Earnings Call Transcript - IDT Q2 2026

Operator, Operator

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

Bill Ulrey, Investor Relations

Thank you, John. In today's presentation, IDT's Chief Executive Officer, Shmuel Jonas; and Chief Financial Officer, Marcelo Fischer, will discuss IDT's financial and operational results for the 3 months ended January 31, 2026. After their remarks, they will be happy to take your questions. Any forward-looking statements made during this conference call, either in their remarks or during the Q&A that follows, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that IDT files periodically with the SEC. IDT assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. In their presentation or in the Q&A session, IDT's management may make reference to non-GAAP adjusted measures including adjusted EBITDA, adjusted EBITDA margin, non-GAAP earnings per share, NRS' Rule of 40 score and adjusted net cash provided by operating activities. Schedules provided in the IDT earnings release reconcile these non-GAAP measures to the nearest corresponding GAAP measures. Please note that the IDT earnings release is available on the Investor Relations page of the IDT Corporation website. The earnings release has also been filed on a Form 8-K with the SEC. Now I'll turn the call over to Shmuel for his comments on the quarter's results.

Shmuel Jonas, CEO

Thank you, Bill, and thank you to everyone who joined the call. NRS' and BOSS Money's and net2phone's top and bottom line expansion drove IDT's strong overall results again this quarter. NRS recurring revenue grew year-over-year, powered by large increases in Merchant Services and SaaS fee revenues. This quarter, we continue to make progress on initiatives to drive additional Merchant Services and SaaS growth and expand our delivery partnerships. We are also developing offerings for differentiated retailer verticals. Advertising & Data results came in lower than we expected after decreases in CPM rates pressured revenues. At BOSS Money, our digital channel continued to outperform relative to the industry as transactions increased 17% year-over-year. The new federal remittance tax, which applies mainly to transactions originated with cash went into effect on January 1. As expected, the tax implementation has accelerated customer migration from the lower-margin retail channel to the higher-margin digital channel, and you will begin to see those positive impacts next quarter. net2phone's bottom line continues to benefit from its strengthening gross margins and operating leverage; and this quarter, we also got a boost from favorable foreign exchange rates. Looking ahead, our AI offerings are generating very positive customer reviews and increased spending. Based on these early results, we are readying a new offering, agentic AI seamlessly integrated with unified communications with a go-to-market strategy targeting both direct and channel sales to small and medium businesses. Traditional Communications remained a strong cash generator. The segment contributed $19 million in adjusted EBITDA during the second quarter, a decrease from the year ago quarter but approximately the same as in the prior two quarters. Because of our recent strong financial and operational performance growth and outlook and balance sheet, we again repurchased stock in the second quarter, and our Board has increased our annual dividend by 17% to $0.28 per year. Now Marcelo, who is more of a gifted orator than I, will discuss our financial results. I also just can't go without saying that our hearts and prayers are with all of our soldiers abroad, and we hope that you come home safely.

