10-Q 1 f10q0113_idtcorp.htm QUATERLY REPORT f10q0113_idtcorp.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2013
 
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 1-16371
 

 
IDT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
 

 
Delaware
22-3415036
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
   
520 Broad Street, Newark, New Jersey
07102
(Address of principal executive offices)
(Zip Code)
 
(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 x 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 x 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.
 
Large accelerated filer
¨
Accelerated filer
x
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes ¨ No x
 
As of March 6, 2013, the registrant had the following shares outstanding:
 
Class A common stock, $.01 par value:
1,574,326 shares outstanding (excluding 1,698,000 treasury shares)
Class B common stock, $.01 par value:
21,276,304 shares outstanding (excluding 2,878,483 treasury shares)
 


 
 
 
 
 
IDT CORPORATION
 
TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
3
     
Item 1.
Financial Statements (Unaudited)
3
     
 
Consolidated Balance Sheets
3
     
 
Consolidated Statements of Operations
4
     
 
Consolidated Statements of Comprehensive Income (Loss)
5
     
 
Consolidated Statements of Cash Flows
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
30
     
Item 4.
Controls and Procedures
30
   
PART II.  OTHER INFORMATION
31
     
Item 1.
Legal Proceedings
31
     
Item 1A.
Risk Factors
31
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
     
Item 3.
Defaults upon Senior Securities
32
     
Item 4.
Mine Safety Disclosures
33
     
Item 5.
Other Information
33
     
Item 6.
Exhibits
33
   
SIGNATURES
34
 
 
 

 
 
PART I. FINANCIAL INFORMATION
 
Item 1.         Financial Statements (Unaudited)
 
IDT CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
   
January 31,
2013
   
July 31,
2012
 
   
(Unaudited)
   
(Note 1)
 
   
(in thousands)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 150,634     $ 151,504  
Restricted cash and cash equivalents—short-term
    23,377       12,636  
Trade accounts receivable, net of allowance for doubtful accounts of $14,519 at January 31, 2013 and $13,055 at July 31, 2012
    72,244       83,054  
Prepaid expenses
    19,517       18,800  
Investments—short-term
    78       86  
Deferred income tax assets, net—current portion
    3,623       5,142  
Other current assets
    11,700       17,436  
                 
Total current assets
    281,173       288,658  
Property, plant and equipment, net
    85,842       85,567  
Goodwill
    14,880       14,614  
Other intangibles, net
    1,602       1,907  
Investments—long-term
    8,757       7,133  
Restricted cash and cash equivalents—long-term
    11,471       9,466  
Deferred income tax assets, net—long-term portion
    27,581       31,744  
Other assets
    9,811       12,025  
Total assets
  $ 441,117     $ 451,114  
                 
Liabilities and equity
               
Current liabilities:
               
Trade accounts payable
  $ 33,798     $ 39,845  
Accrued expenses
    157,646       161,266  
Deferred revenue
    88,155       84,588  
Customer deposits
    20,656       10,524  
Income taxes payable
    765       1,337  
Notes payable—current portion
    654       560  
Other current liabilities
    3,682       3,245  
Total current liabilities
    305,356       301,365  
Notes payable—long-term portion
    28,375       29,716  
Other liabilities
    10,371       17,308  
                 
Total liabilities
    344,102       348,389  
Commitments and contingencies
               
Equity:
               
IDT Corporation stockholders’ equity:
               
Preferred stock, $.01 par value; authorized shares—10,000; no shares issued
           
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at January 31, 2013 and July 31, 2012
    33       33  
Class B common stock, $.01 par value; authorized shares—200,000; 24,155 and 24,112 shares issued and 21,277 and 21,342 shares outstanding at January 31, 2013 and July 31, 2012, respectively
    242       241  
Additional paid-in capital
    397,859       395,869  
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,878 and 2,770 shares of Class B common stock at January 31, 2013 and July 31, 2012, respectively
    (98,836 )     (97,757 )
Accumulated other comprehensive income
    3,522       202  
Accumulated deficit
    (206,915 )     (196,358 )
Total IDT Corporation stockholders’ equity
    95,905       102,230  
Noncontrolling interests
    1,110       495  
Total equity
    97,015       102,725  
Total liabilities and equity
  $ 441,117     $ 451,114  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
IDT CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands, except per share data)
 
Revenues
  $ 411,685     $ 365,449     $ 812,270     $ 742,226  
Direct cost of revenues (exclusive of depreciation and amortization)
    (344,499 )     (306,365 )     (679,763 )     (625,717 )
Gross profit
    67,186       59,084       132,507       116,509  
Operating expenses:
                               
Selling, general and administrative (i)
    56,399       51,552       111,625       103,335  
Depreciation and amortization
    3,865       4,231       7,000       8,673  
Research and development
    1,819       1,119       3,201       2,129  
                                 
Total operating expenses
    62,083       56,902       121,826       114,137  
Other operating gains (losses), net
    149       1,850       (201 )     (9,402 )
Income (loss) from operations
    5,252       4,032       10,480       (7,030 )
Interest expense, net
    (455 )     (1,350 )     (346 )     (1,828 )
Other income (expense), net
    1,815       (429 )     2,700       (240 )
Income (loss) from continuing operations before income taxes
    6,612       2,253       12,834       (9,098 )
(Provision for) benefit from income taxes
    (3,117 )     676       (5,171 )     3,939  
Income (loss) from continuing operations
    3,495       2,929       7,663       (5,159 )
Discontinued operations, net of tax:
                               
Income from discontinued operations
                      1,015  
Income on sale of discontinued operations
                      2,000  
Total discontinued operations
                      3,015  
Net income (loss)
    3,495       2,929       7,663       (2,144 )
Net (income) loss attributable to noncontrolling interests
    (542 )     (273 )     (1,096 )     474  
Net income (loss) attributable to IDT Corporation
  $ 2,953     $ 2,656     $ 6,567     $ (1,670 )
Amounts attributable to IDT Corporation common stockholders:
                               
Income (loss) from continuing operations
  $ 2,953     $ 2,656     $ 6,567     $ (5,580 )
Income from discontinued operations
                      3,910  
Net income (loss)
  $ 2,953     $ 2,656     $ 6,567     $ (1,670 )
Earnings per share attributable to IDT Corporation common stockholders:
                               
Basic:
                               
Income (loss) from continuing operations
  $ 0.14     $ 0.13     $ 0.32     $ (0.27 )
Income from discontinued operations
                      0.19  
Net income (loss)
  $ 0.14     $ 0.13     $ 0.32     $ (0.08 )
Weighted-average number of shares used in calculation of basic earnings per share
    20,829       20,492       20,818       20,429  
Diluted:
                               
Income (loss) from continuing operations
  $ 0.13     $ 0.12     $ 0.30     $ (0.27 )
Income from discontinued operations
                      0.19  
Net income (loss)
  $ 0.13     $ 0.12     $ 0.30     $ (0.08 )
Weighted-average number of shares used in calculation of diluted earnings per share
    22,089       21,811       22,087       20,429  
Dividends declared per common share
  $     $ 0.13     $ 0.75     $ 0.36  
(i) Stock-based compensation included in selling, general and administrative expenses
  $ 1,806     $ 932     $ 4,031     $ 1,616  
 
See accompanying notes to consolidated financial statements. 
 
 
4

 
 
IDT CORPORATION
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Net income (loss)
  $ 3,495     $ 2,929     $ 7,663     $ (2,144 )
Other comprehensive income (loss):
                               
Change in unrealized gain on available-for-sale securities
          6             4  
Foreign currency translation adjustments
    1,645       (2,035 )     3,273       (2,829 )
Other comprehensive income (loss)
    1,645       (2,029 )     3,273       (2,825 )
Comprehensive income (loss)
    5,140       900       10,936       (4,969 )
Comprehensive (income) loss attributable to noncontrolling interests
    (503 )     (266 )     (1,049 )     469  
Comprehensive income (loss) attributable to IDT Corporation
  $ 4,637     $ 634     $ 9,887     $ (4,500 )
 
See accompanying notes to consolidated financial statements. 
 
