IDT CORP - Quarter Report: 2015 April (Form 10-Q)

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2015

or

Commission File Number: 1-16371

IDT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

(973) 438-1000

 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):   Yes  ☐   No  ☒

As of June 3, 2015, the registrant had the following shares outstanding:

IDT CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements (Unaudited)

IDT CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

IDT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to consolidated financial statements. 

IDT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements. 

 
IDT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

IDT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2015. The balance sheet at July 31, 2014 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2014, as filed with the U.S. Securities and Exchange Commission (“SEC”).

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2015 refers to the fiscal year ending July 31, 2015).

Note 2—Sale of Interest in Fabrix Systems Ltd.

On October 8, 2014, the Company completed the sale of its interest in Fabrix Systems Ltd. (“Fabrix”) to Telefonaktiebolget LM Ericsson (publ) (“Ericsson”). The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. The Company owned approximately 78% of Fabrix on a fully diluted basis. The Company’s share of the sale price was $68.1 million, after reflecting the impact of working capital and other adjustments. At April 30, 2015, the Company had received cash of $36.4 million and had aggregate receivables of $31.7 million, which was classified as “Receivable from sale of interest in Fabrix Systems Ltd.” in the accompanying consolidated balance sheet. The Company and the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in two tranches in October 2015 and April 2016. In the three months ended April 30, 2015, the Company recorded gain on the sale of its interest in Fabrix of $1.2 million, which represented adjustments to the Company’s share of Fabrix’ working capital and estimated transaction costs. In the nine months ended April 30, 2015, the Company recorded a gain on the sale of its interest in Fabrix of $76.9 million.

In June 2015, the Company received cash of $23.2 million that was included in “Receivable from sale of interest in Fabrix Systems Ltd.” at April 30, 2015.

Fabrix’ income (loss) before income taxes and income (loss) before income taxes attributable to the Company, which is included in the accompanying consolidated statements of income, were as follows:

Note 3—Marketable Securities

The following is a summary of marketable securities:

* Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker, and may be sold in the secondary market.

Proceeds from maturities and sales of available-for-sale securities were $4.7 million and $2.9 million in the three months ended April 30, 2015 and 2014, respectively, and $16.8 million and $13.0 million in the nine months ended April 30, 2015 and 2014, respectively. There were no gross realized gains or losses as a result of sales in the three months ended April 30, 2015 and 2014, respectively. The gross realized losses that were included in earnings as a result of sales were $54,000 and nil in the nine months ended April 30, 2015 and 2014, respectively. The Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of marketable securities.

The contractual maturities of the Company’s available-for-sale debt securities at April 30, 2015 were as follows:

The following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not been recognized:

At April 30, 2015 and July 31, 2014, there were no securities in a continuous unrealized loss position for 12 months or longer.

Note 4—Fair Value Measurements

The following tables present the balance of assets measured at fair value on a recurring basis:

(1) – quoted prices in active markets for identical assets or liabilities

(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities

(3) – no observable pricing inputs in the market

At April 30, 2015 and July 31, 2014, the Company did not have any liabilities measured at fair value on a recurring basis.

At April 30, 2015 and July 31, 2014, the Company had $9.1 million and $9.5 million, respectively, in investments in hedge funds, of which less than $0.1 million and $0.1 million, respectively, were included in “Other current assets” and $9.1 million and $9.4 million, respectively, were included in “Investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds are accounted for using the equity method or the cost method; therefore investments in hedge funds are not measured at fair value.

Fair Value of Other Financial Instruments

The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

Cash and cash equivalents, restricted cash and cash equivalents—short-term, other current assets, revolving credit loan payable, customer deposits, notes payable—current portion and other current liabilities. At April 30, 2015 and July 31, 2014, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents—short-term were classified as Level 1 and other current assets, revolving credit loan payable, customer deposits, notes payable—current portion and other current liabilities were classified as Level 2 of the fair value hierarchy.

Restricted cash and cash equivalents—long-term. At July 31, 2014, the carrying amount of restricted cash and cash equivalents—long-term approximated fair value. The fair value was estimated based on the anticipated cash flows once the restrictions are removed, which was classified as Level 2 of the fair value hierarchy.

Other assets, Notes payable—long-term portion and other liabilities. At April 30, 2015 and July 31, 2014, the carrying amount of these assets and liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.