Marcelo Fischer, CFO

Thank you, Shmuel. My remarks on our financial results for the second quarter of fiscal year 2026 will focus on the year-over-year comparisons to set aside seasonal impacts on our business. IDT achieved record levels in several key consolidated financial metrics in the second quarter: gross profit, gross profit margin, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP EPS. These results were very much in line with our recent year-over-year growth trajectory. The underlying positive dynamic at IDT remains the same as it has been for several years, namely our consolidated results increasingly reflect the growing contributions of our three higher-margin growth segments, NRS, Fintech, and net2phone; while the contributions of our larger lower-margin Traditional Communications segment become relatively less impactful. To date, we have been pleased by the speed with which each of our three growth segments has increased their cash flow contribution. In aggregate, these three segments contributed during Q2, 53% of IDT's consolidated adjusted EBITDA less CapEx, which we view as our profit or free cash flow, compared to 45% in the year-ago quarter. Given this ongoing rotation plus our strong results through the first half of the year and our positive outlook, we have begun to increase our allocation to shareholder returns. Shmuel already mentioned the increased levels of our share buyback and our dividend. I just want to add that the increase in our dividend marked the second consecutive year of dividend increases, and we hope and expect to be in a position to continue increasing the dividend in the years ahead. Also of note is that the $15 million of stock repurchases in the first six months of fiscal '26 put us on track to exceed the rate of share buybacks compared to the preceding years. We allocated $18 million to share repurchases in all of fiscal 2025 and $11 million in fiscal '24. Now I want to discuss our outlook for the remainder of the year. IDT raised its consolidated adjusted EBITDA guidance for fiscal '26 from the $141 million to $145 million range we shared at the start of the year to now being $147 million to $149 million. At the midpoint, this revised guidance is a $5 million adjusted EBITDA increase and a 12% increase compared to fiscal 2025 actuals. The guidance increase reflects certain developments in each of our segments. At net2phone, our initial guidance made at the beginning of the year was predicated on the assumption that increased investment in AI product development would pressure adjusted EBITDA growth. It has not worked out that way. The net2phone team has been extraordinarily disciplined and made excellent progress so far this fiscal year developing and refining its AI offerings with only modest increases in spend. That approach drove a 37% year-over-year increase in adjusted EBITDA to $3.9 million in the second quarter, a stronger increase than we anticipated. For the remainder of this fiscal year, we expect net2phone's adjusted EBITDA growth rate to moderate somewhat as the increased investment in growth initiatives during the second half of the year is expected. At BOSS Money, federal immigration policies and the new federal tax on remittances that took effect on January 1 have had a massive impact on the remittance industry. No question. But the impact has been felt primarily on transactions originated at retailer agents rather than those initiated through a digital channel. As such, IDT has benefited from an accelerated rotation from higher revenue but lower margin retail channel transactions to relatively much lower revenue but higher margin digital channel transactions. This rotation has also been accelerated by our decision to maximize near-term cash generation at BOSS Money retail. As a result, our higher-margin digital channel transactions increased at 17% year-over-year. That helped to drive a $0.15 increase in Fintech segment gross profit in the second quarter. We are also achieving significant cost advantages as the money transfer business continues to scale, specifically by negotiating better terms without payout agents as well as by continuing to integrate AI into our back-office operations. The combination of stronger GP and more efficient operations drove a 44% increase in adjusted EBITDA compared to a year ago, well ahead of the pace we had envisioned in our original guidance. At Traditional Communications, we once again were very pleased by our ability to extract more cash from our telecom businesses. To date this year, our BOSS Revolution calling business has been a true standout. Revenue is down by double digits that we did expect and continue to foresee going forward, but gross profit has been rock steady over the past year. The BOSS Revolution team has done an amazing job developing and bringing to market international prepaid calling plans that have significantly improved the unit economics of this business and helping traditional business adjusted EBITDA to decline by just 3.5% in the first six months of the year compared to the same period a year earlier, which represents a lower rate of decline than we had expected in our original guidance. Finally, at NRS, Merchant Services and SaaS fee revenue outperformed our expectations. But as Shmuel mentioned, the broader market softening in CPM rates in certain segments of our advertising markets offset those gains so that adjusted EBITDA remains on track with our original guidance to achieve our forecast range of 20% to 25% growth for fiscal '26. To sum up, overall, we are very pleased with our financial results so far this year and are continuing to build on our momentum. Now Shmuel and I will do our best to answer your questions.

Operator, Operator

Our first question is from Inigo Alonso with Stoic Capital.

Unknown Analyst, Analyst

I would like to ask four questions. I'll start with NRS. The first one is about the monthly report. Are we going to see it again? We haven't seen the release for this year. In the past, you have mentioned that there are ample opportunities for growth. Could you provide some insight into the execution level at the group for those opportunities this quarter and also explain why SG&A increased and why advertising picked up a little from last quarter?

Shmuel Jonas, CEO

On the first question, why the NRS release didn't go out, I don't know. I'd have to check.