 
5

 
 
IDT CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Six Months Ended
January 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Operating activities
           
Net income (loss)
  $ 7,663     $ (2,144 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Net income from discontinued operations
          (3,015 )
Depreciation and amortization
    7,000       8,673  
Deferred income taxes
    5,681       (997 )
Provision for doubtful accounts receivable
    1,786       954  
Interest in the equity of investments
    (600 )     798  
Stock-based compensation
    4,031       1,616  
Change in assets and liabilities:
               
Trade accounts receivable
    13,293       (6,818 )
Prepaid expenses, other current assets and other assets
    3,640       5,893  
Trade accounts payable, accrued expenses, other current liabilities and other liabilities
    (16,692 )     518  
Customer deposits
    10,304       3,199  
Income taxes payable
    (572 )     (2,160 )
Deferred revenue
    2,655       25  
Net cash provided by operating activities
    38,189       6,542  
Investing activities
               
Capital expenditures
    (7,462 )     (4,439 )
Collection of notes receivable
    750        
Increase in investments
    (1,069 )      
Proceeds from sale and redemption of investments
    99       3,017  
Increase in restricted cash and cash equivalents
    (12,661 )     (2,594 )
Proceeds from maturities of certificates of deposit
          3,540  
Net cash used in investing activities
    (20,343 )     (476 )
Financing activities
               
Dividends paid
    (17,124 )     (8,185 )
Cash of subsidiaries deconsolidated as a result of the Genie spin-off
          (104,243 )
Distributions to noncontrolling interests
    (816 )     (650 )
Purchases of stock of subsidiary
    (1,804 )      
Proceeds from sale of stock of subsidiary
    145       133  
Repayments of capital lease obligations
          (1,781 )
Repayments of borrowings
    (118 )     (215 )
Repurchases of Class B common stock
    (1,078 )     (210 )
Net cash used in financing activities
    (20,795 )     (115,151 )
Discontinued operations
               
Net cash used in operating activities
          (889 )
Net cash used in investing activities
          (2,048 )
Net cash used in discontinued operations
          (2,937 )
Effect of exchange rate changes on cash and cash equivalents
    2,079       (1,887 )
                 
Net decrease in cash and cash equivalents
    (870 )     (113,909 )
Cash and cash equivalents at beginning of period
    151,504       244,301  
Cash and cash equivalents at end of period
  $ 150,634     $ 130,392  
Supplemental schedule of non-cash investing and financing activities
               
Escrow account overages included in other current assets used to reduce notes payable
  $ 1,340     $  
Net assets excluding cash and cash equivalents of subsidiaries deconsolidated as a result of the Genie spin-off
  $     $ 18,803  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
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 six months ended January 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2013. The balance sheet at July 31, 2012 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, 2012, 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 2013 refers to the fiscal year ending July 31, 2013).
 
The Company records Universal Service Fund (“USF”) charges that are billed to customers on a gross basis in its results of operations, and records other taxes and surcharges on a net basis. USF charges in the amount of $0.2 million and $0.3 million in the three months ended January 31, 2013 and 2012, respectively, and $0.5 million and $0.6 million in the six months ended January 31, 2013 and 2012, respectively, were recorded on a gross basis and included in “Revenues” and “Direct cost of revenues” in the accompanying consolidated statements of operations.
 
Note 2— Discontinued Operations
 
Genie Energy Ltd.
 
On October 28, 2011, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Genie Energy Ltd. (“Genie”), to the Company’s stockholders of record as of the close of business on October 21, 2011. At the time of the Genie spin-off, Genie owned 99.3% of Genie Energy International Corporation, which owned 100% of IDT Energy and 92% of Genie Oil and Gas, Inc. As of October 28, 2011, each of the Company’s stockholders received one share of Genie Class A common stock for every share of the Company’s Class A common stock and one share of Genie Class B common stock for every share of the Company’s Class B common stock held of record as of the close of business on October 21, 2011. Genie and subsidiaries met the criteria to be reported as discontinued operations and accordingly, their assets, liabilities, results of operations and cash flows are classified as discontinued operations for all periods presented.
 
The Company has received a ruling from the Internal Revenue Service (“IRS”) substantially to the effect that, for U.S. federal income tax purposes, the distribution of shares of Genie common stock will qualify as tax-free for Genie, the Company and the Company’s stockholders under Section 355 of the Internal Revenue Code of 1986 (the “Code”). In addition to obtaining the IRS ruling, the Company has received an opinion from PricewaterhouseCoopers LLP on the three requirements for a tax-free distribution that are not addressed in the IRS ruling. Specifically, the opinion concludes that the distribution (i) should satisfy the business purpose requirement of the Code for a tax-free distribution, (ii) should not be viewed as being used principally as a device for the distribution of earnings and profits of the distributing corporation or the controlled corporation or both, and (iii) should not be viewed as part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50 percent or greater interest in the distributing corporation or controlled corporation within the meaning of the relevant section of the Code.
 
In October 2011, prior to the spin-off, the Company committed to fund Genie with a total of $106.0 million in aggregate cash and cash equivalents, including restricted cash. The Company funded Genie with $70.3 million at the time of the spin-off so that Genie held $94.0 million in cash and cash equivalents and $0.1 million in restricted cash. Subsequent to the spin-off, in November and December 2011, the Company funded Genie with the final remaining $11.9 million.
 
The Company entered into various agreements with Genie prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Genie after the spin-off, and a Transition Services Agreement, which provides for certain services to be performed by the Company and Genie to facilitate Genie’s transition into a separate publicly-traded company. These agreements provide for, among other things, (1) the allocation between the Company and Genie of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off, (2) transitional services to be provided by the Company relating to human resources and employee benefits administration, (3) the allocation of responsibilities relating to employee compensation and benefit plans and programs and other related matters, (4) finance, accounting, tax, internal audit, facilities, investor relations and legal services to be provided by the Company to Genie following the spin-off and (5) specified administrative services to be provided by Genie to certain of the Company’s foreign subsidiaries. In addition, the Company entered into a Tax Separation Agreement with Genie, which sets forth the responsibilities of the Company and Genie with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods.
 
 
7

 
 
The Company’s Chairman of the Board and Chief Executive Officer, Howard S. Jonas, is the controlling stockholder and Chairman of the Board of Genie. The Company’s selling, general and administrative expenses were reduced by $0.8 million and $1.0 million in the three months ended January 31, 2013 and 2012, respectively, and $2.2 million and $1.0 million in the six months ended January 31, 2013 and 2012, respectively, as a result of the fees the Company charged to Genie for services provided pursuant to the Transition Services Agreement, net of the amounts charged by Genie to certain of the Company’s foreign subsidiaries. At January 31, 2013 and July 31, 2012, other current assets reported in the Company’s consolidated balance sheet included receivables from Genie of $0.5 million and $0.7 million, respectively.
 
IDT Entertainment
 
In connection with the sale of IDT Entertainment to Liberty Media Corporation in the first quarter of fiscal 2007, the Company was eligible to receive additional consideration from Liberty Media based upon any appreciation in the value of IDT Entertainment over the five-year period that ended in August 2011, however, the Company may have been required to pay Liberty Media up to $3.5 million if the value of IDT Entertainment did not exceed a certain amount by August 2011. In September 2011, the Company and Liberty Media executed an agreement to settle and resolve all claims related to the additional consideration and certain other disputes and claims. Liberty Media paid the Company $2.0 million in September 2011 in consideration for the settlement and related releases, which is included in “Income on sale of discontinued operations” in the accompanying consolidated statement of operations.
 
Summary Financial Data of Discontinued Operations
 
Revenues, income before income taxes and net income of Genie and subsidiaries, which are included in discontinued operations, were as follows:

   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Revenues
  $     $     $     $ 45,796  
                                 
Income before income taxes
  $     $     $     $ 2,609  
                                 
Net income
  $     $     $     $ 1,015  

Note 3—Other Operating Gains (Losses), Net
 
The following table summarizes the other operating gains (losses), net by business segment:

   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
All Other-gain on settlement of claim
  $ 149     $     $ 149     $  
Telecom Platform Services-loss related to a legal matter
                (350 )     (230 )
Telecom Platform Services-gain on settlement of claim (a)
          1,750             1,750  
Telecom Platform Services-loss on settlement of litigation (b)
                      (11,022 )
Corporate-other
          100             100  
Total
  $ 149     $ 1,850     $ (201 )   $ (9,402 )
 
(a) On January 17, 2012, the Company received $1.8 million from Broadstripe, LLC in settlement of the Company’s claim stemming from Broadstripe, LLC’s rejection of its telephony services agreements with the Company upon the confirmation of Broadstripe, LLC’s bankruptcy plan and closing of its bankruptcy sale.
 
