Ziff Davis Inc (ZD) 2003 Q2 法說會逐字稿

Good evening, and welcome to the j2 Global Communications second quarter earnings conference call. (CALLER INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Chief Financial Officer, Scott Turicchi. Sir, the floor is yours.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the j2 Global investor conference call for the second quarter of 2003. As the operator just mentioned, I'm Scott Turicchi, our Chief Financial Officer. Joining me today is Scott Jarus, our President, and Greg Kalvin, our Chief Accounting Officer, who will be available for questions that anyone may have regarding any of our financial statements. We will be discussing the second quarter financial results for 2003. In addition, we will review some of the operational highlights during the past quarter, the progress of our corporate sales growth, the recent price change and its implementation in our Web channel new sign ups, the continuing expansion of our global network, some key operating metrics and finally, guidance for Q3 of 2003 and for the year 2003.

There is a Web cast available at our Web site at www.j2Global.com. We will not go through this presentation in its entirety today. However, the full copy is available there, and you are free to download it and to go through it. As for our press release, you can receive a copy of that by going to www.PRnewswire.com.

After completing the formal presentation, we will be conducting a question and answer session. The operator will instruct you at that time regarding the procedures for asking a question. In addition, at anytime, you may e-mail questions to investor@j2.com.

Before we begin our remarks, allow me to read the Safe Harbor language. As you know, this call and the Web cast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we have included as part of the slide show for the Web cast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements.

Now, I will briefly give you the highlights from a financial perspective of the second quarter. Revenue for the second quarter was $17 million; that compares to 11.3 million in the second quarter of 2002, a 51 percent increase, and a 12 percent increase from the revenue in Q1 of 2003. Gross profit for the quarter was 13.8 million, resulting in an 80.9 percent gross margin, and that compares to 8.6 million of gross profit, or a 76.1 percent gross margin for the second quarter of 2002. By the way, that also compares to an 80.2 percent gross margin from Q1 of 2003. This gross margin is within the range of our expectations.

Net earnings for the Company were 5.9 million for the second quarter compared with net earnings of 3.3 million for the second quarter of 2002, a 79 percent increase. On a per-share basis, our fully diluted earnings were 47 cents a share in the most recently completed quarter compared to 28 cents per share in the year ago quarter. The maximum possible numbers of shares that can be outstanding for our company is approximately 13 million.

You will notice from our balance sheet that in this quarter, we have taken some of the incremental cash and put it in short-term investments. So you need to look at both our cash balances, as well as the short-term portion. Those combined were 46.5 million as of June 30th. That is an increase of approximately of 6 million from the end of the first quarter of 2003.

At this time, I will now turn the presentation over Scott Jarus who will hit some of the highlights that can be found in our IR presentation.

Thank you, very much, Scott. I want to preface this by saying those who are on the call and are listening for the first time, or whom are unfamiliar with the Company and the business we are in, I would refer you to the presentation, particularly Slides 4 through 6, which give a fairly high level but concise definition of what we do and a picture of what we do.

What I'm going to do now is fast forward to Slide Number 7, titled "unique assets," to go through some of the changes that have occurred over the past quarter and talk about some of the successes we have had.

For the quarter just ended, we are now up to 5.2 million subscribed telephone numbers, which, as you'll recall from previous calls, we also refer to as DIDs, direct inward dial numbers. Our global network extends now to over 1000 cities, in 19 countries on five continents. In addition to the 5.2 million subscribed phone numbers or DIDs, we have another 1.3 million for a total of 6.5 million plus unique telephone numbers, worldwide in our inventory. So we have a significant amount of room to grow our customer base.

Our financial position was outlined by Scott. Let me just review it one more time. Our Q2 revenue was 17 million; our Q2 earnings, 5.9 million; our financial growth over the quarter -- this is our 25th consecutive quarter of revenue growth; our six consecutive quarter of positive earnings; as of the end of the quarter, we had $46.5 million in cash and short-term investments, and that number is growing; and we remain virtually debt-free.

I also want to highlight the fact that part of our expertise is the migration of customers from our free to our pay to our corporate, and in some cases, from our free directly to our corporate. That is particularly important to remember, because, for this quarter, it was also a key driver in the growth of our revenue.

I am now going to skip to Slide Number 9, just briefly, to hit on, in addition to our license services channel which occurred during the quarter, as was previously mentioned, in previous quarters, we own a software package -- a documents management software package, called PaperMaster Pro, which was last published in full release in 1998, and was updated by us earlier this year to what we call PaperMaster Pro, the updated version. This past month, we introduced PaperMaster Pro as a completely new version of our document management software. We are seeing good results from that to date, but it has been a short period of time since it was commercially released. Those who are interested in finding more paper information PaperMaster Pro are encouraged to go to its Web site at www.PaperMasterPro.com.

I am now going to skip to Slide Number 11, and I would focus you on the next two slides, Slide 11 and 12 because there is some interesting and new information on these two sides. In slide Number 11, as in the past, I would ask you to pay particular attention to the far right column, the bar listed as Q2, 6/30/2003, and working your way up from the bottom to the top. We had, as I mentioned previously, 5.2 million total active telephone numbers. Of that 5.2 million, 4.8 million of them were free, which is a substantial increase over the previous quarter's assigned free inventory -- free usage base. Of the remaining 348,988 were our paid subscribed phone numbers. That was made up of a little over 293,000 in our Web channel, and a little less than 56,000 in our corporate channel. There is growth in all channels, particularly in our free base, which, as you will recall from previous discussions, is one of the sources we used to derive our paid subscriber base, both in our Web channel and in our corporate channel.