The Company’s investments at April 30, 2015 and July 31, 2014 included investments in the equity of certain privately held entities and other investments that are accounted for at cost. It is not practicable to estimate the fair value of these investments because of the lack of a quoted market price for the shares of these entities, and the inability to estimate their fair value without incurring excessive cost. The carrying value of these investments was $3.6 million and $1.8 million at April 30, 2015 and July 31, 2014, respectively, which the Company believes was not impaired.

Note 5—Equity

Changes in the components of equity were as follows:

Dividend Payments

In the nine months ended April 30, 2015, the Company paid aggregate cash dividends of $1.85 per share on its Class A common stock and Class B common stock, or $43.2 million in total. The aggregate cash dividends included special dividends of $0.68 per share and $0.64 per share paid in November 2014 and January 2015, respectively. In June 2015, the Company’s Board of Directors declared a dividend of $0.18 per share for the third quarter of fiscal 2015 to holders of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about June 23, 2015 to stockholders of record as of the close of business on June 15, 2015.

Stock Repurchase Program

The Company has a stock repurchase program that authorized the repurchase of up to an aggregate of 8.3 million shares of the Company’s Class B common stock. In the nine months ended April 30, 2015, the Company repurchased 29,675 shares of Class B common stock for an aggregate purchase price of $0.4 million. There were no repurchases under the program in the nine months ended April 30, 2014. At April 30, 2015, 5.0 million shares remained available for repurchase under the stock repurchase program.

401(k) Plan Matching Contributions

In the nine months ended April 30, 2015, the Company contributed 70,843 shares of its Class B common stock to the Company’s 401(k) Plan for matching contributions. The Company’s cost for contributions to the 401(k) Plan was $1.3 million in the nine months ended April 30, 2015.

Restricted Stock

On March 11, 2015, the Compensation Committee of the Company’s Board of Directors approved an equity grant of 0.3 million restricted shares of the Company’s Class B common stock to its employees, including executive officers. The shares vest 50% in January 2017 and 50% in July 2018. Unrecognized compensation expense related to these restricted shares on the March 11, 2015 grant date was $5.0 million based on the estimated fair value of the shares. The unrecognized compensation expense is recognized over the vesting period.

Note 6—Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.

The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:

The following outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the stock option was greater than the average market price of the Company’s stock during the period:

Note 7—Revolving Credit Loan Payable

The Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum, at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 150 basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31, 2017. At April 30, 2015 and July 31, 2014, there was nil and $13.0 million, respectively, outstanding under the facility. The principal outstanding at July 31, 2014 incurred interest at a rate of 1.65% per annum. In August 2014, IDT Telecom repaid the $13.0 million loan payable. The Company intends to continue to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of 0.375% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries may not exceed $110.0 million. At April 30, 2015 and July 31, 2014, there were no amounts utilized for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances to affiliates and subsidiaries was $74.4 million and $73.7 million, respectively.

Note 8—Severance Expense

In February and March 2015, the Company completed a reduction of its workforce, which is expected to result in a reduction of approximately 7% of its global compensation costs beginning in the fourth quarter of fiscal 2015. The cost-cutting initiative is expected to reduce the Company’s current selling, general and administrative expense run rate by approximately $10 million per year. As a result of this reduction in headcount, the Company incurred severance expense of $6.2 million in the third quarter of fiscal 2015. Severance expense in the nine months ended April 30, 2015 also included $1.9 million due to a downsizing of certain IDT Telecom sales and administrative functions in Europe and the U.S in the first quarter of fiscal 2015. At April 30, 2015, there was accrued severance of $5.1 million included in “Accrued expenses” in the accompanying consolidated balance sheet for the February and March 2015 headcount reductions.

Note 9—Accumulated Other Comprehensive Income

The accumulated balances for each classification of other comprehensive income (loss) were as follows:

Note 10—Business Segment Information

The Company has two reportable business segments, Telecom Platform Services and Consumer Phone Services. Operating segments that are not reportable individually are included in All Other. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

The Telecom Platform Services segment provides retail telecommunications and payment offerings as well as wholesale international long distance traffic termination. The Consumer Phone Services segment provides consumer local and long distance services in certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise the IDT Telecom division. Beginning in the second quarter of fiscal 2015, All Other includes Zedge Holdings, Inc. (“Zedge”), which owns and operates a platform for mobile phone consumers interested in obtaining free, high quality mobile phone customization content including ringtones, wallpapers, notification sounds and app icons, as well as mobile games. Comparative results have been reclassified and restated as if Zedge was included in All Other in all periods presented. All Other also includes the Company’s real estate holdings and other, smaller, businesses. Until the sale of Fabrix in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery. Corporate costs include certain services, such as compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, and other corporate-related general and administrative expenses including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.

