Chit Chat Stocks - IDT Corporation: A Spinoff Machine (Ticker: IDT) with Rich Howe

Episode Date: October 6, 2022

IDT operates through three segments: Fintech; net2phone-UCaaS (Unified Communications as a Service); and Traditional Communications. Listen as Brett and Ryan ask Rich questions about the company, its business model, and valuation. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Rich's work? Follow him on Twitter here: https://twitter.com/stockspinoffss?s=20&t=Ctb-8VAJVaLAAnlf8UtA6Q Contact us: [e-mail] Timestamps IDT | (3:25) Net2phone | (23:35) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive interview where we have on an analyst to discuss a single stock. And today we have on Rich Howe and we're talking IDT Corporation. It's a bit of an amalgamation of businesses really, but they have a history of spinoffs and creating value for shareholders by doing that. Rich goes through it really deeply and he has a lot of history in spinoffs. He runs StockSpinoffInvesting.com. Am I getting that I think so. And the link of that will be in the show notes if anyone wants to check it out. But we talked about it as well during the interview. Yeah, I mean, IDT is really, really interesting. You have a lot of, you have just this combination of cash flowing companies that may be declining. And then these fast growing entities that you're kind of really surprised to see in this type of collaborate. it um that's a look it's not a recommendation on the stock or anything but it's very interesting to look at a company when you have maybe the consolidated numbers don't look that exciting

but when you look at the the separate parts of the company i know everyone rolls their eyes at some of the parts but you look at the separate parts you have some stuff that's growing much much quicker and could create a lot of value for shareholders over the long term rich gives a good pitch for that also when when you have a company that monetizes the parts the sum of the parts can be a more useful way to value a business and that is something that they've done historically But before we get to the interview, we want to talk about our exclusive sponsor, 7investing. For anyone that doesn't know 7investing, it's probably important to lay out what exactly they do.

You get seven recommendations on the first of each month. It's 1,000 to 2,000 words per report, and it spans a whole lot of different industries. Also, now, if you sign up using our code, which is money, M-O-N-E-Y, I think most people know how to spell money. You get the whole back catalog. So that's more than 200 different companies that you can get extensive research on. And a lot of them they've changed or they've changed their views on the company over time. And you can read up on all of that. It's really useful. We use it for our own idea generation. Am I missing anything? Yeah. So you said that you can use code money, but we should say what you get with code money.

and that is $100 off your annual subscription for life. That is a 25% discount on your subscription every year that you're a subscriber to the service. That is code money. Link to that in the show notes if you want to check them out. And if you're interested in 7investing at the end of this episode, after the music rolls, we are going to have a three to five minute discussion with Simon Erickson, the founder of 7investing to go through in depth for anyone interested on what the service does. All right. Well, without further ado, here's our interview with Rich Howe. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview

industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. Today, we are joined by Rich Howe. He runs StockSpinoffInvesting.com. And today, we're talking about IDT. It's a, I guess, would you call this a micro cap or a small cap? Like we were talking about earlier, it all depends on the definition, right? So I think it's

market caps, maybe like 600 million right now. So maybe it's just above the 500 million market cap threshold, but it's definitely a small cap, definitely sub a billion. Okay. Before we get into IDT, I kind of want to talk about your service, Stock Spinoff Investing. How did you, well, maybe for anyone that's not familiar with these sort of transactions, can you explain what a stock spinoff is and then why you like them? Of course. Yeah. Yeah. So basically, a stock spinoff is when a public company breaks up into two or more public companies, put simply. And so why is that interesting or why is that where I focus? there's been a number of studies over the years looking at different time periods and different geographies and they all point to stock spinoffs doing well so they generally outperform the market

doesn't happen every year not all spinoffs outperform not not all of them do well some go bankrupt but in general when you look at them in aggregate they tend to do they tend to do quite well and so it's an air of the market that is interesting from that perspective it's like you You want to fish where the fish are, so it's a pond that's attractive from that perspective. And then the other interesting aspect about spinoffs, and I tend to focus on the smaller spinoffs because I think that's where there's more opportunity, but oftentimes, a parent company that's a large cap or a mid cap that portfolio managers own because they're large cap stocks will spin off a small cap or micro cap subsidiary. And the shareholders that own