On slide number 12, aside from the metrics we typically provided, we've actually provided two new metrics which I will be talking about. One is a cancellation rate for our Web -- our paid Web channel, and the second is a page index for our corporate. Let me walk you through the existing metrics, here, and then we will deal with those individually.

The number of deployed telephone numbers, as I mentioned above, on our paid Web channel rose to 293,104 for the quarter. That is a net increase of 36,862 -- a very good month, as you can see.

The ARPU for the month was at $13.44. I would point out the fact that while it appears in the metrics slide that the ARPU dropped on a quarter-to-quarter basis, it is important to remember that because of the cancellation rate, which you are seeing on the next slide and the decline of that cancellation rate, we have increased the deferral of activation fees due to the improvement and the expected age of our customers, which is a result of the declining cancellation rate. We evaluate the age of our customer base for the purposes of this deferral of the activation fee every six months; so the previous deferral of activation calculation and the age of the customer was done in Q4 of '02, and is now done in Q3 -- Q2 of '03, resulting in this decline in the ARPU because of the increased deferral of the activation fee for each one of the new accounts.

The new statistic that we have and the new metric is the cancellation rate for our Web paids (ph). As you can see, we have made tremendous progress in continuing to reduce the cancellation rate, which, four quarters ago, was 4.3 percent, then to 4.9, and then declining to 3.7, 3.5, and this most recent quarter at 2.9 percent.

I want to describe what this cancellation rate means. It is an explanation which is put in number two of this slide. However, let me elaborate on this a little bit. We count an customers in our cancellation rate who have been with us with greater than four months of continuous service. We exclude customers who have less than four months of continuous service because of the nature of our credit card business, and because of the way customers come to us. As a credit card customer, many customers do not fully appreciate what they have bought and see the charges until their credit card statement appears and they go to pay that credit card bill, which in many cases, can be three to four months in time. So we want to make sure that those customers fully realize their purchase, and have accepted their purchase and have become a continuous customer.

In addition to that, we have customers who come to us through certain promotions which give them a selected number of months of free service or certain advantages in the early months of their service, which then expire in those early months. We want to make sure that we have burned off those free promotions of those early promotions, so they are, again, fully baked in as customers who are choosing to remain with the company and using the service after the promotions have occurred -- have baked off, and they have seen the pricing on their credit card statements. So therefore, we use the four months of continuous service.

In addition, we exclude from this four months of continuous service any administrative cancellations and reactivation which may occur within the base. As an example, we have customers whose credit cards may, for a short period of time, decline when we go to charge them, because they have moved, the address has changed, have expired. But, within the course of the month, those credit cards are reactivated, or new credit cards are given to us. And then their telephone numbers are re-established within our base. We exclude those, as well, because the customer was only out of service for a very short period of time, and it was an unintentional disconnection of service based upon a credit card issue. So we have eliminated those as well.

And lastly, we have eliminated any telephone numbers in the base which are used internally for testing, development or which are employee-assigned telephone numbers.

The cancellation rate is something we will be giving out on a quarter-by-quarter basis. This is something that the market has been asking for and we are very happy to be able to give it out, and to show that we have made good progress, and continuing to reduce the cancellation rate, quarter-over-quarter.

I now want to deal with the second half of the metric slide, on the corporate. We had 55,884 telephone numbers or DIDs deployed for our corporate channel. That resulted in 7,157 net additions of telephone numbers within that channel. The number of accounts has increased -- 1977 -- a good increase over the previous quarters. We have included, this quarter, a page index, which is intended to describe for you the trend of the growth of our total number of pages within our corporate channel to show you how we are doing in building traffic and usage within that channel. The index is defined as the total pages per quarter of inbound and outbound traffic for our corporate, expressed as a percentage of the total inbound and outbound pages for the channel during Q1 of 2002, which is the base for this page index.

Now, moving onto Slide Number 13 -- our global network presence. I would only highlight here that in the last quarter, we added Mexico City to our list of locations -- international locations -- that are now on our network. And we are currently working on expanding our network within additional cities within Canada in the very near future. We continue to look to expand international locations around the world, and are aggressively doing activities which will get us new markets and new locations around the world.

On Slide Number 14, the two changes for this quarter are the following. Over the course of the quarter, we released several dot revisions of our Messenger Applet, which customers of ours can download for free and use for viewing of faxes, for sending of faxes, etc. Those releases included several new features, some of which were for internal use, and some of which were for our customers, such as the introduction of client matter codes, which is particularly important to the legal profession, accounting, audit, consulting, etc. We are currently working on a new version of Messenger which will include a new -- an entirely new -- user interface, and we hope to be releasing that soon.

I am now going to turn this back over to Scott Turicchi, who is going to walk you through some of the additional financial highlights for the quarter. And then I will come back in and talk about some of the other recent events which have occurred within the company.

Okay. Before I begin to discuss some of the financial highlights, I just want to reiterate that if anyone does have a question they'd like to send in by e-mail, you can do that by sending it to investor@j2.com.

