Description

I think its time to revisit IDT Corp. for 2023 in the wake of a near 40% share price decline this year despite continued tremendous execution both by management and within each of IDT's fast growing subsidiaries in the face of market declines and economic woes. Two straight quarters of meaningful share repurchases for the first time in years is also a positive signal. 

Past writeups provide detailed breakdowns of the business and each of the subsidiaries, so only a brief recap is necessary. IDT Corp. is a founder-led company with an incredibly strong history of value creation (every $1 invested in IDT in 2012 is worth over $35 today, yet a look at IDT stock price and consolidated financials from 2012-2020 would reveal nothing short of a loser with 8 years of flat returns and limited revenue or operating income growth at the consolidated level). Owning IDT today gives investors exposure to three high growth subsidiaries within IDT, a traditional communications business that is run rating around $100mm EBITDA, as well as a large net cash balance sheet and management’s capital allocation prowess. In addition, one could argue, as outlined below, that IDT’s point-of-sale business, National Retail Solutions or ‘NRS’ is worth more than the entire enterprise value of IDT today. The management team has also made a career out of building long-term value per share in patient, unconventional ways. Today, I don’t believe investors are paying much for one of the parts, let alone the sum.

In addition, among the very thorough publicly available analysis for IDT that has been released by Alta Fox Capital and Immersion Partners, there was a focus on revenue multiples for each of the growth subsidiaries. I don’t believe that was the wrong approach at the time given peer comparisons, reinvestment, and (until recently) elevated multiples for comps such as RingCentral, 8x8, Lightspeed, Toast and PayPal among others. I also provide a back of the napkin revenue multiple valuation below. But market conditions drive revenue multiples and IDT has been somewhat levered to this compression despite having what I believe to be best in class businesses with differentiated focuses, less competition, long runways for growth and superior financials in the areas of Money Transfer, Point of Sale and Unified Communication Services. As a result, it might be more instructive to try and project margins and operating income a few years out, which only serves to further highlight the potential mispricing. But most importantly, if we are currently investing within a true regime change, where cash flows and valuations finally matter again, IDT possesses those elements as well.

I’d like to outline my view on each of the various business segments and project what they could potentially be worth within a few years.

Traditional Communications

IDT’s Traditional Communications segment is made up of three separate businesses consisting of BOSS Revolution calling services (prepaid calling cards and other prepaid services), Carrier Services wholesale calling (for global minutes termination), and Mobile Top Up (a global wireless minutes ‘top up’ service). Together, these businesses make up 92% of IDT revenue and generate 100% of EBITDA as of FY21. As internet-based calling, mobile calling services and the use of VoIP technology grows, there are few who would argue that traditional calling services aren’t in decline. As a result, Traditional is viewed by most as a melting ice cube, but still generates significant free cash flow through which to invest in IDT’s numerous growth subsidiaries. More importantly, segment growth has recently been restored by management who has removed a large amount of fixed costs, invested in new products and verticals and incubated a fast-growing subsidiary (Mobile Top Up) that could have the potential to transform the entire margin profile of Traditional Communications. Today, management has shifted Traditional from a declining top line and flattish margin business to one growing at high single digits with some room for margin expansion. While Carrier Services and BOSS Revolution calling should continue to decline in line with industry trends, Traditional should be kept propped up by Mobile Top Up and as a result be able to grow revenues and EBITDA at mid-high single digits. Traditional Communications posted $79.1mm in EBITDA for FY22 which I have conservatively growing to $130mm by 2026 (during Q1 2023 IDT generated a highest ever quarterly adjusted EBITDA figure of $24.1mm).

I’d estimate that Traditional Communications alone could be worth $14/per IDT share within a few years (or 4x EBITDA), netting investors cash and investments plus the remaining three growth businesses for less than $250mm. This would be in my view less than what a knowledgeable buyer would pay for just ONE of the growth subsidiaries.

