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Operator
Welcome to the j2 Global Communications second-quarter earnings conference call.
It is my pleasure to introduce your host, Mr. Scott Jarus, President of j2 Global Communications, and Mr. Scott Turicchi, Chief Financial Officer.
Thank you, Mr. Turicchi.
You may begin.
Scott Turicchi - CFO
Thank you very much.
Good afternoon, and welcome to j2 Global's investor conference call for the second quarter of fiscal year 2004.
As the operator just mentioned, I'm Scott Turicchi, the Company's Chief Financial Officer.
And in addition to Scott Jarus, our President, we also have Gregg Kalvin, our Chief Accounting Officer, with us today.
We will be discussing the second-quarter 2004 financial results as well as the business prospects for the remainder of the year.
In addition, we will provide you financial guidance for the third quarter and fiscal year 2004.
A copy of the presentation is available at our website.
If you have a pop-up blocker on your computer, we would suggest you turn it off to be able to fully view the slides.
If you have not received a copy of the Company's press release, you may access it through our corporate website at www.j2global.com/press.
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 any time you may e-mail us questions on an anonymous basis at investor@j2global.com.
Before we begin our prepared remarks, allow me to read the Safe Harbor language.
As you know, this call and the webcast 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 webcast.
We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements.
I would now like to turn to the results for the quarter.
This was an outstanding quarter for j2 Global -- in fact, it's best ever -- from a financial, operational and strategic standpoint.
Our revenues for the quarter grew 52 percent year-over-year to 25.8 million.
Our gross profit margin continued to expand from 84.1 percent in Q1 of 2004 to 84.3 percent in Q2.
Earnings before taxes rose 82 percent year-over-year to 11.3 million, or 44 percent of revenue.
On a per-share basis, earnings before taxes per share was 44 cents, up from 25 cents per share in Q2 of 2003.
Our net earnings were 29 cents per share, a penny above the high-end of the Company's guidance.
For GAAP purposes, our effective tax rate is approximately 35 percent.
Free cash flow hit a record high of 11.6 million and funds available to grow our business rose to 74.2 million.
We believe that this demonstrates the fundamental strength of our business.
At this time, Scott Jarus will take you through some of the highlights that are contained in our IR presentation.
Scott Jarus - President
And I would point you to the IR presentation which is on our website, which you, again, need to take your pop-up blocker's off if you wish to fully view it.
As Scott Turicchi said, we're very pleased with the financial and operational results for this quarter.
Revenues grew by 52 percent over last year at this time, with pre-tax earnings increasing 82 percent.
Our gross margin and free cash flow increased, with operating margins reflective of our previously-announced increased sales and marketing spend.
We're now providing our customers with more than 7.3 million telephone numbers, an increase of over 1 million numbers since the last quarter, and representing the highest level of gross additions in our history.
I would encourage you to now turn to slide number four.
We continue to fill out our mission statement.
In the past quarter it was through the addition of Electric Mail and M4 Internet; however, this quarter we announced our E-voice initiative, which will position us to take fuller advantage of our network, customer base and marketing strategies, as we enhance our voice messaging business.
On slide five you see the brands at which we're marketing our service through; nothing terribly new there.
On slide six -- as previously stated, we added more than 1 million new subscribed telephone numbers to our customer base during Q2.
This was primarily the result of our increased sales and marketing spend on the acquisition of free customers, which we believe will translate into increased paid subscriptions in the near -- in the future quarters.
As stated during the past two to three quarters' earnings calls, we've had an intention of increasing our base of free customers by 1.5 to 2 million over the course of 2004.
I'm very pleased to report that we have already met that goal for the year.
In addition, the number of marketing partnerships we now have has increased -- and by the way, it's increased to about 17 -- and we are continuing to explore new and diverse opportunities.
Commiserate with our increase in new subscriber telephone numbers, we increased our total inventory of telephone numbers by another approximately 900,000, most of those representing both free and a good deal of paid telephone numbers.
The number of patents owned or pending for j2 Global increased during the quarter as the result of the acquisition of a portfolio of Internet messaging and technology patents from NetOffice Solutions.
I refer you to our press release on June 29 for additional details regarding this acquisition.
As Scott stated, our cash and investment position continued to grow, now totaling more than 74 million, in spite of the fact that we spent cash during the quarter on the NetOffice Solutions patents.
On slide number seven -- we continue to experience strong penetration into the legal market segment and continued growth in the mortgage banking and real estate markets, in spite of the fact that mortgage interest rates are on the rise.
However, the impact of the increasing interest rates is having less and less impact on our business as the percentage of network usage generated by the real estate sector is declining as we add more and more non-real estate businesses to our customer base.
Turning to slide number eight.
As we have stated in the past, our business, marketing and pricing are defined as a continuum of customers and selling opportunities ranging from individual subscribers who typically engage us through our various websites and pay view credit card, or in the case of our international business, utilize calling-party pay services.
We also have small to midsize businesses looking for simple, efficient and cost-effective messaging solutions.
And finally, large enterprises and governmental agencies looking to improve their processes, eliminate costly infrastructure and enhance their internal communications.
