Ziff Davis Inc (ZD) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications third-quarter earnings conference call.

I would now like to introduce Mr. Scott Jarus, President of the Company, and Mr. Scott Turicchi, Chief Financial Officer.

Thank you, gentlemen, you may begin.

Welcome to j2 Global's investor conference call for the third quarter of fiscal year 2004.

As the operator just mentioned, I'm Scott Turicchi, the Company's Chief Financial Officer, and joining me today is Scott Jarus, our President, and Gregg Kalvin, our Chief Accounting Officer.

We will be discussing the third-quarter financial results as well as the business prospects for the remainder of the year.

In addition, we have provided financial guidance for the fourth quarter and fiscal year 2004 as well as a look into fiscal year 2005.

A copy of our presentation is available at our website, www.j2global.com.

As a reminder, please turn off your pop-up blockers to be able to see the presentation.

If you've not received a copy of the press release you may access it through our corporate website at j2global.com/press.

After completing the formal presentation we'll be conducting a Q&A session; the operator will instruct you at that time regarding the procedures for asking a question.

In addition, you may e-mail questions at any time to 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 will 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 slideshow for the webcast.

We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements.

I'll now turn to the results for the quarter.

This was another outstanding quarter for j2 Global.

Our revenues hit a record high and grew 47 percent year-over-year to 27.8 million.

Our gross profit margin remained steady at 84.3 percent.

Our earnings before taxes rose 65 percent year-over-year to $12.4 million in Q3 or 44.8 percent of revenues.

On a per share basis earnings before tax per share was 49 cents, up from 30 cents per share in the third quarter of 2003.

Our net earnings were 32 per share, a penny above our guidance, and this included for GAAP purposes an effective tax rate of approximately 35 percent.

Free cash flow hit a new high of 11.9 million and funds available to grow our business rose to 83.9 million.

We believe that these demonstrate our fundamental strength of our business and our business model.

At this time Scott Jarus will take you through some of the highlights of the quarter contained in our current IR presentation.

As Scott alluded to, we had a very good quarter this quarter.

Qualitatively we experienced the best quarterly paid signups in the Company's history.

We continued to grow our advertising support and free base of customers.

In addition we added dozens of new cities to our networks and completed another major milestone in our international localization which I will talk to in just a moment.

I now refer you to the investor presentation which, again, you can find on our website at www.j2global.com, and would get you to turn to slide number 4 in the presentation which is our mission statement.

As you know, we have continued to fill out this mission statement in the past quarter.

We did this through the acquisition of Onebox, a unified messaging or unified communication services provider that was provided by -- under the name of Call Sciences as a corporate entity.

And that was completed over this quarter and we're now currently in the process of integrating the Onebox services into our general core of services and promoting their unified communication services through the Onebox brand.

Turning to the next slide, slide number 5, you see the various brands we market our products under.

This is a slight change from in the past.

You'll notice there's an oval around certain of the brands.

These brands represent our DID-based business.

And for those of you who aren't familiar -- DIDs are direct inward dial numbers or telephone numbers.

It's very important for you to understand that we have two components to our business -- a DID-based business and a non DID-based business, the brands which are in the oval are our DID-based businesses.

Turning to slide number 6, the unique assets.

As previously stated, we added more than a quarter of a million new subscribers to our customer base during Q3.

This was the result of our sales and marketing spend earlier this year and our continued success in attracting customers directly to our website and converting free customers to our paid subscription services.

In addition, the number of marketing partnerships we now have has increased and we are continuing to explore new and diverse opportunities including, as was previously announced, some targeted off-line marketing.

We added several dozen new cities to our network of locations where we can now provide local fax to e-mail numbers to our customers.

Within the next several weeks we anticipate announcing the addition of several new countries to our network.

Our total inventory of telephone numbers rose by 1.8 million, primarily the result of our acquisition of Call Sciences which has a large number of calling party paid numbers in the United Kingdom which we count as free numbers.

The number of patents owned and pending for j2 Global increased during the quarter as a 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 29th for additional details regarding this acquisition.

You can also refer to prior and subsequent press releases regarding our defense of these patents against a couple of companies.

Our cash and investment position continued to grow, now totaling almost 84 million, an increase of more than 10 million over the last quarter.

