Two Catalysts at IDT
While I think IDT is cheap when evaluated on its mature business lines, I’m not a big fan of investing in a company simply because its cheap. You can end up sitting on a stock waiting indefinitely and often your patience runs out before something happens. So there needs to be a catalyst.
In the case of IDT, I see a couple of catalysts. First, I think they are reaching an inflection point where the declining calling card business is overcome by the growing cardless long-distance (Boss Revolution) business. And second, probably the biggest reason for me to have bought the company is that I think they have a hidden gem in a little subsidiary called Fabrix. While I am going to talk about Boss first, it is Fabrix that I believe that holds the real potential.
IDT’s legacy business is calling card products. That business has been in decline for some time now and many of IDT’s competitors have gone into bankruptcy because of declining revenues and margins. I think the stock trades at a discount because investors associate the name with calling cards and want no part of that game.
The reason that IDT has been able to avoid the fate of its competitors is, in part, because the company recognized the decline in the calling card market ahead of time and developed a couple of alternative products to take its place. One of the products is called Boss Revolution Pinless.
Boss Revolution allows customers to call out of country for a cheaper rate then they would otherwise. They can register their phones and make calls without having to enter pin numbers or dial codes. It essentially acts just like a long-distance plan you would get from your service provider. The website is here.
The introduction of Boss Revolution has allowed IDT to grow its Retail Communications segment when otherwise it would have been in decline. In the last fiscal quarter (ending October 2012) Retail Communications saw revenue growth of 16%.
While IDT is pretty type lipped about breaking out the numbers within its business lines, they did give a bit more color about Boss Revolution on the fiscal fourth quarter conference call (in July). They said that quarter over quarter growth in Boss Revolution had been 15% while year over year growth had been over 100%.
The catalyst with Boss is an inflection point in the overall Telecom business as Boss growth supercedes calling card declines. I think we are at a point where the income generated by Boss Revolution begins to significantly exceed declines in the traditional calling card business, with the result being that we see more substantial gains to the bottom line. The company indicated as much in the 10-Q
“We expect Retail Communications’ growth to continue in fiscal 2013 with revenue increases from Boss Revolution Pinless more than offsetting the expected decline of traditional disposable calling card product sales.”
The growth in Boss is going to be sustained by both further penetration in the United States, recent introduction into the UK, Spain and Germany, and upcoming introduction into Hong Kong, Singapore and Australia.
Management also indicated on the fiscal Q1 conference call that calling card revenues are declining at a slower rate, which will help the thesis.
Up until now the growth of Boss Revolution has been mostly masked by the calling card declines. As this inflection point is passed and Boss Revolution growth begins to substantially outpace those declines, I think the market will take more notice of the growth.
Fabrix is a software development company that, according to the 10-K is “specializing in highly efficient cloud-based video processing, storage and delivery.” Basically, Fabrix provides the software that allows you to use your PVR via a cloud based solution that could be accessed from anywhere. According to management, the Fabrix solution is technically superior to the alternatives and consistently outperforms other options in laboratory testing by prospective clients. IDT owns 80% of Fabrix.
As the table below indicates, Fabrix has grown significantly over the last couple of years. I think what we have again is an inflection point, this time to profitability.
While revenue has grown consistently over the last few years, note how it has really had a step change in fiscal Q1.
Also in the 10-K IDT says of Fabrix that “the major American cable operator that licensed the Fabrix software in August 2010 to empower its cloud-based DVR offering continued to purchase additional product.” On the Q4 conference call, management said that currently Fabrix is used in 350,000 homes in the US, but by the end of 2013 they expect this number to reach 1mm. They also explained on the fiscal fourth quarter conference call that they had received $12mm in cash from a Fabrix contract with a system integrator (it wasn’t clear if this was the same cable provider or not), to be recognized as revenue over the 3 year contract they have signed.
There is a actually a very good article that was written a couple of years ago about IDT on Seeking Alpha. The article does a good job explaining the opportunity at Fabrix (as well as a second little subsidiary named Zedge).
The article points out that there has been some acquisition interest in the past.
During the Investor Day Presentation, Jonas hinted that IBM and Dell (DELL) expressed interest in the possible investment or acquisition of Fabrix. There are rumors that IBM was willing to pay as much as $100 million for Fabrix. If the rumors are true, Fabrix would be worth $70 million or $3 per share because IDT owns 70 percent of it.
I would note that this was the Investor Day presentation that took place over 2 years ago. Fabrix has seen significant growth and adoption since that time.
I’m pretty excited about the potential at Fabrix. While I like the cash flow generation at IDT, and I consider it cheap given the level of cash on the balance sheet ($7 per share), the real catalyst for me to buy shares is Fabrix. I would argue that right now there is no value being placed on Fabrix in the share price. I would suggest most investors are not even aware of the sub. An announcement by another large cable provider that is adopting their technology could be the catalyst that makes investors sit up and take notice. While I recognize that Fabrix is still a pretty small percentage of revenues and income, IDT is only a $200 million dollar company; it would not take much more growth to make Fabrix a significant contributor.