|Shares Out. (in M):||23||P/E||5.0x||0.0x|
|Market Cap (in $M):||235||P/FCF||9.0x||0.0x|
|Net Debt (in $M):||0||EBIT||14||0|
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IDT has been written up as a long idea several times on VIC over the years; the last write-up was by hb190 in November 2010. I will refer readers to this write-up as a nice background supplement and will keep this version short and sweet as much as possible. At the time of the Nov ’10 VIC write-up IDT essentially had two different business units. The first was a telecom / technology business, the second was an energy unit with a distribution business and an oil shale technology venture. In October 2011 IDT spun out the energy unit as Genie Energy (which has been written up twice on VIC since the spin) and the two stocks now trade independently. This recommendation focuses on the telecom/ technology business remaining at IDT.
My view is that the current price (at ~$10, a market cap of around $230 million) looks anywhere from very undemanding to downright cheap as one walks through the inventory of business assets. Also, it seems that downside risk is reasonably protected by asset value, providing the idea with a favorably asymmetric skew. I have tried to take a very conservative view of the assets in place in the analysis that follows, but I think there is some meaningful probability that IDT has a very big percentage upside from here. As a final disclaimer, the stock isn’t very liquid and that may also limit its appeal to many VIC readers.
I will start this analysis with the core telecom business; please refer to the prior VIC write-up for more details on it as I will give only a summary sketch. IDT offers telecom services with an emphasis on retail pre-paid and rechargeable phone cards as well as access to its network to other carriers in the wholesale market, where it has over 800 carrier relationships globally. Full year telecom revenue was just over $1.5 billion in FY2012 ending July 2012, and my best guess is that it can produce anywhere from $25-40 million in annual maintenance FCF, or about 1.5-2% of revenues. The truth is that IDT’s core telecommunications business has and likely always will be a very low-margin business with a lot of competition. Nevertheless, thus far IDT’s status as a low-cost provider, its ability to offer new and innovative services such as its Boss Revolution retail calling card, and its global network (which cost many times the current market cap to build) have enabled the company to successfully compete and remain decently cash flow positive. However, if this was IDT’s only asset I probably wouldn’t have a strong interest in owning the stock. As is stands, IDT also offers a basket of other assets that appear very interesting.
The most interesting of these assets to me is Fabrix, which is a cloud-based storage and retrieval technology currently targeted at the cable industry for use in DVRs. IDT management calls Fabrix the “most efficient, most dynamic cloud-based video storage solution in the industry” and the evidence suggests that Fabrix is gaining traction with cable operators to allow them to provide cloud-based access to video content for their customers. IDT also has stated that the Fabrix technology has potential for many non-video applications. Fabrix is based in Israel , and IDT owns an 80% stake in the business. Fabrix reported revenue of only $3.6 million in FY2012, which was up roughly 50% from the prior year. In Q1 2013, however, Fabrix brought in $12 million in cash flow related to a 3-year deal with a new cable customer, which will be recognized on the revenue line at $1 million per quarter over three years. IDT believes Fabrix can generate $20 million in cash flow in FY2013, which doesn’t appear to be any kind of a stretch given that $12 million is already in by Q1. If Fabrix can indeed generate that kind of cash flow and particularly if it can grow its cash flow over time, then IDT’s 80% stake in the business may well be worth IDT’s current market cap by itself. Unfortunately, I do not possess the technology expertise to gauge whether Fabrix’s technology is in fact superior to what else is out there, but the fact pattern suggests that the company is most definitely gaining momentum with cable customers.
If IDT were only the telecom business and Fabrix, it would be interesting but still perhaps not extremely compelling. But there are some other assets here to consider. The other assets are: 1) excess cash, 2) real estate, 3) Zedge, a mobile content download engine, 4) spectrum assets 5) a portfolio of VOIP patents, and 6) about $180M of NOLs.
Let’s start with the cash. As of Oct 31, 2012, IDT’s balance sheet showed about $166 million in cash, $16 million in ST restricted cash, and $11.4 million in LT restricted cash. In addition, IDT shows $7.5 million in LT investments, which is invested in hedge funds. I’m going to throw out the restricted cash of $27 million for now (I will come back to that later) and focus on the $173 million left. IDT paid one quarter’s normal dividend and accelerated its $0.60 per share 2013 full year dividend at the end of 2012, so I will reduce the cash by about $15 million to account for this (ignoring any cash generated in the January Q). This leaves us with $158 million, or about $6.90 per share in cash. Recall that this is a $10 stock we’re discussing.
Let’s move on to the real estate. IDT owns a large un-occupied office building in Newark (520 Broad Street) valued at $42.9 million on the balance sheet at Oct 2012. There is a mortgage balance against the building with a current value of $23 million, for a theoretical value spread of ~$20M. I don’t actually believe this value spread exists, but I am hopeful that the value of the asset exceeds the mortgage by some amount. Either way, worst case IDT should be able to walk away from the building, eliminating both the asset and the liability from its books, if it felt that there was a negative spread here. I value this at zero, but I could be wrong by as much as $20M, which would be nearly $1 per IDT share.
The other asset for which I assign very little value is Zedge, which is ~81% majority owned by IDT and which IDT has positioned as a recommendation engine for various mobile phone apps. Zedge also recently launched a mobile game channel. Zedge monetizes traffic to its site with ads. Like Fabrix, Zedge only produces about $1 million per quarter in revenue, and reported FY2012 sales of only $3.8 million. This was up about 18% from the prior year. Zedge is now reportedly break-even operationally, so it is at least self-supporting. Though I don’t assign any value to Zedge, there is a chance it turns into something valuable.