This is in spite of the fact that we spent cash during the quarter acquiring the NetOffice Solutions patents which I referenced just a minute ago.

Turning to slide number 7, our subscriber profile, 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 continue to vary with the movement of general interest rates.

However, the impact of 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 8, subscriber acquisition.

As we've 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 via credit card or, in the case of our international businesses, utilize calling party paid service.

We also have small to midsize businesses looking for simple, efficient and cost-effective messaging solutions and large enterprise and governmental agencies looking to improve their processes, eliminate costly infrastructure and enhance their internal communications.

With regard to the new marketing partnerships which I talked about a minute ago, most notably in Q3 we can now be found on the free Hotmail site.

This is similar to our placement on the Yahoo! mail site where we have a button, if you well, on the left side of the page which directs people to our free or paid websites for signup.

In anticipation of the questions that I'm sure we'll be asked at the end, let me go ahead and give an answer.

We had 23 promotional online marketing relationships at the end of Q3, that was up from 17 we had last quarter.

In addition, we now have placement on United Online's two e-mail services, NetZero and Juno.

And anticipating one other question -- our corporate sales organization is now made up of a total of 16 individuals, 14 of which are direct feet on the street salespeople and two of them are in-house salespeople selling to our eFax corporate website.

Turning to side number 9, our paid subscription drivers.

This slide is relatively new and it's a very important slide so that we can explain to you what are the five drivers for our paid subscription additions on a quarter-by-quarter and, frankly, on a week by week and month-by-month basis?

Subscribers coming directly to the Company's website have historically been our number one source of paid subscribers.

The remaining four sources for our paid subscribers, the free to paid subscriber upgrades, our eFax corporate SME sales, direct enterprise sales and direct marketing spend for paid subscribers all vary from week-to-week, month-to-month and quarter-to-quarter in the order of importance to the gross and net paid additions to our Company and they switch places depending on the programs we have in place at any particular time.

Again, it is very important for our shareholders to understand how we are getting customers and understanding that the primary driver right now and has been historically are subscribers coming directly to our website through brand awareness or search engine discovery.

Turning to slide number 10, the active telephone numbers chart.

As I previously stated, we experienced our best quarterly paid signups in the Company's history, adding just under 46,000 new subscribers in Q3.

We also grew our free base of customers by more than a quarter of a million which includes both advertising supported subscribers primarily in North America and calling party paid customers primarily in Europe.

Our cancellation rate increased slightly over the previous quarter but still remains within the range of our historic lows.

The ARPU of our paid base declined slightly over the previous quarter due primarily to the addition to our base of lower-priced services from the call sciences acquisition and a seasonal drop in the number of pages received and sent over our service.

Slide 11, total revenues.

As a reminder, DID-based revenues, or those revenues coming from telephone numbers, are all the revenues which are associated with telephone numbers.

These include not only the revenues from paid DIDs, but the revenues received to our free advertising supported and calling party paid DIDs.

DID-based revenues along with the six components of our subscriber revenues are the two key metrics for understanding j2 Global's core business and they account for more than 93 percent of our total revenues.

Again, that's why they are very, very important for you to understand.

A couple of highlights.

DID-based revenues grow within a fairly narrow band over the past 10 quarters.

Non DID-based revenues which include jBlast, Electric Mail, M4 Internet and Licensing Services which is primarily software sales, tend to grow in an uneven basis throughout time.

As you can see, the growth rate for our non DID-based revenues tend to move around and I'll remind everyone that the jump in non DID-based revenues from Q1 to Q2 was due primarily to the first full quarter's inclusion of the Electric Mail business.

Turning to slide number 12, our global network presence.

We now have 56 POPs worldwide, 36 of which are in the United States which now support more than 1400 cities in which we can offer local fax to e-mail and other messaging service local telephone numbers.

We've also added some statistics to this slide which demonstrate the size of the U.S. and world markets.

It is for these reasons, particularly on the international front, that we are expanding our network and localizing our services.

As a matter-of-fact, I'm pleased to report that as of last week j2 global is now offering fully localized service in Spanish, German, French and Dutch.

This means that the population of these -- countries speaking those languages can now subscribe to our service in their native language and use most native currencies.

In addition, we will begin localized marketing programs in these languages to attract a wider international subscriber base.

Turning to the next slide, our product roadmap.

