Description

Summary

IDT Corporation is a small business incubator masquerading as a stodgy, decaying telecom company. A large legacy wholesale international calling operation and a prepaid wireless business are obfuscating three hidden gem assets cumulatively generating more than $120 million in revenue, growing over 30%, annually. At the current market price, investors get all three “hidden gems” for slightly over 1x our estimates for 2023 revenue. We believe that IDT’s assets (the legacy business, plus the three hidden gems), if properly valued, are cumulatively worth ~$100/share, 2.75x the current price of $38. Supporting our thesis is a strong, founder-led management team with a history of generating strong shareholder returns.

History

Serial entrepreneur Howard Jonas founded International Discount Telephone (IDT) in 1990 as a provider of international calling re-origination services. Over the thirty years since its founding, IDT has launched nearly a dozen successful businesses across a variety of sectors, from media, telecom, and technology to utilities and pharmaceuticals. In 1996, IDT founded net2phone, now one of the largest VoIP calling providers in the U.S. Just four years later it sold a 32% stake in net2phone to AT&T  for $1.1 billion, repurchasing it a year and half later for $92 million. Today, net2phone’s unified communication-as-a-service business (an offshoot of the original net2phone) is a $50 million revenue service growing 30%+, annually, and is likely to be spun out in 2021 at a $200-to-$500 million valuation. Similarly, IDT turned a $10 million investment in a Russian telecom operator in 2000 into a $130 million sale in 2006. From 2009 to today, IDT has also effected five spin-outs:

1. IDW Media Holdings, a comic book and graphic novel publishing and media company, spun out in 2009.

2. Genie Energy, a utility provider of electricity and natural gas services to residential and commercial customers, spun out in 2011.

3. Straight Path Communications, an owner of wireless spectrum licenses, spun out in 2013.

4. Zedge, a content platform for mobile device personalization, spun out in 2016.

5. Rafael Holdings, an owner of real estate assets and a stake in a development-stage pharmaceutical company, Rafael Pharma, spun out in 2018.

IDT’s spun-out businesses have generated phenomenal returns for shareholders. All but one has beat the market by a wide margin.

(data as of 6/24/2021)

We estimate that a $10,000 investment in IDT at its IPO in 1996 would be worth a little over $202,000 today. That is a market-beating return of 1,918%, or 12.5% annualized. The Russell 2000 generated an annualized return of 8% over the same time frame.

The Business Today

IDT is run by Howard Jonas (Age 65; Chairman) and Shmuel Jonas (Age 40; CEO and Howard’s son) who each own 11% and 1% of the Class B Common Stock, respectively. Shmuel joined the company in 2008 and was appointed to the COO post in 2010 before becoming CEO in 2014. Though an apparent beneficiary of nepotism, the father-son team have generated admirable returns for shareholders, and we have a high degree of confidence that this can continue for the foreseeable future.

Today, IDT reports in three segments: (1.) Traditional Communications, (2.) Fintech, and (3.) net2phone.

1. Traditional Communications is IDT’s largest and least important segment (from a prospective shareholder’s point of view). It earns $1.3B and $80mm in annual revenue and EBITDA, respectively, and is primarily comprised of three legacy businesses that are optimized for current cash flow, which is then redirected into the company’s growth segments (Fintech and net2phone):

a.    Boss Revolution calling

                                          i. An international prepaid calling service introduced in 2009. Boss is primarily marketed in retail locations to immigrant communities.

                                         ii. Generates ~$465mm in annual revenue, declining 5-to-7%/year

b.    Carrier Services

                                          i. Provides international voice and text termination, as well as outsourced traffic management solutions to telecom companies.

                                         ii. Generates ~$355mm in annual revenue, declining 20%/year

c.     Mobile Top-Up

                                          i. An outsourced service provider to other telecom companies, enabling the transfer of airtime and bundles of airtime, messaging, and data to mobile accounts internationally and domestically.

                                         ii. Generates ~$422mm in annual revenue, growing 26%/year

2. IDT’s Fintech segment houses two small but rapidly growing businesses – Boss Revolution Money Transfer and National Retail Solutions (NRS).

a.    Boss Revolution Money Transfer is a consumer service for international money remittance. The service was launched in 2013 to leverage the Boss Revolution brand, a highly recognizable label in immigrant communities used by 4 million people every month. Money Transfer allows users to remit money to 320,000 payout locations in 59 countries. Senders initiate transfers in person at a network of authorized agents (primarily convenience stores), through an iOS and Android mobile app, or online via the Boss Revolution website. Over 75% of transfers occur through the app. In IDT’s most recent fiscal quarter, ending April 30th, Boss Revolution Money Transfer processed 1.9 million transactions, a 36% increase vs. the year-ago quarter. Money Transfer earns revenue through a flat per-transaction fee and a markup on the exchange rate.