Marcelo Fischer, CFO

It's probably out tomorrow or the day after.

Shmuel Jonas, CEO

Regarding the increase in SG&A, I would suggest there are a few factors contributing to it. First, I may need to monitor them more closely. Second, we're starting to introduce a new product within NRS, and we've made some preemptive hires for its rollout, which likely has contributed to the rise in SG&A. Lastly, a larger portion of our sales has recently been generated through resellers, who take a slightly higher cut, affecting our overall SG&A. Those are the primary reasons I can identify. Did I overlook any of your questions?

Unknown Analyst, Analyst

Yes, the other one was on dynamics and if you can give some color on those opportunities that you have been working on.

Shmuel Jonas, CEO

I mean, again, we continue to work every day to try to increase our advertising sales. As you know, we've had a couple of different challenges, including a partner that we worked with for quite some time that's no longer in business. But I think that, overall, they're doing their best to get through this period. I think that, going forward, we're going to do a much better job of really connecting the data that we have with the ads that we're trying to sell. And we think that that's going to be a much bigger contributor to volume going forward. Unfortunately, like it wasn't yet a big enough contributor, but we expect that to be what helps NRS ads turn the corner.

Unknown Analyst, Analyst

Okay. On BOSS Money, obviously, this was an important release because it was the first month of January including the results, and that is after the tax change. So we have seen a revenue decrease quarter-over-quarter, which is logical because you have seasonal promotions that you ran in the winter, and you are probably trying to get customers. So part of it might be due to customer acquisition cost. I would appreciate color on, obviously, the surveys that we have done in the markets, so see that immigrant communities are echoing about this tax transition, and they are adapting quickly to minimize their cost in remittances. So can you provide some of the picture of how many new users are you getting compared to what it has been in the past and maybe explain that revenue decrease quarter-over-quarter? Is it due to increased competition from retail players going digital? Or is it purely due to customer acquisition costs?

Shmuel Jonas, CEO

I'll let Marcelo answer it a little bit more thoroughly. But I mean one thing I'll say is that we had a weaker November and December than we had planned for. Frankly, we don't know why. Just it was just weaker than we expected. January picked up quite dramatically, and it's picked up since then as well. But I'll let Marcelo answer.

Marcelo Fischer, CFO

Yes, Shmuel is correct. Since the remittance tax was implemented in January, we have seen a significant increase in digital transactions, which impacted Q2 for just one month. Moving into Q3, we continue to observe a nice increase in digital transactions in February and as we approach March. We are still trying to gauge the extent of the remittance tax’s impact. It’s clear that some of our retail customers are transitioning to our app, indicating that some of our existing customers are shifting to digital. Moreover, we are also attracting customers from other competitors, which is enhancing our digital services and driving transaction growth. For instance, the past week was our third-best week ever for transactions with BOSS Money, only behind Christmas and Mother’s Day, which are typically our strongest periods. Generally, March should see a seasonal uplift, as we have observed in previous years. While it’s still a bit early to draw definitive conclusions, the transition to digital has been encouraging since the tax was implemented.

Unknown Analyst, Analyst

Really good. A higher picture question related to this quarter performance. In 2021, you acquired a minority stake in MarketSpark. That company recently turned profitable. I was wondering what's the plan with MarketSpark. Do you have any call options to acquire the full business? Is it planning to go public in the future? How do you see that investment today?

Shmuel Jonas, CEO

I don't think that I can really comment on that. I mean I'm a Board member, and I wouldn't feel comfortable commenting on their business without their authorization to do so.

Marcelo Fischer, CFO

Right. We have a minority stake in the company.

Unknown Analyst, Analyst

Okay. And the last one, last quarter, you mentioned how, on the M&A front, you were planning your next big move. Do you have any updates on the future in terms of M&A and if those conversations are still progressing adequately?

Shmuel Jonas, CEO

Not right now.

Operator, Operator

We have a question coming from William Vaughan with Corient.