By the way, we've been asked in the past how many promotional marketing relationships we currently have with the likes of AOL, Yahoo!, Google, Lycos and others, and as I previously stated, the number as of the end of Q2 is 17.
Turning to slide number nine -- for those of you who have been following us for a while, you will recall that we had a price change in 2003 in our previously-named web channel.
For all intents and purposes, the effects of that price change have now been fully realized.
This includes both the impact on ARPU and the cancellation rate.
As you can see, our cancellation rate continues to drop during this quarter, and it is now down to a historic low.
I want to again point out the significant growth we experienced in our free users this quarter.
This was primarily because of our increased sales and marketing spend during the first and second quarters, as was previously announced.
I will remind everyone that this growth in our free base of customers is very important to us, as the free to paid conversion process is one of our most successful programs for increasing our paid base of subscribers.
Back in 2003, we stated that our goal was to increase our base of free users by 1.5 million to 2 million over 2004.
And as I previously stated, we accomplished this goal ahead of schedule, which is a testament to the fine job done by our marketing and telecom departments.
Paid ARPU increased is a reflection of the final vestiges of our price change and the increased usage of our services, particularly our desktop fax sending capability.
Unfortunately we saw a decline in advertising ARPU for our free base of customers, due primarily to softness in e-mail marketing spend by our advertisers.
Turning to slide number 10.
I want to tell you, as a reminder, about how we define things.
DID-based revenues are all revenues which are associated with telephone numbers, otherwise known as DIDs.
These include not only the revenues from paid DIDs, but the revenues received through our free advertising-supported DIDs.
DID-based revenues, along with the fixed component of our subscriber revenues, are the two key metrics for understanding j2 Global's core business.
The highlights for this quarter -- DID-based revenue represents a little over 93 percent of our total revenues, so it's still highly significant.
DID-based revenues grow within a fairly narrow band for the past ten quarters, approximating between 10 and 13 percent quarter-over-quarter.
Our non-DID-based revenues -- which include jBlast, Electric Mail, M4 Internet and licensing services, which are primarily software sales -- jumped predominantly, if not entirely, due to the full quarter of Electric Mail's revenues contributing to our P&L.
Also, as you will clearly see, the growth rate for our non-DID-based revenues tends to move around.
Turning to slide number 11.
We now offer local telephone numbers in more than 1350 cities worldwide.
We have as of the end of the quarter 56 pops (ph) worldwide, with 36 of them being in the United States.
During Q2 we launched our first international, fully localized service offering.
The language and marketing message is being done in Dutch, which reflects our most recent acquisition in the Netherlands, and the currency is denominated in euros.
The success of this launch has established a template for our future localization, a couple of which we hope to see completed this year.
Turning to slide 12 on our product roadmap, I am pleased to report that during the quarter we plan on launching a storage and archiving service for our fax and voicemail-to-e-mail (indiscernible) subscribers.
This will include a certain amount of storage which is bundled into the existing subscription pricing, as well as an opportunity for subscribers to increase the amount of storage for an additional fee.
If you turn to slide 13, you will see the announcement of our E-voice enhanced voice messaging service offering.
This is a preliminary announcement.
We announced it originally on June 17.
This enhanced voice messaging service will expand our offerings to include new features for our existing jConnect product line and unified messaging capabilities.
We are on target for release of this service by the end of the year, and more details on this will follow as we get closer to that date.
I'm now going to turn this back over to Scott Turicchi, who will walk you through some of the financial metrics that we had over the second quarter.
Scott?
Scott Turicchi - CFO
Thank you.
Slide 15 shows you our 29 consecutive quarters of revenue growth.
On slide 16 you see the breakdown of our revenue as we publicly report it.
I would draw your attention to the subscriber revenue.
As you know, that constitutes about 95 or 96 percent of total revenue for the Company, and it is where we put our time and attention in terms of managing that growth which comes through both customer acquisition as well as ARPU enhancements.
You'll note that from the first quarter, subscriber revenue growth was up 13.6 percent -- in fact, greater than for the Company as a whole, which was up 12.6 percent.
Slide 17 gives you some of the supplemental information we began disclosing last quarter.
Our subscriber revenues fall into two components -- a fixed component, which is the monthly or annual subscription fee that a customer pays, and a variable component that is driven by incremental usage.
As you will see, the fixed revenue grew this quarter approximately 11 percent over the first quarter and 57 percent on a trailing 12 month basis.
We also, though, experienced good growth in our usage component this quarter, growing 21 percent over the first quarter.
However, as I mentioned, our primary goal is to increase the fixed component of the subscriber revenue, as in many instances the variable component is something of which the Company is a recipient and can only influence on the margin.
Slide 18 shows you our P&L in a pictorial format.
Our gross margin continued to grow to 84.3 percent during the quarter just ended.
Our operating margins were 42.6 percent, which you will observe is -- as we mentioned at the beginning of the year and in last quarter's call -- is an emphasis on incremental spend in sales and marketing, predominantly to drive new free customers, which act as a backlog for future quarters of potential paying customers.