Optionality here exists with the not-yet-broken-out Mobile Top Up business (‘MTU’), a surprising growth story within Traditional Communications given the recent demand trends for mobile top up services across world. Mobile Top Up enables the transfer of airtime, messaging, and data to mobile accounts within the U.S. and internationally where customers can purchase a transfer of airtime minutes by adding a credit to a recipient's local prepaid mobile number within minutes. MTU now generates 35% of IDT’s total revenues and has been growing in excess of 20% throughout the past few years. Mobile Top Up sells their services through both retail partners and direct to consumer. The retail channel is very low margin given payments to suppliers while direct to consumer sports about 3x the margins given less reliance on mobile carrier partners, thus lower fees and commissions. COVID drastically increased MTU’s shift to direct to consumer sales, which if persists will have the result of significantly transforming the entire margin profile of Traditional, resulting in significantly higher cash flow generation.

While unit economics for MTU are not yet broken out, my work indicates that as the percentage of direct-to-consumer sales continues to grow over the next few years, MTU could generate a significantly higher portion of Traditional Communications revenues with a path to doubling gross and EBITDA margins from mid-single digits today to low double digits. A business growing over 20% per year while expanding margins, valued at 15x EBITDA could potentially be worth close to the entire enterprise value of IDT today. As a sanity test, global top up business Ding Mobile, a decent comp for MTU, received a strategic investment in September of 2021 valuing the business at 20x EBITDA. Using the same multiple for Mobile Top Up – which has higher gross and EBITDA margins – would reflect a $600mm valuation or $22/per IDT share for Mobile Top Up alone. Furthermore, Mobile Top Up has additional avenues for growth including geographic expansion and upsells such as the delivery of gift cards.

Saying nothing for Mobile Top Up, at today’s price, investors are paying around 6.0x NTM EBITDA for all of IDT while getting the three growth businesses, management’s capital allocation prowess and future optionality included in that price.

Boss Money Transfer

One of IDT’s biggest strengths consists of the ability to leverage existing customer relationships into new products, services and business lines. BOSS Money Transfer is a carve out from IDT’s BOSS Revolution calling brand whereby IDT is leveraging existing customer relationships and distribution by developing a money transfer business targeted to BOSS Revolution customers (a group of 3mm in the US alone), among others. BOSS Money Transfer is an international money remittance service designed to let customers send money to recipients in 37 countries, to 306,000 locations or digitally via the Boss Money app. Customers can make cash available for pickup, select home or digital delivery to a mobile wallet, or route a transaction to a bank account. During the past twelve months over 8 million transactions have been processed, with BOSS Money reported $57.5mm in revenues for FY22.

BOSS Money generates revenue on a fee per transaction basis, where transactions should continue to climb higher as IDT explores new geographies, increases retailer penetration and as the BOSS Money app continues to take hold. That last point is important as a large percentage of transactions currently take place through the app, which comes with lower customer acquisition costs due to the direct nature of transacting, high repeat customer rate at 80%, low churn and higher gross margins as retailer commissions are eliminated. The money remittance industry is massive and highly competitive with Boss Money a small player, but they serve a critical need for customers who rely on money remittance services to send funds to friends and relatives outside of the US. This, plus the growing market for digital remittance services should continue to provide a long runway for customer and transaction growth.

Efficient customer acquisition, the expansion of the payout network and the entrance into new geographies such as Canada and the UK have allowed BOSS Money to nearly double their transactions each year during the past four years. Transactions grew 24% year over year during 2022. I estimate BOSS Money transaction volume will grow at a low to mid-teens rate on their way to processing over 15mm in transactions by 2026 with transaction fees growing low double digits to around $6.75/transaction. I’d estimate in line with payment companies and digital payment peers that BOSS could earn 18-20% EBIT margins over time, generating (at the mid-point) $19mm in EBIT on slightly over $100mm in revenues over the next few years. Given BOSS’s competitive positioning, expansion opportunities, digital transaction opportunity and growth, I believe a market multiple of operating income is warranted. At 15x EBIT, BOSS Money would be worth $285mm or $10/per IDT share. I believe this valuation may prove to be conservative at 2.8x revenues.

Net2Phone

Net2Phone is IDT’s fast growing Unified Communications Services (UCaaS) business that was founded in the 1990s prior to advancements in cloud-based technology, then sold to AT&T and subsequently repurchased by IDT in 2006. Put simply, UCaaS services are modern, cloud-based business communication tools consisting of features such as cloud-based calling, in-office messaging, video conferencing and conference center outsourcing capabilities.

