IDT Corporation ($IDT)

Good evening. Welcome to the IDT Corporation's Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference call is being recorded. I will now turn the call over to Bill Ulrey of IDT Investor Relations. Bill, you may begin.

Thank you, John. In today's presentation, IDT's Chief Executive Officer, Shmuel Jonas; and Chief Financial Officer, Marcelo Fischer, will discuss IDT's financial and operational results for the 3 months, ended April 30, 2026. After their remarks, they will take your questions. Any forward-looking statements made during this conference call, either in their remarks or during the Q&A that follows, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those, which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or in the Q&A session, IDT's management may make reference to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA margin, non-GAAP earnings per share, NRS' Rule of 40 score and adjusted net cash provided by operating activities. Schedules provided in the IDT earnings release reconcile these non-GAAP measures to the nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website. The earnings release has also been filed on a Form 8-K with the SEC. And now I'll turn the call over to Shmuel for his comments on the quarter's results.

Thank you, Bill, and thanks to everyone on the call for joining us this evening. Last Friday, my father ran the opening bell at the NYSE to celebrate IDT's 25th anniversary, as a NYSE-listed company and our 30th anniversary as a public company. Over 100 employees on their own dime from all over the world made the trip into Manhattan to be part of the event. After the event, I agreed to reimburse them, but I wanted only people to come who generally wanted to be there. I'll be honest, I wasn't sure what to expect going in. And as you can tell from my notoriously short speeches, I don't really like long-winded events. But the moment we approached the exchange and my father saw the IDT sign and smiled at me, something shifted for me. The NYSE team had done something really special. They pulled together photos and documents from our past listing anniversaries, creating a time line of the people, the document, the, I don't know if history of IDT, and it was a very proud moment. What struck me most throughout the morning was the pride of being part of an organization that has stayed relevant and innovative throughout those 30 years, including the spin-off of 5 public companies and that has consistently delivered for employees and shareholders alike, although not always in a straight line. IDT's year-over-year revenue and earnings growth was again powered by the continued expansion and operating leverage of our 3 higher-margin businesses, paired with another quarter of steady cash generation from our Traditional Communications segment. Consolidated revenue grew 5% to $315.7 million. Gross profit grew 9% to $122.5 million, with gross margin expanding by 170 points to 38.8%, a record quarterly high. Income from operations grew 12% to $29.8 million and adjusted EBITDA grew 13% to $37.5 million. Based on our year-to-date performance and forward visibility, we are raising our full year FY '26 adjusted EBITDA guidance to $150 million to $152 million, representing a 15% growth at the midpoint over fiscal year 2025. NRS recurring revenue grew 22% year-over-year and monthly average recurring revenue per terminal increased approximately 10%, driven by merchant services and SaaS fees. We expect both categories to continue driving growth in the coming quarters. The terminal network now stands at over 39,000 active POS terminals and payment processing accounts are also above 29,000, up 14% year-over-year. NRS Rule of 40 score was 50 in the quarter, reflecting a healthy balance between growth and profitability. After the quarter closed, we acquired a controlling stake in OnCore Digital, a digital media brokerage. OnCore's platform, demand relationships and publisher network will be integrated with NRS' screen network and first-party transaction data to create a more competitive retail offering. Our digital channel revenue growth rate accelerated in the third quarter compared to the second quarter. Digital transactions grew 20% year-over-year and digital send volume, the actual dollars our customers are moving grew 40%. We gained market share following the implementation of the new federal remittance tax at customers but reliable, cost-effective alternatives. Netphone continued its growth trajectory with subscription revenue up 12% and total revenue up 11%. Seats served reached 441,000, up 6% year-over-year with CCaaS seats growing faster than UCaaS, driving revenue per seat higher. Gross margins expanded 130 basis points to 80.6%. Most significantly, income from operations was up 76%. We are gaining traction with our AI offerings and expect them to become accretive growth drivers in fiscal year 2027. All Netphone offerings will also benefit from the recent release of Integrate by Netphone, an integration layer that enables our clients to easily through straightforward no-code interface, use our offerings with the tools they already work with every day, such as popular CRMs and ERPs and much more. Our Traditional Communications segment continued its role as a reliable cash generator. SG&A declined $2.6 million year-over-year, as we continue to rightsize the cost structure and adjusted EBITDA was essentially flat at $19.7 million. IDT's global revenue grew 11%, partially offsetting the expected decline in BOSS Revolution calling. Across all our business segments, we are integrating machine learning and AI tools to better understand and meet the expectations of our customers, develop and provide new features faster, better and cheaper. Additionally, we are enhancing customer service refined pricing strategies, accelerating product launches, creating marketing campaigns and streamlining back-office operations, to name just a few. We expect that our AI efforts, in some cases, will serve as the basis for AI offerings that we can sell to our customers. 30 years ago, IDT was a scrapping long-distance phone company. Today, we operate a POS network serving nearly 40,000 independent retailers, a growing digital remittance business, gaining market share in real time and a cloud communications platform with AI capabilities and a traditional communication segment that continues to generate meaningful cash. Thank you all for your continued confidence in IDT. Marcelo will now walk through the financial details.