I'm pleased to report that in the past week we launched the final beta test of the storage and archiving service for our eFax fax to e-mail subscribers.

This includes a week's worth of message storage which is bundled in the existing subscription pricing as well as an opportunity for subscribers to increase the amount of storage for an additional fee.

Full production release of our message storage and archiving service, including an identical offering for our jConnect subscribers, will occur within the next couple of weeks.

You'll also notice that we have added Onebox and its find me/follow me service to our product roadmap.

While we're still on the process of integrating Onebox into the Company, we are looking forward to future synergistic opportunities between the existing j2 Global base of customers and the services offered through the Onebox product suite.

I'm now going to turn the presentation back over to Scott Turicchi who will walk you through the financial highlights for the quarter.

If you turn to slide 16 you'll see not only the 30 consecutive quarters of revenue growth, but we've also added now the 11 consecutive quarters of positive and growing GAAP operating earnings -- that's in the smaller bar you see in that chart.

Slide 17 shows how we report our revenues on a GAAP basis.

As we've stated before, about 97 percent of our total revenues are derived from our subscription services, the other 3 percent coming from advertising and various licensing programs.

So clearly our revenue continues to be driven by what happens in our subscription revenue streams.

Slide 18 gives you a little greater insight into that.

About 71 percent of that total subscription revenue is contractually fixed, meaning that whether it's per DID or per e-mail box there is a fixed payment that is paid every month for which you have access to the service.

About 29 percent of the revenue is variable which is a function of how the customers actually use the service.

As we've seen over the last couple of years, generally speaking the second quarter showed the best relative growth in variable revenue, meaning Q2 versus Q1, and Q3 shows a declining growth rate relative to Q2 during -- primarily due to summer vacation issues that affect our business customers and we also expect to see seasonality affect the business during the fourth quarter because of Thanksgiving, Christmas, New Year's and the holidays.

Slide 19 is a rolling pictorial presentation of our cost structure.

As I mentioned earlier, our cost of goods sold remain relatively constant resulting in an 84.3 percent gross margin.

Our operating margin went up this quarter to 43 percent aided largely by the fact that, as we mentioned last quarter, we would hold the sales and marketing spend roughly constant with what we spend in Q2.

I'm happy to say that we were able to do that while still achieving the results that you've heard about.

Slide 20 shows you the dynamic nature of our business that we are predominantly a cash oriented business.

As I mentioned at the beginning of the presentation, a little under $12 million of free cash flow this quarter, well in excess of our GAAP earnings -- and that's after we spent almost $1.4 million in CapEx for the quarter.

Slide 21 gets into our guidance for the final quarter of the year, the fourth quarter.

We're expecting revenues of approximately $29.5 million and earnings per share fully diluted of 34 cents.

That assumes a 35 percent tax rate and approximately 25.8 million shares outstanding in the fully diluted calculation.

Slide 22 gives you some insight into what we're looking for in fiscal year 2005.

We're looking for revenues to grow approximately 40 percent over fiscal year 2004 revenues and net earnings to grow between 30 and 35 percent over fiscal 2004 earnings.

I want to point out -- we are deliberately, as we look into fiscal '05, making investments in certain areas not all of which will have an immediate payback during the fiscal 2005 year.

Specifically we will be putting more money into expanding our international customer base.

As Scott mentioned, we've already seen some very good traction with particularly what we've been doing in Dutch (ph) -- following up on the Jump acquisition earlier this year, now we have access to other multi language websites including Spanish, French and German.

We're also in the process, as we mentioned before, of developing and marketing new service offerings specifically eVoice also that would be initiatives for the Onebox product.

And finally, as we've seen this quarter, we believe it is prudent to continue to fuel the advertising or the spend for the free base of customers.

As you know, going into this year our goal was to increase our free base by 2 million or more.

We were able to do that by the end of the second quarter.

Our goal is to continue to increase that free base of customers by at least an equal amount meaning 2 million or more into next year.

And as you know, that will require a spend with (indiscernible) payback coming anywhere from 4 to 16 months later.

Scott?

Just to wrap it up, on our recent events on the next slide, as already mentioned, we have launched the localized Spanish, German and French versions of eFax which localizes the language, currency and marketing efforts that we have there.

That will be also made available for our other products in the near future.

