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How one CFO helped execute a turnaround that took his company from major losses to profitability in just two years.
Kate O'Sullivan, CFO.com | US
February 8, 2011
When Bill Pereira became CFO of IDT in January 2009, the diversified holding company was hemorrhaging money. New Jersey-based IDT had lost $224 million in 2008, and its stock, which had sunk to an all-time low of 72 cents in December, was hovering around $1. Soon after Pereira took over finance, the Internal Revenue Service notified IDT that it owed some $100 million in taxes related to an acquisition. "There was a lot going on at the company," he says in something of an understatement.
Today, Pereira can afford to relax a little. For 2010 IDT reported sales of $1.4 billion and net income of $20 million — a $244 million swing from its 2008 numbers. The company has paid its debt to the IRS, and its shares now trade in the $20 range. How did IDT turn itself around so quickly, and in the middle of a recession to boot?
For starters, IDT founder and CEO Howard Jonas appointed a new management team, which included Pereira. The team immediately began drawing up plans for a turnaround. "There were a few major things that we focused on in terms of getting the company back on solid footing," says Pereira. "Figure out the core businesses, fix those businesses, get rid of everything else, and reduce the cost structure as much as possible."
Here, in more detail, were the critical steps in IDT's turnaround, according to the CFO:
1. Get focused. "We had to decide what we wanted to be," says Pereira. IDT had started out as a telecommunications provider, but over the years it had expanded into a wide range of unrelated businesses, including a debt-collection business, a food-distribution company, and a radio station. "We had to identify the core businesses where we had expertise and where we thought we could grow and succeed," he says.
The management team decided to stick close to IDT's roots and focus on the telecom business, which generated strong cash flow and accounted for 85% of revenue. It also retained the company's energy-services business, an electricity and gas reseller. The remaining dozen businesses were swiftly jettisoned.
"Once we decided on our core businesses, everything else was either sold, spun off to investors, spun off to management, or shut down," says Pereira. That move alone improved the bottom line dramatically, as the divested businesses had generated $60 million in losses in 2008.
2. Reduce overhead. IDT's managers then focused on reducing costs at the businesses they kept. "We knew we had to make the company much leaner in order to compete," says Pereira. The CFO pulled just about every lever available to lower the company's cost structure — making layoffs, reducing salaries and benefits, eliminating business travel, and renegotiating fees with professional-service providers such as auditors and outside legal advisers.
The process was grueling, yet the fact that the country was in a deep recession proved helpful, says Pereira. "It was easier to approach vendors and tell them we could no longer afford to deal with them," he says. "Everyone was looking to hold on to whatever business they could, so we were able to negotiate better deals."
The company also modernized its telecom network, moving to an Internet protocol platform, and reduced its overall footprint by closing some call centers, leading to substantial savings. IDT now has selling, general, and administrative costs of $230 million, compared with $500 million in 2008.
3. Strengthen the core. In the telecom business, IDT bought out its distribution partner. The move did not reduce costs, but "it eventually made us more competitive by giving us more control over our business," says Pereira. "We control the pricing and the products we offer."
On the energy side, IDT ran a very efficient operation, says the CFO. But the business required a lot of capital, as suppliers demanded that the company post large amounts of collateral before they would allow it to resell their products. "At any given time, we had $50 million or $60 million in restricted cash hung up on the balance sheet to support that business," says Pereira. With cash at a premium (in part because of the need to make installment payments to the IRS), management needed an alternative. By entering into an exclusive agreement with BP, which made the energy giant IDT's sole supplier, the company eliminated the collateral requirement and freed up cash on its balance sheet.
While Pereira played a major role in reversing IDT's fortunes, he says it's unlikely he will hang out a shingle as a turnaround CFO, offering to revive other struggling companies. "I kind of like what we're doing now," he says. "It's rewarding to sit back and see that we not only turned the company around but also put it in a position where it can grow from here. I'm much happier seeing that what we did is working out."