IDT - Long

Stock Price: $17.50

Market Cap: $397mm

Cash: $233.8mm           

IDT is a company with a colorful past and a most remarkable transformation over the last 2 years. Founded by serial entrepreneur Howard Jonas, it revolutionized the international calling industry in the mid-90s with the invention of callback technology (cut the cost of international long distance by 95%), played a key role in the invention of VoIP (and still holds the IP), became a high-flying tech stock, sold what would later become Starz Media to Malone's Liberty in 2006, and managed to spend almost a billion dollars of cash on defending its IP, operating inefficiencies, failed incubations, and charity. Howard Jonas came back as CEO in 2008 and oversaw a complete overhaul of the company's P&L and capital structure, transforming it into an efficient, money-making enterprise.

Today you can buy a set of profitable businesses with oodles of hidden assets and growth opportunities, zero analyst coverage, and a thoughtful path to creating value and returning it to shareholders...at under 2.5x EBITDA and at 3.4x EV/FCF. It is one of the most asymmetric risk/reward situations out there.

For a brief overview you can take a look at an investor presentation that the company put together for the first time in years at:

http://sec.gov/Archives/edgar/data/1005731/000121390010004252/f8k101910ex99i_idt.htm

IDT is either hated or simply ignored, but probably both – and not without good reason. Having sold Net2Phone to AT&T in 2000 for $1.1bn, and later IDT Entertainment to Liberty for $500mm (later renamed Starz Media), IDT found itself for years flush with cash. Jim Courter, the company’s CEO at the time, took the liberty of investing the cash in unproven ventures and didn’t care to run the operating businesses for profitability. The excesses at IDT were egregious; in the Orthodox Jewish community it was known that any English-speaking immigrant to Israel could get a job at one of IDT’s call centers, the company’s headquarters in New Jersey had a swimming pool, etc. The headcount exceeded 5,000. Fast forward to 2008, when the cash had dwindled to under $200mm, the market cap languished deep below the cash on the books, and IDT received a delisting notice from the NYSE.

Howard Jonas realized that the baby he had spent two decades building was rapidly slipping into a coma. With no strategic plan, unprofitable businesses, and an extraordinarily bloated cost structure, it was only a matter of time before IDT would burn through its cash and go away. With that in mind, and the need to put together a business plan for the NYSE to maintain its listing, Jonas came back as the CEO. Interestingly, he took his comp in stock, with the stock at $1. At the time, he called the stock price absurdly low.

Immediately, good things started to happen. Headcount went from 5,000 to 1,000 (!!!). Businesses started turning a profit. Real estate was sold, unprofitable ventures were given up, a subsidiary was spun out to shareholders, the cash started to grow again and Howard started buying back stock in the low single digits.

Nonetheless, despite two years of only positive value-creation, the company remained in the penalty box, with fears that cash would again be wasted and/or that the company’s oil shale venture would do nothing but eventually consume cash (despite management’s assurance to the contrary). Although a sum of the parts analysis always came up with a much higher valuation for IDT, the market’s fear that management would somehow destroy value precluded the market from valuing the stock at anything close to the sotp. It didn’t help that management hasn’t cared to go to conferences or court investors, choosing rather to focus on making the business as cash flow generative as possible

IDT’s press release on Friday evening changed all of that. In it, the company announced a spinoff of its energy business and instituted a dividend policy at IDT Telecom. At this point it is time to start thinking about what one buys for $397mm (IDT’s market cap). To start, IDT has $234mm in cash. Not a bad way to start.

IDT Telecom

The telecom business is one of the world’s largest whole carriers of international minutes with its own low-cost network enabled by IDT’s large volumes, which come from the fact that IDT is one of the largest providers of calling cards in the US.  The other large calling card business is STI and is owned by Loews Corp.

In FY10 (just ended 7/31/10) Telecom did 47mm of EBITDA and required 7mil of capex.  A good comp for this business is iBasis, a competitor in the wholesale business (but without the more sticky calling card business) that was sold to Dutch carrier KPN in late 09. The multiple of EBITDA in that deal was 4.0x, which gets to $190mm + $50mm of cash that IDT Telecom will likely be spun out with, over 22.7mm shares = ~$10.50/share. In reality, Telecom will likely trade at a yield, and with its quarterly dividend of $0.22 it would be an $11 stock. 

The more fair way of thinking about intrinsic value is that an existing player in the business would think about the telecom business as a multiple of gross margins, finding most of the infrastructure and operating costs to be duplicative. In fact in its plea to shareholders against a low-ball tender by KPN, iBasis specifically walked through the math of where comps trade as a multiple of gross margins. On the basis of the iBasis/KPN deal, the business is worth 1.65x gross margins, or $14.50/share.

So far we have $10.50 on the low end and $14.50 on the high end. We have only assumed that $50mil of the $233mil in cash is going to be left with telecom. 

Genie Energy

The energy business is a little harder to think about, as it is a mix of both the shale venture as well as a perfectly profitable New York ESCO (energy service company).

After deregulation of retail energy markets, independent companies are able to market their services to retail and commercial customers, acquiring energy meters and reselling energy to those customers at unregulated rates. This business is fairly stable, without a lot of churn once the customers are acquired.