As a result, sales and marketing represented 18.5 percent of revenues in this quarter, engineering an R&D that remained around 5 percent, and G&A came down to 18.3 percent.
(technical difficulty) business continues to be a strong provider of free cash flow.
We had a record quarter, (indiscernible) off 11.6 million after 1.4 million of purchases of property and equipment, substantially exceeding our GAAP net earnings.
Our financial guidance for both the quarter and the fiscal year are provided on slide 20.
For the third quarter, we're looking for between 27.4 million and 27.8 million of revenues; on a pre-tax basis, 48 cents per share; on a fully diluted basis, 31 cents per share.
For the fiscal year as a whole, you will notice we have increased the high-end of the range from 105 million of revenues to 106.
We have increased the high-end of the pre-tax earnings per share from 175 to 183, and on a fully diluted basis from $1.15 to $1.18.
This is premised on 25.7 million shares, a slightly higher calculation than seen in previous quarters given the current stock price at around $27.
Scott?
Scott Jarus - President
Let me wrap up by going through some recent events that came along this quarter.
We're very enthusiastic about the acquisition of the patent portfolio from NetOffice Solutions.
The acquisition of this portfolio of Internet messaging technology patents, along with our existing patent stable, not only protects our intellectual property but enables us to perhaps capitalize upon them in the form of licensing fees in the Internet space and/or other industries.
Also, as previously stated, we successfully launched our first international fully-localized service offering, with the anticipation of launching a couple of more by the end of the year.
Finally, we are very pleased that we're now being covered by an additional analyst from Harris Nesbitt, and Jefferies & Co. has reinstated its coverage of j2 Global, which resulted from the departure several quarters ago of their analyst.
And lastly, I just want to preempt, to head off any questions regarding the Oasis Semiconductor IPO, by telling you that we have no insight into this process except what is publicly known.
They filed their original S1 on March 19, 2004.
They're still in registration and we continue to own approximately 17.5 percent of their pre-IPO shares.
Other than that, we don't have any idea when they might actually have their public offering.
So I'm hoping that will preclude some questions on that subject.
With that, we conclude the presentation and we now open it up to questions from the audience and through e-mail.
Again, e-mail questions may be submitted by e-mailing us at investor@j2global.com.
And now I'll turn it back to the operator.
Operator
(OPERATOR INSTRUCTIONS).
Dan Ernst, Rodman & Renshaw.
Dan Ernst - Analyst
Congratulations on another consecutive quarter here of top and bottom-line growth.
It's well deserved.
Three questions.
First, can you give me a specific breakdown on the $1 million incremental sales and marketing expense, say, between salary, commissions and general marketing?
Scott Turicchi - CFO
This is Scott Turicchi.
The answer is, most of that incremental spend quarter-to-quarter -- in fact, since the end of last year -- has gone towards the acquisition of free customers, which is greater than what you see reported in the presentation, which is only the net number.
So we grew the net by 1.3 million this quarter but the gross was in excess of that.
And the vast majority of that spend has gone toward the acquisition of frees.
A small amount has gone toward some sales and marketing personnel and things like that, but most of it has been online spend for free customers.
Dan Ernst - Analyst
Got it.
Related to that, on the Yahoo! relationship, since Yahoo! upped their free storage for customers and also upped their storage for customers who are paying, they made a change in the way that they address their paying subscribers; their paying subscribers no longer see promotions.
I'm wondering if you can address how that might impact the acquisition of subscribers in that channel?
And than just third, can you give me a breakout of what the real estate business is relative to the whole business now that you've been adding other sectors?
Scott Turicchi - CFO
In terms of the first question, as you know, as you can observe -- first of all, your point is correct that when they made their shift to the new platform, paying customers do not see the advertising; however, free customers still do.
You'll also note that prior to that change we had already gone to a fractional placement with Yahoo!.
So we are only, even in the free customer base, experiencing about 50 percent placement versus what we were experiencing as recently as the end of last year.
So yes, there are a certain portion of customers we will not have access to as a result of both of those changes.
But as Scott mentioned, the breadth of marketing spend that we have now -- which is at any moment in time can be 15 to 20 advertisers -- really does not make that change substantial in terms of how it impacts us.
Because in fact, you'll see that we gained the million net free customers during this quarter with those two things in place for most of the quarter.
Now as to your second question on the real estate, as we have said before -- and actually, it is a good question, because there was some confusion that somehow crept in the marketplace during last quarter that a much larger percentage of our total revenue was real estate-dependent than is in fact the case.
As you know, we have a variety of customers, some of whom if they're a business we can identify as being in a particular industry -- an individual customer, not necessarily so.
If you take all of our customer revenue across all of our lines of business, my best estimate is that the real estate component affects 10 to 15 percent of our revenues.
And that has been declining based upon adding new customers and based upon diversifying, if you will, away from the real estate; however, as we've said before, it is a very solid and very good customer base and we certainly do wish to have it.
As you will also notice, we performed at this level this quarter with higher interest rates during Q2 than existed on average for Q1.
Dan Ernst - Analyst
And it's also safe to assume on the real estate side that the variable part of their contribution is larger than the fixed basis versus other types of customers?