the parent company will more often than not just sell the spinoff that they receive indiscriminately like price independent, regardless of price, because it's such a small percentage of their investment in the parent company. And they never made an active decision to invest in that spinoff. And so my favorite situation is a setup. I'll give you a perfect example. Like there's a company called vf corp they're an apparel company so they own the brands like north face and vans some other high profile good brands they spun off two brands primarily wrangler and lee so jeans denim denim denim brands into a new company called contour brands and at the time vf corp had like a 30 billion market cap vf corp had a 1 billion dollar market cap and so investors a lot of

investors have a mandate to only invest in large cap stocks, you know, some portfolio managers or index funds, if you're tracking the S&P 500, you want to own VF Corp because it's in the S&P 500, then you get this random little, you know, 1 billion market cap company with Wrangler and Lee brand and not as good growth prospects. You're just going to sell that thing pretty much automatically. And so that's like the thing that I'm generally looking for. I'm looking for a situation where it's actually a pretty good business and you can pick it up from people who are just selling indiscriminately. But yeah, I guess to answer your question specifically, a spinoff is just when a public company breaks up into two or more. It could be a single spinoff

or it could be a situation where the entire company breaks up into three different individual publicly traded companies. All right. And yeah, we'll link in the show notes to anyone interested in stocks, spinoffinvesting.com, just because that's a lot to spell in audio format. We'll have the link in the show notes, but let's talk IDT. This is a company I know people know conglomerates like, you know, there's Berkshire. And then if you move down the ladder, there's another popular one like Markel and even smaller ones, maybe like IAC, but IDT is really, really small and has a really good track record. How did you find them as a potential investment? Yeah, great question. So basically, obviously, as we just talked about,

I track spinoffs and IDT is a spinoff machine. So since 2009, they've spun off five different companies and we'll get into a little bit long, a little bit more, but it's, they're always spinning off micro-cap spinoffs. So it's kind of perfect. Usually IDT is a mid-cap. Sometimes it's like a, you know, one to 2 billion market cap company right now it's under a billion, but they're always spinning off these small little subsidiaries that they've incubated. And more often than not, they're pretty interesting little businesses. And so

I always have kept an eye, you know, for the past 10 years or so, I've known of IDT and kind of kept half an eye on it. I actually, the reason why I ended up, you know, buying it, recommending it last year was somebody actually just emailed me. Somebody from my list emailed me and said, hey, if you looked at IDT recently, it looks pretty interesting. And so I checked out the stock. And it looked extremely compelling. And it looked compelling for a lot of the same reasons that it still looks compelling. But essentially, IDT's business model, they have a more traditional communications business that's kind of in secular decline, but it generates a ton of free cash flow. And what IDT does is it uses that free cash flow to incubate and to start basically other little

startups. And so right now, IDT has three basically little businesses that are growing incredibly quickly that ultimately will be spun off or will be monetized in some way. And so that's what really hooked me in. I kind of kept an eye on it peripherally, but I took an updated look at the beginning of last year and looked incredibly compelling. And so that's why I immediately kind of jumped in and ended up buying some shares. Is there, I mean, you kind of answered some of the history parts there. Is there anything else that's important about the company's history or maybe about the company's structure that investors should be aware of? Yeah. So you guys had a good question,

or basically, as you guys mentioned, it's a conglomerate, right? So it does kind of a bunch of different things and we'll get into some of the different divisions, but usually conglomerates, I don't love investing in conglomerates because they're always going to trade it a discount to the sum of the parts. I've learned the hard way when I'm investing in companies that should break up or are going to break up, that usually the value isn't really unlocked or you think the conglomerate discount is going to shrink and it somehow just doesn't shrink. But the beautiful thing about IDT is you know that the assets are going to get monetized. They're either going to get spun off to you or they're going to get sold.

And then one other important thing, and that's why I'm comfortable owning this name, even though there's no spinoff has been announced. One was announced and then it was delayed just because it wasn't a great environment for for growth stocks, which which this spinoff would have been. So I guess that's one point that this is a conglomerate. And the reason why I'm comfortable owning it is because I just know that the value is going to be unlocked at some point. The other important thing to know is this company's been around for a while. So I think it was founded in 1990 and it was founded by a guy named Howard Jonas. And he's a really important person to understand. He owns still about 17% of the company. The original company went public in 1996. IDT stands for International Discount Telecommunications. And this gets into the legacy of the business. They were in the telecommunications business.