We acquired the Onebox unified messaging business and related assets from Call Sciences and, as Scott had indicated and I just before that, we anticipate on growing that business and adding some additional functionality to it.

And as was announced in a press release over the quarter, we launched j2 Global's first major credit card marketing partnership with Advanta Corporation which is a leading provider or issuer of business credit cards to small businesses.

This in essence is our first recent off-line marketing program that we're working through and we're very excited about that one as well.

So that wraps up the formal presentation.

We'll now turn this back to the operator who can open the floor up for questions.

(OPERATOR INSTRUCTIONS) Bill Benton, William Blair.

I know the one question I know a lot of people are thinking about is this conversion on the free to paid.

I know you get customers from multiple channels but I'm curious if you would be willing to talk about maybe what your early experience has been from the new marketing channels and specifically maybe if you could talk about how the conversions took place during the quarter, whether they ramped or were they pretty even?

How important were they do the overall additions during the quarter?

The answer is that, as we stated, we were using this past quarter to really study and analyze some of the marketing programs that we initiated in Q1 and Q2.

You're correct, the data is still relatively early stage but obviously we've got about 3 or 4 months of data.

The conversion was within our historical range of expectation.

So there wasn't really much of a surprise there.

We'll continue to monitor it.

As you heard, we added some new marketing programs during this quarter.

We obviously feel that the programs are successful enough that we think it's a good driver for next year.

As Scott mentioned though -- Scott Jarus mentioned earlier though, still was not and we didn't expect it to be the primary contributor grossed add in this quarter and I don't suspect it will be next quarter either.

But it's not acting any differently than your historical channel?

Fundamentally no.

No, we have a range on a monthly basis, so some months are higher than others and so we're looking at the conversions by month relative to the base that is eligible.

And for each of the 3 months in Q3 the conversions were within those ranges.

Okay.

And then just one quick one.

I know you're talking more aggressively on the international expansion front.

As you think about the marketing channels and getting to that customer base on a free basis or otherwise what are your thoughts?

Any preliminary thoughts there?

Well, what we've seen so far has been the calling party paid revenue model and we've seen it really from two sources, those that we've gotten through our Dutch experience, which, as I mentioned earlier, came through the Jump acquisition and then the inherent growth in that business subsequent to acquiring it.

And then secondly, although on a much more limited basis, we have some calling party pay revenue that comes from the Onebox acquisition and that's particularly targeted at the UK.

I think it's important to note here for those that may not be familiar with the calling party paid model that exists in Europe.

But basically what it amounts to is that the calling party, as the name implies, pays for the toll of the call coming into our subscriber.

So we give out a number to our subscriber and anybody who wishes to deliver a fax or a voice mail to them using our number is actually paying the toll.

And the way it works is that the carrier who handles the call collects the money from the calling party and then splits that money on some sort of a revenue share basis with themselves and most probably the end company which in this case would be us.

And that's important to recognize because in a calling party paid model, unlike a free advertising supported model where we have a certain threshold or limit at how much usage we allow a free advertising supported customer to consume, in a calling party paid model we typically don't -- not only don't we care how much usage a "free customer" consumes but we encourage a lot of usage.

Because with a significant amount of usage in a calling party paid model you can actually get an ARPU which mirrors what would be a paid ARPU in the United States.

So we don't have the same threshold set up for our free customers in the UK that we have in the United States.

And that's worked well for the pre paid guys over there as well on the wireless side?

That's correct.

To go back to that question, are you using any other channels?

Forms in terms of getting the free customers internationally?

It works a little bit different than in the United States.

The message that we predominantly use is working with portals and ISPs where we enter into a contract with them and they provide us access to their end-user customer base for so many solicitations given the life of the contract.

Generally what happens is there will be some revenues split or revenue share based upon a customers that actually signup based upon those marketing programs.

That's different than say in the United States where we're either buying search or we've got fixed or quasi fixed placement in the likes of an AOL or a Hotmail and each customer that clicks becomes a free customer of ours and then the lifecycle management kicks in and that customer 00 hopefully becomes direct paid at some point and we keep 100 cents on the dollar.

Great, guys.

Solid quarter.

Youssef Squali, Jefferies & Co.

A couple of questions.

Still on this conversion.

One way of looking at this is to basically look at your 46,000 net DID added in the quarter after you guys have added about 1.6 million freeze in the first half.