Scott Turicchi - CFO
Not necessarily true.
The way our contracts are structured, if you are a corporate or a business-oriented customer, irrespective of your industry, you will have a contract that will have a fixed component and has a usage-based component.
But the fact that you are in real estate versus law versus some other industry does not determine the kind of contract you will get.
That being said, real estate organizations, particularly in the mortgage business, do tend to generate a lot more pages by the nature of their business than other, which is why it's been a good segment for us.
Dan Ernst - Analyst
Just a follow-up on the Yahoo!.
Is there an opportunity to go ahead and offer j2-type services through Yahoo! to that base of people who are paying them, who presumably are the base of customers who are willing to pay for online messaging services?
Scott Jarus - President
I frankly don't know the answer to that, but would be happy to check on that.
Operator
Youssef Squali, Jefferies & Co.
Youssef Squali - Analyst
I have a few.
First of all, there typically is a correlation between free ads and paid subscribers, albeit it's not obviously a one-to-one.
But we've seen an acceleration in your total net adds on the billable front between Q4 and Q1.
Between Q1 and Q2 it was flat, although you guys have reported 643,000 net adds and free net adds in Q1 in now almost 1 million.
Can you speak as to is there just a delayed mechanism by which, hopefully, in Q3 and Q4 we'll see aeration a re-acceleration in subscriber -- in paying subscribers, or is there anything else that we are missing?
Scott Turicchi - CFO
It's basically what you just hit on.
If you look at Q1 and Q2, the big ramp-up in frees began -- versus what you might call the normal historical rate we had in months past, began in March of this year.
So, we began the ramp in March; it continued through each of the months in Q2.
That now has given us a base of customers that will be right in the early stage of conversion about now but will continue, in terms of their conversion process, for the next year.
So it really is creating a backlog for future paid gross adds over the next four quarters beginning in this quarter.
Youssef Squali - Analyst
So have you seen a continual increase in the conversion between the beginning of the second quarter and the end of the second quarter?
Scott Turicchi - CFO
There has been an increase;
I think it's too early, though, to make any definitive statements because the base is relatively small.
Obviously, the reason we acquired these customers free customers is anticipation of that conversion over the next year.
Youssef Squali - Analyst
Sure.
And then, Scott Jarus mentioned that typically there is kind of a conversion that -- coming from the 1.5 to 2 million subscribers, or for users.
Now that you've already got to that goal, what should we be looking for for the remainder of the year?
Obviously, you guys are just not going to (multiple speakers)
Scott Jarus - President
With regard to the frees, you mean?
Youssef Squali - Analyst
Yes.
Scott Jarus - President
I would tell you that we hit our goal, as I said, but we're not stopping there.
There is a bit of a Herculean effort when we set the goal to do 1.5 million to 2 million, and I would tell you that we're kind of not doing the Herculean right now for the rest of the year, but on the same token we are spending a consistent amount of energy to continue to try to acquire both free telephone numbers for our inventory as well as acquire additional free customers.
So it's not going to stop; it's just not going to go probably at the pace at which it's gone over the last two quarters.
Youssef Squali - Analyst
Okay.
Could you give us the breakdown of revenues between web and corporate, the way you used to break it?
I know you stopped, but just to have some apples-to-apples comparison (multiple speakers)
Scott Jarus - President
No.
In fact, actually if anything, we just got an e-mail question to a similar effect.
And the answer is no; we're no longer breaking it down between the various sub-channels or segments.
Youssef Squali - Analyst
Can you speak to the growth in those segments then?
Scott Jarus - President
What I'd tell you qualitatively is that all of the channels had a very good quarter in Q2.
The corporate channel continued to show very good traction on the enterprise and small-business side.
It was one of its best quarters ever.
It built a very -- has a very good pipeline building, particularly of large opportunities.
In the case of the individual customer channel, the pipeline of opportunities is a combination of all the things we do in the ordinary course plus this huge backlog of frees that over the next year we will work to convert to paid.
Scott Turicchi - CFO
And, by the way, that intermediate channel, if you will, on the continuum which we have in the past called eFax Corporate, which is a hybrid of our individual marketing efforts to the web and direct sales through an inbound -- in-house sales force, continued to do well as well, in so much as we are adding additional inside salespeople to handle the volume.
Youssef Squali - Analyst
Okay.
That's great.
Scott Jarus - President
Let me jump in with an e-mail question just real quick here, and then we can go back to the phone.
We received an e-mail question that says -- can you address the issues associated with the pending legal action with Venali?
All I can say is it's very, very early in the process, and we're only now at the beginning of the discovery phase.
So that isn't too much more to report at this point.
You want to give another one?
Scott Turicchi - CFO
One other very quick question.
We had a question in the past that was asked again this quarter in terms of the linearity of our adds over the course of a quarter, and is there any reason why adds would come or be skewed more towards the beginning or the end of the quarter.
The answer is no, that our adds come on a daily basis, a business day basis.
They show a high degree of linearity over the course of a quarter.
There can be in the case of the large enterprise deals a reason why a deal will close towards the end of a month or the end of a quarter.