their initial business was really focused on what's called call callbacks and essentially what howard noticed was if you're in israel or in some other part of the world this is in the 90s and you're trying to call the u.s it's going to be way more expensive than if you were in the u.s trying to call israel or another company and so he kind of invented a service whereby if you're Israel, you call back to the US, and then the phone line immediately hangs up. But then that number, that number calls you back. And I don't fully understand all the technology behind it. But it basically was it enabled consumers to be able to cut costs dramatically, like by like 50 or 75%. So that was their initial business that they were in. And then they've, Howard's really

an entrepreneur. So he's incubated and spun off and sold a bunch of different businesses along the way. So there are four different, five different spinoffs that have happened since 2009. But even before 2009, you can see Howard being very creative and being a really good capital allocator. Just to give you one example. So he sold, this was in 2000, in the heyday of the telecom boom. He sold a business called Net2Phone to AT&T for about $1 billion and then used those proceeds to buy Spectrum, which he ended up spitting off about 12 or 13 years later. And that asset ended up getting... That asset ended up or that company ended up getting sold for $3 billion. And if you go back and look at his track record, he just has a good... Not all

the bets work out, but generally he has a very long-term vision and he's really good about seeing value and then putting the company's money where he sees value. And then ultimately, more often than not, that value is realized. So I'd say that's an important thing to consider that I feel like we're well aligned because we have Howard Jonas and his family who still own a bunch of shares and they're really calling the shots. Okay. And I guess I have one more question around kind of just spinoff structure. When IDT spins one of these businesses, it becomes its own publicly traded company. Does IDT just retain a percentage of that company while it's still public and then kind of sell it off periodically? Is that how it works? Yeah. So great question.

And it's all going to be different. So I'm going to give you an example. So Brookfield Asset Management, which is a company that I know you guys have covered, and I actually liked that episode a lot. And my conclusion is very similar to yours. It seems like a great company, but it's pretty complicated. It's hard to exactly get your hands around. But Brookville Asset Management is going to be spinning off their investment management business. And the whole theory is this is going to unlock value. And I think it probably will. But they're not going to spin off 100% of their asset management business. They're only going to spin off 25%. And then the remaining 75%, they're going to hang on to. And so that's an example of a situation where I

don't think that much value is going to be unlocked. The situations where value is unlocked is when it's like 100% spinoff, where if you own 100 shares of IDT on the day before the spinoff, you're going to own your pro rata portion of the spinoff from IDT, whether it's Raphael Pharma or Zedge, or whatever it is. And to answer your question, specifically, usually, I think almost always IDT has done like an 100% spinoff. And so post spinoff, IDT owns, owns none of the spinoff. I think that is most often what happens. But then, so Howard Jonas owns about 17%, last time i checked of of idt and so he's historically kept his pro rata share of the spinoffs and so when straight path communications the spectrum company was sold to verizon for three

billion dollars that was a spinoff of idt he made a lot of money because he still retained his his big stake in that company okay let's hit uh yeah that's a great overview of the history let's hit what they're doing today though there's three main business lines that they outline fintech cloud communications and traditional communications. I think since this is a conglomerate, I'm just going to open the floor to you, pick whatever order you want. Let's just go through those three segments. And I know there's some subdivisions in there as well. So what's important for you when you're looking at it as an investment? Perfect. Yeah. So maybe I'll go through each one individually, then I'll pause to see if there are any questions and move on to the next one.

So let's start with the fintech assets. So basically there are two fintech assets. The first is called national retail solutions it's known as nrs and essentially this is a point of sale terminal business so if you go to a coffee shop i don't know who provides the terminal but usually they have a terminal which says hey here's your order this look right you know tip me you know 20 and sign and and sign i think clover is is a big player there i think square is also a big player there. Basically, what NRS IDT subsidiary does is they provide similar terminals to bodegas and convenience stores. So think of a bodega as a place where you could, in a city, pretty urban environment, you could go in, get a snack, get a soda, get cigarettes, get tobacco, whatever you

need. And so this bodegas and convenience stores are typically pretty low-tech. They just have a basic cash register. But what NRS is providing them is basically a terminal that allows them to manage inventory, see what's selling, see what's not, see what isn't selling, process payments, run sales, share that data with the consumer package companies that want to know what's selling and what inventory is turning and what's the highest margin product that these bodegas are selling and also advertise. These terminals face the consumer, so there's some advertising space that NRS can take advantage of too. So basically, IDT and NRS kind of owns this market. They currently have, I think, about 15,000 terminals that have been installed. How big

