Revisiting IDT – again

IDT is at it again. They are generating free cash and incubating businesses. Spin-offs will be soon to follow.

A brief history of IDT:

IDT is run by the Jonas family (first father Howard, now son Samuel, and I think some other relatives are involved). They are majority owners and they run this business however they see fit. If they don’t want to answer questions at an earnings call, they don’t. If they don’t like a question on the call, they say so. They do want they want and disclose what they want.

In other words they don’t really care about what shareholders have to say. And you know what? I am okay with that because the Jonas family does one thing very well – make money for shareholders. If they make even more for themselves in the process, who am I to protest?

The IDT template that has played out 5-6 times over the last 10+ years: They start with their boring legacy business of international calling and carrier services. This business does not grow very much but does spit off a lot of cash. Then they use the cash to incubate losses from new, fledgling businesses that are started. Once those fledgling businesses gain traction, they spin them off into their own companies, with the shares going to existing shareholders.

They did this with IDW Media, Genie Energy, StraightPath, Zedge and Rafael, and that is in addition to Fabrix, which rather than spin-off they sold to Ericsson for $65 million. If you aren’t familiar, look up the history of StraightPath and what happened to that stock.

After the Rafael spin off in 2018 it looked like the cupboard was bare. But as the old saying goes, never count out a Jonas.

I hadn’t looked at IDT since Rafael. What brought it to my attention again was simply that the stock was up. Given that IDT gets no respect, I figured that a move in the stock like we have seen was most likely because something good was happening.

It turns out that was the case. The folks at IDT are doing what they do best, incubating businesses and letting them grow.

This time around we get three nascent businesses:

• BOSS Revolution Money Transfer – an international money remittance/payment transfer
• National Retailer Solutions – nationwide POS payment processing solution aimed at independent convenience store
• net2phone – a UCaaS cloud communications solution aimed at LatAm

The BOSS Money Transfer and NRS businesses are both growing at 100% yoy. net2phone is growing at 40% yoy.

Both the money transfer and payment processing businesses have recently announced expansion plans. The next step for Boss Money Transfer is to become a neo-bank (in all probability the Jonas’s have noted that neo-banks (like chime) get ridiculous valuations and all they really do is collect interchange fees, which BOSS already does with transfers). IDT first mentioned this on the fiscal Q4 call two weeks ago:

we will roll out BOSS Money Visa card in peer-to-peer transfers early next year. This is the first step in a broader and strategic challenger bank initiative that we are now focusing on to help our immigrant, underbanked and unbanked customers conveniently access and participate fully in the digital economy.

With NRS, the expansion will be to a broader range of locations. Right now NRS is focused on independent convenience stores, of which they are in 12,000 locations and increasing those deployments by 450-500 terminals per month. The expansion will target liquor stores, gas stations and fast-pay restaurants.

The NRS business is particularly interesting because companies in this space get eye-popping valuations. Consider Lightspeed POS. Lightspeed recently made two acquisitions: Upserve and ShopKeeep

Upserve is a POS platform for restaurants. Lightspeed bought it for $430 million, which is 10-11x trailing revenue.

The second was ShopKeep, a general small-business oriented POS. Lightspeed bought ShopKeep for $440 million. That works out to a multiple of about 9x trailing revenue.

NRS has trailing revenue of around $15 million. And like I said, it is growing at 100%.

Now NRS, like all things IDT, is not going to have a flashy, silicon valley start-up type of look or feel. That simply is not the way that IDT works. Check out the website of NRS. Now look at ShopKeep and Upserve. The latter two look slick and hip. The former looks like an infomercial.

But here’s the thing about IDT. That is just the way it is. You are always buying businesses that make you purse your mouth and squint your eyes. But these Jonas guys find a way to make money.

You can make a simple argument for IDT on valuation. The market cap of the stock is about $330 million. There is around $128 million of cash and securities on the balance sheet. So the EV is about $200 million.

In the last 4 quarters IDT generated $40 million of free cash ex-working capital. That puts you at a 5x FCF multiple.

All of that free cash flow is coming from the boring legacy business. Each of the incubated businesses are losing money right now. But they are also all growing with leaps and bounds.

The NRS business could be worth a significant part of IDT’s capitalization already. 10x revenue on $15 million puts you almost there. Even at 5x you are half the EV.

The Boss Money Transfer business, which has done $55 million in revenue the past 4 quarters, could get a 1-2x revenue multiple just on a comp with MGI, or it could be much higher if IDT is successful in their bid to turn it into the next neo-bank.

net2phone has $34 million in trailing revenue and I don’t even know how to value that one. True UCaaS businesses get 5x revenue multiples and some much higher.

My bottom line is that I don’t know what all these parts are worth. But who cares? They are worth more than the current price of the stock. And you are betting on the jockey here. If history is any guide, the Jonas team will find a way to realize that.