 
8

 
 
(b) On October 12, 2011, the Company entered into a binding term sheet with T-Mobile USA, Inc. (“T-Mobile”) to settle litigation related to an alleged breach of a wholesale supply agreement. In consideration of the settlement of all disputes between the parties, on October 13, 2011, the Company paid T-Mobile $10 million. The Company incurred legal fees of $1.0 million in connection with this matter.
 
Note 4—Fair Value Measurements
 
At January 31, 2013, the Company did not have any assets or liabilities measured at fair value on a recurring basis. At January 31, 2013 and July 31, 2012, the Company had $6.9 million and $6.4 million, respectively, in investments in hedge funds, of which $0.1 million and $0.1 million, respectively, were included in “Investments—short-term” and $6.8 million and $6.3 million, respectively, were included in “Investments—long-term” 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, investments—short-term, other current assets, customer deposits, notes payable—current portion and other current liabilities. At January 31, 2013 and July 31, 2012, the carrying amount of these assets 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 investments—short-term, other current assets, 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 January 31, 2013 and July 31, 2012, 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 liabilities. At January 31, 2013 and July 31, 2012, the carrying amount of other liabilities approximated fair value. The fair value was estimated based on the Company’s assumptions, which was classified as Level 3 of the fair value hierarchy.
 
It is not practicable to estimate the fair value of the Company’s notes payable—long-term portion at January 31, 2013 and July 31, 2012 without incurring excessive cost. Notes payable—long-term portion included the following: (1) a term loan with a carrying amount of $6.8 million and $6.9 million (excluding the current portion) at January 31, 2013 and July 31, 2012, respectively, that bears interest at the rate of 5.6% per annum, and is payable in monthly installments of principal and interest of $0.1 million and a final installment of $6.4 million payable on September 1, 2015, which is secured by a mortgage on a building in Piscataway, New Jersey, and (2) a note payable with a carrying amount of $21.6 million and $22.8 million (excluding the current portion) at January 31, 2013 and July 31, 2012, respectively, that bears interest at the rate of 8.9% per annum, however, until March 31, 2013, the Company only pays interest at the rate of 6.9% per annum, the interest of 2.0% per annum that is accruing but is not payable is added to the principal balance (an aggregate of $1.9 million), monthly payments of principal and interest of $0.2 million commence beginning in April 2013 and a final payment of $20.4 million is due on April 1, 2020, which is secured by a mortgage on the building at 520 Broad Street, Newark, New Jersey.
 
The Company’s investments-long-term at January 31, 2013 and July 31, 2012 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 $2.1 million and $1.1 million at January 31, 2013 and July 31, 2012, respectively, which the Company believes was not impaired.
 
 
9

 
 
Note 5—Equity
 
Changes in the components of equity were as follows:
 
   
Six Months Ended
January 31, 2013
 
   
Attributable to IDT Corporation
   
Noncontrolling Interests
   
Total
 
   
(in thousands)
 
Balance, July 31, 2012
  $ 102,230     $ 495     $ 102,725  
Dividends declared ($0.75 per share)
    (17,124           (17,124 )
Restricted Class B common stock purchased from employees
    (300           (300 )
Repurchases of Class B common stock through repurchase program
    (778           (778 )
Distributions to noncontrolling interests
          (816 )     (816 )
Purchases of stock of subsidiary
    (1,795 )     (9 )     (1,804 )
Sale of stock of subsidiary
    (58 )     203       145  
Stock-based compensation
    3,843       188       4,031  
Comprehensive income:
                       
Net income
    6,567       1,096       7,663  
Foreign currency translation adjustments
    3,320       (47 )     3,273  
Comprehensive income
    9,887       1,049       10,936  
Balance, January 31, 2013
  $ 95,905     $ 1,110     $ 97,015  

Dividend Payments
 
On October 16, 2012, the Company paid a cash dividend of $0.15 per share to stockholders of record of the Company’s Class A common stock and Class B common stock at the close of business on October 9, 2012. On November 13, 2012, the Company paid a special dividend of $0.60 per share to stockholders of record of the Company’s Class A common stock and Class B common stock as of the close of business on November 5, 2012. The aggregate dividends paid were $17.1 million. The Company suspended payment of its regular $0.15 per share quarterly dividends for the remainder of fiscal 2013.
 
Purchases of Stock of Subsidiary
 
In December 2012, a wholly-owned subsidiary of the Company purchased shares of the Company’s subsidiary, Fabrix T.V., Ltd. (“Fabrix”), for cash of $1.8 million. The shares were purchased from holders of noncontrolling interests in Fabrix representing 4.5% of the equity in Fabrix, which increased the Company’s ownership in Fabrix to 86.1% from 81.6%.
 
Sale of Stock of Subsidiary
 
On November 21, 2012, the Company’s subsidiary, Zedge Holdings, Inc. (“Zedge”), sold shares to Shaman II, L.P. for cash of $0.1 million, which increased Shaman II, L.P.’s ownership in Zedge to 11.17% from 11.1%. One of the limited partners in Shaman II, L.P. is a former employee of the Company.
 
Stock-Based Compensation
 
On September 24, 2012, the Company’s Board of Directors approved a grant of 10% of the equity of the Company’s subsidiary, Innovative Communications Technologies, Inc. (“ICTI”) to Howard Jonas. These ICTI shares vested immediately. The Company recorded stock-based compensation expense of $1.2 million in the six months ended January 31, 2013 for the grant of these shares, based on the estimated fair value of the shares on the grant date.
 
Stock Repurchase Program
 
The Company has a stock repurchase program for the repurchase of up to an aggregate of 8.3 million shares of the Company’s Class B common stock. In the six months ended January 31, 2013, the Company repurchased 77,843 shares of Class B common stock for an aggregate purchase price of $0.8 million. There were no repurchases under the program in the six months ended January 31, 2012. As of January 31, 2013, 5.1 million shares remained available for repurchase under the stock repurchase program.
 
 
10

 
 
Note 6—Earnings Per Share
 
Basic earnings per share is computed by dividing net income (loss) 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:

   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Basic weighted-average number of shares
    20,829       20,492       20,818       20,429  
Effect of dilutive securities:
                               
Non-vested restricted Class B common stock
    1,260       1,319       1,269        
Diluted weighted-average number of shares
    22,089       21,811       22,087       20,429  

The following shares were excluded from the diluted earnings per share computations because their inclusion would have been anti-dilutive:
 
   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Stock options
    704       601       704       678  
Non-vested restricted Class B common stock
                      1,761  
Shares excluded from the calculation of diluted earnings per share
    704       601       704       2,439  

For the three months ended January 31, 2013 and 2012 and the six months ended January 31, 2013, outstanding stock options for which the exercise price of the stock option was greater than the average market price of the Company’s stock during the period were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For the six months ended January 31, 2012, the diluted earnings per share equals basic earnings per share because the Company had a loss from continuing operations and the impact of the assumed exercise of stock options and assumed vesting of restricted stock would have been anti-dilutive.
 
Note 7—Business Segment Information
 
The Company has two reportable business segments, Telecom Platform Services and Consumer Phone Services, which comprise the IDT Telecom division. All other 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 telecommunications services, including prepaid and rechargeable calling products and international long distance traffic termination, as well as various payment services. The Consumer Phone Services segment provides consumer local and long distance services in the United States. All Other includes (1) Zedge, which operates a service accessible online and through both an Android and iOS app that provides mobile game discovery and personalization content such as ringtones and wallpapers, (2) Fabrix, a software development company specializing in highly efficient cloud-based video processing, storage and delivery, (3) IDT Spectrum, which holds, leases and sells fixed wireless spectrum, (4) ICTI, which holds intellectual property primarily related to voice over Internet protocol technology and the licensing and other businesses related to this intellectual property, (5) the Company’s real estate holdings, and (6) other smaller businesses. 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.
 
