Idt Corporation Business Information, Profile, and History

History of Idt Corporation

IDT Corporation is a leading provider of long-distance telephone access, Internet access, and global Internet telephony services. Its telecommunications activities include wholesale carrier services and prepaid calling cards. Launched as International Discount Telecommunications Corporation, the company pioneered international callback telephone service with a technology allowing anyone around the world to bypass the high cost of placing international calls from countries outside the United States.

International Telephone Callback Service: 1990-93

A native of New York City's borough of the Bronx, Howard Jonas graduated from Harvard in 1978. During the next decade he built a small brochure-distributing and publishing business into an enterprise with revenue exceeding $1 million a year, running it from a converted Bronx funeral home that he shared with his father's insurance brokerage. Shocked by the massive phone bills incurred by staffers who opened a company sales office in Israel, Jonas began thinking of ways to cut this cost of business. After a few months, and with the help of a computer engineer, he had, at an expense of $1,200, a working automatic-dialing device.

In 1990 Jonas entered the telecommunications industry with International Discount Telecommunications (IDT) Corporation, which introduced international call-reorganization service. This service capitalized on the often-prohibitive rates charged for long-distance telephone calls in certain highly regulated international markets. Subscribers calling a designated number from a foreign carrier's standard international calling service contacted an IDT node in Hackensack, New Jersey, transmitting a dial tone and hanging up after the first ring. The node was equipped with custom-designed call processors programmed to recognize such a call, routing it into the U.S. public switched telephone network and thereby enabling the client to place the call through the usually cheaper international calling service of the U.S. carrier chosen for this purpose.

For calls to the United States from such countries as Brazil, Italy, Spain, and the Soviet Union, the customer typically saved half the cost--sometimes more--by having these calls reoriginated in the United States. IDT billed its customers at rates high enough to cover its operational costs and make a profit. (Before long, however, the company began leasing its processors so that clients could avoid this markup.) Because touch-tone phones were not readily available abroad, subscribers had to use hand-held dialers to generate the dual-tone multifrequency tones needed to enter access codes and telephone numbers into IDT's call processors. As part of the $250-a-month service, International Discount Telecommunications gave such callers a small electronic box with an automatic dialer and a device to coordinate conference calls. Each box could handle about 100 calls.

The company's first customer was NBC, which needed to be in frequent contact with a three-man team in Barcelona, Spain, preparing for the 1992 Summer Olympic Games. By the end of 1991 the company had 150 customers, some of them Fortune 500 firms, such as PepsiCo, Inc. Few, if any, were foreign enterprises, because they were fearful of angering their national telephone companies--most of them government-owned monopolies. France Telecom threatened legal action, for example, before reducing its own rates so much that Jonas pulled IDT out of the country.

In 1992 International Discount Telecommunications relocated its headquarters in the windowless, two-story, cement-block Hackensack building where it had placed the call receptors. Jonas sold 14 percent of IDT that year to an investor group for $1.4 million and bought new equipment, also hiring a couple of Bell Laboratories engineers to improve the technology. By the spring of 1993 Jonas claimed that his company was taking in $400,000 a month in revenue from more than 1,000 customers in about 60 countries.

Internet and Other Services: 1993-98

International Discount Telecommunications used the expertise derived from, and the calling volume generated by, its call-reorigination business to enter the domestic long-distance business in late 1993 by reselling the long-distance services of other carriers to its domestic customers. As a value-added service for these customers, the company began offering Internet access in early 1994. IDT also introduced an international fax service, offering a new, brand-name machine to any customer who would commit to sending $500 worth of such calls over the next two years and promising free e-mail and Internet access as well. Some 7,000 small businesses had signed up by midyear. The company also got a boost when the Federal Communications Commission denied AT & T Corp.'s 1992 petition to ban callback services.

In May 1994 International Discount Telecommunications, in collaboration with the London-based Index on Censorship and other human rights groups, began publishing articles by political dissidents on the Internet. Its 'Digital Freedom Network' web site offered a variety of material banned by various governments. The company's free-access policy extended to pornography--which raised some eyebrows, since Jonas was an Orthodox Jew and father of six. While other Internet providers were shutting down access to some sites, radio host Barry Farber, as part of a $10 million-a-year ad campaign, was promoting IDT's $15.95-a-month ($29.95 with images as well as text), no-time-limit service with the words, 'I access all Internet services. I said all Internet services--get that naughty smirk off your face.' By early 1996 IDT, seeking to survive the inevitable shakeout among the 1,350 or so U.S. Internet-access providers, had 65,000 subscribers.

International Discount Telecommunications had revenue of $3.17 million in fiscal 1994 (the year ended July 31, 1994), about half from domestic long-distance service. The company lost $289,000 but had no long-term debt. Revenue more than tripled in fiscal 1995, to $10.8 million, but rising expenses resulted in a loss of $2.15 million. Shortly after reincorporating as IDT Corporation, the company went public in February 1996, taking in $42.78 million by selling about 20 percent of its common stock at $10 a share. Jonas retained a 54 percent stake in the company. Revenue shot up fivefold in fiscal 1996, reaching $57.69 million, of which Internet, rather than telephone, service accounted for about 40 percent. IDT's costs rose even more rapidly, however, resulting in a net loss of $15.76 million for the fiscal year.

Under strain from its rapid expansion, IDT found itself flooded with mounting complaints from customers concerning technical problems, overbilling, and false or misleading advertising claims. At least some of the technical problems stemmed from IDT having become a national Internet provider without establishing a national infrastructure, instead contracting with more than 200 smaller service providers and thereby running the risk of incompatibility between carriers. In early 1997 IDT agreed to offer refunds to unhappy customers and to refrain from misleading and false statements in its advertising. (The company had, for example, neglected to inform Internet subscribers that they had to sign on for long-distance telephone as well as Internet service to qualify for the $15.95 rate.)

