margin for the quarter was 16.6% compared to 17.5% in the year ago quarter which benefited from Fabrix's contribution. Looking just at our TPS segment, the decline was 50 basis points from 16.3% to 15.8%.

The decrease in TPS's margin was caused by the loss of revenue from the relatively high margin South American arbitrage opportunity by a decline in margin contribution from our hosted platform solutions business where we renewed contracts with key cable operator clients at lower rates and margins than we enjoyed in the year ago quarter and by margin pressure on our airtime top up offerings.

Consolidated SG&A expense increased $109,000 year-over-year to $57.4 million. Corporate SG&A significantly decreased year-over-year down to below at $12 million annual run rate. The deconsolidation of Fabrix also reduced consolidated SG&A expense. At IDT Telecom, SG&A expense increased by $700,000 year-over-year to $51.3 million.

Following the quarter close, the company reduced its global workforce by approximately 7%. As a result, we expect to record severance charges of approximately $6.6 million in the third quarter and to reduce run rate compensation cost by approximately $10 million per year.

This reduction in force has been difficult for everyone here at IDT, however, it’s clear that we must continue to ramp up investment in technology as well as in new and recently launched services in the coming quarters. And as Shmuel noted last quarter we are committed to keeping cost in line and under control.

IDT generated $8 million in adjusted EBITDA for the quarter compared to $11.3 million in the year ago quarter.

The adjusted EBITDA decrease resulted primarily from the diminished impact of the South American Arbitrage opportunity, the onetime non cash compensation expense relating to a revaluation of outstanding Zedge stock options, and the lower levels of revenue and profitability from our cable telephony business following the renewal of our key customers at lower rates.

GAAP net income attributable to IDT was $2.5 million or $0.11 per diluted share in both the second quarter of 2015 and a year ago quarter.

Our measure of non-GAAP net income which excludes non routine gains and expenses, non cash compensation, and appreciation and amortization expense increased to $7.5 million from $6.4 million in the year ago quarter. Overall this quarter's results were very much in line with recent results and expectations.

Our largest and most significant businesses had a very strong quarter led by the continued growth of our Boss Revolution Calling service and the increase in both minutes and gross profit generated by our wholesale carrier business.

We have also taken steps to reduce our SG&A expense going forward and we remained focused on developing –and deploying features and services which we expect to drive long term growth. Based on our results IDT’s Board of Directors has declared an $0.18 per share dividend for the second quarter.

During the second quarter the company distributed $34.9 million to its shareholders including two special dividends paid after collecting the majority of proceeds from the sale of Fabrix.

Even after paying those hefty dividends our balance sheet remains strong with no long term debt and liquid with $152.2 million in unrestricted cash, cash equivalents and marketable securities.

Finally all of us here in Newark are delighted at the renovations to our office space within our former headquarters building at 520 Broad street are nearing completion. We expect to be moving back into that space later this spring.

The move will not only enhance our ongoing effort to maximize the property's value by either leasing or selling the vacant portion of the building but will also provide our employees with a new and modern work environment. That concludes my remarks and now Marcelo and I would be happy to take your questions. Operator back to you for Q&A. Thank you..

Thank you very much for joining the call and feel free to contact us if you have any questions. Thank you..

And we thank you sir for your time today, and to the rest of the management team. The conference call is now concluded. At this time you may disconnect your lines. Thank you and take care everyone..