 
11

 
 
Operating results for the business segments of the Company are as follows:
 
(in thousands)
 
Telecom
Platform
Services
   
Consumer
Phone
Services
   
All Other
   
Corporate
   
Total
 
Three Months Ended January 31, 2013
                             
Revenues
  $ 402,758     $ 3,714     $ 5,213     $     $ 411,685  
Income (loss) from operations
    10,050       437       (807 )     (4,428 )     5,252  
                                         
Three Months Ended January 31, 2012
                                       
Revenues
  $ 357,588     $ 4,973     $ 2,888     $     $ 365,449  
Income (loss) from operations
    6,513       998       (260 )     (3,219 )     4,032  
                                         
Six Months Ended January 31, 2013
                                       
Revenues
  $ 794,791     $ 7,729     $ 9,750     $     $ 812,270  
Income (loss) from operations
    19,090       1,036       (2,439 )     (7,207 )     10,480  
                                         
Six Months Ended January 31, 2012
                                       
Revenues
  $ 726,653     $ 10,365     $ 5,208     $     $ 742,226  
(Loss) income from operations
    (836 )     2,208       (1,144 )     (7,258 )     (7,030 )

All Other’s loss from operations in the three and six months ended January 31, 2013 included a gain of $0.1 million from the settlement of a claim. Telecom Platform Services’ income from operations in the six months ended January 31, 2013 included a loss of $0.4 million related to a legal matter. Telecom Platform Services’ income from operations in the three months ended January 31, 2012 included a gain of $1.8 million from a settlement with Broadstripe, LLC (see Note 3). Telecom Platform Services’ loss from operations in the six months ended January 31, 2012 included a loss of $11.0 million from the settlement of litigation with T-Mobile (see Note 3) and a $0.2 million loss on the settlement of an unrelated claim, net of the $1.8 million gain from the Broadstripe, LLC settlement.
 
Note 8—Legal Proceedings
 
On February 15, 2011, a jury in the United States District Court, Eastern District of Texas awarded Alexsam, Inc. (“Alexsam”) $9.1 million in damages from the Company in an action alleging infringement of two patents related to the activation of phone and gift cards (incorporating bank identification numbers approved by the American Banking Association for use in a banking network) over a point-of-sale terminal. The judgment issued in August 2011 awarded Alexsam an aggregate of $10.1 million including damages and interest. Post-judgment interest continues to accrue at an annual rate of 0.11% on the $10.1 million awarded in the judgment. Notwithstanding confidence in the merits of its appeal, the Company has completed a design-around of certain of the card encoding schemes at issue in an attempt to avoid infringement of the Alexsam patents, and the Company does not expect that the jury’s decision will have a material impact on its future business operations. On September 1, 2011, Alexsam filed a related action seeking royalties for the products and systems previously found to infringe its patents to the extent they have been used since January 1, 2011. A bench trial is scheduled for April 1-2, 2013. On October 28, 2011, the Company filed a notice of appeal and on November 1, 2011, Alexsam filed a notice of cross-appeal. Oral argument for the appeal was held on March 5, 2013. A decision on the appeal is expected by mid 2013. In the second and fourth quarters of fiscal 2012, the Company recorded an aggregate of $10.8 million in expenses related to this matter. As of January 31, 2013, the Company had $10.1 million accrued for this matter. As of January 31, 2013, the Company’s reasonably possible liability related to Alexsam’s claims above the amount that has been accrued ranges from $0 to $4.1 million. The upper limit of the range of reasonably possible liability may increase to the extent that the products and systems previously found to infringe Alexsam’s patents continue to be used.
 
On July 2, 2009, Southwestern Bell Telephone Company and nine of its affiliates (collectively “Southwestern Bell”), each of which is a local exchange carrier, filed a complaint in the United States District Court for the Northern District of Texas seeking an accounting as well as declaratory, injunctive and monetary relief from the Company. The complaint alleged that the Company failed to pay “switched access service” charges for calls made by consumers using the Company’s prepaid calling cards. The complaint alleges causes of action for (i) violation of federal tariffs, (ii) violation of state tariffs, and (iii) unjust enrichment. On October 22, 2012, the Company and Southwestern Bell entered into a Confidential Settlement Agreement to fully and finally resolve the litigation and the underlying claim and matter in dispute.
 
Aerotel, Ltd. (“Aerotel”) and the Company are parties to a Settlement Agreement dated June 29, 2009 (the “2009 Settlement Agreement”). The 2009 Settlement Agreement resulted from a lawsuit filed by Aerotel against the Company in 2008, which was a by-product of a complaint originally filed by Aerotel and its affiliates against the Company in 2003. The initial 2003 claim was settled in 2007 with the Company’s agreement to pay Aerotel $15 million in cash, and to make available to Aerotel calling cards or PINS over time with potential termination costs of up to $15 million, subject to certain other conditions. On October 27, 2010, Aerotel served the Company with a Notice of Arbitration and Statement of Claim referring disputes related to the 2009 Settlement Agreement to the CPR Institute for Dispute Resolution. The Statement of Claim alleged breach of contract, anticipatory breach, breach of covenant of good faith and fair dealing, common law fraud, negligence and deceptive business practices and sought damages of at least $25 million and attorneys’ fees. The arbitration was held in June 2012. On December 7, 2012, the Company received the written Interim Award of the arbitration panel. The panel did not find recoverable breaches on many of Aerotel’s claims, and did not award restitution to Aerotel. The panel found that the Company is required to compensate Aerotel for lost profits on a portion of the sales of international calling cards it was to make under the 2009 Settlement Agreement. Aerotel also filed a Motion for Clarification seeking to have the panel reconsider portions of the Interim Award, which the panel denied. The parties submitted updated damages calculations based on various requests from the panel.
 
 
12

 
 
The Company is the exclusive licensee of a patent related to a method and process used in prepaid calling cards that was invented by Shmuel Fromer. The Company has been attempting to enforce this patent in Germany, and had succeeded, prevailing in infringement cases against certain calling card providers, including Lycatel (Ireland) Limited and Lycatel Services Limited, and Mox Telecom AG. On February 21, 2012, a nullity hearing (effectively judging the validity of the patent) with respect to the patent, took place before the German Federal Court of Justice in Karlsruhe, between Lycatel Services Limited as claimant, Mox Telecom AG as intervenor on the side of claimant, and Mr. Fromer, as defendant. During this hearing, the court nullified claims 1, 2, 3, 5 and 6 of the patent. The Court also ordered the defendant to pay costs and fees in respect of all of the nullity proceedings involving Lycatel and Mox. Except for the amount of fees and costs which may be claimed against the Company that are based on applicable statutes, the outcome of this matter is uncertain, and, as such, the Company is not able to make an assessment of the final result and its impact on the Company. 
 
As of January 31, 2013, the Company had an aggregate of $15.1 million accrued for the Southwestern Bell, Aerotel and Lycatel/Mox matters. As of January 31, 2013, the Company’s reasonably possible liability above the aggregate amount that had been accrued for these matters was $7.9 million. 
 