Now, if you turn to Slide 16, this is the chart we have had which is our historical revenue growth. I am proud to say that we now have 25 consecutive quarters of revenue growth. That trend has continued, going all the way back to the beginning of 1997. Recently, on Slides 17 and 18, as I've mentioned in the past, Slide 17 is how we financially report our revenue streams, subscriber advertising and license services. The vast majority of our revenue is in the subscriber category. As you can see, we had a very strong quarter, growing 12.8 percent, quarter-to-quarter, sequentially. In fact, it's one of the best quarters that the company has experienced since acquiring eFax. Advertising revenue was flattish (ph) 609,000 for the quarter, and as you can see, is declining to a point where it is less than 4 percent of the total revenue of the company.

On Slide 18, we give you some granularity by channel. The Web channel, as Scott mentioned, had a very good quarter, particularly because of the improvement in its retention rate of customers. It came in at slightly under $12 million, and that was an 11.3 percent quarter-to-quarter growth over Q1. The corporate channel also had a very good quarter, coming in at 15 percent growth, quarter-to-quarter, and slightly under $5 million of revenue.

Slide 19 is an adaptation from what you have seen in the past. During some of our marketing trips, people have been asking for the numbers on a percentage or margin basis. So, what you are looking at here are six quarters of our primary cost components on a margin basis. So, if you start with the red line at the top, those are our cost of goods sold, that result in a gross margin, which, as I mentioned, was 80.9 percent for the quarter most recently ended. Then, below that, the green line is G&A as a percent of revenue, sales and marketing and engineering. G&A continued to decline as a percent of revenue. Sales and marketing was roughly flat, quarter-to-quarter. And engineering as a percent of revenue, showed a slight decline. The new line that you see, which is the darker blue line in the middle, is the operating margin for the company, which was 36.1 percent for the quarter most recently ended.

Slide 20 is our earnings and free cash flow. And as we stated in the past, given the nature of our business, our true cash flow that we produce as a company tends to approximate our GAAP net earnings. As you can see in the most recently completed quarter, we actually produced more cash within our GAAP net earnings. Although, as I've cautioned people in the past, any given quarter, we may be slightly above or below, from a cash basis, our GAAP earnings. That has to do in part with the timing of our CapEx, which, by way of fact, was $1.4 million for the quarter just ended, also can be influenced by the timing of the payables.

Slide 21, finally, is our guidance. If you look at the quarter we are in, Q3, we are guiding equal to 18.7 million of revenue. That is a $1.7 million increase in revenue from the second quarter just ended, and 52 cents per share in net earnings. I draw your attention to the two footnotes. The earnings per share is calculated on an increasing number of shares, which is approximately 12.8 million. That is how we derive 52 cents for the third quarter. And the reason that number is up is not because we have issued shares, but rather because of where our stock currently trades and the treasury stock method that is inherent in calculating our EPS because of our underlying options and warrants.

Also, the EPS assumes a continuing 5 percent tax rate for the State of California, and the utilization of our federal NOL to offset our 2003 taxes, both for the quarter and for the year.

Now, for the year end, what we have done as we've done in the past is we've taken the first and second quarter numbers, which are now historicals, we have added the Q3 guidance to it, and then we have assumed that the Q4 numbers will be no worse than the Q3. So, in essence, it is Q3 times two. That gives you, then, a guidance of 69.6 million or more in revenues for the full year, and $1.92 in fully diluted earnings per share. Once again, on a 12.8 million share base, and assuming a 5 percent tax rate for California state taxes, but no federal tax implication.

Scott?

Okay. To wrap up the presentation, I will walk you through some of the recent events which occurred over the past quarter. As most people are aware, we increased the pricing for new subscribers. That took effect in mid-June. The price increases for our products were as follows. eFax Plus went from $9.95 a month to $12.95 a month. And our jConnect Premier went from $12.50 a month to $15 per month. This again was for new subscribers only. Just to preclude a question which will probably come up, we have not yet made a decision if and/or when, we would consider a price change for our existing customers, so no decision in that regard has been made.

As I mentioned earlier in the presentation, we have released PaperMasterPro, a new version of the company's document management software solution; and people can find information about it at www.PaperMasterPro.com.

j2 Global's network now extends to over 1000 cities in 19 countries. If you will recall form last quarter, it was 18 countries. The addition of the new country, as I mentioned, was Mexico, where we have started service in Mexico City.

We also signed an agreement and issued a press release on the same, that we will be (inaudible) Microsoft Office 11 or Microsoft office 2003, whatever it happens to be called these days, we will be integrated into Microsoft Office 11, 2003 on both our eFax and jConnect product line. And lastly, most recently, jCom's A2 (ph) Global was added to the S&P SmallCap 600 index, for those that are following those indices.

That concludes the presentation. We are at a point now where we will open the floor up to questions. Again I would reiterate, what Scott Turicchi has mentioned, those who want to submit questions by e-mail may do so by sending them to investor@j2.com. And, operator, you can open up the floor now to questions.

(CALLER INSTRUCTIONS). Steve Levinston (ph) with Advest.

Hi, Scott and Scott. Nice to read this press release. Curious about how big your sales force now, how many people you have in Washington, and where you think it's headed?