IDT also agreed to pay $100,000 to settle claims that it was using unlicensed software. At this point the company had 150,000 Internet subscribers but was losing money on the service because of the growing cost of seeking new customers. It began deemphasizing its Internet-access service, and its revenue from this segment of its business peaked at $32.9 million in fiscal 1997.

International Discount Telecommunications was offering Internet access to some 10,000 corporate clients in 80 countries in late 1995, when it announced that international computer users could soon use its links to make telephone calls to the United States or Great Britain over the Internet for the price of local calls.

In August 1996 the company introduced PC2Phone, which it called the first commercial telephone service to connect calls between personal computers and telephones over the Internet. There were about 350,000 customers for that service in late 1997, when IDT introduced Net2Phone Direct, which enabled users to make both international and domestic calls over the Internet using standard telephones. The company began marketing prepaid calling cards in January 1997.

IDT's revenues doubled in fiscal 1997, to $135.19 million, and its loss decreased to $3.84 million. Revenue soared to $335.38 million in fiscal 1998, during which the company lost $6.4 million. At the end of that fiscal year IDT was selling prepaid debit and rechargeable calling cards providing access to more than 230 countries and territories. The cards were being marketed to retail outlets throughout the United States through Union Telecard Alliance, LLC, a joint venture company in which IDT owned 51 percent of the equity. Customers were primarily members of ethnic communities in the United States who made calls to specific countries where IDT had favorable agreements. The cards also were being marketed to similar customers in Great Britain, France, and The Netherlands.

IDT sold another 4.6 million shares of stock to the public in January 1998 at $24.88 a share. It spun off Net2Phone as a separate business in August 1999, completing an initial public offering of the stock that yielded $85.3 million in net proceeds to the parent company, which retained 56 percent of the shares. In March 2000 Net2Phone Inc. had a market value of $2.6 billion&mdashout twice that of IDT itself. That month Liberty Media Group purchased almost ten percent of IDT's common stock for about $130 million, or $34.50 a share.

IDT in 1999

IDT earned its first profit in fiscal 1999, when it had net income of $2.92 million on revenue of $732.18 million--more than double the previous year's sum. Of this total, telecommunications accounted for 94 percent, Net2Phone for four percent, and Internet service for two percent. International sales accounted for 13 percent of revenue (compared with a high of 25 percent in fiscal 1997). The company had long-term debt of $112.97 million at the end of the fiscal year. Jonas held 32.2 percent of the stock in December 1999. IDT had offices in London, Paris, Mexico City, and Rotterdam, The Netherlands. Its headquarters remained in Hackensack.

IDT was delivering its telecommunications service over a network of 70 switches in the United States and Europe, and it owned and leased capacity on 16 undersea fiber-optic cables. It was obtaining additional transmission capacity from other carriers. The company also was operating a domestic Internet dial-up network consisting of multiple leased lines.

By acting as a 'carrier's carrier,' IDT was providing wholesale carrier service to about 125 domestic and international customers. Wholesale carrier sales represented 39.5 percent of the company's total consolidated revenues in fiscal 1999. Sales of prepaid calling cards--some 50 million in the fiscal year--generated even more money, amounting to 49.7 percent of total consolidated revenues. IDT's rechargeable cards, distributed primarily through in-flight magazines, allowed users to place calls from 43 countries through international toll free services.

IDT was also still offering international retail services to clients outside the United States, mainly through call reorigination. In 1999 it launched DebitalK, its first prepaid callback phone card. The company had more than 50,000 call-reorganization customers in 170 countries during the fiscal year. Certain long-distance services were being marketed directly to retail customers in the United States as a value-added bundled service with dial-up Internet access for $15.95 a month plus a minimum of long-distance billings of $40 a month. In 1999 IDT offered a plan with five-cent-a-minute calls for a $3.95 monthly fee that it believed made it the lowest-cost long-distance domestic provider in the United States.

IDT had three primary Internet-access and online services: dial-up access for individuals and businesses, direct-connect dedicated Internet services for corporate customers, and Genie online entertainment and information services. A basic dial-up Internet service was being offered for $19.95 a month and a premium service for $29.95 a month, both fully graphical accounts that included e-mail. An e-mail account only was available at $7.95 a month. Bundled customers who maintained monthly telephone billings of at least $150 a month could get basic Internet access for free. Internet customers also could receive e-mail by telephone, using text-to-speech technology. There were about 65,000 dial-up retail customers and nearly 500 large and medium businesses using IDT Internet access.

Principal Subsidiaries: Genie Interactive Inc.; IDT America, Corp.; IDT Debit Card Limited; IDT Europe B.V.; IDT Global Ltd.; IDT International Corp.; IDT Internet Services, Inc.; InterExchange, Inc.; Internet Online Services, Inc.; Media Response, Inc.; Net2Phone, Inc. (56%); Nuestra Voz Direct Inc.; Rock Enterprises, Inc.; Union Telecard Alliance, LLC (51%); Yovelle Renaissance Corporation.

Principal Competitors: Pacific Gateway Exchange, Inc.; Star Telecommunications Inc.; Telegroup Inc.

Chronology

• Key Dates:

• 1990: Howard Jonas founds International Discount Telecommunications as an overseas callback service.
• 1993: IDT becomes a wholesale carrier for domestic customers.
• 1994: The company begins offering dial-up Internet access.
• 1995: Company is renamed IDT Corporation.
• 1996: IDT goes public; PC2Phone connects PCs and telephones over the Internet.
• 1997: IDT's Net2Phone enables calls to be made over the Internet using standard telephones.
• 1999: IDT earns its first annual profit.