IDT Corporation ($IDT)
"Spin-off Incubator With Three Potential Triggers"
This write up was done in collaboration with Mexican Investor.
100% of the research was done by Mexican Investor, I just added couple of final touches.
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Disclaimer is at the end.
The company, run by Howard Jonas and his son Shmuel Jonas, has become a spin-off incubator. This is because they have a core business that is neither growing nor interesting but generates sufficient cash flows to develop new companies. Later, they take these companies public on the stock market as independent entities, thus creating value for shareholders, which the core business cannot provide.
I believe the opportunity exists because if you are not familiar with IDT's history and you only examine the financial statements, you might consider leaving. Sales have shown little growth in recent years, and EBIT margin is minimal and not interesting at first glance.
In this article, we will discuss the three businesses currently under development within the company, any of which could become the subject of a spin-off at any time. Also, I will also perform a valuation to estimate the potential value the company could have if each business were valued individually.
IDT Corporation (NYSE: IDT 0.00%↑ ) is a telecommunications company based in the United States. Its core business lies in traditional communication services, such as prepaid international calling services or wholesale carriers of international long-distance minutes. This segment of the business represented 91% of sales in FY2022, but is in secular decline because the consumer is moving towards internet-based calling applications such as WhatsApp and even video calls like Skype. However, IDT's appeal lies not in its traditional communications business, but rather in the companies it has developed 'at home,' taking advantage of the cash flows generated by this segment. The company currently has three main businesses in 'incubation,' which are as follows:
This company is a UCaaS (Unified Communications as a Service, also known as Unified Communications in the Cloud) provider, which involves integrating various communication tools on a single platform. This integration allows users to access multiple communication services, including IP Voice, contact center, video, email, instant messaging, and real-time collaboration, from a single platform, anytime, anywhere, and on any device. This business is particularly intriguing because its revenue source is a monthly subscription fee based on the number of seats on the platform. In other words, net2phone clients, typically businesses (making net2phone a B2B business), pay a subscription fee for each employee they wish to grant access to the unified communication network. This model generates predictable revenues with minimal incremental costs for adding new users.
Solutions like these are essential in the modern digital workplace as they enable quick and efficient collaboration with colleagues and clients, enhancing productivity in communication and collaboration. It's not surprising that this market is experiencing double-digit growth rates in the US and is expected to maintain this trend for the next decade.
Net2phone's revenue has been growing at a 33% CAGR between 2019 and 2022. Although it was not profitable in EBITDA during FY2022, we have observed a positive trend that eventually led to a profitable Q3 2023 with an Adjusted EBITDA Margin of 5.4%.
A Western Union-style international money transfer business that enables customers in the US to remit money to recipients in ~60 countries. Boss Money generates revenue through per-transaction fees charged to customers. While it may not have an extremely attractive business model, it is not a bad business by any means. This is because it can exhibit resilience during crises, given that many people rely on remittances for essential expenses in their home countries, such as food, housing, education, and healthcare. Consequently, there is often a steady demand for these services even during challenging economic times.
The company doubled between 2019 and 2020, but in FY2022 it had a non-depreciable growth rate of 15% and in Q3 2023 it grew 29% YoY and the volume increased by 38% to 3.28 million transactions, which is very positive. This business is not yet profitable in EBITDA, but comparable companies such as Western Union, International Money Express or MoneyGram usually have EBITDA margins of around 15 to 20%, so we could get an idea of how profitable the business can be and why the management is betting on this investment.
National Retail Solutions (NRS)
NRS is a point-of-sale platform catering to independent, niche-focused retailers such as convenience stores, liquor and tobacco stores, and bodegas. IDT sells terminals to these retailers, with nearly 24,000 active terminals in over 21,000 independent retail stores. Over the past year, they've added 6,000 terminals.
The hardware terminal sales offer growth but involve one-time payments. The real value comes from recurring revenues, driven by software subscriptions that include features like Employee Time Clock, inventory management, customer loyalty programs, and store performance statistics. These subscriptions typically cost between $25 and $65 per month, depending on the functionalities required.
Additionally, NRS processes credit and debit card payments for a commission on each transaction, adding to its income. Leveraging relationships built through the traditional communications business, NRS has room to grow, given the presence of over 150,000 independent convenience stores, as well as the potential to increase the average revenue per customer.
NRS has achieved triple-digit growth over the past three years, with a 60% growth in Q3 2023. Notably, it reached adjusted EBITDA margins of 23% in FY2022, which is in line with the expected performance of software businesses that typically generate EBITDA margins between 30% and 40%.
Straight Path Litigation
In 2013 IDT spun off a company called Straight Path Communications. It was listed at around $6 USD and was later sold to Verizon at $184 per share, a sign of how highly capable management is of generating value for its shareholders.
During this purchase process, legal problems arose between the companies involved. By way of summary, the accusation was as follows:
The lawsuit, filed by the plaintiffs in 2017, alleged that the Company aided and abetted Straight Path's Chairman of the Board and Chief Executive Officer Davidi Jonas, and Howard S. Jonas in his capacity as controlling stockholder of Straight Path, in forcing an unfair settlement of claims between Straight Path and the Company at the time of the sale of Straight Path. The Court found that the settlement in fact exceeded the value of those claims, and that there was no harm to Straight Path stockholders as plaintiffs alleged.