But when you're dealing in the volume of the DIDs that we are, assuming linearity over the three months is a good assumption.
Scott Jarus - President
Let's take another call from the phone.
Operator
Joe Noel, Pacific Growth.
Joe Noel - Analyst
Congratulations on a nice quarter here.
A question about expenses here.
You boosted sales and marketing almost $1 million in Q1 and almost $1 million in Q2.
And part of that was I understand to get the free adds up.
Now that they are up, do you ease back on that spending a little bit?
The additional million seems to be pretty high.
What kind of guidance can you give me on that going forward here?
Scott Turicchi - CFO
The only guidance we can give you at this point is, is that Q1 and Q2 were clearly quarters where we had stated our intention to spend more than usual for our sales and marketing spend.
But I can tell you on an absolute number basis, for Q3 at least, we may choose to continue to spend at the levels that we have been spending at, which as a percent of revenue would, obviously, be less than what it is in this quarter, because revenues are growing.
So there is an opportunity for us to spend on an absolute dollar value roughly the same, but I will caveat that by saying it all depends throughout this quarter on how the marketing partnerships come to us -- whether they are good deals; whether we believe in the quality of the base that we get from those, and the pricing of those deals.
If the deals aren't good, if the quality isn't good, we won't spend it; if they are, we will.
Joe Noel - Analyst
So you're saying it's likely you'll be relatively flat on a dollar basis?
Scott Turicchi - CFO
I think on an absolute basis, you should look for something relatively the same as to what we spent this quarter.
Joe Noel - Analyst
Okay.
And R&D -- I will assume that extra R&D spend there was for the new product?
Scott Turicchi - CFO
I wouldn't attribute it to that, because it was such a small fluctuation.
It had more to do with small incremental headcounts and number of payroll days, etc., etc.
So I would (multiple speakers)
Joe Noel - Analyst
Would you expect to see a similar dollar increase in Q3 that you saw in Q2?
Scott Turicchi - CFO
I think it is fair to say that as we roll out the new product at E-voice, etc., we will be spending slightly more money on engineering and R&D than we have in the past, though I certainly wouldn't expect us to be spending -- have a curve take off like the sales and marketing did.
But I do think it will increase.
Joe Noel - Analyst
So you're saying increase in dollar terms?
Scott Turicchi - CFO
Yes.
Joe Noel - Analyst
Really the same question for G&A.
I mean, you boosted it about a little less than $300,000, I guess 250.
Kind of the same type of ballpark there on the dollar basis going forward?
Scott Turicchi - CFO
There, a big chunk of the jump in G&A was the inclusion of Jump and Electric Mail for the full quarter versus the prior quarter.
Scott Jarus - President
And in addition, Sarbanes Oxley (multiple speakers) compliance work that we're going through has been (multiple speakers)
Scott Turicchi - CFO
You'll continue to see some modest upward bias there; although as you know, many of those components are fixed.
And now that Electric Mail and Jump are baked in on a full-quarter basis, we wouldn't be looking to see those be large contributors on a quarter-to-quarter basis.
Joe Noel - Analyst
So probably up on a dollar basis, but not --
Scott Turicchi - CFO
I would say up modestly on a dollar basis.
Operator
Steven Freitas, Harris Nesbitt.
Steven Freitas - Analyst
Nicely done this quarter.
Just a couple of questions.
First, I was wondering if you could share with us what proportion of your subscriber revenue was not derived from inbound fax to e-mail?
Scott Jarus - President
I don't have a specific number for you, but as in past quarters, the vast majority would have been from the eFax product and the jConnect product.
Now, that's more than just inbound fax e-mail; it includes also the other services within jConnect.
You do have this quarter an incremental amount from the e-mail subscribers, but that is a relatively modest number against the whole.
I think as you know, Electric Mail, from their publicly reported financials prior to our acquisition, is a $2 million-ish run-rate revenue company.
So, obviously, we'd have the inclusion of one full quarter in Q2 of their numbers, but that is a relatively small percentage against our total subscriber revenue.
Steven Freitas - Analyst
I was hoping you could comment on the competitive environment.
And just had a couple of observations this quarter, and I was hoping you could chime in but your two cents.
First, as you expand your base of corporate fax services -- I think you mentioned this quarter -- regarding storage and archival.
Scott Jarus - President
That's typically more appropriate, at least in the initial phases, for the individual consumers as opposed to the enterprise sales.
Steven Freitas - Analyst
But I imagine that's -- at some point you're going to target the corporate user base, large corporate user base more.
And in terms of who you bump up against, and if you can talk about the -- is there anything you need to do to your infrastructure that may not have the same capacity as some of your competitors who do outsource solutions that take it from the enterprise side, or enter the pricing environment -- what that does over the long-term to your profitability?
So for instance, is it -- are these services inherently less profitable than your core services now?
And then secondly -- I'll just ask the second part of the question as well, and you can answer at one time.
I guess -- what I noticed on kind of the eFax service, it seems like a couple of your competitors who have focused more on the corporate side have started their own virtual fax type of service at a lower price point than eFax or JConnect.
If you can just comment on your thoughts there, in terms of are you seeing them?
What's your competitive response?