is the market? IDT has shared that they think the bodega and convenience store market is about 110,000 stores. So maybe 10% to 15% penetrated right now, a lot of room to grow. But then even after they're penetrated in this convenience store bodega market, they can probably move on to some other low-tech stores, for instance, like liquor stores. Liquor stores, I don't think, have any payment terminals. And so I think there's a big opportunity here. This business is growing very rapidly. So the vast majority, I think like 98% of revenue is recurring. So very, very high quality, good business. In the last quarter, revenue grew 78% to 11, basically $11 million. On a recurring basis, the recurring revenue grew over 100%. So this is even in the kind of tougher macro

environment, this is a business that's growing incredibly well and has a very good outlook going forward so that's i'd say that's the first one and maybe i'll pause to see if you guys have any questions before we move on to the next one i do so uh in terms of generating revenues just are they just taking a percentage of each sale or do these convenience stores pay like a monthly price to have this uh software i guess yeah so that's a so good question so the convenience stores they're paying a software uh subscription so they're paying like a subscription monthly you know fee to get access to that terminal um but then also any revenue that the bodega store is generating uh nrs is taking a cut of that as well okay what about it seems i don't know it

almost seems too simple is it is is that a competitive market the terminals for convenience stores uh or is that just something that's historically been underserved yeah because It seems like Clover, sorry to cut in, it seems like it's a niche where Clover and Square and Toast are not going to want to serve that specific niche. And it kind of feels like a way to, I don't know, cut in there without getting much competition. Yeah, it basically, it's a really good question. And I'm not aware, I think there are larger competitors like Clover and Square that are just focused on bigger, bigger markets. It's like another one of the divisions of IDT Net-to-Pay, which we'll talk about, is also serving something very similar to some of the competitors, but they're focused just on a smaller market. So if you look at the bodega convenience store market, first of all, NRS's terminal is geared specifically to them, whereas the other competitors like Clover and Square aren't necessarily geared towards bodegas and convenience stores.

And I just even though it seems like a pretty big, a pretty big market, like $10 million of revenue per quarter right now seems pretty, pretty meaningful. I don't think it really would move the needle yet. So today, NRS has a huge first mover advantage, and there's really very limited competition in the space. And then I'd say the other thing that is the common thread between a lot of the IDT spinoffs is you're like, how did you come up with this? How did you come up with this idea to come up with a payment terminal business? This seems like kind of a random idea for like an IDT conglomerate. Like, why would you just start this from scratch? Like, how would this even even begin? And the answer is that the bodega stores sell like calling card plans and things into IDT's traditional communications business. So that's why IDT had a line of sight into this market.

And they realized that it's kind of an interesting opportunity that nobody's quite serving. So that's the reason that they saw the opportunity and they decided to really go after it. And then other fintech stuff. I know they have Boss Money. Is that the other big one? Yes, exactly. Yeah. So the other fintech asset is Boss Revolution money transfer app.

So this is pretty much very as simple as it sounds. The primary focus of this is immigrants. So that's a lot of IDT's customer base, especially on the traditional communications business. These are immigrants that have come to the United States and want to communicate with their families back home. They also want to transfer money back home. And so basically IDT has leveraged their relationships and really grown this business from scratch as well. This is a very nice grown business. The last quarter did about 15 million

of revenue. And again, it was growing about 100%. It's growing at about 50% as of the last quarter. So a very nice business as well. All right. And do you think that is an acquisition candidate? Because I know there's kind of the big... Well, there's other ones as well, but there's, you know, wise there's for Mitley that are the new ones. There's Western union. There's money gram. Do you think boss money as a smaller player could be a potential acquisition candidate that could get taken out at a pretty, pretty sizable multiple? Yeah, I think, I think definitely, I feel like there probably should be consolidation in the space. Like I personally use wise I've, I've had good, good success with wise, you know, I don't

know. Uh, I don't know if Venmo is necessarily in that market. I know I use Venmo, but yeah, I think it would make sense for somebody to come in and buy that asset, consolidate that market. I don't know, don't have any specific insight on timing for that. But the one thing that I will say is that Howard and the IDT board, they're kind of agnostic, like they've spun off five companies since 2009. But if they get a crazy price, they're very willing to sell. And so that is definitely a possibility that could happen. In terms of the most recent or the most likely spinoff, or I think something that's going to get monetized sooner rather than later is probably Net2Phone, which is their cloud communications business. But yeah, it wouldn't shock me at all to come in and hear that, you know, IDT has sold that business for like a pretty, pretty healthy multiple. This episode is brought to you by ourselves. If you're hearing this now, we know you're a Chit Chat Money listener, but if you want to get more than just our free episodes,

