Quick Freebie: IDT Corp - Melting Ice Cube Fuels Fast Growth
(Soft) Guidance to NTM EV/EBITDA of 8x, a run-rate adjusted PE of 20x, and $35M of tax assets
EDIT: I should not have annualized the GAAP Q4 EPS number as the company recorded a tax gain in this quarter. I mark edits below. Apologies for the inconvenience.
Introduction
This is a quick free post, not very in-depth, do your own due diligence. This kind of post does not represent what I put forward behind my paywall.
I know it is not a secret and I do not have a unique variant view on this, but: IDT is a case where a melting ice cube segment funds fast-growing segments. For some time, the melting ice cube obfuscates the fast-growing segments until, at some point, the benefits come to the center of the stage.
What?
IDT Corp IDT 0.00%↑ has a history of building up business segments and spinning them off.
They currently have three fast-growing segments and legacy melting ice cube businesses that they run for cash generation with minimal investment. The legacy businesses are in terminal decline but fund the other segments: National Retail Solutions (NRS - mentioned here), net2phone, and Fintech.
FY2024 Results
EDIT: I strike the first sentence and replace it
According to today’s results release (10-K will be submitted by next Tuesday) the company achieved an EPS of $1.45, representing a run rate of $5.80, with a share price touching $45, which would mean a 7.75x PE.
According to today’s results release (10-K will be submitted by next Tuesday) the company achieved a GAAP EPS of $1.45 including the effect of a $23.6M tax benefit. The adjusted non-gaap EPS quarterly earnings of $0.57 represent a run rate of $2.28, with a share price touching $45, which would mean an adjusted PE of approximately 20x. The growth segments grew quarterly revenues strongly: “NRS* +42%; BOSS Money +41%; net2phone* +15% …*NRS revenue refers to recurring revenue. net2phone revenue refers to subscription revenue”.
Looking at the quarterly operating income figures, the three fast growth segments (NRS $6.0M, Fintech $2.5M, net2phone $0.8M) are closing the gap to the traditional communications segment fast $13.9M.
Of note is that the company earns recurring revenue and shows $30M of deferred revenues (you know I like that), i.e. it collects prepayments. Further, the company has $80M in customer deposits, so there is a level of float-like capital provided to the company to earn interest on.
Year-on-year, shareholder equity increased from $210.5M to $266.6M, i.e. 25%. With a P/B value of 4.5x and ROE of 28%, a simple yardstick would be: 1$ of equity can be purchased at $4.5 and thus, the ROE yield on the purchase price is 6.2%. But as the equity purchased is growing 20%+, the yield on that equity investment should be expected to compound at whatever the assumed equity growth rate is. Is it 20%+ like observed for the last couple of years and then flattens? Should one assume 10%+ to be on the safe side?
The reason for this quick and free article: In today’s earnings call, the CFO gave soft guidance to expect at least $100M in EBITDA next FY - compared to an LTM EBITDA of $86.8M. Based on the current Enterprise Value according to TIKR Terminal of approximately $800M, that implies a forward multiple of 8 times. With an EBITDA to FCF conversion for LTM of $59.3M / $86.8M = 68.3%, this implies an FCF/EV yield of 8.5% - for a business with three fast growing segments. The company has no debt and a net cash position of $190M. They exhibit strong growth with little CAPEX (although I would not mind seeing a higher rate of reinvestment).
EDIT: The company also has $35M of tax assets on its balance sheet - at an assumed 25% tax rate these should shield $140M in profits before tax in future years. This needs to be checked against the 10-K, once it is published.
Another aspect to note: the CEO commented in the call that they are continuing their focus on growing the NRS business (“we're focused on building NRS into a multibillion-dollar company”), and seemed open to spin-off or a sale at an opportune moment (NRS has a history of spinning off profitably growing segments, but these past years have not been very conducive to that).
Disclaimer
I own shares of IDT Corporation and stand to benefit if they rise in price. I may decide to purchase or sell shares at any time without prior notice. Do your own research and size positions appropriately if you invest. Nothing here is meant to be understood as investment or financial advice.