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) (“Wavelengths”) on a global undersea fiber optic network that Tyco was deploying at that time. In June 2004, Tyco asserted several counterclaims against the Company, alleging that the Company breached the settlement agreement and is liable for damages for allegedly refusing to accept Tyco’s offer regarding the Wavelengths referenced in the settlement agreement and for making a public statement that Tyco failed to provide the Company with the use of its Wavelengths. On August 19, 2008, the Appellate Division of the State of New York, First Department, granted summary judgment in favor of Tyco dismissing the complaint and remanded the matter to the Supreme Court for further proceedings. On October 22, 2009, the New York Court of Appeals issued an Order denying the Company’s appeal and affirming the Appellate Division’s order. On or about November 17, 2009, the Company demanded that Tyco comply with its obligations under the settlement agreement. After further discussions and meetings between the parties regarding Tyco’s obligations under the settlement agreement, including its obligation to provide the use of the Wavelengths for fifteen years in a manner fully consistent with that described in the settlement agreement, the Company filed a complaint on November 24, 2010 in the Supreme Court of the State of New York, County of New York, against Tyco based upon the failure to comply with the obligations under the settlement agreement, to negotiate the terms of an indefeasible right to use the Wavelengths in good faith, and to provide the Company with the Wavelengths. The complaint alleges causes of action for breach of contract and breach of duty to negotiate in good faith. On January 6, 2011, Tyco filed a motion to dismiss the complaint, which was granted. On July 22, 2011, the Company filed a notice of appeal. After briefing was completed, oral argument was held on April 2, 2012. On December 27, 2012, the Appellate Division issued an opinion and order reversing the order of the Supreme Court which granted Tyco’s motion to dismiss the Company’s complaint. On January 31, 2013, Tyco filed a motion for reargument or, in the alternative, leave to appeal to the Court of Appeals, which the Company opposed. On February 8, 2013, Tyco filed an answer with a counterclaim. The parties are engaged in discovery.
 
On April 1, 2004, D. Michael Jewett, a former employee with whom the Company entered into a confidential settlement agreement in November 2010, sent a copy of the complaint he had filed against the Company to the United States Attorney’s Office. In the complaint, Jewett had alleged, among other things, that improper payments were made to foreign officials in connection with an IDT Telecom contract. As a result, the Department of Justice (“DOJ”), the SEC and the United States Attorney in Newark, New Jersey conducted an investigation of this matter. The Company and the Audit Committee of the Company’s Board of Directors initiated independent investigations, by outside counsel, regarding certain of the matters raised in the Jewett complaint and in these investigations. Neither the Company’s nor the Audit Committee’s investigations have found any evidence that the Company made any such improper payments to foreign officials. The Company continues to cooperate with these investigations, which the SEC and DOJ have confirmed are still ongoing. 
 
 
13

 
 
In January 2012, the Company filed complaints in the United States District Court for the Eastern District of Virginia against Stalker Software, Inc. (d/b/a CommuniGate Systems, Inc.), ooVoo, LLC, and Vivox, Inc. claiming infringement of a number of its key patents. The Company sought both damages and injunctive relief from the defendants. The defendants each filed an answer to the complaint and/or a counterclaim. A markman hearing (also known as a claim construction hearing) was held on October 10, 2012, and on October 26, 2012, the judge issued an Opinion and Order that was favorable to the Company. In October and November 2012, the Company reached confidential settlement agreements with each of the three defendants. 
 
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, 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 9—Commitments and Contingencies
 
Purchase Commitments
 
The Company had purchase commitments of $1.5 million as of January 31, 2013.
 
Tax Audits
 
The Company is subject to audits in various jurisdictions for various taxes, including utility excise tax, sales and use tax, communications services tax, gross receipts tax and property tax. As of January 31, 2013, the Company had accrued an aggregate of $0.2 million related to certain of these audits. The following is a summary of the recently resolved audits:
 
 
In December 2010, the New Jersey Division of Taxation filed a Certificate of Debt related to a sales and use tax audit of IDT Domestic Telecom, Inc. that resulted in the entry of a judgment in the amount of $2.1 million, which allows the Division of Taxation to place a lien or levy on the Company’s assets. In January 2013, the Company and the Division of Taxation completed a settlement of this audit, and the Company paid $0.6 million.
 
In May 2011, the Company received a Notice of Proposed Assessment from the Florida Department of Revenue related to communications services tax that included an aggregate assessment of tax and interest of $2.7 million. In November 2012, the Company agreed to resolve this matter and paid $0.3 million.

At January 31, 2013, the Company has accrued for the estimated loss from audits for which it is probable that a liability has been incurred, however amounts asserted by taxing authorities or the amount ultimately assessed against the Company could be greater than the accrued amounts. Accordingly, additional provisions may be recorded in the future as revised estimates are made or underlying matters are settled or resolved. Imposition of assessments as a result of audits related to these other taxes could have an adverse affect on the Company’s results of operations, cash flows and financial condition.
 
In February 2011, the Company liquidated its Puerto Rico legal entity. The final Puerto Rico tax return was filed in April 2011 claiming a refund of $4.8 million. The Company expects to receive the refund shortly after the completion of the audits of the liquidated entity’s Puerto Rico tax returns for fiscal years 2009 and 2010.
 
Letters of Credit and Surety Bond
 
As of January 31, 2013, the Company had letters of credit and a surety bond outstanding totaling $19.1 million. The letters of credit were primarily collateral to secure mortgage repayments and a payment pursuant to a settlement agreement. The surety bond is related to the $10.1 million Alexsam judgment (see Note 8). The letters of credit outstanding as of January 31, 2013 expire as follows: $2.2 million in the twelve month period ending January 31, 2014, $2.0 million in the twelve month period ending January 31, 2015 and $2.8 million in the twelve month period ending January 31, 2016.
 
Customer Deposits
 
As of January 31, 2013 and July 31, 2012, “Customer deposits” in the Company’s consolidated balance sheets included refundable customer deposits of $20.7 million and $10.5 million, respectively, related to IDT Financial Services, the Company’s Gibraltar-based bank.
 
 
14

 
 
Restricted Cash and Cash Equivalents
 
Restricted cash and cash equivalents consist of the following:
 
   
January 31,
2013
   
July 31,
2012
 
   
(in thousands)
 
Restricted cash and cash equivalents-short-term
           
Letters of credit related
  $ 1,677     $ 1,430  
IDT Financial Services customer deposits
    21,700       11,206  
Total short-term
    23,377       12,636  
Restricted cash and cash equivalents-long-term
               
Letters of credit related
    4,767       2,763  
IDT Financial Services related
    6,704       6,703  
Total long-term
    11,471       9,466  
Total restricted cash and cash equivalents
  $ 34,848     $ 22,102  
 
Note 10—Other Income (Expense), Net
 
Other income (expense), net consists of the following:

   
Three Months Ended
January 31,
   
Six Months Ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in thousands)
 
Foreign currency transaction gains
  $ 1,481     $ 45     $ 2,045     $ 471  
Gain (loss) on investments
    313       (548 )     605       (790 )
Other
    21       74       50       79  
Total other income (expense), net
  $ 1,815     $ (429 )   $ 2,700     $ (240 )

Note 11—520 Broad Street Building
 
At January 31, 2013, the carrying value of the land, building and improvements that the Company owns at 520 Broad Street, Newark, New Jersey was $42.6 million. The Company is considering a range of options as to the future use or disposition of 520 Broad Street, some of which could result in a loss from a reduction in the carrying value of the land, building and improvements and such loss could be material.
 
Note 12—Recently Issued Accounting Standards Not Yet Adopted
 
In December 2011, an accounting standard update was issued to enhance disclosures and provide converged disclosures in U.S. GAAP and International Financial Reporting Standards (“IFRS”) about derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities will be required to provide both net and gross information for those assets and liabilities in order to enhance comparability between entities that prepare their financial statements on the basis of U.S. GAAP and entities that prepare their financial statements on the basis of IFRS. The Company is required to adopt this standard update on August 1, 2013. The Company is evaluating the impact that this standard update will have on its consolidated financial statements.
 
In July 2012, an accounting standard update was issued to reduce the complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Prior to the adoption of this update, an entity is required to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount. The Company is required to adopt this standard update on August 1, 2013. The adoption of this standard update will not impact the Company’s financial position, results of operations or cash flows.
 
 
15

 
 
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, 2012, 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, 2012 as supplemented by the information contained in Item 1A to Part II of this Quarterly Report. 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, 2012.
 