The UCaaS industry is large (estimated to be a $70+ billion market within a few years) and rapidly growing between 20-25% per year. There is a massive opportunity for UCaaS businesses to play a part in transitioning the majority of on-premise or private branch exchange (PBX) customers to the cloud with many of the top UCaaS players citing a TAM of over 400 million potential customers or ‘seats’. Anyone who has ever used modern office communication tools would understand the advantages and benefits over traditional office phone lines as UCaaS requires minimal to no hardware, less ongoing maintenance and provides more seamless communication. Net2Phone has been developing their own communication platform for five years and now sells their services through direct sales reps, master agent partners and a network of over 5,000 channel partners (reseller, service provider, vendor etc.).

The UCaaS industry in the US is highly competitive with low barriers to entry, little differentiation in the form of commoditized technology, and currently undergoing among incumbents an all-out ‘land grab’ resulting in discounting, massive incentive payments to channel partners, and a pricing / ARPU ‘race to the bottom’ (sounds attractive, right?). The focus on land and expand is a result of the stickiness exhibited by customers as many want to choose an all-in-one provider for UCaaS services, and revenue in the back end of a contract is very high margin following high customer acquisition upfront to grow your seat count.

IDT and Net2Phone made the conscious (and smart) choice to differentiate themselves by attacking geographies outside the US including South America and focusing on small and mid-sized businesses with as little as 25-100 seats where there is less competition and the inability for large enterprise sales forces to make the unit economics work. Despite the very low barriers to entry in the US, South America is a very different market that requires relationships, channel partners and established infrastructure to succeed. Today over 50% of Net2phone seats are outside of the US, and their first mover advantage, use of channel partners and favorable customer acquisition costs allow them to earn gross margins higher than their UCaaS peers. While investors might balk at paying an above peer multiple for a business that sells 25 seat accounts to Joe Shmoe’s accounting office in Brazil, Net2phone’s award winning solutions, value proposition and incentives to channel partners have earned them customers such as ESPN Brazil, Allstate, Shopify and Berkshire Hathaway Home Services.

This geographic focus has resulted in faster than peer seat growth of over 50% during the past few years to over 291,000 total seats with the non-US markets representing the fastest growing segments. During 2022, Net2Phone reported 58% growth in Latin America vs. 42% in the US. The South America opportunity is tremendous as there is significantly less competition for Net2Phone in these geographies given the large focus on US, Europe and APAC regions. To put this in perspective, a read through of every competitor’s annual reports and conference calls as well as speaking with industry experts, competitors, suppliers, employees, customers and management teams reflected a near zero focus on South America. Oddly, this is not due to the unattractiveness of the geography. While large accounts don’t make up the bulk of potential seat additions, South American infrastructure is largely PBX based providing a long runway for growth among the many businesses available to transition to UCaaS during the next five years. Especially long for the first mover with the most channel partners.

Given the small business focus and US competition, Net2Phone likely won’t be immune to slight declines in ARPU moving forward, so with conservative estimates for both seat growth and ARPU decelerating from their recent growth rates, I estimate Net2Phone can reach over 600,000 seats by 2026, earning around $16/seat in monthly recurring revenue, down 11% from today. This would peg total revenue for Net2Phone at $115 million. At a projected 20% operating margin, slightly below at-maturity peer projections, Net2Phone could generate around $23mm in operating income. I don’t believe applying a slightly above market multiple of 16x would be egregious given Net2Phone’s geographic advantages, gross margins, industry leading growth rates and continued runway for expansion. In this scenario IDT’s 86.4% ownership in Net2Phone would be worth $317mm or $12/per IDT share. I believe this is a conservative valuation as this scenario implies a valuation of 3.2x revenues when peers in the space have regularly traded for a median of 6.6x revenues with slower growing mature businesses on the lower end and faster growing ones sporting high teens to low 20’s multiples.

National Retail Solutions

National Retail Solutions or ‘NRS’ is IDT’s point of sale and payments platform sold into the single operator convenience store, bodega and grocery markets. NRS followed the path of ‘businesses being incubated within IDT’ and was officially launched in 2016 by leveraging the 40,000+ retail relationships IDT has through selling their BOSS Revolution prepaid calling card products. Point of sale terminals (hardware) are sold to customers for a one-time payment upfront, while NRS also generates revenue through monthly software subscriptions, payment processing fees via NRS Pay and the sale of data and out of home advertising displays. Developing a customized point-of-sale solution for its pre-existing base of customers not only allowed IDT to make first-mover inroads into the immigrant, convenience store and bodega markets, but also allowed them to purpose-fit a specialized solution outside of the one-size-fits-all approach for other enterprise POS businesses.