Our corporate sales organization -- the people who are actually out on the street knocking on doors -- is now at 16, and that is on not only domestic, but now a worldwide basis. We actually have -- and have had for a while -- a corporate sales account manager in Europe. And we have now added, with the acquisition we made two quarters ago, the corporate account manager in Hong Kong. So, we have a total of 16. You specifically asked about Washington D.C. We don't actually have an account manager in Washington D.C., currently. Though, we are recruiting for one right now. So if anybody knows of anyone, please forward them to us. And, we are recruiting for corporate account managers in other markets, as well. As we had previously mentioned, I believe two quarters ago, our goal for this year, was to double what we had at the end of last year, which was 10, which we should be at 20 by the end of this year.

And, is the fact that you are recruiting one for Washington -- I know you had opened up a government account not too long ago. Does that mean you are seeing more information in your database, that there are more government users? Or is it corporate users in Washington?

Yes on both. The government is where we -- the federal government is where we have focused a good deal of attention. We believe that there is a great opportunity with the federal government. As we had mentioned, again, I think a couple of quarters ago, we have filed our certification with the GSA to be put on the approved vendor list. As you also are probably aware, that takes a good long time to go -- to wind through the process. We are getting ever closer. And once that occurs, we will have the ability to sell a little more streamlined in the federal government, and believe there is a tremendous opportunity there for us.

On the commercial side, we believe there is also tremendous opportunity, because the Washington D.C. market continues to be a good hotbed or location for both high-tech as well as consulting type of businesses who find our particular product offering to be very valuable to them.

Okay. Thank you. One last question. Your text to voice and optical character recognition services -- where do you stand on those?

Let me deal with the optical character recognition first. We actually have it deployed currently in one of our large commercial accounts, and hope to be rolling out OCR, optical character recognition, to both our corporate our Web channel very soon. The only thing holding this up is a little bit of development work that we need to complete. But again, hope to have that very soon.

The text to speech that you talked about is a product we have which we call e-mail by phone. That product has a little bit longer development cycle for us. I would not anticipate seeing any changes to that in this quarter. But it is a product that we have started spending some focus on. And I am hoping that we will have some news shortly on how that will be developed and deployed in the future.

Joseph Noel (ph) with Pacific Growth.

Good quarter. A couple of questions here. Can you talk a little bit more about the falling cancellation rate? What can you attribute it to? Why is it falling? I'm not sure you talked about that. And can you go over, once again, the ARPU issue -- you went over it pretty quickly.

Sure. Let me deal with the cancellation rate first. The falling cancellation rate is really a result of two things -- two primary things. One is, for the last 18 months or so, we have spent a great deal of internal energy, time and resources on making sure that the processes we use to manage our customers, both on the billing, the service -- the customer service, etc. -- are as flawless as we can make them be, such that a customer, A, does not have a reason to cancel because of poor service, but also is not cancelled arbitrarily or capriciously because of some breakdown in our processes -- be it credit card validation, credit card charging, billing, etc. And so we have made a tremendous amount of progress in reducing those barriers, such that we are not accidentally causing a customer to cancel or causing the quality to suffer such that a customer would cancel.

The second primary reason we believe that the cancellation rate has declined is that we are doing a very good job at what we call lifecycle management. And what lifecycle management really means to us is getting our customers right from the get-go to start using our service and to therefore recognize the value of what we offer to them, so that they 1, understand what we can do, and 2, start using it for the betterment of their business or their personal use. And, we have found that once we get a customer to start using our service, that they do, indeed, develop a tremendous amount of value sensitivity to our product, and therefore, are less likely to cancel than those who may sign up for it, don't use it very much, and then decide that it just isn't worth the money that they are paying. So, I would attribute the declining cancellation primarily to those two issues.

On the ARPU side, let me just, again, reiterate what I said. As the cancellation rate has declined, we go through a process -- we go through a process regardless of the cancellation -- we go through a process every six months of evaluating the age of our customers. And we do that for the purposes of determining how much of the activation fees we charge those customers are deferred when they sign up. The older the customer base, the longer the deferral this. And therefore, since our cancellation rate has been going down, the age of the customer has, arithmetically, been going up. And therefore, when we went through the evaluation in this quarter, which was a normal course of business, it caused us to extend the life of the customer, and therefore, to defer the activation fees over more months instead of fewer months. And so therefore, the ARPU, which is made up of both the activation fee, the monthly recurring fee and any usage components, went down a little bit because of that lengthier life of the customer and the lengthier deferral of the activation fee.

Right. If we remove that factor, would the ARPU have been up?

It would have been pretty flat.

Yusef Squally (ph) from First Albany. Mr. Squally, your line is live. Daniel Ernst from Rodman & Renshaw, Inc. (ph).

Good afternoon. It's Dan Ernst from Robert and Renshaw (ph ). First, start with the obligatory congratulations, which in this case, actually is very well deserved. So congrats, guys. (inaudible) questions, a couple it I might. First of all, just getting to the heart of the matter. You guys have increased guidance for the next quarter and for the year, but, yet assume flat revenue or flat growth for the fourth quarter, despite the fact that, in the last quarter, you doubled your growth in pay Web channel numbers. And, in this quarter, you doubled your number of adds on the corporate side. So, I guess I actually have trouble believing that you'll have no growth in the fourth quarter. Can you address that assumption. And then I have a follow-up question.