Then there is the spectrum license portfolio, which based on a company presentation dated 2011 included 633 38-GHz licenses and 16 28-GHZ LMDS licenses. In FY2012 the company sold eight licenses for $6.8 million, or roughly $870K per license. My sense is that these may have been among the most valuable licenses in the portfolio, and thus I hesitate to extrapolate this value to the rest of the portfolio. Still, there is likely some considerable value here. If it turned out that the 640 remaining licenses were really worth something more like $100K per license, the value ($64M) would still certainly be big enough to move the needle for IDT.
On the IP front, IDT has announced that they intend to try to spin off its VOIP patent portfolio into a separate publicly traded company called ICTI. The IP business has filed litigation against a couple of companies for infringement of IDT-owned patents and has apparently recently extracted something in a settlement, but the 10-Q doesn’t go into details. In late September 2012 the Board awarded CEO Howard Jonas a 10% interest in ICTI, which is likely a preliminary event to the spin-out. I assign very little value to ICTI, but if the spun out is completed the market will be provided with enough information to place some sort of value on it. I don’t think IDT would spin it off if there wasn’t sufficient value to make it worth the effort, and this alone represents a favorable piece of evidence that ICTI is in fact worth something.
Let’s do a quick review: The bull thesis for IDT is that for a company a market cap of ~$235 million, IDT sure seems to have a lot of “stuff.” Here again is the list:
There are two important questions that need to be considered as an offset to the above list. The first is how much of IDT’s cash is really excess? The second is that IDT has $27 million in restricted cash which is there to offset some liabilities; what are these liabilities and is this amount sufficient?
The company has been asked about its cash on its investor calls in the past, and has generally answered along the lines that IDT needs about $50 million in working capital for its telecom business, and also that the company has found it helpful when dealing with large telecom companies to be able to show a decent balance sheet. I will note that on the most recent balance sheet, IDT showed accrued expenses of $160 million, and accrued accounts receivable of just $71 million, or a current account deficit of about $90 million. So it may well be that less of this cash is available for shareholders than what I have assumed. Still, if we assume that excess cash runs from $50 million at the low end to $100 million at the high end that still means that there is $2.20 to $4.38 per share of value here. IDT had been paying a large dividend before accelerating calendar 2013 payments into a special payout in late 2012, and also recently has been buying back a few shares. So there is a history of excess cash being distributed to shareholders here.
As far as the liabilities go, at the time of the last VIC write-up in November 2010 IDT had a very ugly assortment of legal and tax disputes and liabilities outstanding. Since then, the company has done an admirable job of cleaning this up and continues to show progress pretty much every quarter. There are three pretty significant legal disputes mentioned in the 10-Q, but it appears that IDT’s $27M in restricted cash probably represents a reasonable estimate of what the ultimate damage might be to the company. In my read of the most recent Q, it appears that IDT may have settled one of these (with Southwestern Bell) in a manner that would be quite acceptable (there was mention of a $0.4 million charge). IDT also had a whole slew of tax disputes outstanding a year or two ago; the worst of these has been favorably resolved and it appears IDT is in progress of settling other state tax audits here in early 2013. IDT also expects a $4.8 million tax refund from Puerto Rico to show up sometime in 2013. Last but not least, there is a whistle-blower item that dates back to 2004 that prompted an SEC and DOJ investigation. The company’s 10-K disclosure states that its own internal investigation conducted by outside counsel found no evidence of wrongdoing, but the case is apparently still open.
My expectations for FY2013 are reasonably modest. I hope IDT can kick out another $25-35 million in FCF for the telecom business. It would be nice if IDT can resolve some of its remaining legal issues and monetize something from amongst its IP, real estate and/or spectrum assets. I am hopeful that Fabrix reaches a point where the stock market is forced to assign some real value to it.
IDT reported what I felt was an excellent first fiscal quarter of 2013 ending October 31, 2012. The company reported revenue of $400.6 million, up 6.3% YOY. Minutes of use in its telecom business increased 19% to 8.7 billion, and the company increased its gross margins to 16.3%, up 110 basis points from the prior year. Gross profit was up 13.8% to $65.3 million. Adjusted EBITDA increased to $8.7 million, while operating income was $5.2 million versus a loss of $11.1 million in the year-ago quarter. Net income was $3.6 million, while the company’s non-GAAP income was reported at $9.9 million, or $0.45 per share (versus $0.37 per share a year ago). However, the single most impressive metric of the quarter was the operating cash flow of $25.7 million, which is compared to a negative OCF in the year-ago quarter of $13.4 million. Q1 has often been a negative FCF quarter for IDT in the past. The strong Q1 cash flow was boosted significantly by Fabrix, which produced $12.8 million in OCF, but the telecom business must have contributed decently as well. Also during Q1 ‘13 IDT bought back 77,843 shares of Class B stock for $0.8 million, or right at $10 per share.
In summary, a conservative review of IDT suggests that fair value is likely to be in the range of $12-15 per share, albeit with a wide range of possible outcomes. My view is that the downside range is muted by the cash on the balance sheet. There is a chance (I won’t venture to guess what percentage) that a home run with one of the assets owned by IDT turns this stock into a very big percentage winner from here. Fabrix and the spectrum assets seem the most likely candidates. How well Chairman and CEO Howard Jonas plays his cards is obviously a big factor here; since I’ve been following the company his primary moves have been to spin out Genie Energy, announce the spin out of the IP unit, and to initiate a meaningful dividend followed by an accelerated payout in late 2012 in front of the fiscal cliff debate.
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