However, on October 3, 2023 IDT announced that the Court dismissed the claims against IDT and found that the Class suffered no damages, to which the market reacted with a large rise of almost 22% thanks to the fact that this great risk was finally removed from the equation.
Anyway, I would like to mention that despite this enormous increase, the share price is still too attractive, as we'll see next in the Valuation section.
Howard and Shmuel Jonas
Howard Jonas founded IDT Corporation in 1990 and launched it to provide wholesale telecommunications services and low-cost international calls. The company went public in 1996, and since then, it has found a way to create value by starting new businesses using the capital generated by the telecommunications business.
Since the inception of incubating businesses, IDT has spun off five businesses and sold several others that were also formed within the company. For example, in 2013, IDT spun off Straight Path Communications at a price of approximately $6 USD per share, and this business was later acquired by Verizon in 2017 at a price of $184 USD per share.
And this is just one example, but it is already evident that Howard Jonas has proven to be a great capital allocator over the years, so it is important for him to continue in the company. Although he no longer serves as CEO, Mr. Jonas still owns 17% of the company, equivalent to over $100 million dollars, and holds a position as Chairman of the Board. If you want to learn more about him and his work ethic, I recommend reading his books "I'm not the boss, I just work here" and "On a Roll."
Currently, Howard Jonas is 67 years old, so it seems understandable that he stepped down as CEO. This position was taken over by Shmuel Jonas in 2014, who currently owns 1.32% of the company, representing over $9 million dollars. In addition, during this period, his salary has remained around $475,000 dollars annually, and his compensation has remained stable, while the EBITDA per share has grown almost 20% annually. However, as we have seen, the performance of IDT is not the primary focus of this thesis; instead, it is the businesses that the company takes public.
For the valuation I will do a sum of the parts, where I will calculate the EBITDA margins that each part of IDT can generate, I will assign a multiple according to what the market usually assigns to similar businesses and thus we can get a better idea of how much it should be worth. the company if each component were evaluated individually.
The image below displays the growth and margins for Traditional Communications, NRS, Boss Money, and net2phone, along with my forward guidance. It's important to note that these figures represent the average growth and margins I anticipate over the next 5 years and does not imply the exact growth and margins that I expect each year. Actual performance may vary from year to year, but it should closely align with the averages shown.
Traditional Communications: This segment of the business has decreased in previous years and it would make sense for it to continue doing so in coming years at rates of 2% CAGR. I will also consider that EBITDA margins are reduced to 4% on average.
NRS: Estimating the growth of a high-growth business is challenging, but I consider a 40% CAGR to be a reasonable average for the next 5 years, and it might even be somewhat conservative. As for EBITDA margins, I believe they can reach around 25%, which is also a conservative considering that it is a business with a large part of its revenue comes from subscription, like a SaaS business.
Boss Money: This business achieved a remarkable 35% CAGR over the past four years. I anticipate it can maintain a 15% annual growth rate in the future. Additionally, I've considered margins that are slightly below the average for comparable businesses.
net2phone: I believe this business has significant potential for continued 20% annual growth, despite achieving 33% growth in recent years. As for future EBITDA margins, I will use the margins of companies like Crexendo, Five9, or 8x8, which have previously had margins close to 10%.
Subsequently, I opted to value it based on both sales and EBITDA, aiming for more precise calculations. The valuation multiples were determined by averaging those of comparable businesses listed on the stock market, with a conservative approach to the multiples assigned.
In the P/S and EV/EBITDA value lines, you can see the calculated values for each segment. The total value for the year 2027 averages about $1,800 million. On a per-share basis, this would amount to $70 USD, considering the 25.6 million diluted shares in circulation. This represents a potential annual return of 26% from the current price of $27 USD. This expected return seems excellent to me considering that we made conservative and reasonable projections at all moment.
While I find the businesses within IDT to be solid and profitable, it's important to consider potential risks:
The acceleration of the decline in the traditional business, which may affect its ability to finance new projects.
Competitive pressures in the UCaaS market for net2phone and NRS's sector, as other businesses like Thryv Holdings are exploring similar markets, potentially impacting growth.
Delays in the Spin-Off's release, which could lead to the market undervaluing IDT.
However, there are also positive factors worth noting, such as the company's negative net debt of $132 million, indicating its ability to pay off debt with available cash. Additionally, IDT boasts a competent board of directors capable of adjusting the business's direction as needed and determining the ideal time for independent listings.
It seems to me that IDT is a special situation with hidden assets that could become extremely profitable for shareholders when the market turns positive again, and the management decides to spin off one or even several of the incubated businesses.
The businesses within the company appear to have the necessary characteristics to operate as independent and potentially highly profitable entities, especially NRS. Additionally, in this case, time would work in favor, and with the Jonas family behind it, given their great track record and history, one could feel confident about keeping capital in the company until the catalysts emerge to unlock value.
If you enjoyed this, Mexican Investor has Spanish version of this write up on his Substack.
At the time of this publication, Mexican Investor does not owns shares in IDT Corporation IDT 0.00%↑ but he is considering while I (YZ) do not own it in my main portfolio, but I do own a small amount in my IRA.
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