Sure. I'm glad you asked that question, because I obviously didn't explain it clearly. We do not give guidance more than a quarter out. So, our guidance is for the third quarter. However, since we've given guidance for a year, but we don't do re-budgeting for the remaining quarter or quarters in the year. All we do in creating the year guidance is say that whatever quarter or quarters are left over will be no worse than the current quarter we have given guidance for. So, we have not, in fact, given guidance for Q4.

Okay (multiple speakers) --

We have no reason to believe, based upon some of the things you just mentioned that it would be worse than Q3, therefore, for purposes of giving an annual number, the math is leading you to 69.6 or more, and $1.92 or more. Let me emphasize, there is specifically and explicitly no Q4 guidance given by the Company at this time, because we only give guidance for the current quarter that we are in.

Okay. That makes sense, but just to beat the horse a little bit dead. You are not forecasting some seasonal downturn in net additions in either the Web channel or corporations in the fourth quarter?

That would be correct. While we're not giving an explicit Q4 forecast, obviously, by implication, no. We're not saying there's anything unusual about the fourth quarter; we're just basically not commenting on the fourth quarter at this time. It's also the reason for both the revenue and EPS you see the plus sign.

Okay. The second question. On the corporate side, again, it looks like you doubled the number of corporate account adds in the quarter. Can you talk about the productivity of your sales force? I think you said you had 16 now, and I had 18 on my last count. So did you have some churn there? You know, are the people that are left being very productive, and kind of put the linearity in that, because it also looks like you don't calculate this, but your ARPU for corporate account went down slightly, which could be explained that they (ph) came (ph) in (ph) at the end of the quarter.

You are very correct; we were at 18 last time, last quarter, and we had declined to 16. As we have mentioned in the past, we are not perfect hirers of people, and sometimes, the folks we have hired do not pan out for us in the direction we want to go. So we have declined down to 16, and have every intention of hiring up -- back up to where we were at 18. And again, with the goal of being at 20 by the end of the year.

And, as a matter of fact, that dovetails into the productivity side. We are very, very meticulous in measuring the productivity or corporate account managers, both, on a daily, weekly and monthly basis. And, we have certain expectations which are built into our financial model, what they must hit after their -- through the ramp period of the new account manager. After the ramp period, and even as a seasoned account manager. And we have a sales plan, which says if they don't meet if after a certain period of time, we just decide that it's just not working out for us. That being said, I could tell you that we are -- continue to be -- pleased with the progress that our corporate sales team has made in both penetrating new accounts as well as growing revenue in our existing accounts. And I would characterize their productivity as being as we expected for the most part. And, that we believe we have a sales program, meaning program where we hire, train and turn people lose onto the market that is now proving to be successful and that we would anticipate continuing for the foreseeable future. So, I would characterize it as good.

I have two follow-ups to that, Dan. First of all, with regard to your question on -- as you know, we don't -- it sounded like you calculated revenue per account. It would not surprise me to see the revenue per account go down, because as new salespeople bring on new customers, generally they will be smaller nature. So you will be seeing a smaller revenue per marginal new customer if, it in fact is a truly new relationship. And of course, for all of the new sales reps, they can only bring truly new corporate customers to the table.

And the second thing is, regarding what appears to be the very large increase from Q1 to Q2 on the number of accounts, as you know form the last three quarters and the footnotes you see on Slide 12, there were customers that were under $200 billable, that, in prior periods, we moved from the corporate channel to the Web channel. You'll notice that footnote does not exist on Q2 of '03. The reason for that is that customers who are willing to accept a $200 minimum charge, irrespective of their actual usage, we will treat and continue to keep as a corporate customer. So, from Q1 to Q2, you've got about 300 accounts, roughly, that are affected, that are at a $200 minimum, even though their strict usage and subscription fees would be less than that. So, you're really looking at a net couple of hundred new accounts, apples-to-apples growth from Q1 to Q2. And then you've got these little guys that are at a bill 200, but may not have actual usage at that level.

Okay. But given this relatively strong performance of the group, you know, you have a program in place that you briefly described there that is the training getting out into the field. Why not double down? Why not go to 40 by the end of the year?

Well, as we have stated in the past, there's a certain number, which a company of 170-ish people can absorb reasonably and be able to train, manage and excel with. So, we are taking an approach, which we believe we are able to digest smoothly. In addition, we have spent a great deal of time in determining where the market should -- where we should place people, geographically in order for the sales. And, I think that the rate at which we are growing our corporate salespeople is... while it is not optimized at for what we think we could suggest, because again, that should be a 20 by the end of the year, I think we are very close. And, once we hit that number, we will probably end up in the next evolution of the sales organization where there will be some need for some administrative overhead in order to manage a larger base of account managers, etc. We want to be very careful not to grow our non-revenue producing, administrative costs ahead of the curve.

Okay. Thank you. Last question. Going back to the guidance, if I just plugged in your revenue numbers and keep some of the margins you have now the same, I would get to, you know, a $2 plus EPS number for '03. So, you know, should I assume that you are going to have some sort of stare step again in the operational costs? Or perhaps you're putting more into R&D to develop some of the new products like OCR?

Explain to me what --

If I just drop in your revenue number, keep the margins the same, I get to a higher EPS unless I add some costs.

Which revenue number, though?

Year-end.