IDT’s efforts in this area have resulted in NRS terminal growth of around 40% per year for the past three years, having just crossed 20,000 installed terminals as of Q1 2023. Importantly, the installed base of terminal customers can now be upsold payment processing / merchant services capabilities through NRS Pay as well as additional features and functionality such as inventory management capabilities and remote cash protection, among others. Today, payment processing accounts represent just 45% of total terminals, indicating a long runway for growth that will provide both an ARPU and gross margin uplift for new NRS Pay accounts.

Investments in sales reps and a bi-lingual call center have begun to pay off as the most recent quarterly results reflected a 107% increase in revenues year over year while revenue per terminal has increased by more than 50% during that same period. This follows the triple digit growth trajectory NRS has seen since publicly disclosing segment details in 2018. For IDT, the sales process is less intensive than it would be for competitors due to the built-in relationships as well as the bilingual requirements for IDT salespeople to penetrate these markets. Typically, NRS would be replacing a legacy cash register as opposed to another POS system, both because many store owners were made up of immigrant families less familiar with modern POS technology and because this market remains underpenetrated given the one-size fits all nature of larger enterprise POS businesses and lack of specialized sales forces. IDT estimates the TAM for NRS is a large percentage of the 200,000 single operator convenience stores and bodegas throughout the industry, providing a significant runway for growth. Importantly, IDT recently rolled out self-install capabilities for merchants, no longer requiring the physical presence of a sales or tech person which should have the effect of further accelerating growth.

While there are certainly larger and better capitalized competitors, especially on the enterprise side, IDT is content to let peers fight it out for multi-location convenience stores, restaurants and gas stations as NRS continues to attack its niche. Most importantly, there remain zero competitors that possess the data and advertising opportunity NRS has, which cannot be overstated. NRS collects incredibly valuable scan data on each transaction, providing a look at consumer behavior in typically under-served markets and geographies. NRS merchant customers could provide CPG companies with purchase behavior information on key convenience store categories such as alcohol, tobacco, beverages and snacks. Multiple industry operators have confirmed that basic transaction data (such as tobacco / beverage purchases) can be sold for amounts up to $1,000/month. NRS monthly recurring revenue per terminal is currently $296. In addition, NRS can package, slice and dice the data to provide it in a customized way to CPG and tobacco companies meaning they could potentially sign multiple deals per terminal moving forward. The opportunity can be illustrated as such: if NRS entered into 5 data deals at just $65/month, they would earn $325 monthly recurring revenue from JUST data alone, compared to TOTAL MRR of $296 right now. Removing any conjecture are the deals NRS currently has with both Swisher and Turning Point Brands for tobacco purchase data. In my opinion, there is a $300-400 MRR per terminal opportunity for NRS moving forward that is currently in the very early stages. In this case, the economics would accrue to NRS very quickly and very lucratively. The current installed base of terminals is 20,800. At 31,000 terminals within a few years doing potentially $4,500 ARR per terminal gets NRS to $140 million in recurring revenue. At a conservative 6-8x revenue, IDT’s 83.5% ownership in NRS would be worth between $840mm - $1.0 billion, or $27-33/share compared to a share price of $28 for ALL of IDT today. Notably, 31k terminals would only represent a small fraction of the total addressable market.

Although it would be disingenuous to project revenue growth at triple digit rates moving forward, I estimate that NRS could finish 2026 with revenue in the range of $160-190mm, the higher end of which would represent just 35% growth from today. As data and advertising sales become a higher percentage of revenue per terminal – nearly 100% cash margin – I estimate NRS could post somewhere between 30-35% operating margins. Importantly, NRS is currently profitable and doing somewhere between 30-40% EBITDA margins based on IDT recent disclosures. A business growing in excess of 30% with recurring revenue, low churn, limited competition and a continued long growth runway with those unit economics could be worth 20x EBIT. At the low point of that revenue and margin range and utilizing a 20x multiple, NRS would also be worth close to $1 billion, or $960mm, representing $31/per IDT share. I believe these assumptions will prove to be incredibly conservative especially as the data opportunity takes hold. I think NRS best in class gross margins, highest ARPU and revenue CAGRs among peers and location value with limited competition should allow them to trade at a premium to comps (although there aren't great comps). Furthermore, a transaction was completed in September whereby Alta Fox Capital acquired 2.5% of NRS for $10mm, implying a $400mm valuation or 19x current revenues. Revenues have more than doubled from when the deal was announced.