Overview
 
We are a multinational holding company with operations primarily in the telecommunications industry. We have two reportable business segments, Telecom Platform Services and Consumer Phone Services, which comprise our IDT Telecom division. Telecom Platform Services provides telecommunications services, including prepaid and rechargeable calling products and international long distance traffic termination, as well as various payment services. Consumer Phone Services provides consumer local and long distance services in the United States. All other operating segments that are not reportable individually are included in All Other. All Other includes (1) Zedge Holdings, Inc., or Zedge, which operates a service accessible online and through both an Android and iOS app that provides mobile game discovery and personalization content such as ringtones and wallpapers, (2) Fabrix T.V., Ltd., or Fabrix, a software development company specializing in highly efficient cloud-based video processing, storage and delivery, (3) IDT Spectrum, which holds, leases ands sells fixed wireless spectrum, (4) Innovative Communications Technologies, Inc., or ICTI, which holds intellectual property primarily related to voice over Internet protocol technology and the licensing and other businesses related to this intellectual property, (5) our real estate holdings, and (6) other smaller businesses.
 
IDT Telecom
 
Since our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 98.8% and 99.3% of our total revenues from continuing operations in the six months ended January 31, 2013 and 2012, respectively.
 
Telecom Platform Services, which represented 99.0% and 98.6% of IDT Telecom’s total revenues in the six months ended January 31, 2013 and 2012, respectively, markets and distributes multiple communications and payment services across four business categories, including:
 
Retail Communications provides international long-distance calling products primarily to immigrant communities worldwide, with core markets in the United States and Europe. These products include our flagship Boss Revolution Pin-less product (an international calling service sold through the Boss Revolution payment platform) as well as many of our established traditional disposable calling card brands including Boss, La Leyenda, and Feliz, and mobile apps, including PennyTalk.
 
Wholesale Termination Services is a global telecom carrier, terminating international long distance calls around the world for Tier 1 fixed line and mobile network operators as well as other aggregators through our network of 800-plus carrier interconnects.
 
Payment Services markets payment offerings such as international mobile top-up, or IMTU, as well as gift cards in both the United States and Europe. IMTU enables customers to purchase airtime for a prepaid mobile telephone in another country. IMTU is available in both traditional cards as well as on our Boss Revolution payment platform. Payment Services also includes reloadable debit cards and Bank Identification Number (BIN) Sponsorship services offered in Europe by IDT Financial Services through our Gibraltar-based bank.
 
 
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·  
Hosted Platform Solutions provides customized communications services that leverage our proprietary networks, platforms and/or technology to cable companies and other operators. The majority of Hosted Platform Solutions’ revenue is generated by our cable telephony business which is in “harvest mode” – maximizing revenues from current customers while maintaining expenses at the minimum levels essential to operate the business.
 
In fiscal 2013, our subsidiary, IDT Payment Services, applied for money remittance licenses in most states in the United States. To date, IDT Payment Services received approvals to start transacting in over twenty states. As a licensed money transmitter, IDT Payment Services will be regulated by the states where it holds licenses and by federal law.
 
Over the past few years, we have experienced a continued shift in demand industry-wide, away from traditional calling cards and into wireless products and Internet protocol (or IP)-based products, which, among other things, contributes to the gradual erosion of our pricing power. The continued growth of these wireless and IP-based services has adversely affected the sales of our traditional disposable prepaid calling card products as customers migrate from using cards to using these alternative services. We expect pricing of wireless and IP-based services to continue to decrease, which may result in increased substitution and increased pricing pressure on our prepaid calling card products’ sales and margins.
 
To combat this trend, we have introduced in recent years new sources of revenue, such as Boss Revolution Pin-less and IMTU that have now largely replaced revenues from our traditional disposable calling cards. Boss Revolution Pin-less allows users to call their families and friends overseas without the need to enter a personal identification number. IMTU appeals to residents of developed countries such as the United States who regularly communicate with or financially support friends or family members in a developing country. The addition of Boss Revolution Pin-less and IMTU represent successful efforts to leverage our existing capabilities and distribution. In general, Boss Revolution Pin-less and IMTU command lower gross margins when compared to our more established, traditional calling cards. There can be no assurance that we will continue to grow our Boss Revolution Pin-less and IMTU sales, or that we will be able to generate new sources of revenue to offset the continuing decline in our traditional disposable calling card revenues.
 
The wholesale carrier industry has numerous players competing for the same customers, primarily on the basis of price, products and quality of service. In our Wholesale Termination Services business, we have generally had to pass along all or most of our per-minute cost savings to our customers in the form of lower prices.
 
Discontinued Operations
 
Genie Energy Ltd.
 
On October 28, 2011, we completed a pro rata distribution of the common stock of our subsidiary, Genie Energy Ltd., or Genie, to our stockholders of record as of the close of business on October 21, 2011. At the time of the Genie spin-off, Genie owned 99.3% of Genie Energy International Corporation, which owned 100% of IDT Energy and 92% of Genie Oil and Gas, Inc. As of October 28, 2011, each of our stockholders received one share of Genie Class A common stock for every share of our Class A common stock and one share of Genie Class B common stock for every share of our Class B common stock held of record as of the close of business on October 21, 2011. Genie and subsidiaries met the criteria to be reported as discontinued operations and accordingly, their assets, liabilities, results of operations and cash flows are classified as discontinued operations for all periods presented.
 
We have received a ruling from the Internal Revenue Service substantially to the effect that, for U.S. federal income tax purposes, the distribution of shares of Genie common stock will qualify as tax-free for Genie, us and our stockholders under Section 355 of the Internal Revenue Code of 1986. In addition to obtaining the IRS ruling, we have received an opinion from PricewaterhouseCoopers LLP on the three requirements for a tax-free distribution that are not addressed in the IRS ruling. Specifically, the opinion concludes that the distribution (i) should satisfy the business purpose requirement of the Internal Revenue Code for a tax-free distribution, (ii) should not be viewed as being used principally as a device for the distribution of earnings and profits of the distributing corporation or the controlled corporation or both, and (iii) should not be viewed as part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50 percent or greater interest in the distributing corporation or controlled corporation within the meaning of the relevant section of the Internal Revenue Code.
 
In October 2011, prior to the spin-off, we committed to fund Genie with a total of $106.0 million in aggregate cash and cash equivalents, including restricted cash. We funded Genie with $70.3 million at the time of the spin-off so that Genie held $94.0 million in cash and cash equivalents and $0.1 million in restricted cash. Subsequent to the spin-off, in November and December 2011, we funded Genie with the final remaining $11.9 million.
 
 
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We entered into various agreements with Genie prior to the spin-off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship with Genie after the spin-off, and a Transition Services Agreement, which provides for certain services to be performed by us and Genie to facilitate Genie’s transition into a separate publicly-traded company. These agreements provide for, among other things, (1) the allocation between us and Genie of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off, (2) transitional services to be provided by us relating to human resources and employee benefits administration, (3) the allocation of responsibilities relating to employee compensation and benefit plans and programs and other related matters, (4) finance, accounting, tax, internal audit, facilities, investor relations and legal services to be provided by us to Genie following the spin-off and (5) specified administrative services to be provided by Genie to certain of our foreign subsidiaries. In addition, we entered into a Tax Separation Agreement with Genie, which sets forth the responsibilities of us and Genie with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods.
 
Our selling, general and administrative expenses were reduced by $0.8 million and $1.0 million in the three months ended January 31, 2013 and 2012, respectively, and $2.2 million and $1.0 million in the six months ended January 31, 2013 and 2012, respectively, as a result of the fees we charged to Genie for services provided pursuant to the Transition Services Agreement, net of the amounts charged by Genie to certain of our foreign subsidiaries. At January 31, 2013 and July 31, 2012, other current assets reported in our consolidated balance sheet included receivables from Genie of $0.5 million and $0.7 million, respectively.
 
IDT Entertainment
 
In connection with the sale of IDT Entertainment to Liberty Media Corporation in the first quarter of fiscal 2007, we were eligible to receive additional consideration from Liberty Media based upon any appreciation in the value of IDT Entertainment over the five-year period that ended in August 2011, however, we may have been required to pay Liberty Media up to $3.5 million if the value of IDT Entertainment did not exceed a certain amount by August 2011. In September 2011, we and Liberty Media executed an agreement to settle and resolve all claims related to the additional consideration and certain other disputes and claims. Liberty Media paid us $2.0 million in September 2011 in consideration for the settlement and related releases, which is included in “Income on sale of discontinued operations” in the accompanying consolidated statement of operations.
 