                                          i. Since management began disclosing financial details in the first quarter of IDT’s fiscal 2019, Boss Revolution Money Transfer has roughly tripled revenue and processed transactions have expanded 2.5-fold. We foresee $52mm in revenue in fiscal 2021, an 8% increase vs. fiscal 2020, at a 60% gross margin. Abnormal currency movements in Nigeria temporarily boosted revenue growth in 4Q2020 and 1Q2021. Outside of this aberration, we believe the business can sustainably grow at a 30-40% rate for the foreseeable future by continuing to market and penetrate existing Boss Revolution prepaid calling customers and onboarding new authorized retail agents in the U.S. To date, Boss has only onboarded ~1,000 retail partners for outbound money transfer services vs. an existing base of over 30,000 retailers that sell Boss Revolution prepaid calling services.

                                         ii. According to management, consumers choose Boss based on brand recognition and the implicit trust built up through years as a prepaid phone operator. We also see two other dynamics working in Boss’s favor – price and physical network. Running numerous tests online and in-app, we believe that Boss is consistently cheaper than its competitors (namely Xoom, a PayPal service, and Western Union). Second, it is no small task to build a physical retail network of 300,000+ locations that are able to handle complicated international money transfer services. We believe Boss has an inherent advantage through its existing network, which could serve as a barrier to potential new entrants.

b.    National Retail Solutions (NRS) offers a technology platform for transaction processing and related services to independent convenience, liquor, and grocery stores. NRS’ suite of solutions includes cloud-based point-of-sale software for transaction processing, point-of-sale terminal hardware, payment processing gateway software, and advertising, which is displayed on the customer-facing terminal at checkout. The software is sold as a service on a recurring, monthly billing schedule. Point of sale costs ~$20/month and the payment gateway costs an additional $60-80/month. Hardware revenue is one-time/non-recurring. Additionally, NRS earns money through the sale of terminal data to third-party data providers such as Nielsen. In the second quarter, NRS generated $6.4mm in revenue, a 121% increase vs. the prior-year period. We believe that 80% of quarterly NRS revenue is generated by high-margin software, advertising (management has disclosed 90%+ margin here), and data sales. Active deployed terminals at the end of the quarter totaled 13,100, a 49% increase vs. the prior year, and a 4.4-fold increase from when IDT first disclosed NRS’ installed unit count three years ago. We anticipate fiscal 2021 revenue of $26mm at an 80% gross margin. Management is unofficially guiding to an installed base of 20,000 over the next twelve months and 40-50,000 within three years. We consider this a reasonable target. There are over 300,000 retailers in NRS’ core markets (convenience, tobacco, liquor, and grocery) and IDT already has pre-existing relationships with over 30,000 C-stores through Boss Revolution Calling. At 45,000 stores and $1,600 in average recurring revenue per unit (software, advertising, data sales), we believe the business can generate over $70mm in annual recurring revenue. In addition to rapid growth, NRS has many attributes closely associated with a high-quality business, including low customer attrition (low single digit percentage), recurring revenue at high margins (80%+), a large addressable market, and it is critical to the day-to-day operations of the business.

3.    Net2phone is a cloud subscription service that unifies business communications across devices – desk phone, PC, and mobile. Net2phone replaces legacy on-premise private branch exchanges (PBXs) with an internet-based platform for calling, messaging, and video chat for both internal and customer-facing purposes. Features include a mobile app, SMS, live chat widgets, voicemail to email transcription, and client analytics. Additionally, net2phone integrates seamlessly with a myriad of business tools, including Microsoft Teams and Salesforce. The service is mostly marketed to small businesses, but it also has an enterprise solution, where it counts Berkshire Hathaway Home Services, Panera, and Allstate as customers. Today, net2phone has 210,000 active seats/users and we estimate $43mm in revenue for fiscal 2021 at an 85% gross margin. Similar to NRS, we believe annual customer attrition is quite low at net2phone -  less than 5%  

a.    Net2phone competes in the $56 billion Unified Communications as a Service (UCaaS) market. Growth in the number of computing devices for work (both company-owned and personal) has necessitated a shift in how companies view their internal and external communication requirements. Increasingly, businesses are shifting towards UCaaS offerings, including those offered by net2phone. The industry, in aggregate, has grown at a rapid 15-to-20% annual rate for the past several years, which net2phone has handily beaten, with annual revenue growth of ~40% since 2018. Net2phone’s growth is partially attributable to overall industry growth and the simple fact that it started from a smaller revenue base, but, more importantly, net2phone management made a conscious decision early on to enter international markets. Net2phone UCaaS launched in 2015 and just a year later  entered the Brazilian market. Today, approximately 50% of revenues are generated internationally, mostly from Spain, Brazil, and Mexico, where there is less competition and less penetration of UCaaS solutions. This dynamic will allow net2phone to grow above the market average for the foreseeable future, but even in a “worst case” scenario, the business can still grow in the mid-to-high teens due to the structural shifts occurring in the business communications market.  