The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. IDT Telecom depreciation and amortization are allocated to Telecom Platform Services and Consumer Phone Services because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments.

Operating results for the business segments of the Company are as follows:

Note 11—Legal Proceedings 

On May 5, 2004, the Company filed a complaint in the Supreme Court of the State of New York, County of New York, seeking injunctive relief and damages against Tyco Group, S.A.R.L., Tyco Telecommunications (US) Inc. (f/k/a TyCom (US) Inc.), Tyco International, Ltd., Tyco International (US) Inc., and TyCom Ltd. (collectively “Tyco”). The Company alleged that Tyco breached a settlement agreement that it had entered into with the Company to resolve certain disputes and civil actions among the parties. The Company alleged that Tyco did not provide the Company, as required under the settlement agreement, free of charge and for the Company’s exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement) on a global undersea fiber optic network that Tyco was deploying at that time. After extensive proceedings, including several decisions and appeals, the New York Court of Appeals affirmed a lower court decision to dismiss the Company’s claim and denied the Company’s motion for reargument of that decision. The Company is evaluating its options going forward.

In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, the Company believes that none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

Note 12—Commitments and Contingencies

Purchase Commitments

The Company had purchase commitments of $3.8 million at April 30, 2015, which includes commitments related to the renovations of the first four floors of the Company’s building located at 520 Broad Street, Newark, New Jersey.

Letters of Credit

At April 30, 2015, the Company had letters of credit outstanding totaling $3.3 million for collateral to secure mortgage repayments and for IDT Telecom’s business. The letters of credit outstanding at April 30, 2015 expire in the twelve month period ending April 30, 2016.

Performance Bonds

IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At April 30, 2015, the Company had aggregate performance bonds of $11.0 million outstanding.

Customer Deposits

At April 30, 2015 and July 31, 2014, “Customer deposits” in the Company’s consolidated balance sheets included refundable customer deposits of $68.8 million and $62.7 million, respectively, related to IDT Financial Services Ltd., the Company’s Gibraltar-based bank.

Substantially Restricted Cash and Cash Equivalents

The Company treats unrestricted cash and cash equivalents held by IDT Payment Services and IDT Financial Services Ltd. as substantially restricted and unavailable for other purposes. At April 30, 2015 and July 31, 2014, “Cash and cash equivalents” in the Company’s consolidated balance sheets included an aggregate of $9.5 million and $12.9 million, respectively, held by IDT Payment Services and IDT Financial Services Ltd. that was unavailable for other purposes.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consist of the following:

Estimated Liability to Straight Path Communications Inc.

On July 31, 2013, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Straight Path Communications Inc. (“Straight Path”), to the Company’s stockholders (the “Straight Path Spin-Off”). The Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off. The Separation and Distribution Agreement includes that the Company is obligated to reimburse Straight Path for the payment of any liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off. The following table summarizes the change in the balance of the Company’s estimated liability to Straight Path, which is included in “Other current liabilities” in the accompanying consolidated balance sheet:

Note 13—Other Operating Gains, Net

The following table summarizes the other operating gains, net by business segment:

(a) In the nine months ended April 30, 2014, the Company received proceeds from insurance of $0.6 million related to water damage to portions of the Company’s building and improvements at 520 Broad Street, Newark, New Jersey. The damage occurred in a prior period. The Company recorded a gain of $0.6 million from this insurance claim.

Note 14—Other (Expense) Income, Net

Other (expense) income, net consists of the following:

Note 15—Recently Issued Accounting Standard Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. The Company will adopt this standard on August 1, 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company is evaluating the impact that the standard will have on its consolidated financial statements. In April 2015, the FASB proposed a one-year deferral of the effective date for the new revenue recognition standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the accompanying consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2014, as filed with the U.S. Securities and Exchange Commission (or SEC).

As used below, unless the context otherwise requires, the terms “the Company,” “IDT,” “we,” “us,” and “our” refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2014. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the year ended July 31, 2014.

Overview

We are a multinational holding company with operations primarily in the telecommunications and payment industries. We have two reportable business segments, Telecom Platform Services and Consumer Phone Services. Telecom Platform Services provides retail telecommunications and payment offerings as well as wholesale international long distance traffic termination. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise our IDT Telecom division. Operating segments not reportable individually are included in All Other. All Other includes Zedge Holdings, Inc., or Zedge, which owns and operates a platform for mobile phone consumers interested in obtaining free, high quality mobile phone customization content including ringtones, wallpapers, notification sounds and app icons, as well as mobile games. All Other also includes our real estate holdings and other, smaller, businesses. Until the sale of Fabrix Systems Ltd., or Fabrix, in October 2014, All Other also included Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and delivery.

Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 99.0% and 98.6% of our total revenues in the nine months ended April 30, 2015 and 2014, respectively.

Telecom Platform Services, which represented 99.4% and 99.3% of IDT Telecom’s total revenues in the nine months ended April 30, 2015 and 2014, respectively, markets and distributes multiple communications and payment services across four broad business verticals:

Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for fiscal 2014. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill, valuation of long-lived and intangible assets, income taxes and regulatory agency fees, and IDT Telecom direct cost of revenues—disputed amounts. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2014.

Recently Issued Accounting Standard Not Yet Adopted

In May 2014, the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards, or IFRS. The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. We will adopt this standard on August 1, 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. We are evaluating the impact that the standard will have on our consolidated financial statements. In April 2015, the FASB proposed a one-year deferral of the effective date for the new revenue recognition standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.

Results of Operations

Three and Nine Months Ended April 30, 2015 Compared to Three and Nine Months Ended April 30, 2014

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.

IDT Telecom—Telecom Platform Services and Consumer Phone Services Segments

Revenues. IDT Telecom revenues decreased in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014 due to decreases in both Telecom Platform Services’ and Consumer Phone Services’ revenues.

Telecom Platform Services’ revenues, minutes of use and average revenue per minute for the three and nine months ended April 30, 2015 and 2014 consisted of the following:

Retail Communications’ revenue grew 5.7% and 6.1% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014 due to increased penetration of Boss Revolution within our U.S. retail distribution network, partially offset by continued declines in sales of traditional disposable calling cards and retail sales in Europe and South America. The change in retail sales in Asia was not significant in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014. In fiscal 2014, we acquired the assets of an over-the-top messaging provider. We expect to introduce instant messaging and free peer-to-peer voice calling within the Boss Revolution app in the second half of calendar 2015. Retail Communications’ minutes of use decreased 2.9% and 0.1% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014. Boss Revolution minutes of use increased in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014, but was more than offset by the decrease in traditional disposable calling cards’ minutes of use as well as the decrease in minutes of use in Europe and Asia. Retail Communications’ minutes of use in South America increased in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014. Retail Communications’ revenue comprised 46.6% and 42.7% of Telecom Platform Services’ revenue in the nine months ended April 30, 2015 and 2014, respectively.

Wholesale Termination Services’ revenue decreased 15.7% and 12.7% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014 because the traffic mix in the three and nine months ended April 30, 2015 continued to shift towards lower revenue per minute destinations compared to the similar periods in fiscal 2014. In addition, in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014, exchange-rate driven arbitrage pricing opportunities in Latin America continued to decline. Wholesale Termination Services’ minutes of use decreased 7.3% in the three months ended April 30, 2015 compared to the similar period in fiscal 2014 due to decreases in minutes of use from carrier sales and our web-based prepaid termination service. Wholesale Termination Services’ minutes of use decreased 0.2% in the nine months ended April 30, 2015 compared to the similar period in fiscal 2014 due to a decrease in minutes of use in our web-based prepaid termination service, partially offset by an increase in carrier sales minutes of use. Wholesale Termination Services’ revenue comprised 37.8% and 42.1% of Telecom Platform Services’ revenue in the nine months ended April 30, 2015 and 2014, respectively.

Payment Services’ revenue increased 2.9% and 2.4% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014 due to an increase in international and domestic airtime top-up revenue, as well as an increase in revenue from our international money transfer service. Future growth will be, in large part, contingent upon our ability to enter into new international airtime top-up partnerships with wireless providers, as well as continued growth of international airtime top-up volume within existing relationships and the introduction of new payment offerings through the Boss Revolution platform. In fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution platform. At April 30, 2015, we had money transmitter licenses in 45 of the 46 states where they are required and we have applied, as well as in Puerto Rico and Washington, D.C. We expect to begin offering a mobile/web based money transfer service for Boss Revolution customers with access to credit cards or bank accounts later in calendar 2015. Payment Services’ revenue comprised 13.0% and 12.4% of Telecom Platform Services’ revenue in the nine months ended April 30, 2015 and 2014, respectively.