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if that's the second one you want to touch on. Of course, yeah. So this one basically is in the UCAS space. So they're kind of taking the communications and serving businesses and moving it from kind of like an on-premise phone system with big servers and lots of wires tucked away that an engineer has to manage to more of a cloud-based solution.

So basically, their software is a service solution. It helps businesses, and these are going to be small and medium-sized businesses, communicate, collaborate, and connect all over North America, but also all over Latin America as well. And so in terms of like other, you know, folks that are other companies that focus on this space, there are, you know, like think of like a RingCentral or a Vonage. The only difference here is that Net2Phone is focused on small and medium sized enterprises.

And they're also more focused on Latin America, whereas some of their competitors are not. In terms of what this business actually does. So there's some videos online that kind of show you a tutorial of what it does. But it basically integrates everything, all your communication needs, whether it's text, whether it's Slack, whether it is your phone sitting at your desk or your cell phone. It gives you an interface to basically manage and keep track of all your communication needs for your company. So that's essentially in a premise and in a nutshell what they do. Again, this business is growing very well. It's mainly recurring revenue.

the last quarter, they did about 14 million of revenue, which was about 42% growth. And then the vast majority of that is recurring. This was the business that was most likely to be spun off. And they actually announced at the beginning of last year that they were going to be spinning off this business by the middle of 2022. Obviously, that didn't happen. The reason why they stepped back is just because this is a company that is in growth mode. So it would have been capitalized probably with some cash from IDT, but it wouldn't necessarily be generating free cash flow from day one. And they just saw the multiples of all the high growth stocks that are growing really well, but not necessarily generating any free cash flow,

just plummet. The valuations just get cut in half or worse. And so they just figured, hey, this isn't the right time to spin off this business, which I agree with. I mean, probably just wouldn't have been a great time to let this let this company out and into into the wild and be its own publicly traded company do they have like a new time frame on the spin or are they just kind of saying like we're waiting for the market conditions to get better so no new time frame has been announced and they're basically saying exactly like you said that they're waiting for the market conditions to be better and again usually with the sum of the parts story which this definitely is i'm like oh man there's no reason to own this you don't

have to own this today wait till the spinoff is actually announced till you actually need to need to buy the stock and that actually might be the case i mean if you look at idt right now it is you know i'm not a huge chart guy or a huge momentum guy but the chart as most stocks do doesn't look particularly pretty you know below the 50 50 day and 200 day moving average so maybe Maybe if you don't own IDT and you want to get into this stock, maybe like kind of dollar cost to average into it. But the thing that gives me confidence is using really conservative valuation estimates or multiples.

I have a lot of conviction that IDT is worth a lot more, probably double what it's trading at today. And then the beautiful thing too, is that these businesses are just continuing to grow. So I'm using for my high growth asset valuations, I'm using like a three times revenue multiple, which is in line with where the comps trade. But as recently as last year in 2020, things were trading at like 5 or 10 or in some crazy cases, 20 times revenue. And so we're not using those crazy multiples. But at the same time, these are businesses that are growing at 50%, 100%. And so the value can grow over time. And we know that ultimately, we're going to see that

value, whether the business is just sold or spun up. So even though no time frame has been articulated in terms of when this transaction is going to take place, I still have conviction in the idea because I have a lot of confidence that it ultimately will happen, whether it's two or three years down the road. A question I guess I forgot to ask on the fintech side, are those businesses profitable? I know you mentioned the cloud communications kind of high growth mode. It sounds like fintech is as well. Are they generating any sort of EBITDA for the company? Yeah. So they don't disclose EBITDA on a, by like a division level, but the NRS business, I think they're, my understanding is that they're basically investing all of the revenue