What is it Worth?

No matter how you break down IDT’s valuation, it is clear that the market does not quite appreciate its underlying assets. Excluding $162mm in net cash (capitalized interest on restricted cash at 20x), IDT is valued at $777mm.

Starting with the Traditional Communications business, we have $80.2mm in trailing EBITDA generation. Arguably, we should break out the Mobile Top-Up business, since it’s rapidly growing, but for the sake of conservatism we will lump it in with the other two, declining businesses. Applying a 7x EBITDA multiple seems appropriate, which is in-line with peers (TDS, TMUS, T, VZ, DISH) and gives us a $561mm valuation, implying just $295mm in value to the three growth businesses (Boss Revolution Money Transfer, NRS, and net2phone) generating over $120mm in revenue and growing more than 30% per year. Note: we capitalized $8mm in corporate at 10x.

What are the other pieces worth?

For Boss Revolution Money, NRS, and net2phone, we will apply a revenue multiple to our fiscal 2023 revenue estimates for each business,  which is a reasonable valuation method here. All three businesses are currently unprofitable on an operating level but are highly profitable on a unit basis and have significant runways for future growth. See our comparable company set below.

Notably, all of the comparable businesses are growing materially slower than our IDT assets. We see Boss Revolution Money and net2phone maintaining a 40%+ growth rate for the next two years, while NRS should decelerate to ~60% growth from 100%+ currently. We assume continued strength in Boss Revolution as immigrant communities continue to gravitate to Boss’ convenient product offering (mobile, convenient retail network, etc.) and low prices. On a macro level, remittance services are still seeing strong demand as low-income countries are still struggling with COVID-related economic fallout related to the more developed U.S. economy. This dynamic should support Boss for the foreseeable future. Net2phone’s growth will be driven by the continued shift from legacy phone bank systems in international markets to a UCaaS solution. Lastly, NRS growth will come from continued expansion of unit count, growth in ARPU, and expansion into new verticals, specifically gas stations, which NRS just released a product for in the past few months.

Cumulatively, Boss Revolution Money, NRS, and net2phone are worth nearly $2 billion – 2.5x the current enterprise value of IDT – yielding a fair value per share of $99 for IDT. There is room here to argue about proper multiples, given scale relative to peers. That said, even a simple 4x multiple on all three businesses yields a $64 stock, which, if realized in two years, would represent a 33% annual rate of return.

Why is this stock mispriced?

1. Less than $1 billion market capitalization and no sell-side analyst coverage.

a.    There are zero sell-side analysts covering IDT today and the company rarely makes appearances at investor conferences. The lack of communication with the outside world, which usually occurs through the sell side, increases the likelihood that IDT is a misunderstood and overlooked stock.

b.    IDT has a public market float (value not held by insiders) of approximately $800mm, which is under the commonly cited $1 billion minimum float-adjusted market capitalization of many institutional investors. Similar to how a lack of sell-side coverage reduces the likelihood of market participants fairly assessing IDT’s value, fewer eyeballs on the stock due to market cap constraints increases the likelihood of it being mispriced.

2. IDT screens very poorly on high-level quantitative metrics.

a.    Most of IDT’s value creation has occurred through spin-outs and dividends. When IDT gets a “win”, they either sell the asset or spin it out. This is a positive for shareholder value creation, but it creates the appearance of a business with no history of growth in revenue or earnings.

b.    From 2015 to today, revenue and income from operations have dropped 16% and 81%, respectively. Anyone who runs a quantitative screen will quickly toss out IDT and label it as a “loser”. One needs to scratch the surface to see the merit in this investment!

3. Frequent changes in reporting segments creates analyst confusion.

a.    IDT’s frequent spin-offs and sales necessitate “resegmenting” of IDT’s businesses in the financial statements. We count four changes in the makeup of IDT’s reported operating segments over the past five years. General heuristics amongst financial analysts dictate that frequent changes in a company’s reporting segments constitutes a red flag. It is likely that the extensive legwork required to parse through and analyze IDT’s history is a turn-off to most stock pickers and prevents further analysis of the business.

4. Family involvement

a.    IDT has some governance quirks that would make most public companies blush. Howard Jonas firmly believes in “keeping it in the family”. The Jonas family, through the publicly-traded B shares and privately-held A shares, control more than 73% of the voting power of IDT.

b.    Jonas family members manage and hold board seats on IDT and spun-out businesses.

