- IDT is an ignored and undervalued collection of assets with an impressive track record of capital allocation and shareholder value creation
- Unlike most SOTP situations, IDT catalyzes value recognition by spinning assets into standalone entities (a la IAC) or selling them outright
- IDT is on the cusp of another spin with several other embedded attractive “options” at the remainco, a profitable core business, and a strong balance sheet
Price: $22.20 (Sawbuckd cost basis $17.35-19.05)
Mkt Cap: $571M
P/E (LTM): 13.4x
IDT was founded in 1990 by Howard Jonas with the designed purpose of providing cheap international long distance telephone rates to U.S. consumers. After building a successful international telecom business through a series of savvy business moves and technical innovation, Jonas parlayed that momentum into a platform for significant shareholder value creation across a diversified array of industries using IDT as the incubator. IDT’s history of spinning off or otherwise successfully exiting businesses is impressive and extensive – here is an abbreviated timeline of IDT’s track record:
1996: IDT is publicly listed as an international long distance carrier and wholesale servicer to other telecoms
2000: IDT sells the original net2phone subsidiary (a leader in VoIP technology) to AT&T for $1B
2006: IDT sells its Russian Telecom business for $129M
2007: IDT sells IDT Entertainment to Liberty Media for $220M
2009: IDW Media Holdings (IDWM – a collection of comic book, television, board games, books, etc. IP) spun off to shareholders (market value subsequently stabilized around $30-40M, has been as high as ~$300M)
2011: Genie Energy subsidiary (GNE – electric and natural gas services) spun off (average market value over the past decade has been ~$200M)
2013: Straight Path Communications subsidiary is spun off to shareholders and would eventually be purchased by Verizon for $3B in 2018
2014: IDT sells Fabrix subsidiary (cloud storage and network delivery tech) to Ericsson for $69M
2016: Zedge subsidiary (ZDGE – mobile device content development) is spun off (market cap has been as low as $10M since the spin but currently sits at $125M)
2018: A number of real estate holdings and Rafael Holdings (early stage pharmaceuticals) subsidiary are combined spun off (RFL – has grown from $60M to $600M in market cap since spin)
Today, IDT continues to execute the same playbook they have been since 1996. The legacy telecom business produces consistent cash flow that is deployed into new lines of business that are incubated and monetized in one way or another. The company currently divides itself into 3 operating groups: fintech, Net2Phone, and traditional communications. The “fintech” segment includes a payments/money transfer business and a point of sale (POS) terminal network. Net2Phone is a comprehensive cloud based communication service for domestic and international commercial customers. The “traditional communications” segment includes the legacy telecom lines of business: a consumer-focused international calling service, a consumer-focused mobile “top-up” offering, as well as a carrier/platform services offering that caters to cable providers and telecoms.
One interesting thing I noticed about the current collection of businesses that compose IDT is that while each of the business lines might appear fairly incongruous with one another, they all build on a core strength of the legacy business. IDT’s legacy telecom services in the consumer space were aimed directly at immigrant communities, who have an obvious need for long distance international calling service. IDT’s current portfolio is a group of offshoot businesses that dovetail with that existing customer base or utilize some of IDT’s existing internal infrastructure. The money transfer service is a natural need for existing long distance calling customers that want to send money abroad (the payments business even carries the same branding as their legacy calling service) while the POS network is marketed primarily to independent convenience and liquor stores that typically serve immigrant communities. Even the Net2Phone business line carries certain synergies with the legacy telecom operations and give them reach into a number of foreign markets. I will note, however, that IDT is no one trick pony; this sort of tangential relation to their core business is not a necessity. As I listed in the timeline above, IDT’s spinoffs include a media company (IDWM), an electric/gas services company (GNE), a pharma company (RFL), and a mobile phone content business (ZDGE).