But you're getting back on that issue of trying to now project the fourth quarter or give guidance for the fourth quarter, which we haven't done.

Right. Okay. Let me re-phrase the question. Are you assuming some uptick in either, you know, cost of services for R&D or marketing that is, you know, not -- you know, that should be implicit in your guidance.

Let me answer that in two ways. First of all, as you know, assuming no change in the business, we have a fairly stable gross margin of 80 percent plus. We have a fairly stable G&A, as a percentage of revenue, and engineering or R&D. The one that can fluctuate around is sales and marketing, although it has been, as a percentage of revenue, fairly stable, the last couple quarters. So, the short answer to your question is, no. As we sit today, there are no fundamental changes in the business that would cause a materially different view, in terms of how things are going to evolve. However, when we are on the third quarter call, we are going to be much more specific as to the fourth quarter guidance, and with various programs, particularly in marketing, will have been in place at that time, which may very well influence the cost structure. Those things happen, as you know, very much in real-time. So as I always tell people, we have a contract today in the Web channel with Yahoo!. If we were to go and to get another very large portal that would be incremental for the Yahoo! deal, not a replacement -- but incremental, that would obviously change the sales and marketing line of costs for the company.

Stephen DeLucia (ph) with Sidoti.

Great job on the quarter, guys. Looking at the Web channel additions, there was a big step up from the first quarter, which was, you know, pretty strong itself. Is there anything more to that than you know, just the Yahoo!? Is there something else going on? And, you know, have you seen any slowdown since the price increase went into effect?

Let's take the questions in pieces. I think the strength of the quarterly Web channel net DIDs is a function of two things. As it was in the first quarter, I'd say first and foremost, the improved cancellation rate or retention rate of the customer. That is the primary driver. Secondarily, I would say that, yes, the increase of the free customer base, which you've seen grow from a low of 4 million as of 12/31/02, up to 4.8 million currently. And, as you know, those incremental customers become paid Web and corporate opportunities, but not immediately, because it takes a while -- generally a few months -- for the number to get populated and for the behavior to season itself, based upon which then our lifecycle management kicks in and either direct to customer for the Web paid solution; or if we observe the right kind of traffic, makes it a corporate opportunity; or stimulates usage if we're not seeing enough usage from that new free customer. So, the growth in the free customer base is also contributory; and as you know, one of the reasons for that in the last couple of quarters has been our presence with Yahoo! Although I would note, as I have done in meetings with people, we do have some discretion over the promotion we put on the nab (ph) bar in Yahoo!. So, you will not always see the free product promoted. Over the last several months, you've seen the pay products, meaning eFax pay promoted; you've seen voicemail promoted; you've seen conference calling promoted. Generally speaking, over the last six or seven months, the vast majority of the promos have been the free products, but it's not always the case.

Okay. And, you know, with the price increase, has there been any --

What was that on the price increase?

Has there been any impact?

As you know, we have very limited data. The price increase went into effect in mid-June. So we are looking at about 30 days of data, and we do look at it daily, in terms of how the gross line-ups are tracking. I can tell you a couple of things regarding it -- that one, based upon the limited amount of data that we have -- and I want to emphasize it is extremely limited at this point with 30 days -- that it has been a net positive for the company, in terms of the 30 percent increase in price relative to the sign-ups. I would say that the sign-ups over the thirty-day period have been affected. They are less than in some comparable periods, but, still to a level that makes the overall price change a net positive to the company, at least to this point in time. I would also tell you that as we get farther away from the price change date, that the decrement, if you will, in gross sign-ups, declines.

Okay.

Which is perfectly consistent with what we expect to see.

Let me emphasize the fact that we have had five weeks since the price increase, of which one of them was the July 4th week, which was not necessarily a good week to compare against. So, we have very limited amount of data.

Brian Gonick (ph) with Corsier (ph) Capital.

Good afternoon. Just a couple of quick things. First, in your original guidance at beginning of the year, in those assumptions, did you assume you would have a price increase on new customers at some point during the year?

No, we did not.

That is sort of an incremental thing?

Yes.

Okay. My next question is, when are you going to start showing income taxes as sort of a full taxpayer -- and when does that come on the balance sheet, the NOL?

Let me answer that question; maybe Greg can give some further guidance, because you're asking really two questions there. As you know, currently today, our tax rate for our book purposes, as well as for cash payments, is about 5 percent -- it's a little under that, which is for the State of California, because of the governor's action here late last year to suspend the use of NOL for California-based companies. We are not currently, as you pointed out, reporting a federal tax, nor are we paying one. Now, we do have a federal NOL, which we are using, as needed, to offset what would be the cash tax payment liability. As you've correctly pointed out, though, there is a standard more likely than not standard, which has to be looked at from time to time to determine whether it would be appropriate to bring some or all of that NOL onto the balance sheet. And, I will now turn it over to Greg to go into greater detail in terms of how that works and what we are seeing in terms of when that might occur.

This is Greg. We are required to evaluate that quarterly and yearly, as our earnings history goes out. The standard in the accounting literature weighs heavily on a "strong earnings history." We have to evaluate both positive and negative aspects in accordance with the accounting literature, which is FASB 109. At this point, the company has determined that we are not that (ph) more likely than not scenario, and we have not brought any of that asset on the balance sheet. However, we monitor, again, every quarter. And it is not to say that that won't happen in the foreseeable future. Once we make that determination, we will let the public know it is forthcoming. You know, we consult with our accounts on this quarterly, and they evaluate it also. And again, we have reached that determination right now that it is not the appropriate time to put it on under the accounting literature.