Thank you, Shmuel. My remarks on our third quarter fiscal '26 results will focus on year-over-year comparisons in order to set aside the seasonal impacts on our business. As a reminder, our fiscal third quarter, February through April have just 89 days, roughly 3% fewer days than our other fiscal quarters. With that as context, we were very pleased with our consolidated performance. The third quarter extended the trajectory that we have been on for several years. The underlying growth dynamic at IDT remains in force. Our consolidated results increasingly reflect the growing contribution of our 3 higher-margin growth segments, NRS, FinTech and net2phone, even as our large traditional communications segment becomes relatively less impactful. That location again produced record consolidated gross profit and a record consolidated gross profit margin in the quarter. Gross profit increased 9% to $122.5 million, and our gross profit margin expanded 170 basis points to 38.8%. Let me put that rotation in number terms. Our 3 growth segments contributed $107 million of revenue in the quarter, about 34% of our consolidated total, up from 30% a year ago. Because the combined gross margin is far higher than that of traditional communications, that shift continues to generate substantial operating leverage as the revenue scales. In the third quarter, our growth businesses gross profit contribution increased to 67% from 61% a year earlier. The combined adjusted EBITDA from NRS, Fintech and net2phone grew 27% year-over-year to $20.5 million. In aggregate, our 3 growth segments generated 55% of IDT's consolidated adjusted EBITDA in the third quarter, up from 29% in the year ago quarter. Because these segments still account for only about 1/3 of our revenue, that rotation has a long way left to run. I also want to call your attention to the consistent profitability of traditional communications, which slightly increased its adjusted EBITDA contribution year-over-year this quarter, even as its revenue edged slightly lower. This segment will remain a reliable contributor to our cash generation for many years to come. On the balance sheet, we ended the quarter with $251 million in cash, cash equivalents and current debt and equity securities exclusive of restricted cash. Last week, our Board declared a quarterly cash dividend of $0.07 per share. We also continued to repurchase shares opportunistically during the quarter, repurchasing approximately 84,000 shares for $4 million. Our growing free cash flow and debt-free balance sheet let us keep investing in our growth initiatives while returning cash to stockholders, and we expect to continue doing both. In terms of our outlook, given our results through the first 9 months of the year and our visibility into the fourth quarter, we are again raising our full year fiscal '26 guidance for consolidated adjusted EBITDA from the $147 million to $149 million range, we provided last quarter to a new range of $150 million to $152 million. At the midpoint, this $3 million increase represents 15% growth over our fiscal 2025 adjusted EBITDA of $131.7 million. This latest guidance raise reflects both the increasing operating leverage we are seeing in our growth segments and the resilience of traditional communications contribution. To sum up, this was another quarter of disciplined profitable growth, and we are carrying real momentum into the close of our fiscal year. Just to finish up on a nostalgic note, as Shmuel mentioned, this year is our 30th year as a public company. So naturally, I had to take a look at IDT's first annual 10-K report from 30 years ago, 1996. That year, IDT reported revenue of $58 million and a net loss of $16 million. Today, even after spinning off 5 public companies, we are generating 22x the revenue and over $100 million more in net earnings. I am especially pleased by our performance over the past few years. In fiscal 2021, just 5 years ago, IDT reported $75 million in adjusted EBITDA. In fiscal '26, we are now on track to more than double that amount. So indeed, there was much to celebrate at the New York Stock Exchange last Friday. We are proud of all that we have accomplished and excited by the opportunities ahead. Now Shmuel and I will do our best to answer your questions. Operator, back to you for Q&A.