Any discussion of IDT must begin with the company’s founder and visionary, Howard Jonas. Joe Boskovich of Old West Investment Management did an entire podcast about Jonas on Bobby Kraft’s Planet Microcap Podcast, which I found to be an extremely valuable resource (and what ultimately lead me to look at IDT in the first place). My conclusion, much like Joe’s in that podcast, is that Jonas is a highly capable leader with a fierce business acumen and the track record at IDT to prove it. I hope that the timeline included above, which cumulatively reaches into the billions of dollars worth of shareholder value created over multiple decades, speaks for itself. Beyond merely the impressive historic record, the Jonas family itself is aligned with shareholders. Each of Howard’s nine children (including one of Howard’s sons who is the acting CEO) hold shares via trust with the family collectively controlling about 33% of the shares in IDT (and ~75% of the voting power).
Before I get into some of the nuts and bolts valuation, I want to say a little about why I think this opportunity exists. Despite the aforementioned insider alignment and strong track record, IDT continues to be (unbelievably, IMO) ignored. Beyond the small market cap, I think the primary driver for this lack of attention is the “complicated” nature of the company. The valuation for IDT is not really as simple as slapping a multiple on trailing earnings. The business is nuanced – a declining but cash generative legacy business feeds capital into growth-oriented internal startups with indeterminate runways that might be sold or spun in the near or distant future if incubated to success. Like many of the businesses I find myself looking into, this one requires more than a superficial glance which means it’s automatically bypassed by many market participants. Even the in realm of value investors, IDT seems to be a known but forgotten commodity. The CoB&F and VIC threads are basically dead and haven’t been particularly active since 2013. Even on Twitter the chatter is pretty sparse; Joe’s discussion of it in Old West’s letters and the MicroCap Planet podcast were certainly the first I’d ever heard of the company.
I generally do not believe in the much maligned sum of the parts (SOTP) style valuations, however I think IDT is one of the rare instances where the methodology is valid (along with a few of my other portfolio holdings). In my mind I compare IDT to an IAC, albeit a lower quality version. Much like IAC, IDT is a collection of related or unrelated business that benefit from being part of a holdco for a time but must ultimately stand on their own. When the right moment presents itself, the parent must be willing to let that happen. And it’s precisely because IDT/IAC do this frequently and with success that the market is forced to recognize the previously obscured value of the new standalone company. This is all pretty well understood market dynamics and operational philosophy, but I think my point here is that it takes conviction to execute that playbook and relatively few companies do it well and consistently, but those that do can create tremendous value.
The slide below is from the most recent (Dec 2020) investor presentation for IDT. Management, presumably understanding the very issue I have spent the preceding two paragraphs discussing, has made their case painstakingly simple for anyone with the intellect and perseverance to… visit their corporate website and download a PDF. Here, management gives you an idea of what they think the range of value is for each of the key lines of business and what that rolls up to at the enterprise level. Obviously, there was a ton of upside (in their opinion) back in December when shares were still <$10. Today, the stock has run to the $20ish range, but I still think there is plenty of upside left here.
Below, I will give a little background on each of the business lines and try to outline a bear/base case scenario for each. Before we get there, I should acknowledge a few things. As I alluded to earlier in this write up, the basic IDT playbook is to use the cash flow from the “traditional communications” legacy business to incubate and grow new diversified lines of business (currently the money transfer, POS network, and cloud communications subsidiaries). So as I try to value the “parts” below, it’s important to remember that these are still relatively early stage enterprises that have not reached stand-alone scale. As far as I can tell only the money transfer division is profitable and even that is a recent development and unlikely to be reliable moving forward, IMO. There’s a reason management is using revenue multiples and not EBITDA or operating income to value these – it’s reflective of the fact they aren’t mature enough to be cash flow positive. Also it’s probably indicative of how they think public markets might value these given today’s market environment (i.e. revenue multiples and growth vs. profitability). I fully recognize that good valuation work and the phrase “revenue multiple” do not often go hand in hand, but I do believe it would be completely disingenuous to say there’s no (or little) real value here. If I were trying to evaluate each of these as standalone entities in public markets it would be pretty challenging to get comfortable enough with any of them to buy shares individually. However, given that they are merely a component of broader IDT portfolio at the moment and benefit from the company’s strong financial position and management, I tend to view them as embedded call options. You may only need one of them to really payoff to make it worth the risk here. Anyway, here we go:
The engine that powers IDT is the Traditional Communications segment. This is the legacy telecom business that throws off all the cash that is fed to the more aggressive “growth” businesses. The segment breaks down into 3 sub-segments: Boss Revolution Calling (their consumer facing international long distance calling service), Mobile Top Up (allows customers to transfer calling, data, and messaging credits to other international and domestic mobile accounts), and Carrier Services (which is the core legacy business that provides wholesale voice and SMS facilitation and traffic management to other telecoms). Each sub-segment accounts for somewhere between 20-40% of revenues for the group. Collectively, the Traditional Communications accounts for 90-95% of IDT revenues and typically all of the operating income.