and basically the EBITDA that, that, that would be coming out. They're reinvesting in marketing spend and getting on new clients and trying to open up new, new bodegas. The money transfer business. I don't know. I don't know if they've broken it out, but my guess is it's very profitable just because it's a pretty scalable business. They can probably utilize some of the technology that they're using in their communications business. And I know there's another company called Airtel Africa. It's focused on Africa, but they have a money transfer subsidiary that's like, has like 40 or 50% EBITDA margins. And so I think my best guess is that this would be very, that that that that that money transfer business would be would be very profitable yeah it's hard

the margins of the money transfer business internationally it's it's hard not to be profitable sometimes but let's say traditional communications what should investors know about this segment oh yeah great so yeah traditional communications so as we we talked about earlier so they basically came to be in the 1990s and even at that time even by the late 1990s traditional communications the the advent of the internet it didn't look like the outlook for this business was was very good and so it's a business that has always been perceived and is in in secular decline but essentially this is a business again their primary focus is on serving immigrants that have come to the country that want to call back the countries that their uh family families

and friends live in and so the the the biggest um you know primarily idt used to sell like calling cards um now they call they they sell more like uh you know calling plans um but it's essentially enables a big big uh driver the revenue i think over over over 30 is from basically boss revolution calling, which is just simply put long distance calling plans, uh, primarily market marketed to immigrants. The big question here, the obvious question here is there's a ton of competition in the space. You know, you, why would you pay for, why would you pay for calling plan when you can just get on, you know, WhatsApp and talk to people for free. And it's a point that IDT completely will accept and, and, and say that, you know, that's, that's definitely a valid point.

The one area of pushback is there still isn't great internet connectivity in a lot of parts of the country where IDTs, customers, are trying to call. But eventually, the internet is going to go everywhere. And so that's going to definitely be a little bit of a headwind. Another big driver of revenue, especially during the pandemic, was what's called mobile top-up revenue. And it basically allowed people, say you have a calling plan, and you're somewhere in Africa, and you want to transition or transfer your minutes or your data to somebody in another country, IDT will basically facilitate that. And then they'll just basically take a cut of that revenue that they generate. And so that represents, you know, 30 to 40% of revenue as well. And then the other business is carrier service revenue, which is IDT is a traffic manager for text invoice messaging for telecoms on a global basis. And that's a little bit of a smaller chunk of revenue. But that that makes up the balance, I think more like 20 to 30 percent. What sort of revenue or earnings declines are you modeling out if you're kind of I don't know what precision you're using for that.

But if so, can you share? Yeah, so I think of the the telecom business as kind of a flat to down 5% per year per year business. It generates a lot of free cash flow, I think in the most recent quarter, which was a down quarter generated, I think 19.1 million of EBITDA. And I think there's about a million or so of CapEx. So it's about 18 million, you know, free cash flow. So this is a business that it's definitely a shrinking ice cube, but it's lasted a lot longer than people have anticipated. And then there's also businesses that tend to get incubated or spun out of this traditional business, like for instance, the NRS business, you know, arguably came from this traditional business. And then the also the money revolution business or the money transfer business

also came out of this business. And there could be, that's the thing about IDT, they're always incubating new businesses. And so they could even be incubating new businesses that they just haven't shared yet that are basically coming out of this traditional business. But I think of it as kind of like a down 5%, down 10% a year business. Maybe there's a big boom during the pandemic. There's kind of a big boom. And so it's down, I think, 17% in the most recent quarter, but that was just because there was such a big boom during the pandemic. Strange comps. Yeah. Ryan, do you want to hit management since he kind of had questions before of those. Yeah, I think that covers the pretty much all of the business. You mentioned Howard

Jonas. What are your thoughts overall on the management team? And then you mentioned their ownership. And so how critical is the management team and Howard Jonas to this investment? I think it's super critical. So I mean, like I said, I'm a little wary of some of the part stories. But when you have somebody that first of all, especially when you're investing, I mean, Always, I want to invest in companies that the management team owns a good stake in the business, especially in the micro-cap space. Granted, this isn't quite a micro-cap, but especially when you go down the market cap spectrum, you want to invest in a company where your interests are aligned. They don't just own the company to get compensation. They don't think of it as a job.