                                          i. Shmuel Jonas (CEO of IDT) is Howard’s son

                                         ii. Michael Jonas (CEO of Zedge) is Howard’s son

                                        iii. Michael Stein (CEO of Genie) is Howard’s son-in-law

                                       iv. Joyce Mason (General Counsel and Corporate Secretary of IDT) is Howard’s sister

How will it become fairly priced?

IDT management will unlock value for shareholders by spinning out or otherwise monetizing their growth assets, just as they have done for the past decade. Management has publicly stated that it will look to spin out or monetize a piece of the net2phone business by the end of 2021. The likelihood of this occurring is extraordinarily high. On December 31, 2020, IDT gave Howard and Shmuel Jonas restricted stock representing 5% ownership of net2phone. The shares only vest if the business unit earns $18mm in revenue for any fiscal quarter between now and October 31, 2023 and the business is valued for at least $100mm on October 31, 2023. The Jonas’ stock will also vest if the business is sold for at least $100mm and they are protected from dilution for the first $15mm invested in net2phone. The latter stipulation seemed rather pointed and, given management commentary around potentially seeking a private equity investment, leads us to think that a monetization is more likely than a spinoff. Either way, a transaction will help close the value gap between the market price of IDT and the intrinsic value of its businesses. Assuming net2phone is conservatively valued at 5x our revenue estimate of $88mm and no other aspect of IDT’s valuation changes, there is 15% upside to the stock.

Looking past net2phone, NRS is the next likely spin-off candidate, given its recent rapid revenue growth and opportunities for continued growth, including new installations, upselling of advertising and payments, and the introduction of new products. NRS has introduced a number of new services including a point of sale offering for gas stations, an EBT acceptance service, a module for merchants to accept drop-ship packages, and a funding service to lend money to its customers (similar to Square Capital’s loan program). Merchant processing (accepting, processing, and settling credit and debit transactions) is the most obvious opportunity for NRS and we expect this service to be introduced in the near future. Upselling services creates a multiplier effect on revenue by dramatically increasing average revenue per user. For example, the average NRS customer generates $135/month in revenue. NRS offers a native loyalty program for $20/month. If every NRS customer took this service, it would immediately increase revenue by 15%. Ultimately, NRS could be a $100mm business within the next five years and growing 20%+. At 10x revenue, that is a $1 billion asset and worth multiples of IDT’s current enterprise value by itself.

Regardless of how we calculate it though, there is little room for downside. If NRS and Boss money transfer stall out and die off, net2phone is worth almost all of IDT’s EV today, with ample opportunity for further upside. Alternatively, net2phone and Boss money transfer die out and NRS becomes the $1 billion brand that we envision. The point is that today we are paying very little for net2phone, NRS, and Boss Revolution Money Transfer. If we are wrong, we lose a little. If we are correct, we will make multiples of our money.

Risk

Given management’s history and the low valuation, we see few company-specific risks. That said, the last scenario we laid out in “Why is this stock mispriced?” is the biggest risk. The A shares, worth three votes per share, giving the Jonas family over 70% of the voting power, is the largest red flag on this investment. The presence of the A shares means that we have no way of forcing management’s hands. The Jonas family runs the show and there is nothing we can do about it. We are party to their decisions and must accept that or sell. Luckily, Howard Jonas has a long history of generating shareholder value and it does not appear that he has lost that ability. Rafael Holdings, the last company spun out of IDT, has generated a nine-fold return for investors in just three years and the upcoming transaction with net2phone signals that Jonas is still attempting to generate good returns for his shareholders.

Another large risk to our thesis is time. Opportunity cost is present in all investments, but the effects of time are especially acute when utilizing a “sum-of-the-parts” analysis. The amount of time it takes to close the gap between the stock price and intrinsic value will greatly impact our returns. Luckily, we have two mitigants to this risk. The upcoming monetization of net2phone should serve as a catalyst in closing the intrinsic value gap and all non-core assets are growing very rapidly. All else being equal, if they continue to grow, the intrinsic value gap will continue to widen, or the market will catch up to this discrepancy and close the gap. At a minimum, it is better to have a growing valuation disconnect due to growth in intrinsic value of the underlying assets than a stagnant valuation due to a no-growth asset.

Boss Revolution Money is somewhat of a black hole and utilizes a company-owned bank (IDT Financial Services) in Gibraltar to facilitate transactions. In addition to facilitating Boss transfers, the bank also sells prepaid card services on the Visa and MasterCard networks to 3rd party customers The impact of foreign currency held on the bank’s books can materially impact financial results.

Catalyst

IDT management will unlock value for shareholders by spinning out or otherwise monetizing their growth assets, just as they have done for the past decade. Management has publicly stated that it will look to spin out or monetize a piece of the net2phone business by the end of 2021.