As you can see from the figures above, there are some definite questions about the future of some of the business lines. Carrier Services has been the hardest hit over the last few years as the industry has moved away from traditional long distance international voice providers and price competition from larger wireless and sovereign telcos has increased. IDT has openly admitted that they are no longer maximizing revenues or utilization within this line of business but are instead optimizing for economics. I’m generally more optimistic about the consumer facing business, Boss Revolution Calling, which has seen a more modest contraction in revenues despite accelerating competition from traditional wireless carriers (Verizon, AT&T, etc. are increasingly offering international calling as part of standard mobile plans). Unlike the Carrier Services division, IDT is still aggressively competing in this segment. They currently serve about 4M customers through both DTC apps/web portals and a retail partner network that boasts 30k locations and continue to add new services/offerings/features. Reading between the lines, economics seem to be moving in the right direction as more retail customers move to the DTC mobile app which I expect reduces costs to service & acquire customers. The last notable line of business in this segment is Mobile Top-Up which has seen increasing demand amongst users over recent years as IDT has added additional mobile providers and bundling option offerings. This appears to be the only sub-segment within Traditional Communications to see sustained top line growth in the last few years. Much like their other business lines, Top-Up seems like a niche space but an important need to IDT’s target customers. There appear to be several digital-only competitors in the space, but I suspect IDT’s mixed physical retail and digital offerings give them a branding and familiarity advantage here. Collectively, the Traditional Communications group did about $40M in operating income in FY 2020 but about $20-25M in the preceding 3 years. I think it’s reasonable to assume that the huge jump was partially driven by increased demand for their services due to COVID but through two quarters of FY 2021 the group is on pace to do $70M (I expect the actual may come in lower due to seasonality of the business) and, in alignment with their comments about optimizing economics, costs seem to be declining faster than revenues at the group level. It’s hard to say what forward expectations should be, but $30M in normalized operating income feels like a pretty conservative estimate to me given that you expect some regression on the recent results. D&A add back plus drag from corporate overhead (each ~$10/yr) offset one another to yield an “EBITDA” figure of about $30M from the business unit. As I write this, the EV for IDT is sitting at about $455M. If you ignored every other line of business that I will discuss below and just focused on the legacy core business, you’d be paying approx 15x EV/TTM EBITDA or 8x P/run rate operating income (i.e. $571M market cap on $70M in est. FY 2021 operating income). Maybe that seems expensive for a telecom business facing headwinds, but certainly not an absurd valuation. Not to mention IDT has $80M in cash, $80M in debt/equity investments and PP&E, and carrying no debt. To me, a 4x normalized EBTIDA valuation feels pretty conservative for the legacy telecom + corporate overhead portion of IDT which would give us a $120M valuation.