They think of it as their way to increase their wealth. And so first of all, you have, I looked at the most recent proxy and I think between Howard Jonas and he's got a bunch of kids. So if you look at the, the, the proxy, it's, it's like, it's all, it's all Jonas, Jonas family. So he's got a ton of kids and they all own shares. I think one of his sons is CEO. One of the sons is CFO. And a lot of the other ones are on the board, which in some ways you're like, that's, that doesn't smell right. This is a guy that's just putting his family on the board, but you can just look at his

track record. And at the end of the day, if there's any big cap allocation decision that's being made, you know, you know that Howard is going to win heavily and he does continue to own the majority of the stock there. And so in terms of the importance of the management team and the culture to the success of this investment, I think it's absolutely critical. I don't think I would be interested in this if this was a company that hadn't in the past spun off its assets on such a regular basis. All right, let's talk. Let's put some numbers behind this. How are you valuing this coming today? Can we use some of the parts as you've kind of talked about the positives and downsides of using that as we sit at a market cap, just for reference today at approximately $650 million?

dollars yes yeah so the first thing i'll start with i think some of the parts you have to look at it on some of the parts basis because whether it's the right way or not i mean that's the way that i'm looking at it because i do believe that ultimately the assets are going to get spun out and so i think that's actually in this case an appropriate way to to think about it um so first of all i think of the legacy telecommunications business so if you just take the free cash flow that was generated in the last quarter, and you multiply it by four to annualize it. The business is generating about $72 million of free cash flow on a run rate basis. I'm assuming an eight times free cash flow multiple. So that gets me to about a $550 million of value

for the legacy telecommunications business. Eight times free cash flow is arguably you know pretty cheap um you know this business is in you know secular decline the business doesn't have any debt it's well capitalized so i think it's a i think it's a reasonable a reasonable multiple and then i basically assumed revenue multiples because the remaining subsidiaries the fast growing subsidiaries are not profitable or not very profitable right now they're definitely not at their, their mature, uh, profitability levels. So just to, to start with NRS, this is the point of sale payment terminal for bodegas. They're doing about, they're growing at about 78%. They're doing about 46 million of revenue on an annualized basis. They're, uh, you know,

best comps you can look at a clover or a square it's amazing but uh or or like a like a toast um these companies are trading at about it's amazing how far they've come down but they're trading at about three times revenue right now so that's what i've assumed for this business despite the fact that it's growing a lot faster than those other businesses so that just gets you about 137 million of value. I think that's really conservative. So just to put that in perspective. So AltaFox is an up and coming hedge fund. They have a ridiculous track record generated like 50% annualized return since inception. They actually did a minority investment. They own IDT last disclosure. And they also did a minority investment into NRS. And their minority investment

valued NRS at $400 million, so roughly 3x what I'm assuming. So I think my estimate is definitely pretty conservative. The net to phone division, the comps are like a Ring Central or Vonage or Lock Me In. Those traded about 3.2 times revenue currently, down from 8 to 10 times revenue last year and before. So if you just multiply that times annualized revenue, you get about $200 million of value for net to phone. The boss money transfer business, I'm assuming at three times revenue multiple, that gets me a little bit under $200 million of additional value for that asset. You add it all up and you get about $1.1 billion of value for the assets. And then like I mentioned before, they have no cash. So they have no debt. They do have about 120 million of cash. And so

you add it all up, you get to a $1.2 billion fair value divided by shares outstanding, and you get to a current share price or fair share price of about $46, which is above, I think the current stock price is trading around $24. And then the thing that I feel comfortable about is I think the revenue multiples that I'm using are arguably pretty conservative. I think they're fair given where growth assets are trading. But I think eventually, people are going to realize that growth companies are usually trading high valuations for a reason. And I think there's a good probability that eventually the valuations will reflate. And then the other great thing is that the growth, the revenue growth, even if you assume the same multiples going forward,

all these businesses, these subsidiaries that are ultimately going to get monetized are growing between 50% and 100%. And so that's going to help value continue to accrete over time. All right. Yeah. And just a note for the listeners, according to Whale Wisdom,

which is an aggregator site, AltaFox is the largest outside shareholder right now of IDT. So they still hold that stake. I know people would be interested in reading their presentation as well. But yeah, Ryan, you have the last question here,

the premortem. Yeah, I think we've covered, I guess, the upside fairly well. What could go wrong investing in IDT today? Yeah, so great question. And we also got this question on Twitter. So I think it's one that's definitely important. And I think it's on investors' minds. And before I dive into it, I don't know that I necessarily have any great insight here into how this is going to play out. But essentially, there's a lawsuit against IDT. So Straight Path, which was the spectrum