Hosted Platform Solutions’ revenue declined 13.4% and 13.2% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014. The decline was due to decreases in revenues from managed services and from our cable telephony business. Within our cable telephony business, we renewed multi-year contracts with key cable telephony customers in the second half of fiscal 2014, but at lower rates, reflecting the long-term decline in the underlying costs of hosted telephony services. In addition, several of our other hosted managed services operators are continuing to experience attrition in their subscriber customer base. Hosted Platform Solutions’ revenue comprised 2.6% and 2.8% of Telecom Platform Services’ revenue in the nine months ended April 30, 2015 and 2014, respectively. Hosted Platform Solutions’ minutes of use decreased 7.1% and 6.6% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014, primarily as a result of the decline in minutes of use from managed services and cable telephony customers. In general, since our Hosted Platform Solutions business’ revenues and cash flows are driven far more by the number of existing subscribers in the form of a per-subscriber fee rather than by subscriber minutes of use, we do not view Hosted Platform Solutions minutes of use as a very meaningful metric for evaluating that business’ performance.

Consumer Phone Services’ revenues declined 20.1% and 21.7% in the three and nine months ended April 30, 2015, respectively, compared to the similar periods in fiscal 2014 as we continued to operate the business in harvest mode. This strategy has been in effect since calendar 2005 when the FCC decided to terminate the UNE-P pricing regime, which resulted in significantly inferior economics in the operating model for this business. The customer base for our bundled, unlimited local and long distance services business was approximately 5,300 as of April 30, 2015 compared to 6,600 as of April 30, 2014. We currently offer local service in the following 11 states: New York, New Jersey, Pennsylvania, Maryland, Delaware, Massachusetts, New Hampshire, West Virginia, Maine, Rhode Island and California. In addition, the customer base for our long distance-only services was approximately 24,000 as of April 30, 2015 compared to 30,300 as of April 30, 2014. We anticipate that Consumer Phone Services’ customer base and revenues will continue to decline. Minutes of use relating to our Consumer Phone Services segment is not tracked as a meaningful business metric as the domestic traffic generated by this segment is not carried on our network, and the international traffic generated by this segment, though carried on our own network, is insignificant.

Direct Cost of Revenues. Direct cost of revenues in Telecom Platform Services decreased in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014, which reflects the declines in Telecom Platform Services’ revenues. Direct cost of revenues as a percentage of revenues in Telecom Platform Services decreased 60 basis points in the three months ended April 30, 2015 compared to the similar period in fiscal 2014 primarily because of a non-recurring contractual expiration of unused calling card minutes from certain private label calling card offerings. Direct cost of revenues as a percentage of revenues in Telecom Platform Services increased 10 basis points in the nine months ended April 30, 2015 compared to the similar period in fiscal 2014 primarily because of the loss of revenue from the relatively high margin exchange-rate driven arbitrage pricing opportunities in Latin American, the decline in margin contribution from the cable telephony business, and pricing pressure on airtime top-up offerings.

Direct cost of revenues in our Consumer Phone Services segment decreased the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014 primarily as a result of the declining customer base.

Selling, General and Administrative. The increase in selling, general and administrative expenses in our Telecom Platform Services segment in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014 was primarily due to increases in marketing and advertising costs, employee compensation and internal commissions. The employee compensation increase reflects annual payroll increases effective in the first quarter of fiscal 2015. The increase in internal commissions was due to the expansion of our retail direct sales force in the U.S. As a percentage of Telecom Platform Services’ revenue, Telecom Platform Services’ selling, general and administrative expenses increased to 12.8% in the three and nine months ended April 30, 2015 from 12.2% in the three and nine months ended April 30, 2014.

Selling, general and administrative expenses in our Consumer Phone Services segment decreased in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014 as the cost structure for this segment continued to be right-sized to the needs of its declining revenue base.

Depreciation and Amortization. The increase in depreciation and amortization expense in the three and nine months ended April 30, 2015 compared to the similar periods in fiscal 2014 was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software.

nm—not meaningful

Severance expense. In February and March 2015, we completed a reduction of our workforce, which is expected to result in a reduction of approximately 7% of our global compensation costs beginning in the fourth quarter of fiscal 2015. As a result, IDT Telecom incurred severance expense of $5.6 million in the third quarter of fiscal 2015. In addition, severance expense in the nine months ended April 30, 2015 included $1.9 million due to a downsizing of certain Telecom Platform Services’ sales and administrative functions in Europe and the U.S.

Other Operating Gain. The Telecom Platform Services segment’s income from operations in the nine months ended April 30, 2014 included a gain of $0.7 million related to a legal matter.