[Operator Instructions] Our first question is from [indiscernible] Capital.

First, congratulations on the 25 years, and thank you for sharing the touching words. I'm happy you spent some money fighting people over to New Stock Exchange, knowing how tightly you manage money. So I'm glad you are celebrating how it is worth it. So the first -- that was not the only milestone this quarter. And I have a question on another milestone, which was NRS having the first terminal in non-North American country. So this year -- this quarter, sorry, Colombia was the first country where you had an NRS terminal. I'm wondering why you selected that country? And is it beta testing? How should we think about the growth of NRS in that country?

The real answer is we could have selected a bunch of different countries to have an expansion, and we have some partners there that suggested that we try it there and we decided why not.

Okay. I would like to ask another question on OnCore and the acquisition. We know that advertisement has been a challenging industry in the last few years with so many streaming services offering screen time, and you have suffered those consequences. Now with this acquisition, how should we think about advertisement in NRS? What can we expect of it?

I mean, listen, we definitely think that they are going to be a help to our advertising group. I mean they have a lot of expertise internally that we as a company didn't have. They have a lot of relationships that we as a company didn't have, and they're very good guys to work with. And we've worked with them as partners for a number of years already. So this is sort of a long-term relationship already. And we expect it to be an accretive acquisition. Okay.

In terms of net2phone, a couple of years ago, you went through the process of getting those papers ready to do the spin-off. That was canceled. Now we are in an environment where IPOs are the topic of the hour again and valuations are stretched. I'm looking at one of your peers in the segment that is growing organically less than you has literally the same amount of revenue, and they're trading at 3x sales plus. Is this enough of valuation for you to spin off netsphone or in view of the excitement that you have around the new AI offerings, you would like to keep it close to your chest for a longer time?

It's a good question. I'm not prepared to really give an answer on today's call. I mean, I would definitely say that it's becoming more appealing to possibly do something. That being said, I'm very, very confident that Netphone is going to do much better than our investors think it's going to do and much better than some of the competitors that you mentioned without mentioning. So yes.

Okay. And one last question on BOSS Money. The performance this quarter has been impressive. You are acquiring customers like -- I mean, like I haven't seen in a long time. And I'm wondering, you expanded margin despite the customer acquisition costs. If we think about BOSS Money in a steady state, what kind of EBITDA margins do you think it can produce? I mean less marketing expenses.

Yes. I don't know the answer to the question. I mean we have relatively good margins, I agree. We try to be opportunistic when we can be. And by the same token, we're very I'll say, sensitive to the fact that we want to continue to have our customers for a long time and continue to attract new customers. And to do so, you cannot have prices that aren't correct in the market. But Marcelo has a couple of things that you'd like to say about it as well.

Okay, I mean, indeed, this was a real good quarter for us. It's kind of a continuation of what we started to see already in the beginning of the year. Our digital channel is really doing very, very strongly as you saw in the numbers. Our digital channel, as I've mentioned before, those command much higher margins than our retail channel. And that shift in channel continues, it adds to the total margin, the net margin. But the story is not just that. We're doing a better job understanding our customer, understanding how to price the service better, how to manage the FX that we go to our customers for the various corridors, like managing the entire cost structure, taking advantage of AI features to make our workflows and processes more efficient. So -- and the business, obviously, as it grows, it continues to scale quite nicely to the bottom line. I mean we put that release a few weeks ago about how modest day was a record weekend for us now that we have seen the May results, the month of May that just finished now and our first month into Q4 is our strongest transaction month ever. It's going to be our strongest gross profit month ever. And I think that's the reason. We're not just trying to grow transactions or revenue, we trying to do so, okay, with a very large focus into making that to be higher gross margin, higher gross profit. So I think we're in a real good situation, well positioned, gaining market share. And if this continues that way, obviously, we're going to continue to invest behind acquiring customers. But I do expect to see margin expansion as the year go by.