Boss Revolution Money Transfer (BRMT) is an international money remittance service launched in 2013 that provides connects U.S. residents to 60 foreign countries. Initially, the service relied heavily on a retail partner network for distribution, which seemed logical at the time given shared “Boss Revolution” branding between it and the calling business, plus the fact that many target customers dealt in cash. From what I can tell, the serious growth has come since 2017 when they launched a mobile app that seamlessly integrates the money transfer and calling services. BRMT collects revenue via transaction fees from customers and benefits from some currency fluctuation. Revenue growth has been strong (>100% from FY 2019 to FY 2020) and I suspect the business might be at breakeven/slightly profitable over the last two quarters. BRMT competes with both traditional retail based money transfer services like MoneyGram (MGI) and Western Union (WU) as well as digital-only offerings like Xoom (a PYPL service), TransferWise, Remitly, and World-Remit. When thinking about the valuation, I don’t think that MGI and WU are good comps given their brick and mortar footprint (and MGI seems like kind of a debt-laden tire fire) and the fact that BRMT is doing the majority of their business digital DTC (app or web) already. The digital-only comps are all private with limited valuation information, with the exception of Xoom which was acquired by PayPal in 2015 for ~$900M. From what I was able to find based on private valuations and reported user bases, the digital-only comps are valued at anywhere from $375-700 per user. I’ve not found any disclosure of the user count for BRMT anywhere, so we will need to make assumptions about that to get to a valuation. The Boss Revolution Calling business claims 3.7M monthly users and thus far BRMT’s marketing focus has been cross converting Calling customers into their user base. Let’s assume they can convert just 25% of those users (and ignore any potential new customer acquisition) and let’s give them half the valuation credit of their lowest rated private peer (WorldRemit, who recently raised at a $1.5B valuation with 4M users = $375/user). So we’d conservatively value BRMT at $375/2 * 25% * 3.7M = $170M. That works out to about 4x sales, which seems pretty conservative to me for a business that grew >100% YoY with plenty of avenues for additional growth (onboarding additional retail partners, acquisitions, etc.). As for what I really think a reasonable valuation might look like, your guess is as good as mine but “payments” in general is a hot space right now. A higher conversion rate for Calling customers (or god forbid brand new customers), fuller valuation credit relative to peers, or sustained revenue growth anywhere near their current pace – or any combination of these things – would pretty easily get to something like management’s midpoint estimate ($300M) IMO.
National Retail Solutions (NRS) is a POS terminal system marketed to independent convenience, liquor, bodega, etc. stores. NRS is the youngest and smallest (by revenue) of the IDT “growth” lines of business, but has seen strong adoption thus far. IDT builds the terminals in house and charges $20/month per terminal to customers. They estimate their target market of independent store so be approximately 200k locations in the U.S. As of the end of January 2021, NRS had about 13k terminals across 10k retailers and projects to add 1k terminals per quarter (however, this seems a bit aggressive relative to actual results over the last few years). NRS also derives some revenues from display advertising and data/analytics resale, which should both compound in value as the network grows. IDT mentions time and again in their commentary that they believe their specific target market is underserved by more mainstream competitors like Square, Clover (owned by Fiserv), and NCR. That makes some sense to me as the IDT target market is fragmented and likely too small to move the needle for significantly larger organizations. Management cites a 7.5x-10x estimated revenue multiple based on peers (and also on 2021 FY projected revenues), which seems aggressive to me. Something like 3x revenues feels fair given the growth profile and potential runway here, which would land us at a bear case valuation of about $60M. Management’s low end estimate would peg valuation at about $150M and I have no reason to think that’s not possible, so let’s call that the optimistic scenario.