According to management, value for NRS will be unlocked via a tax-free spinoff or IPO within 12-24 months dependent on business progress and market conditions. Most importantly, growth in terminals requires nothing more than continued blocking and tackling on a product with a very high value proposition to customers.

Putting It All Together

As mentioned above, valuing IDT’s growth subsidiaries has typically required a revenue multiple approach given they are in growth mode and thus reinvesting (as they should be) while generating slight operating losses.

Utilizing conservative revenue multiples below peer valuations despite the competitively advantaged aspects discussed above would yield a share price of around $64 within the next 12 months, or 125% higher than the current price. I stress the word conservative given the lower than peer multiples, exclusion of Mobile Top Up optionality, and a low multiple of EBITDA for Traditional Communications while assuming zero growth in cash flow from today.

With an enterprise value of $592mm today, investors are paying 5.9x Traditional Communications EBITDA for ALL of IDT and paying little to nothing for the three growth businesses set to generate over $220mm in recurring revenue during the next twelve months, with spin-offs/IPOs on the horizon.

Adding up the 2026 valuations described above would yield a share price of $74/share or greater than 150% upside from today’s price. Keep in mind this excludes a breakout of Mobile Top Up, as well as reduces cash and investments to $20mm, setting aside $125mm for potential damages relating to IDT’s ongoing lawsuit with Straight Path Communications (touched on below).

Assuming my NRS projections are supported by execution, investors are getting NRS for more than the entire enterprise value of IDT, netting you Traditional Communications, Boss Money and Net2Phone for nothing. Alternatively, netting out Traditional from the above enterprise value leaves $250mm being paid for the remaining three growth businesses. In other words, no matter how one slices it, IDT appears to be severely undervalued as investors are paying little today for growth and optionality. Furthermore, I believe the potential spins/IPOs of Net2Phone and NRS would not only serve to highlight the attractiveness of these businesses but also remove the management teams of each unit from the constraints of IDT which has historically been very disciplined on spending for growth. In this case, the upside could be even more significant.

Working in IDT’s favor is their track record of customer satisfaction earned by providing critical support and services to under-served groups of people and communities. When the market zigs, IDT zags, and as a result has made it their focus to spend time with less competitively burdened geographies and markets whether that is the focus on single location convenience stores through NRS in immigrant communities (as opposed to enterprise sales) or their market presence in South America and Brazil with Net2Phone (as opposed to the dog-eat-dog worlds of the US, Europe and APAC regions). It shouldn’t come as a surprise then that NRS, Net2Phone and Boss Money Transfer services are the preferred providers for each of their end markets with customer satisfaction leading to stickiness, low churn and the potential for upselling in order to drive higher ARPU within each business.

A bear argument against IDT consists of nepotism claims as a look through proxy statement and board makeup would reveal they certainly like to keep it in the family. There is also an outstanding lawsuit involving Straight Path Communications where any potential damages should reveal themselves to be a fraction of the plaintiffs demands and much less adverse than is being anticipated. While I don't have a crystal ball, I believe the outcome will be favorable for IDT. Without getting into the weeds, the plaintiffs have fumbled a number of aspects of this case including having their lead witness be dismissed due to insider trading allegations. I've seen some estimates for liability around $500mm - $1.0B, for which there is no precedent. The work I've done indicates that a truly worst case scenario outcome would involve damages around $150mm. Even at $225mm, IDT will have the option to pay off the settlement over time, can borrow against their EBITDA and have cash flows to pay the debt. I would think the stock responds positively to any outcome below my estimates for a worst case scenario. 

Also for what it's worth, IDT has been repurchasing more stock during the last two quarters than they have in the past decade, using cash potentially needed for an adverse legal outcome. On the surface that may indicate at the very least they are confident in the outcome of the trial. 

Catalyst

Lawsuit resolution

Spinoffs / IPOs of subsidiaries

Continued execution

Continued buybacks