Our next question comes from William Vaughan with Corient.

Congrats on the great quarter. Awesome anniversary as well. So once again, congratulations. I have a couple of questions. First one on the OnCore Digital acquisition. Is there any color you can give on the price paid or any multiple of whatever it is EBITDA, income from operations or anything like that?

Yes. I mean we're going to have to put a little more detail when we file the 10-Q next week, right? But note this company is a small tuck-in acquisition. As Shmuel mentioned earlier, this is a relationship that we have had for many years. Now the company carries a lot of media for CTV or our advertising screens. We took a majority 80% controlling position in the company, valuation of about $6 million, now some earn-outs, et cetera. We believe that the price is basically an excellent price. And again, the focus is to have them be able to better monetize our screen inventory. And now that we are part of the family, we will be able to work better together to maximize that opportunity.

Awesome. Are there any other types of acquisitions or different places within your 3 growth businesses that you're looking and you're seeing attractive, if there are some tuck-ins or bolt-ons or other things you could do in that space, that would be attractive to you? And it could be in any one of them, NRS, BOSS Money or net2phone.

We always have our ears open, and we've done some successful acquisitions and some not as successful acquisition. So we -- and we might have dodged the bullet with some of our acquisitions, too, but it didn't happen. So I don't know. We keep our eyes open and remain cautious and prudent.

Okay. Staying opportunistic. So I guess just a question on net2phone AI. You brought up in the release. It seems like it's something that is gaining a lot more traction. What features of you're offerings do you find your clients are liking or excited about using the most?

It's a good question. I mean my first suggestion always is you should go and use the product yourself, become a customer. We always want more customers. And again, what I think is really exciting is really -- first of all, like for everyone, there's continuous advancements in it. And again, we use a lot of the products inside of IDT. And we're probably one of the biggest customers, we'll call it, of our own products. And I mean, already, we're handling probably 30% of our customer service calls using our own product, we'll call it. Obviously, they're not our own models, but our own products. And on chat it's, I think, above 50% at this point that's being handled by our products again. And all of those interactions are having to dip into our systems and provide real-time information to customers. It's not just like, hi how are you? Just call to say, hi, no, they want to know like I sent $200 to my brother in Mexico, and he still hasn't received it and they want to know where it is, is there an issue? When will it be available. And it's able to give as accurate answers as any one of our customer service reps would be able to give that customer. And it does it perfectly every time. And again, those same kinds of integrations are what we're providing to our customers in a way that they don't even have to be able to code anything. So I'm very excited about that. We have a premium product that we're starting for businesses so they could try it out called Flex. You can check it out on our website. Yes, I mean, I think they're doing great things, and I think it's really, really like not even early innings, it's like pre-innings, but the warm-ups are super impressive. And already, we're selling tens of thousands of dollars a month of products to customers outside of IDT, besides what we're using ourselves here.

To see that in the numbers, right, at this point. I mean, net2phone is doing really great right now, right? They just crossed the $100 million MRR revenue barrier. So we are pleased about that. The month of May for them was the best month ever in terms of new sales. And they are going to show that the AI element is becoming a larger portion of those new sales, still small relatively, but becoming a bigger portion. So we are looking forward. Going back to the previous question about monetizing Netphone at some point. I think we are building the right assets and features to make the net2phone attractive -- a lot more attractive than people believe it is.