The last piece of IDT that should be discussed is the Net2Phone (N2P) business, which is a unified communications platform (which IDT refers to as Unified Communications as a Service – UCaaS) that allows businesses to manage their phone call, text, and chat traffic via one integrated application across the entire organization. Net2Phone also offers analytics/reporting capabilities as well as third party integrations like Salesforce, Slack, Zoho, and MS Teams. Since its U.S. launch in 2015, N2P has expanded to major South American Markets (Brazil, Argentina, Columbia, Mexico) and Canada (2018 acquisition) and Spain (2019 acquisition). IDT notes that they are specifically targeting new markets based on high market fragmentation, low UCaaS penetration, and general lack of attention from global market leaders. IDT cites future growth potential via increased features, new APIs, additional third party integrations, increased focus on specific industry verticals, and even a potential DTC offering (they recently launched some video chat functionality). N2P is playing in space that feels pretty crowded to me, especially with larger and more established players like Vonage (VG), 8×8 (EGHT) and RingCentral (RNG). But I appreciate that IDT is pursuing lower hanging fruit, rather than trying to compete head to head, and seems to be having some level of success. N2P is on course to do about $35-40M in revenue for FY 2021 and has been growing 20-30% YoY. I think N2P (and to some extent, this whole UcaaS trend) is still in the early innings from a macro perspective as several of the other publicly traded players in the space seem to be enjoying solid growth as well (even pre-COVID). To some extent, UCaaS looks to me like any other tech vertical nowadays – reaching critical mass in terms of customers will make or break the long term economics and viability of the individual players. To that end, you can see that IDT has accelerated their investment in the business as costs and capital deployed for acquisitions have really ramped up in recent years. Although there have been no disclosures of imminent plans, IDT has pretty decisively signaled that N2P is the next spinoff from the mothership. The story should be relatively easy to market to investors as a stand alone entity, the question is what kind of reception to expect from public markets. Management cites a 5-10x revenue multiple based on peers, and the public comps above seem to suggest 4-8x – so we are in a similar ballpark. At the lower end 5x multiple on today’s revenues we get to a $175M valuation and at a more aggressive 8x multiple we get $280M. This feels like a reasonable range to me right now.
Now, I know that was a lot to digest and, to be honest, it only scratches the surface of each of the underlying businesses. But the big picture here is that if you take all those valuation figures and put them together you get range of $525M to $850M which, as I mentioned in the section on the legacy communications business, ignores a lot of the optionality at the IDT holdco given it’s rock solid financial position and strong leadership. But given this valuation range you’re looking at a pretty limited downside and modest to significant upside in company that has a habit of creating it’s own catalysts.
There are two or three key issues I see with IDT. First, as I acknowledged above, I am pretty wary of assigning revenue multiples to businesses as a means of valuation, even if done conservatively. I could completely understand some level of skepticism applied to any of the comps or theoretical multiples discussed above. But I think that is just baked into the situation here. We are trying to value sub-scale businesses that are not ready to be standalone entities yet. Part of why this write up is absurdly long is that I wanted to provide context beyond just revenue multiples for each of the underlying business lines. As I alluded to previously, I think you could have any one (or multiple) of the businesses turn out to be less valuable than anticipated but still have a good outcome if another one is a homerun. Again, I sort of view IDT as a collection of embedded call options on any of the businesses creating a ton of unexpected value.
I mentioned above that Net2Phone will likely be the next spin (more on that reasoning below). Once N2P is spun, you’ll be left with the legacy communications business, NRS (the POS network), and BRMT (the money transfer business). To me, N2P makes a ton of sense as a standalone business – it is more of a true software business with lots of potential for growth and seemingly limited synergies with any of the other businesses beyond normal corporate overhead. Theoretically the next two options for future spins will be NRS and BRMT, but after having dug into those there seems to be tighter integration with IDT’s legacy communications business. For instance, the money transfer service is braded under the same name as the consumer facing calling service (which is part of the legacy communications line of business). To that end, consumers access both products via the same app and, in my mind, think of them as basically the same integrated service. I think that makes it pretty awkward to spin BRMT into a standalone when it shares the same app/consumer mindshare with a line of business left back at the IDT mothership. Alternatively, I suppose you could spin the calling business along with BRMT, but that probably complicates the narrative and reduces the “sexiness” of the payments angle for investors. Shifting back to NRS, I think we are a ways off from realistically considering that for a spin candidate. It’s still in the very early innings and I presume it has pretty different economics from any of the other businesses. NRS, too, seems to have pretty close ties with the legacy business in that they are targeting the existing retail footprint of the Boss Revolution products. In my mind, it remains to be proven if NRS can build out a large enough customer base to be viable long term. The Boss Revolution consumer calling product is distributed through 26k retail partners while management cites the 200k potential market for NRS. Even assuming 100% overlap between those two customer bases, I’m not sure we have enough info at this point to know if NRS growing to exactly the same footprint would be enough to be valuable as a standalone entity. I guess my large point here is that there is a pretty clear path to Net2Phone’s spin while the timing and prospects of the next catalyst(s) (i.e. spins) are a little less certain.