Scott Jarus - President
On the first question with regard to storage, I think you need to understand that our storage and our timing solution is a bit -- is different than a storage and archival solution that is sold by a large enterprise document retention and storage solution.
We are offering storage and archiving services primarily for users who are receiving their faxes to e-mail and voicemail to e-mail, or even just their e-mail.
There was a study -- I wish I could remember the exact percentage of how much of a company's corporate intelligence is actually stored in e-mail -- but it's north of 60-some-odd percent if I recall.
And our job is that -- our mission (indiscernible) the storage and archiving is to provide a very simplified individual way for people to store their inbound e-mails, faxes to e-mail and voicemail to e-mail off-line, either as a method of immediate retrieval or as a method of archiving so that they can unload their corporate e-mail system.
So, it's a different product offering and I don't anticipate that we're going to be competing head-to-head with large enterprise-based document retention and archiving solutions, where they buy their own storage and archiving.
In addition, by the way, the patents that we have developed or acquired put us in a very good competitive advantage, we believe, in the storage and archiving, in the method at which we're doing it -- again, not as a direct competition against in-house large storage and archiving solutions, but more as a web-based archival and storage solution for individuals in small to medium-sized businesses.
And lastly, I think, on the storage by the way, our brand-name brings a lot of cachet to that as well.
So I think that answers the first question, I hope.
With regard to the second question, eFax j2 -- we have never been the cheapest provider of service out there on the fax to e-mail.
There have always been companies which have undercut us on pricing.
And that's not really a competitive threat for us at this point, because we believe that we are providing a service which has a tremendous amount of additional value that we can provide over and above just pricing through the number of local numbers we can offer worldwide, through the quality of our service, through the other features we provide.
And by the way, we also believe that our patents provide a certain level of protection in the sense that others can't provide, because we own those patents.
So price is not the big kind of competitive threat that we face out there, and it never has been.
Steven Freitas - Analyst
Can I just ask one follow-up on the corporate side?
Scott Jarus - President
Sure.
Steven Freitas - Analyst
First, am I mistaken to believe that Venali has a similar type of archival system that they sell on an outsource basis?
And then, I guess, in terms of just other enterprise services in general -- blast services, production fax, things of that nature -- is that a focus -- going to be a greater focus in the future?
And what is the relative profitability versus -- your perception of those services versus kind of firm-wide (ph) profitability now.
Scott Jarus - President
I can't comment on Venali specifically, because we are in litigation with them; so I'm not going to deal with them.
What I will say is there are other providers out there that offer a storage and archival solution that functionally appear similar to what we do.
But we believe that through the use of our Electric Mail e-mail division in Vancouver, we have a method of providing storage and archiving which is highly profitable for us and will put us in a very good position to gain good margins from the service offering that others may not be able to provide.
Because maybe their only business is storage, whereas we are able to leverage both our fax to e-mail, voicemail to e-mail and e-mail through Electric Mail service -- in addition to the storage, which is additive to the process and did not require a substantial investment on our part to bring this product to life.
Steven Freitas - Analyst
Okay.
Thanks.
Scott Turicchi - CFO
In terms of the other question you had.
It is not a strategic focus of the Company to get into or to broaden things like Broadcast Fax.
We have a very small piece of the business.
It's actually reported in the non-DID revenue.
So you can see it's part of that 1.7 million and a quarter of revenue that is really designed for small businesses on a self-initiated basis, but it is not a focus of the Company to get further penetration into that business or that space.
The profit margins are good there, but it is a business that is highly competitive on price and for the most part is not growing.
Operator
Brian Hoi (ph), Equity Growth Management.
Brian Hoi - Analyst
Congratulations on a good quarter.
Historically, you've done a lot of marketing online for new customers.
And we've seen some reports, I guess most recently from Netflix, that online advertising market had tightened considerably and costs had gone up.
Can you guys just comment on what you're seeing in the marketplace in that regard?
Scott Jarus - President
Sure.
It is true that we have seen, generally speaking, online marketing costs rise historically over the past two to three or four quarters.
That being said, from our perspective they're still for the most part economically good for us in our ability to acquire customers the way we do, and for them to equate on a percentage basis into an upgrade to a paid subscription service.
So I think the general comment about whether the market has gotten tougher from a price standpoint on web marketing is true; but in our belief, we're still able to do very well on the deals that we have with them.
I don't know, Scott, whether you have anything you want to add.
Scott Turicchi - CFO
We have not given out a subscriber acquisition cost number, and I don't think we're prepared to do that on this call, but I can tell you in looking at the data -- and we monitor all of our deals both individually and in the aggregate.
As Scott mentioned, you see some upward bias, say, over the subscriber -- customer acquisition cost of a year ago, but the payback for us on a paid subscriber is still measured in weeks to two to three months.
So it is a very rapid payback despite the fact that some of the online advertisers have had the ability to raise their prices.
So we don't see that as being a gating factor at this point.
Brian Hoi - Analyst
Can you give a kind of a ballpark number for what you think the cost of online advertising has increased by in the last -- say, the last year?