And to be honest, we don't know when or if that time will come.

Right. Hypothetically, if that time were to come, what would that amount be as of, you know, the end of June 30th? That you would, hypothetically, again, bring onto the balance sheet?

We don't know. Because you might not -- even if you reach that determination, it would not necessarily imply you would bring it all on. So the answer is really indeterminate.

Now, let me answer -- let me answer a question implicit in your question. Which is, when and if that time comes, there certainly will be a time we will become a taxpayer. I mean, eventually, we will use all the NOLs, irrespective of how they are accounted for, for income statement purposes. The work we have done has indicated that we would have a fully taxed rate on our pre-taxed earnings of between 35 and 40 percent -- and it's probably towards the higher end of that range.

(inaudible) current structure and the way the revenue is coming in.

Hagitt Linedell (ph) with First Albany.

Our questions have been answered. Thank you.

We would like to take -- if you would -- Wayne, we would like to take a couple of the questions that come in by e-mail. So if you could hold a couple of the live questions for just a minute?

No problem, sir.

One of the questions has to do with -- what were the repayments and advances of note (ph) receivables in the cash flow statement? And, as you will recall, there was a loan that was repaid actually by Scott Jarus within the last quarter, and that was a reduction off of an asset, and of course, it was credited (ph) to cash. That was on the order of magnitude of about 530-some thousand dollars. Greg, do you want to handle this one?

Yes, there was also a question via e-mail about a purchase of an intangible asset. We made a purchase of a licensing intangible asset during the quarter. This amount was related to a faxing-based technology licensing payment that we had disclosed in the past in our 10-K and we made past payments on. This was a final payment related to that. We amortized that over its useful life, but that's what the actual cash payment was for.

A couple of other questions. Let me try to wrap a couple together. We have been asked about the Microsoft Office integration. One was, at what level will the eFax and jConnect service be integrated into Office 2003? Without getting into a whole lot of gory details, what I can tell you is we are a part of the application. There are hooks (ph) actually in Office 2003, which are tied directly to us, that recognize when a user of Office 2003 is a subscriber customer of j2's, and there is a communication, if you will, back and forth between the office application and our application. So the integration is certainly tighter than it was when we were added to the Microsoft Office XP Solutions Suite a couple of years ago. So, it is pretty tight. And then, the follow-up question was, Microsoft has been announcing a lot of new things like the set-top box -- the set-top box software for the cable market. They want to know if there are other services that we have been discussing with Microsoft. The answer is no. Right now, we are focused on the Microsoft Office 2003 -- or Office 11, whatever you want to call it -- integration, and we hope that will go very well. And then, you know, if we're very successful, maybe that will lead to other things, and then again, maybe not. So, we just made progress in those areas.

I received a question regarding the makeup of our customers. We don't publish demographics on our customers. But, what I can tell you, specifically on the corporate channel, our customer base continues to be very solidly weighted towards those industries or companies which are heavily paper- or signature-reliant, such as the mortgage banking industry, the medical or health care, legal profession, accounting, consultancy, etc., though we are seeing an increasing -- also seeing an increasing amount of usage from those other verticals that are also beginning to realize the value of the service, both from a digitization aspect, and ease of messaging across their domain, with remote workers and off-site employees. I also have a couple of others that are just clarification in nature, and I believe we do have one more live question. The cancellation rate that Scott mentioned on slide 12 is for the Web channel only. Some people asked whether that was for the Web channel or the Web end corporate combined. That is for the Web channel only, and only the paid Web channel; it is not for the free component of the Web channel.

Secondly, a question was why did free subscribers go up (ph ) so much during the quarter? Was Yahoo! a big contributor? The answer is yes, it was not the sole contributor, but it was an important contributor in the increased number of advertising supported subscribers.

There was another question regarding the page metric, also on Slide 12, for corporate. I want to make clear as Scott did earlier, that the page, first of all, is an index. It means they are obviously not the number of pages that our customers utilize on a send or receive basis during the quarter, but indexed relative to the first quarter of 2002. Secondly, it includes both inbound and outbound pages; it's not just the inbound alone. And we do believe -- and the reason we gave you this metric --is that it is important to see how the underlying page growth is behaving in the channel. Because unlike the Web channel, where pre the price change, basically if you knew the number of net adds, you had a very good grip on how the channel was performing. The corporate channel is much more complex. We got into this a little bit on the last quarter conference call. You can't look just at the net additions or just at the number of accounts, or for that matter, just at the pages. You need to really look at a combination of metrics to see how they are behaving, quarter-to-quarter, and year-over-year, to see whether that channel is on-track, and, in fact how much on-track it is. So we felt that giving you a sense for what the underlying page count was, since a good portion of a corporate revenue stream is generated from the underlying pages usage. We do that for you on an index basis. And as you can see, it is not quite but almost double what it was a few quarters ago.

Any more live questions?

Shendard Shenovassin (ph) from Elliott.

Gentlemen, thanks. Let's see, I guess also on those metrics you were just talking about, Scott, first, on the cancellation rate, you guys mentioned a couple of times the period over which you amortize the sign up fees? Can you tell us what that currently is?