If I look at the same stats in last year, you've added 900,000 free and you've added roughly 31,000.

The ratio of that goes from 3.4 percent last year to about 2.9 percent this year.

So there is a declining conversion.

I understand that there are obviously different ways of defining conversion.

Number one, can you kind of tell me why this is not the right way of looking at it?

Let's take that question first before you ask your second question.

The answer is yes, that's not the right way to look at it because you're dealing with nets instead of grosses.

Obviously internally here we look at the gross signups, we look at the gross conversions, and we look at the gross eligible base.

So, if you go back to one of the earlier slides we have five generators of gross add in a given month or quarter.

As Scott Jarus mentioned historically, and it continues to be true, the number one driver has been what we call direct to website -- whether that comes through word of mouth, or surf or some other means.

In terms of how we score the free to paid, what we look at is how many gross customers came to us in a given month or quarter and how many were in the eligible pool meaning, they were aged between months four and sixteen of their life as a free customer and what is the conversion of that base relative to the number of direct paying customers we got from the programs.

You are dealing with net numbers and I think you end up with some unusual math.

We are looking at all of the gross numbers so everything is all squared up.

And as I mentioned, we have seen that there is historically a range of conversion when you look at the base that is eligible and the actual number it produces, and in each of the three months and for the quarter as a whole, we had had conversions that feel within the range.

As a clarification why wouldn't you see this as the primary driver for subscriber growth next quarter since you have added so many in the first half?

I would expect it to be a more meaningful contributor.

But once again looking at how the growth comes to us there has generally been a very comfortable lead between the direct to Website acquisition of customers and whichever falls into the number two category and remember its not always free to paid.

It could be one of the business channels or it could be direct acquisition of paid customers through direct placement.

Okay.

And on the marketing front you spent the same amount this quarter on marketing as you spent the previous quarter, i.e. in Q2, yet you've added about a quarter -- or you've added about a quarter of a million versus a million last quarter.

Can you tell us what went on there?

Actually we added almost an equal amount, if not more so, of (indiscernible) because, once again, it's gross how the dollars are spent.

We went through arguably a more aggressive cleanup on the cancel side this quarter so the net reflected was about 250 versus a million.

But we actually had greater productivity in the third quarter in terms of the rate and the cost per acquisition of our free signups.

And I think that had to do with the fact that, as we said, we were going to study the marketing programs that we began in Q1 and Q2 and we were able to find ways to improve some of those programs to either get us better yields or to reduce the cost of acquisitions.

But the growth was actually not dissimilar from Q2 signups.

Okay.

Lastly, which tax assumption do you have in your 30 to 35 percent year-on-year growth in the --?

We seem to have been in the last couple quarters and at best we can tell right now hovering around 35 percent tax rate.

And that's true not only for the fourth-quarter guidance but also for the fiscal '05 guidance.

Fair enough, thanks.

Nice quarter.

Joe Noel, Pacific Growth Equities.

A quick question here.

I'm a little surprised to see the G&A expenses move up a little bit here on a percent of revenue, and up about $600,000 in real terms and I think you did a great job on sales and marketing.

But it seems like you spent a little extra on G&A.

Can you explain really what happened there?

That is a good point.

I actually as a CFO don't like to see that go up either.

But part of it -- and really what accounts for all of the percentage change if you will or the increase had to do with some professional fees for Sarbanes-Oxley, various tax and accounting issues and then we did hire a few more people into our network ops and obviously absorbed some of the G&A from Call Sciences.

That really accounted for about half or 300,000 of that 600,000 increase.

Would we expect to be down sequentially in dollar terms in Q4?

Unfortunately you've still got Sarbanes-Oxley going on and probably will through the end of the year.

So no, I don't expect that to change.

The professional fees yes, I would expect obviously some year end accounting fees but probably not have them in some other areas in Q4.

And I don't think there's going to be any material change in the hiring of our net ops people or Call Sciences personnel.

In those areas I would expect to see a decrease.

So it is possible we will see it down sequentially?

Yes, in dollars and in percentage.

What about on the sales and marketing side?

On a historical basis you're spending still quite a bit on sales and marketing.

I realize you have more customers to serve, but what about just directionally on sales and marketing for Q4?