Scott Turicchi - CFO
I can only tell you what I've seen in the public reports since we're not reporting our own (indiscernible) cost.
I think what I have seen in the public reports is 25 to 30 percent.
Brian Hoi - Analyst
And have you guys thought about moving any of your advertising spend to other channels as a consequence of that bump-up in rates?
Scott Jarus - President
No.
Even though costs have gone up, we're still very pleased with the success we have in web marketing.
Certain media just don't fit well with us -- print, traditional newsprint, magazines -- though we do do some print advertising for our enterprise sales and specific journals, etc., for its targeted audiences and segments.
But those don't do really well for us, certainly not television and radio and things like that.
So traditional hardcopy media or broadcast mediums just aren't good for us.
So we are going to stick to our mettle (ph) in web marketing.
I will tell you that as there has been cost pressure, we have also intensified our efforts in finding more diverse marketing opportunities with other channels, web channels.
And we have been successful, based on numbers I gave out earlier, and I think we will be successful going forward.
Brian Hoi - Analyst
Congrats again on the quarter.
Operator
Youssef Squali, Jefferies & Co.
Youssef Squali - Analyst
I just have a couple of follow-ups.
If I look at chart or slide number 17, where you breakdown the fixed and variable -- the fixed sequentially grew roughly 11 percent; the variable grew about 21 percent, which is kind of inverse to what had happened before.
So we're seeing a deceleration in your rate of growth and (indiscernible) acceleration in the variable.
I'm trying to understand -- I mean, am I correct in implying or understanding this to mean that the corporate business, the corporate is growing actually faster than the (indiscernible) since the corporate has a bigger variable component?
Scott Jarus - President
First of all, since we no longer use those terms it's an impossible question to answer.
I think what this chart is telling you is that for all of our subscribers across the board, we saw an increase in the usage-based component of the total ARPU for Q2.
That would be a true statement.
But I also think that there is probably not a lot you can read into the difference between a 73/27 split and a 71/29 split.
You are splitting hairs.
Youssef Squali - Analyst
What does it mean that the variable component is growing that fast?
Why is it?
Scott Jarus - President
I think it's a combination of factors.
I don't believe there's any one factor we can point to that says that usage-based revenue is growing because of X. I think one is that it is a focus of the marketing team, to the extent they can, to stimulate usage.
As I mentioned earlier, oftentimes our ability to do that is within some limited range, but that is a focus of the marketing team to stimulate usage.
So that is one part of it.
Two, I think, general economic conditions being good or better than, say, a year ago are helpful.
Once again, not pointing to any specific industry but just in general.
But there's no one item to pop out here to say this is the primary driver.
Youssef Squali - Analyst
So going forward in Q3, Q4, can you help us just understand or try to figure out how those two -- I mean, should we expect kind of a similar pattern to continue throughout the year, or is it just so --
Scott Turicchi - CFO
It would be interesting to know what pattern you're gleaning from the variable (multiple speakers)
Scott Jarus - President
I'll be honest, the pattern I look for is a little bit -- I guess you can reverse engineer it in terms of quarter-to-quarter growth.
To me it's more the ratio of fixed to variable revenue.
So if you take our guidance for this quarter; and you took the midpoint of the range of 27.6 million; and you assumed that subscriber revenue to other revenue was relatively constant, to me there's probably a three or four point band in mix of revenue between variable and fixed of that subscriber revenue.
And I don't think you can draw any meaningful conclusions if you're in that roughly 70 to 30 range of fixed to variable.
And some quarters that fixed will be a little higher than 70/30 and in some quarters it will be a little lower than 70/30 -- any of which, I think, is completely immaterial; it's just how the business flows and arbitrarily having quarter ends, and pushing revenue into one quarter versus the next because of either how a customer is billed -- I don't think you can draw any meaningful conclusions from it.
I really believe that the variable revenue is best measured on an annual basis, because you will have things that will cause it to be more robust or less robust in a given quarter relative to another quarter.
For example, business days or vacation periods, or as we saw historically last year, interest rates falling dramatically or interest rates rising dramatically.
All of those things were influencers on the variable contribution of revenue, virtually none of which the Company had any control over.
But if you look at variable revenue on an annual basis, you will see that it was growing commensurate with the Company as a whole in a 40-plus percent range.
I mean, I understand why you want to drill down to the small pieces, but I think arbitrary quarterly cutoffs can box you in a little bit, and you want to look at the bigger picture.
Youssef Squali - Analyst
I don't know if you're in a position to give some details on this new product, the storage and archiving service.
Can you talk about, maybe, pricing and the functionality (inaudible) --?
Scott Jarus - President
Actually, I can't talk about pricing yet because it hasn't been set yet.
What I can tell you is, as I stated, we anticipate offering storage and archiving at a certain level, bundled into the existing subscription rate that our paid customers -- and by paid I mean noncorporates or the individual paid customers -- already receive, and then offering those same subscribers the ability to increase that level of storage incrementally for additional dollars, which would, obviously, contribute to their ARPU.
But initially, it will be offered to all of our individual paid customers as a bundle into their existing subscription rate.
Youssef Squali - Analyst
Is there much of a hit to the bottom-line from that?