Awesome. Excited to see how that progresses over time. Switching to NRS. I know in the past, you guys have mentioned you don't see too much competition in terms of U.S. systems, in terms of single store operators for Bodegas and convenience stores. We're following other players in the space. I'm starting to see other players start to expand into different segments, specifically Toast. I was shocked to see that they're thinking about or actually starting to expand into convenience stores. And so I'll just ask the question again, are you guys seeing any more competition coming into the space in terms of point-of-sale operators and bigger players coming in? Or is it still sort of kind of not white space, but not as much competition as more from smaller guys?

I definitely think that we are seeing more competition at NRS, and it's definitely affected the new sign-ups. In terms of some of the bigger players, I mean, again, I think Toast is a great company. I must buy some for my personal portfolio as -- but in terms of like the offerings that we provide to convenience stores, liquor stores, I really think that we're a much better value and a much more purpose-built product for those markets. I mean the same way if you were starting a nice sit-down restaurant in your neighborhood, I wouldn't suggest you come to NRS to have us do your restaurant. I basically would tell you like the same thing if you were starting a convenience store, like I don't think you would be best off financially or otherwise from choosing anyone NRF. And again, it's only going to get better. In terms of our own road map for NRS, it's really going back and strengthening the product even more. We're not nearly as focused about expanding into new verticals, but more about just continuing to improve the verticals that we're in so much that nobody will be able to compete with us.

Okay. I think focus and solution to a specific vertical is really important in this space. So I appreciate that color. Moving to our BOSS Money. Love to see the growth, love to see the increased gross profit and the shift from retail to digital. I also saw that with a healthy investment in marketing and new customer acquisition. There are other digital players in the space I brought up before, who are growing as well. They spend a lot more in marketing. And I think -- I mean, I agree with your assessment that probably shouldn't be spending nearly as much as those players. But I guess I'm curious to hear your thoughts on maybe not spending a ton in terms of marketing, just in general customer acquisition and new customer acquisition, but let's say, for specific verticals, does it make sense to be more aggressive in verticals where you are on the precipice of high market share and gaining dominance in those verticals, specific countries? Or do you think it makes more sense to try to attack specific verticals in countries where you have a very low market share, sort of broaden the reach to more and more countries? Like how do you guys think about that dynamic?

It's a good question. I mean, again, I think we, to some degree, try to do a little bit of both, if I understand your question correctly. I wouldn't say in terms of like send countries, right now, we're really obviously only from the U.S.A. as opposed to some of our larger competitors who are really much more global in terms of send out countries. I think that over time, we would like to expand into other countries on a send-out basis as well. In terms of in terms of like our penetration into, we'll call it, countries that you send to, we definitely take a market-by-market approach to it. And we do offer better pricing, more incentives, et cetera, to customers in certain destinations than we do to others, either because there's more profitability to that country over time or because we're trying to get to a certain critical mass, we'll call it, inside of that country so that we get the benefits of being a larger player. Again, we have really good competitors in that business as well. So every day, we have to come in and win customers over with honestly pricing and great service, because if we don't do that, like we won't have a business. So that's really our main focus. And thoughtfully speaking, it seems to be working.

Awesome. Great color. Last question. So I was happy to see the buyback this quarter, which was about $19 million. Do you foresee a similar pace of buybacks going forward? Was this more taking advantage of maybe more attractive stock price? Or do you think based on where we are, we'll probably more or something close to it.

I mean, I have a lot of color on this 1 or 2 calls ago. So you can go back and listen to that rather than be like sort of repeating redundant information. But I mean, in general, I will continue to buy back stock. Obviously, we're opportunistic. If the price for some reason to fall a lot, like we would be buying like crazy. And if the price goes up a lot, we'll probably buy a little less. That being said, we are trying to stay on pace to continuously buy our stock, and this quarter was no exception.

Yes. Awesome. I mean if I'm looking at the EBITDA guide and where the business is headed on a consolidated basis, once you back out the enterprise value, we're probably trading at around 6x EBITDA, which is very, very low, at least in my opinion, in terms of where the value in the company. So love to see the buyback. I appreciate the color.

As there are no more questions, this concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.