We don't release that period -- the age of our customers. We consider it part of our proprietary information base. So we don't release the age of our customers. But, it did go up, which resulted in the ARPU going down for the Web channel.

Okay. How about the -- I guess in terms of, trying to understand the cancellation number that we are getting, then. In terms of seeing it apples-to-apples, you mentioned that it really only talks about -- it's kind of a four-month -- you have to be at (ph) a customer for four months for this thing to actually be -- to kind of be in the pool, right?

Let me reiterate. The amortization or the deferral of the activation fees has no bearing on the percentage of the cancellation rate which is listed here. It has to do with the ARPU numbers.

No, I understand.

So, (multiple speakers) calculation.

Let's say, for instance, right now in Q2 '03, we have a cancellation rate of 2.9 percent.

Correct.

Is that 2.9 percent calculated off of the Q2, '03 number of deployed DIDs?

It is calculated over -- yes. Well, it's calculated over the quarters Q2 '03, deployed and active telephone numbers, active being the operative, not just inventory -- not including inventory, over the number of customers who are four months of age or older who cancelled.

Got it. So it's kind of apples-to-apples. It not necessary the 10-9-3 (ph), for instance?

No. That is correct. We use an apples-to-apples comparison of the aged customers. So, even a customer who could have been with us two months is not included in the numerator.

Gotcha (ph). And then, on the page index, I'm sorry, I couldn't read it very well on the Web. But it sounds like you guys mentioned that if baseline is Q1, 2002, for the page index?

If Q1 2002 is the baseline at 100 --

And this is the total pages per channel; this is not per (ph) account?

This is total pages per quarter of inbound and outbound traffic for the corporate channel. And it is expressed as a percentage of the total inbound and outbound pages, using Q1 of '02 as the baseline. So, if you can't read it, basically, the baseline is 100 (multiple speakers) 102; it goes to 108 in Q2; 124.2 in Q3; 3; 135.1 in Q4, (multiple speakers), etc.

Right. Now, but I guess you guys have just about doubled the accounts over that period, right?

Yeah, it's gone from 858 to 1977, yeah.

I'm sorry. This is the corporate channel.

Yes.

So does that mean that the page index for accounts are -- the marginal ones are lower? Or what does that mean?

Well, as we've described in the past, we have corporate accounts of all different profiles. We have large corporate accounts which have one telephone number, and a huge amount of revenue or pages flowing through that one telephone number. And we have other corporate accounts which have a lot of telephone numbers, (inaudible) give it out to every employee in their company, but the usage on each individual telephone number is actually relatively small except for the power users. So, I don't know that you would be able to tie, directly, the number of accounts to the page index to figure out whether our customers are being more productive or less productive on the pages as we've added new customers. They don't mathematically tie to one another.

It depends on who the customer is, what type they are, and also, licensing (ph) the Web channel for the free customer base -- you do need a seasoning period before you get to sort of that corporate accounts usage threshold. So, if you sign up tomorrow as a corporate account, we would not expect for you to hit your stabilized level of usage within the first 30 days.

Gotcha. All right. Those are my questions. Thanks, very much.

We have a couple of more e-mail questions. And then, I think there are no more on the phone, so I think we can wrap it up.

One was a question regarding our consensus conference calling service, and how and when (ph) we are making progress there. We tell you that we continue to offer the service, and it has been well-received by the customers who are using it. Anyone who follows the conference calling market, plays (ph) knows that this has turned very quickly into a commodity business. We have recognized that, and are attacking the market, recognizing this as a commodity business. I would tell you that, as in the past, that this is not a major part of our business; it is an add-on service offering to our customers, and that you should not expect a significant amount of revenue to -- relative to our overall revenue base -- to be seen from that.

Let's see, there's a last one of this -- has to do with a description of our corporate sales process. Without getting into a whole lot of detail, we have, as we described in the past, a plan for our corporate salespeople, which includes a ramp period, which typically runs between three and five months before they become seasoned. And then, after that, they are considered to be in full production, expected to make their regular full production quota. If they do not either do well during the ramp period, or during full production quota, we end the relationship. And, as I've said, we continue to believe that we are on the right track in that regard. We also encourage our corporate account teams to get long-term contracts, which they are compensated additionally for, etc.

Two last questions. One, further clarifying the point -- the cancellation rate that you see on Slide 12 for the Web channel -- that is a monthly number? No.

It is a quarterly number. It is a number which reflects the period of the entire quarter. Calculated across the three months of the quarter, it reflects -- it reflects the mathematical censor, if you will, of the quarter. It is consistent across the quarter.

And then the question was, in absolute dollars, why did G&A go in the last quarter? Two reasons. We have been growing the employee base. We need to take additional space, so there are incremental rent costs. There are also incremental depreciation flowing through the G&A account. Those are two of the primary drivers for the increase in G&A, in absolute dollars.

Is that the last question? Are there any more questions on the phone?

No sir, there are not.

Okay. We want to thank you for participating in our Q2 earnings call. We look forward to hearing from you again in the next quarter. And thank you, very much, for your participation.

Thank you for joining today's j2 Global Communications conference call. You may disconnect your lines. Have a wonderful evening.

(CONFERENCE CALL CONCLUDED)