The energy business did $38mil of EBITDA in FY10. One of the interesting things about ESCOs is that several states are just now deregulating their retail markets, essentially creating an opportunity for someone other than the incumbent utility to market to consumers. IDT is now starting to expand into New Jersey and Pennsylvania, which are blue sky opportunities that could add significantly to Genie’s footprint of ~370,000 meters in NY state.  A comparable business that was recently acquired is Hudson Energy, which was taken out by Just Energy, a Canadian ESCO.  Hudson’s business was also in New York, as well as Texas and several other states, although Hudson was more focused on the higher churn, lower quality commercial customers. The deal was done at 4.4x EBITDA, while Just Energy itself trades at over 10x.  At 4.4x, the ESCO business is worth $7.35/share. This gives no credit to the fact that Genie is growing while Hudson wasn’t, but all’s fair in the name of conservatism.  If we want to be a little more aggressive with 6x, that gets us to $10/share.

The other part of Genie are the oil shale ventures, which give people pause. IDT has assembled the world’s top shale talent to work on commercializing the technology in the US and/or Israel. In the US, there are three large oil shale concessions and they belong to Shell, Chevron and IDT. In Israel IDT has a similar concession. It is not worth spending a ton of time understanding shale; it’s fair to say that this is a long shot that will take time to play out but could make this a 100x investment.

For purposes of a conservative analysis, I ascribe it absolutely no value. But several things need to be said. The market is worried about shale consuming the company’s cash. This is unlikely to be the case. IDT brought in Total as a partner in the Colorado project, where Total will fund most of the R&D and capex required to test the technology. They are looking for a similar partner in Israel, and this should significantly de-risk shale in the market’s eyes (even though there’s absolutely no reason to not take management at their word).

Also, IDT really has assembled a very talented team to try to commercialize shale. This team is led by Dr. Harold Vinegar, a former Chief Scientist at Shell and Harvard PhD of whom the US DoE said “Harold has broken the code [of producing shale]”. The strategic advisory board of Genie, assembled in August of 2010, includes Michael Steinhardt, Dick Cheney, Wes Perry (veteran oil & gas investor), Harold Vinegar, Alan Burnham, PhD (Lawrence Livermore scientist for 30 years), Allan Sass, PhD (former CEO of Occidental Oil Shale), Stephen Trauber (vice chairman and global head, energy investment banking group at UBS). Again, it is entirely possible that this team fails miserably in its effort to commercialize oil shale, although the technology has worked in many small-scale experiments. This article provides more background info on Harold Vinegar and shale: http://money.cnn.com/2007/10/30/magazines/fortune/Oil_from_stone.fortune/index.htm

Let’s assume oil shale is worthless.  So far we have a range of $7.35 - $10/share for Genie, plus $10.50 - $14.50 for Telecom, or a total range of $17.85 to $21.85. But there is a lot we haven’t counted.

What do we get for free?

We only gave credit for $50mm of cash (guesstimate) that will be spun out with Telecom.  In reality the company has $234mm of cash, or $8.10 that we haven’t counted and that will probably be spun out with Genie.  To be conservative with the low end, we can assume that the market will only ascribe 50% of the cash value, or $4.05. We can live with that.

Fabrix is an IDT majority-owned tech company that developed software to enable Cloud DVR solutions. You can think of this as a way for cable MSOs to avoid putting a DVR in your living room, instead having a centrally stored repository that you can access on demand, which would let you watch your shows remotely while the cable company avoids spending on a DVR to install in your house. With IBM as the hardware partner, Fabrix very recently signed up Cablevision as its first customer. It is rumored that IBM was interested in acquiring Fabrix for something in the neighborhood of $100mm although we have not confirmed this. Management has said that they would want to commercialize a wide roll-out of Fabrix before considering selling the business. In private conversations management has hinted that a monetization of Fabrix would come back to shareholders (as dividends or a repurchase).That’s free (it will probably stay with IDT Telecom after the spinoff of Genie).

Zedge is also majority-owned by IDT and is an online community of 18 million members who can share and download mobile content (ringtones, wallpapers) for free. Membership is growing and speaking to a number of members it definitely sounded like people are using the site actively to share the content. The site is also cash flow positive from advertising revenue, so the value here is certainly more than zero. This is also a free option.

Telecom intellectual property are the VoIP patents that were issued to Net2Phone, which was sold by IDT to AT&T and later reacquired.  Interestingly, IDT has spent millions of dollars defending this IP and recently settled on undisclosed terms with Skype. One of the things that came out of Friday’s announcement was the fact that the Board directed management to aggressively pursue other cases where others might be infringing on this IP.  Given the widespread use of VoIP, it is very possible that IDT either has very legitimate claims (a top law firm agreed to litigate against Skype on contingency, so clearly they had faith in the merits) or has enough nuisance value to be able to milk this IP for cash going forward. The press release also mentions that the IP might be spun out into a separate entity altogether.

In summary, IDT has finished the bulk of its turnaround. With a lean cost structure and a management team focused on creating value, and sum of (not all of) the parts yielding $22 to $32, it seems difficult to lose money here. The value range includes nothing for Shale, Fabrix, Zedge, or the telephony IP. The reader can apply his own estimates of value for these. 

For truly in-depth info  on Howard and an appreciation for his entrepreneurial nature, I recommend reading his book, “On a Roll: From Hot Dog Buns to High-Tech Billions” A copy can be found at http://milo.digitalentropy.com/projects/onaroll/onaroll.pdf