Joe was also on another one of my favorite podcasts, Andrew Walker’s Yet Another Value Podcast, to talk about another Old West holding (WildBrain). Early on in the pod, they chat a little about IDT/Howard Jonas and Andrew brings up the point there is some question about the fairness of IDT/Jonas dealings with minority shareholders. I think Andrew raised a fair question here. In the pod, he cites the recent 8-K that IDT filed announcing that Howard and Shmuel (Jonas, current CEO and son of Howard) were each granted 5% equity in the Net2Phone business. The grant is subject to meeting certain operational criteria (doubling run rate revenue and a $100M valuation) and only exercisable in a spin, sale, IPO, etc. It’s great that there are some strings attached here, but that’s 10% of Net2Phone that IDT has given away to two insiders (not even spread across the management team) and the bar has been set pretty low, IMO. The SOTP graphic above is from the company’s December 2020 investor deck and this grant was announced in early October. Notice that management already expects the value of Net2Phone to be well above the $100M criteria specified in the grant and, given the resources being allocated to N2P, I don’t expect the revenue goal to be difficult to achieve in the next couple of years either. To me, this looks like more of a reward than an incentivization tool. Now it’s pretty hard for me to know whether the Jonases were crucial to the success and future trajectory of N2P but apparently the board felt that way. Perhaps it’s a little heavy handed, but I guess at the end of the day IDT shareholders will also do well if N2P is successful. On a separate note, Howard Jonas and IDT are also involved in litigation related to the sale of their Straight Path spinco to Verizon in 2018. Several institutional investors allege that Jonas personally hijacked the company sale process in order to ensure IDT avoided certain liabilities related to FCC violations that Verizon would later pay $600M to settle. I’m not exactly sure what to make of this, but I highlight both of these issues to make the point that although Jonas and company appear to be talented value creators, it’s important to go into the situation with eyes wide open about the incentives and motivations of those in control. For me, it ultimately comes down to the fact that as a fellow equity holder, if Jonas and family/insiders are prosperous then I should be too.
The Key Variables:
- Continued progress of Net2Phone – As the obvious next spin, the continued success and growth of Net2Phone will be of particular interest. I also hope/expect that IDT will continue to be more transparent around N2P’s reporting and guidance ahead of a spin.
- Deterioration of the legacy communications business – a severe decline in economics of the legacy business could be problematic. IDT has acknowledged that they are maximizing profitability here but if the money faucet gets shut off it becomes much harder to feed their growth-oriented businesses.
- Roadmap for NRS & Money Transfer businesses – I think the NRS plan is fairly straightforward, simply roll out more installs and build the customer base. For Money Transfer it would be nice to see some signaling or outright communication about the intentions with that business. As I have stated above, I think the monetization of that business line is less clear at the moment.
If you’ve made it this far, I am grateful. This is by far the longest write up I have ever done and took me 2-3x as long as normal to actually write. Unfortunately, as a result of the extended writing time, the company has run quite a bit since I started writing (and since my initial purchase). And that is in addition to a meaningful surge in the shares over the last few months (notice that the investor presentation graphic above shows a current EV/share at the time of $8.35!). Still, as I hope I have made clear by now, I think this is still a great opportunity to own some undervalued assets and ride shotgun with some great capital allocators. I put IDT into the portfolio at ~8% position at cost and consider it part of my mean reversion/deep value bucket of the portfolio. GLTA, DYODD and feel free to reach out with thoughts, questions, or comments.