assets that IDT spun off. Those spectrum assets, it got spun off as a microcap, and then ultimately it got sold to Verizon for $3.1 billion. So spectrum is scarce. There's a finite supply of spectrum. And for telecom companies and wireless companies wanting to roll out 4G and then 5G, you need spectrum to do that. So there was a bidding war for this asset. It ended up being sold for about $3.1 billion, I think, to Verizon. But prior to the sale, IDT was sued by the FCC for basically squatting on the spectrum. So if you own spectrum, you have to use it for some reason. And as part of the settlement with the FCC, the IDT agreed, their penalty was first, we're going to sell it. And second of all, 20% of the proceeds from the sales of Straight Path

are going to go to FCC, the federal, I think, or maybe the FTC, Federal Trade Commission. And so that was the backdrop to the sales process. Now, what happened was, I think IDT realized that $3 billion is a lot of money. IDT had previously said, we'll cover the fine to the FCC. But once the bidding war really got going, 20% of $3 billion, it's like $600 million. That's a lot of money for a micro cap at the time IDT to come up with. And so IDT basically negotiated an agreement, an indemnity agreement with Straight Path, such that the proceeds or the fine to the FCC would be paid by the proceeds from the sales process. So instead of the straight path communication shareholders getting the full

$3 billion, they would only get $2.4 billion and the remaining proceeds would go to settle the lawsuit or the fine. So some straight path communication shareholders said, hey, the indemnity agreement that was negotiated between IDT and Straypath wasn't an arm's length negotiation. Howard Hughes or Howard Jones has a controlling stake based in both companies. This is the argument. He strong-armed the directors from Straypath Communications to accept this indemnity agreement. That wasn't valid. That shouldn't have come to be. And IDT should have been responsible for paying all of that. And so that's a little bit of the backdrop. There's been an ongoing lawsuit for a very long time. And it's actually, you know,

still ongoing, whereby the defendant in IDT is arguing, hey, no, it wasn't arm's length negotiation, we paid them for the indemnity agreement. And then the shareholders are saying, Oh, no, we're owed more money. And so that is kind of the elephant in the room, I guess, in terms of, you know, what I think could potentially go wrong. I mean, the way that I think about it, this lawsuit has been going on for a very long time. I think usually most lawsuits are settled. the uh the the suing shareholders probably want 600 million dollars i don't think that is you so that that's kind of how i think about it from like a worst case perspective so i value the company right now you know i call it 1.2 billion dollars i think that value is going to grow over time but a worst case scenario is is that's the outcome and that would be that would be a horrible outcome. But even if you assume that outcome, I think the stock is worth basically what it's

trading at today. And I think over time, the fair value is going to grow. I think what ultimately happens is that they come to some sort of settlement where I don't know what the number is. Maybe it's $10 million. Maybe it's $25 million. Maybe it's $100 million. Maybe it's $200 million. But I think ultimately, there is probably a middle ground which can be viewed as a win for both the suing shareholders, as well as for IDT to just kind of put this lawsuit behind them. But I would say that's the one thing that I would say, if there was a really bad outcome for that case, I think that would be a reasonable pre-mortem. I have no great insight. I've tried to read some of the documents in terms of the lawsuit and try to put my legal hat on. But to

be honest, I just don't have any great insight there. And so that's a risk that I'm aware of that I think could be potentially meaningful. I'm comfortable with investing despite this risk, just because I think the fair value is so much higher, even factoring in that kind of worst case scenario. All right. Makes sense. I think that's all the questions we have, Brett, do you have any more? All right. Well, that is going to do it for listeners that want to keep up with you. Obviously, StockSpinOffInvesting.com is one place. Are there any other ways? I'm on Twitter too, at StockSpinOffs with two S's. If you search Rich High on Twitter, I think I should pop up. But no, that's all. I really appreciate you guys having me on. I'm a

big fan of your show. And so, really appreciate what you guys are doing. All right. We'll have to have you back on in the future. Yeah. For another potential spinoff that you're willing to share publicly. Yeah. Keep me in mind if there's any that you guys are interested in, And I'd love to, I follow them all. So yeah, let me know. All right, we'll do. I should probably sign off here. Brett and I are not financial advisors.

Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you guys all for listening. Thank you, Rich, for coming on the show again. And we will see you guys next time.