Summary Financial Data of Discontinued Operations
 
Revenues, income before income taxes and net income of Genie and subsidiaries, which are included in discontinued operations, were as follows:
 
   
Three months ended
January 31,
   
Six months ended
January 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(in millions)
 
Revenues
  $     $     $     $ 45.8  
Income before income taxes
  $     $     $     $ 2.6  
Net income
  $     $     $     $ 1.0  

520 Broad Street Building
 
At January 31, 2013, the carrying value of the land, building and improvements that we own at 520 Broad Street, Newark, New Jersey was $42.6 million. We are considering a range of options as to the future use or disposition of 520 Broad Street, some of which could result in a loss from a reduction in the carrying value of the land, building and improvements and such loss could be material.
 
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 2012. 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 and other taxes and regulatory agency fees, IDT Telecom direct cost of revenues—disputed amounts, and contingent liabilities. 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 2012.
 
 
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Recently Issued Accounting Standards Not Yet Adopted
 
In December 2011, an accounting standard update was issued to enhance disclosures and provide converged disclosures in U.S. GAAP and International Financial Reporting Standards, or IFRS, about derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities will be required to provide both net and gross information for those assets and liabilities in order to enhance comparability between entities that prepare their financial statements on the basis of U.S. GAAP and entities that prepare their financial statements on the basis of IFRS. We are required to adopt this standard update on August 1, 2013. We are evaluating the impact that this standard update will have on our consolidated financial statements. 
 
In July 2012, an accounting standard update was issued to reduce the complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Prior to the adoption of this update, an entity is required to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount. We are required to adopt this standard update on August 1, 2013. The adoption of this standard update will not impact our financial position, results of operations or cash flows.
 
Results of Operations
 
Three and Six Months Ended January 31, 2013 Compared to Three and Six Months Ended January 31, 2012
 
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

   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$
   
%
   
2013
   
2012
    $     %  
   
(in millions)
 
Revenues
                                               
Telecom Platform Services
  $ 402.8     $ 357.6     $ 45.2       12.6 %   $ 794.8     $ 726.6     $ 68.2       9.4 %
Consumer Phone Services
    3.7       5.0       (1.3 )     (25.3 )     7.7       10.4       (2.7 )     (25.4 )
Total revenues
  $ 406.5     $ 362.6     $ 43.9       12.1 %   $ 802.5     $ 737.0     $ 65.5       8.9 %

Revenues. IDT Telecom revenues increased in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 due to an increase in Telecom Platform Services revenues, which more than offset a decline in Consumer Phone Services revenues. As a percentage of IDT Telecom’s total revenues, Telecom Platform Services revenues increased from 98.6% in the six months ended January 31, 2012 to 99.0% in the six months ended January 31, 2013, and Consumer Phone Services revenues decreased from 1.4% in the six months ended January 31, 2012 to 1.0% in the six months ended January 31, 2013.
 
 
19

 
 
Telecom Platform Services’ revenues, minutes of use and average revenue per minute for the three and six months ended January 31, 2013 and 2012 consisted of the following:

   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$/#
   
%
   
2013
   
2012
   
$/#
   
%
 
   
(in millions, except revenue per minute)
 
Telecom Platform Services Revenues
                                               
Retail Communications
  $ 161.1     $ 133.0     $ 28.1       21.1 %   $ 314.7     $ 265.0     $ 49.7       18.8 %
Wholesale Termination Services
    182.2       173.9       8.3       4.8       363.8       360.9       2.9       0.8  
Payment Services
    46.6       36.4       10.2       27.9       90.4       71.4       19.0       26.4  
Hosted Platform Solutions
    12.9       14.3       (1.4 )     (9.5 )     25.9       29.3       (3.4 )     (11.4 )
Total Telecom Platform Services revenues
  $ 402.8     $ 357.6     $ 45.2       12.6 %   $ 794.8     $ 726.6     $ 68.2       9.4 %
Minutes of use
                                                               
Retail Communications
    2,352       2,040       312       15.3 %     4,682       4,054       628       15.5 %
Wholesale Termination Services
    6,250       5,102       1,148       22.5       12,367       10,087       2,280       22.6  
Hosted Platform Solutions
    233       274       (41 )     (15.0 )     472       572       (100 )     (17.4 )
Total minutes of use
    8,835       7,416       1,419       19.1 %     17,521       14,713       2,808       19.1 %
Average revenue per minute
                                                               
Retail Communications
  $ 0.0685     $ 0.0652     $ 0.0033       5.1 %   $ 0.0672     $ 0.0654     $ 0.0018       2.8 %
Wholesale Termination Services
    0.0291       0.0341       (0.0050 )     (14.5 )     0.0294       0.0358       (0.0064 )     (17.8 )

Telecom Platform Services’ minutes of use increased 19.1% in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 driven by the continued strength in both our Wholesale Termination Services and Retail Communications businesses. Consistent with the growth in minutes, Telecom Platform Services’ revenues increased 12.6% and 9.4% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012.
 
Retail Communications revenue (39.6% and 36.5% of Telecom Platform Services’ revenue in the six months ended January 31, 2013 and 2012, respectively) grew 21.1% and 18.8% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012. The growth was led by aggressive penetration and acceptance 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. We launched the Boss Revolution payment platform in the United Kingdom and Spain during fiscal 2012, and in the first half of fiscal 2013, it was launched in Germany, Hong Kong, Singapore and Australia. We expect Retail Communications’ growth to continue in fiscal 2013 with revenue increases from Boss Revolution Pin-less more than offsetting the expected decline of traditional disposable calling card product sales.
 
Wholesale Termination Services revenue (45.8% and 49.7% of Telecom Platform Services’ revenue in the six months ended January 31, 2013 and 2012, respectively) increased 4.8% and 0.8% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012. The growth was primarily due to a significant increase in revenues in our web-based prepaid termination service. We expect that Wholesale Termination Services’ revenues will increase modestly during fiscal 2013 as expected increases in minutes of use continue to offset expected declines in average revenue per minute.
 
Payment Services revenue (11.4% and 9.8% of Telecom Platform Services’ revenue in the six months ended January 31, 2013 and 2012, respectively) grew 27.9% and 26.4% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012. The increase was driven by the success of our IMTU offerings. Future growth will be, in large part, contingent upon our ability to enter into new IMTU partnerships with wireless providers, as well as continued growth of IMTU revenue and the introduction of new payment offerings through the Boss Revolution payment platform. We expect that Payment Services revenues will continue to increase in fiscal 2013 as we continue to increase IMTU sales and introduce new payment offerings.
 
Hosted Platform Solutions revenue (3.2% and 4.0% of Telecom Platform Services’ revenue in the six months ended January 31, 2013 and 2012, respectively) declined 9.5% and 11.4% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012. The decline was partially due to a decrease in revenue from our cable telephony business which is in harvest mode. The decline was also due to decreases in revenues from managed services and from call shops outside the U.S. Call shop revenues decreased due to price competition and migration to alternative wireless and IP-based services.
 
 
20

 
 
Total minutes of use for Telecom Platform Services increased 19.1% in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012. 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. Within Telecom Platform Services, minutes of use relating to Wholesale Termination Services increased 22.5% and 22.6% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012, which included significant increases from our web-based prepaid termination service as well as from wholesale telecom. Minutes of use from Retail Communications increased 15.3% and 15.5% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012, which was driven by the volume growth in the U.S. and Asia, which more than offset the decrease in minutes of use in Europe and South America. Hosted Platform Solutions minutes of use decreased 15.0% and 17.4% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012, primarily as a result of the decline in minutes of use from managed services and call shops, as well as in the six months ended January 31, 2013 compared to the similar period in fiscal 2012, a decline in minutes of use from 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 significant metric.
 
Consumer Phone Services revenues declined 25.3% and 25.4% in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012 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 9,200 as of January 31, 2013 compared to 11,900 as of January 31, 2012. 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 40,600 as of January 31, 2013 compared to 51,000 as of January 31, 2012. We anticipate that Consumer Phone Services’ customer base and revenues will continue to decline.
 