William Vaughan, Analyst

Congrats on the quarter. My first question is about NRS. Can you share your insights on the single-store operator and convenience bodega market? What trends are you seeing? In the past, it was noted that store traffic was somewhat impacted by immigration policies. Has that situation changed? Are there any emerging trends or comments you can provide regarding the economics of these businesses and what you’re observing on the NRS side? That would be helpful.

Marcelo Fischer, CFO

Yes. I mean, I think ultimately, what drives the economics of the single retailer that we service is probably a lot less about the immigration issue. Now that could be a factor, maybe in certain markets and certain locations. By and large, I think it's much more a reflection of the larger economy on the side of the customer pocket, affordability. So I think that inflation and other measures of customer demand are much more of a factor impacting how the retailers are doing than the immigration side. And so far, over the past few retailer reports that we put out on a monthly basis, now we have seen that the retailers continue to grow the businesses that are now quite nice percentages. So I think that overall, when you look at our 35,000-plus retailers, I think that category remains quite strong.

William Vaughan, Analyst

Okay. Good color. Another question on BOSS Money. Nice growth in the quarter. And it sounds like you mentioned that the digital transaction business might be accelerating maybe in the second quarter. So just wondered if you could give some color on that. And also, what do the competitive dynamics look like in the business. There are some other digital-first remittance players that have shown a really good growth in their previous quarter in their filings as well. So just if you could comment on the competitive positioning, thoughts on investments in that business in terms of increased possible marketing to compete with those players. How do you guys think about that?

Shmuel Jonas, CEO

I mean, again, as we, I guess, answered in the last question, it's definitely accelerating. I mean in terms of competition, we have some very strong competitors, both from the traditional players as well as the only digital players. And I'm sure that they're also benefiting from the change from a retail-driven business to a digital-driven business. That being said, I think that we really do have an excellent app and an excellent experience for our customers, and we received probably, by at least some measurements, the highest ratings of any app in the U.S. And we think that there's a reason why our customers come to us and stay with us. And our pricing is extremely competitive. The experience, as I said, is extremely good. If I were looking for a money transfer service myself, I would use BOSS Money. So that being said, we do have strong competitors, and it's a competitive market. But we are spending, I would say, probably also more acquiring customers than we have in the past just because we have been doing a good job bringing on customers, so might as well spend money to get more of them and keep them.

Marcelo Fischer, CFO

Yes. I would just add what I just mentioned in my remarks, something to bear in mind, is that, as you know, revenues at retail are significantly higher than revenues that are derived digitally. I think this is true for us. It's probably true for other players in the industry as well. And the reason being is that when we sell something at retail, we charge a much higher fee because usually half of that fee then goes back to the retailer, either the cost of goods sold or something like that. So in general, revenue per transaction is much higher at retail than in digital. But at least for us, our digital net margins, I think, is higher than retail. So to some extent, you're seeing that dichotomy that, on one hand, our revenues continue to grow because of digital, but maybe not as fast as they used to. But some of it is because the retail revenues are coming down, which is now almost twice as high as our digital revenues. But at the same time, you see our EBITDA growing at a much faster clip because the margins at digital are so much higher.

William Vaughan, Analyst

I'm pleased to see the buyback this quarter. In terms of capital allocation, the $15 million buyback is a great first step. However, considering the cash available in your high-growth businesses and even the legacy business, the current capital allocation plan is good but doesn't significantly reduce the cash position. How do you see this moving forward? Will buybacks maintain the cash level for now while waiting for a larger M&A opportunity, or do you anticipate that buybacks will eventually start to reduce your large cash reserves?

Shmuel Jonas, CEO

I would probably say the first rather than the second. I don't expect cash to materially decline from where it is. I think we prefer having more cash available for lots of different purposes, including potential acquisitions. That being said, as you're pointing out, the businesses are very cash generative, and we intend to continue to purchase back shares depending on the price more or less opportunistically. And we increased the dividend this quarter as you know, and we try to be as responsible as we can.

Operator, Operator

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

Shmuel Jonas, CEO

Thank you.