Scott Jarus - President
No.
Again, as I said, I think we've done a very good job of taking advantage of the technology we acquired through Electric Mail and using the e-mail platform, as the engine for our storage and archiving has allowed us, enabled us to offer storage and archiving at a very, very inexpensive rate to our customers.
Youssef Squali - Analyst
That's very good, thanks a lot.
Operator
Joe Noel, Pacific Growth.
Joe Noel - Analyst
A couple of quick ones.
Can you talk a little bit about your cost of goods sold and the components there, and what is happening with the actual cost of those components?
And also, on the bottom-end of your ranges -- they seem a little bit unreasonable.
I think you'd have to do 23 cents for Q3 and Q4 to earn $1 this year.
Is there a reason why you're maintaining the low-end of that guidance there?
Scott Jarus - President
In answer to your second question, just as a matter of policy, we have not revisited and don't revisit the lower-end of the range.
As we said last quarter, we were expecting to operate at the higher-end of the range.
We've, obviously, now raised guidance higher than the old higher-end of the range, but we've not gone back to do any analysis in terms of raising the lower-end of the range.
So we just left it in place.
Joe Noel - Analyst
And what about on the cost of goods sold?
Scott Turicchi - CFO
Cost of goods sold -- I don't know if you're talking about in percentages or in absolute dollars.
First of all, the components of cost of goods sold (indiscernible) on the same page is primarily network cost, aided by customer service and support and credit card processing fees and some depreciation.
Joe Noel - Analyst
(indiscernible) network cost?
Scott Turicchi - CFO
The network cost -- I don't think we're seeing any material change in the cost.
We, obviously, in terms of absolute dollars, continue to add to the network to cover more cities, more territories, add additional capacity to the existing pops.
So that's why you're seeing an increase in absolute dollars in cost of goods sold.
Also, some of the other components are also rising in terms of CS and credit card processing fees, because as we have more credit card paying customers we have more credit card processing fees every time we go and bill them.
But there's no material fundamental change in the cost structure of either the network, customer service or credit card processing.
Joe Noel - Analyst
What kind of guidance can you give us for a gross margin going forward here?
Scott Turicchi - CFO
I think that we've been now a couple of quarters, a few quarters, consistently operating around 84 percent.
And I don't see any reason why that won't continue.
Joe Noel - Analyst
Thanks a lot.
Scott Jarus - President
I have one e-mail question that just came in.
Can you address why advertising revenue has declined over the last two quarters while the free subscriber base has dramatically increased?
Is there a lag effect?
Also odd given the described general increase in web ad industry fees of 25 to 30 percent.
You have to understand that the advertising that we sell that goes to our free base of subscribers is e-mail advertising; it arrives as e-mail as opposed to what is considered -- what is usually considered for web-based marketing, banners, advertising spots or sponsorships, or even buying real estate on webpages.
They're two very, very -- well, two or three very, very different forms of advertising.
And unfortunately for us, because of the way we advertise through e-mail and through messaging, using e-mail as a vehicle, and what has gone on in the spam world, the favoritism of e-mail advertising is lower than it has been.
And again, it's completely different than other web marketing tools that are out there.
By the way, search engines have also taken on more and more of a role in web marketing.
And again, e-mail is kind of the lowest form, if you will, of web marketing that is out there.
And we are -- and because of spam -- it is an unfortunate consequence of spam -- it's not in good favor right now because of people's concerns about being tagged as spam, even if it's not really spam.
Scott Turicchi - CFO
Having said that, though, it is relatively immaterial to the Company as a whole in terms of the volumes of it.
And as we've said in the past, given where our overall revenue mix comes from and the great predominance in subscriber revenue, that is where we focus really all of the efforts of the Company.
If you look at our FTEs, literally we have less than two people on an FTE basis focused on the advertising revenue stream, and almost 200 on other aspects of the business.
We also, as we have said before -- you asked -- a question was asked about the free base is growing.
The answer is yes it is, but we also will take in various periods some of the real estate that might be normally allocated to advertising for third parties and use it for our own purposes.
And because of the great predominance of our revenue being subscriber revenue, and the free base really being there to generate future paid subs, to the extent some advertising revenue gets moved from third parties to ourselves, that will be done, has been done and will continue to be done.
Scott Jarus - President
And just to finish up that thought, we have a limited amount of focus, if you will, on the importance of where we spend our energy.
And we would prefer to focus on up-selling our free base of customers to paid subscriptions rather than on the advertising component, which, again, is a very small part of our total revenue.
Advertising for the quarter was only $650,000 of a base of 25.8 million.
So you have to focus on the right thing.
That was the last question we had on e-mail.
I don't know if there's any more phone questions.
Operator
Gentleman, there are no further questions at this time.
I will turn it over to management for closing comments.
Scott Turicchi - CFO
I think that's it.
We look forward to talking with you again at the end of this quarter, and it's roughly the third week of October.
I will say that we are scheduled to speak at a couple of investor conferences intra-quarter; as those become public we will announce them, and we encourage you to listen in.
Thank you very much for your attention.
Operator
Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time.
Thank you for your participation.