   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
    $     %    
2013
   
2012
   
$
   
%
 
   
(in millions)
 
Direct cost of revenues
                                               
Telecom Platform Services
  $ 342.2     $ 303.6     $ 38.6       12.7 %   $ 675.1     $ 620.0     $ 55.1       8.9 %
Consumer Phone Services
    1.7       2.2       (0.5 )     (22.7 )     3.4       4.7       (1.3 )     (27.9 )
Total direct cost of revenues
  $ 343.9     $ 305.8     $ 38.1       12.4 %   $ 678.5     $ 624.7     $ 53.8       8.6 %

Direct Cost of Revenues. Direct cost of revenues of IDT Telecom increased in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 primarily as a result of the increase in minutes of use volume in our Telecom Platform Services segment.

   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$
   
%
   
2013
   
2012
   
$
   
%
 
   
(in millions)
 
Gross profit
                                               
Telecom Platform Services
  $ 60.6     $ 54.0     $ 6.6       12.3 %   $ 119.7     $ 106.6     $ 13.1       12.2 %
Consumer Phone Services
    2.0       2.8       (0.8 )     (27.5 )     4.3       5.7       (1.4 )     (23.4 )
Total gross profit
  $ 62.6     $ 56.8     $ 5.8       10.4 %   $ 124.0     $ 112.3     $ 11.7       10.4 %
 
    Three months ended
January 31,
         
Six months ended
January 31,
       
    2013    
2012
   
Change
   
2013
   
2012
   
Change
 
Gross margin percentage
                                   
Telecom Platform Services
    15.1 %     15.1 %     %     15.1 %     14.7 %     0.4 %
Consumer Phone Services
    53.5       55.1       (1.6 )     56.1       54.6       1.5  
Total gross margin percentage
    15.4 %     15.7 %     (0.3 )%     15.5 %     15.2 %     0.3 %
 
 
21

 
 
Gross Profit and Gross Margin Percentage. Gross profit in our Telecom Platform Services segment increased 12.3% and 12.2% and gross margin percentage was unchanged and increased 40 basis points in the three and six months ended January 31, 2013, respectively, compared to the similar periods in fiscal 2012. Gross profit generated by the increase in Boss Revolution Pin-less and IMTU sales more than compensated for a decline in gross profit from traditional disposable calling card revenue. The increase in the overall gross margin percentage reflects, in part, the rapid growth of relatively higher margin Retail Communications revenue compared to the lower growth of the relatively lower margin Wholesale Termination Services revenue. Within Retail Communications, gross margins generated by Boss Revolution calling services strengthened in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012. These trends are expected to stabilize or slightly improve Telecom Platform Services’ gross margin throughout 2013.

   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
    $     %    
2013
   
2012
    $     %  
   
(in millions)
 
Selling, general and administrative expenses
                                               
Telecom Platform Services
  $ 47.3     $ 45.6     $ 1.7       3.8 %   $ 94.4     $ 90.6     $ 3.8       4.3 %
Consumer Phone Services
    1.6       1.7       (0.1 )     (10.9 )     3.3       3.4       (0.1 )     (4.3 )
Total selling, general and administrative expenses
  $ 48.9     $ 47.3     $ 1.6       3.2 %   $ 97.7     $ 94.0     $ 3.7       4.0 %

Selling, General and Administrative. The increase in selling, general and administrative expenses in our Telecom Platform Services segment in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 was partially due to increases in employee compensation. We are continuing to expand our retail direct sales force in the U.S., which results in more control over our product distribution and enhances our relationships with retailers. We expect to continue to add to the direct sales force in fiscal 2013, which will likely somewhat further increase our selling, general and administrative expenses.
 
The increase in selling, general and administrative expenses in our Telecom Platform Services segment was also due to the increase in our variable costs, as our revenue grew as well. Variable selling, general and administrative expenses include costs that closely track top-line performance. In particular, third-party transaction processing costs have increased in direct proportion to the rapid growth of sales on the Boss Revolution payment platform since many of the retailers on the Boss Revolution payment platform use credit cards to pay us for their purchases. We intend to compliment the use of credit cards with ACH transfers in order to reduce these costs.
 
In addition, an increase in external legal fees contributed to the increase in selling, general and administrative expenses in our Telecom Platform Services segment in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012. These increases were partially offset by a decrease in marketing expenses. We expect that Telecom Platform Services’ selling, general and administrative expenses will increase at a more rapid pace during the remainder of fiscal 2013 as the spending for previously announced product development and enhancements ramps up.
 
As a percentage of Telecom Platform Services’ revenue, Telecom Platform Services’ selling, general and administrative expenses decreased to 11.8% from 12.8% in the three months ended January 31, 2013 and 2012, respectively, and decreased to 11.9% from 12.5% in the six months ended January 31, 2013 and 2012, respectively.
 
Selling, general and administrative expenses in our Consumer Phone Services segment decreased in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 as the cost structure for this segment continued to be right-sized to the needs of its declining revenue base.

   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$
   
%
   
2013
   
2012
   
$
   
%
 
   
(in millions)
 
Depreciation and amortization
                                               
Telecom Platform Services
  $ 3.2     $ 3.6     $ (0.4 )     (10.6 )%   $ 5.8     $ 7.4     $ (1.6 )     (22.3 )%
Consumer Phone Services
                      (87.9 )                       (86.6 )
Total depreciation and amortization
  $ 3.2     $ 3.6     $ (0.4 )     (10.6 )%   $ 5.8     $ 7.4     $ (1.6 )     (22.3 )%

Depreciation and Amortization.  The decrease in depreciation and amortization expense in the three and six months ended January 31, 2013 compared to the similar periods in fiscal 2012 was due to lower levels of capital expenditures in recent periods and more of our property, plant and equipment becoming fully depreciated. In addition, depreciation expense in the six months ended January 31, 2013 was reduced by $0.7 million due to an adjustment in our estimate of capital expenditures subject to sales and use tax as a result of an audit. We expect continued reductions in depreciation and amortization expense in the future although at a reduced rate.
 
 
22

 
 
Other Operating Losses. The Telecom Platform Services segment’s income from operations in the six months ended January 31, 2013 included a loss of $0.4 million related to a legal matter. The Telecom Platform Services segment’s income from operations in the three months ended January 31, 2012 included $1.8 million received from Broadstripe, LLC in settlement of our claim stemming from Broadstripe, LLC’s rejection of its telephony services agreements with us upon the confirmation of Broadstripe, LLC’s bankruptcy plan and closing of its bankruptcy sale. The Telecom Platform Services segment’s loss from operations in the six months ended January 31, 2012 included an $11.0 million loss on the settlement of litigation with T-Mobile USA, Inc., or T-Mobile, and a $0.2 million loss on the settlement of an unrelated claim, net of the $1.8 million received from Broadstripe, LLC.
 
   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$
   
%
   
2013
   
2012
    $    
%
 
   
(in millions)
 
Income (loss) from operations
                                               
Telecom Platform Services
  $ 10.1     $ 6.5     $ 3.6       54.3 %   $ 19.1     $ (0.8 )   $ 19.9    
nm
 
Consumer Phone Services
    0.4       1.0       (0.6 )     (56.2 )     1.0       2.2       (1.2 )     (53.1 )%
Total income from operations
  $ 10.5     $ 7.5     $ 3.0       39.6 %   $ 20.1     $ 1.4     $ 18.7    
nm
 
 

nm—not meaningful

All Other
 
   
Three months ended
January 31,
   
Change
   
Six months ended
January 31,
   
Change
 
   
2013
   
2012
   
$
   
%
   
2013
   
2012
   
$
   
%
 
   
(in millions)
 
Revenues
  $ 5.2     $ 2.9     $ 2.3       80.5 %   $ 9.7     $ 5.2     $ 4.5       87.2 %
Direct cost of revenues
    (0.6 )     (0.5 )     (0.1 )     (17.9 )     (1.2 )     (1.0 )     (0.2 )     (21.9 )
Gross profit
    4.6       2.4       2.2       94.7       8.5       4.2       4.3       102.8  
Selling, general and administrative
    (3.1 )     (1.0 )     (2.1 )     (222.9 )     (6.7 )     (2.1 )     (4.6 )     (212.1 )
Depreciation
    (0.6 )     (0.6 )