I would expect it to be in dollars up a bit in part because we, as I mentioned, want to go out and continue the free acquisition program.

So to the extent we can get even more deals in house you could see some acceleration of spending there.

Also remember that of the 4.7 or 4.8, a large chunk of that is people expense.

So unless we're going to change the number of people in our various channels of acquisition, that's pretty much baked in and isn't going to move.

What's going to move is the marginal dollars that are discretionary above and beyond that which is in the range of 2.5 million a quarter.

As I say, I would expect to go up a little bit in dollars this quarter, it may or may not go up as a percentage of reps.

Okay.

And since we've got two of those done, what about R&D?

It looks like you're -- you boosted R&D a little bit, but if you look at it relative to Q1 you're I guess a little bit over $400,000 higher.

Is that direct employee cost there?

It is a couple of things.

One is it's a reflection of the addition of Electric Mail and Call Sciences and their R&D engineering organizations.

And then secondly, we are increasing the spend on engineering a bit both in this -- we did in this past quarter, we will in Q4, and we have a small increase also in next year's guidance as well.

This is being done because we have a sufficient enough pipeline of projects which we want to get out the door earlier rather than later next year and this requires engineering talent in order to get that done.

Okay, thank you very much.

Steve Freitas, Harris Nesbitt.

Can you hear me okay?

Absolutely.

Since you don't have the gross add data, maybe looking at it this way if you can comment on a good way to look at things.

So in terms of -- if I look at the last 8 quarters for instance, you've been able to increase the ratio of paid users to total users and churn hasn't spiked up materially, which is obviously to your credit and a good sign.

In some ways it seems counterintuitive in so far as one might expect the yields that you get on your marginal or incremental free users should go down over time.

So in some ways it sounds like you're doing things smarter or better.

Can you just comment on --?

I think you're right, it's the latter, but I don't know that the math necessarily is relevant or credible in terms of how you get there.

I absolutely believe that we have refined and made more efficient our sales and marketing program and our lifecycle management.

So I think that yes, there's net net better experience and better efficiency with which we gain customers and with which we lifecycle management.

However, I don't think that you can use the math that you're trying to do to prove that.

I understand the math is the math, but once again you're dealing with taking the net number in terms of the number of bids outstanding at the end of a period against a net free number and you're making some inference that most or all of our customers somehow traveled through the free product which is not the case.

So really two separate equations are going on -- how are we doing with the free and its conversion and then how are we doing with other forms of customer acquisition and are we getting better at those other forms of customer acquisition.

And presumably over time those other forms are a growing part of the --?

They are a growing part.

They are.

In fact, the equation is somewhat dynamic.

If you take out the direct to website, which is something that you can indirectly influence through brand advertising, through search and other things, and you look at the other four means that we currently have for customer acquisition -- they do jockey for position on a month-to-month basis.

And so, as we put new programs in place, as we target our efforts into a given area you will see it influence the relative ranking of those other four categories.

As you look at the competitive environment it appears that over time you've either acquired or marginalized most of your first generation competitors and at the same time obviously demonstrating excellent profit potential for the space and validating the market.

So I would think that as you continue to grow and grow profitably, obviously, as you've done, you're bound to experience the next wave of competitive entry.

So I was wondering who do you think -- where do you think the next breed of formidable competitors will come from?

Is it portal providers for instance or service providers?

Kind of your thoughts as to where you think the next -- where you start bumping into the next wave of competition?

First of all, I'll answer the question acknowledging the fact that we have intellectual property which we think gives us a leg up on competition and so let's ignore that for a minute and assume that that gets taken care of through a licensing arrangement or whatever.

Competition for us is always possible, but it requires the understanding and acknowledgement of a couple of competitive advantages that -- or barriers to entry that we have that others would have to overcome.

One is this network of over 1400 locations where we can offer local telephone numbers, that's -- while not rocket science to build is difficult to build and requires significant capital in order to deploy that in a reasonable time frame and at reasonable cost.

Number two, we have the advantage of having millions upon millions of customers that are already paying, they're already contributing to our success either through paid subscription or a free advertising supported a base or a CPP base.

So there is a critical mass of customers out there that you would have to compete against initially.

Third -- and it shouldn't be trivialized -- our expertise in knowing how to market to this base of customers through the web, using our lifecycle management technology and expertise, etc., is a critical element in the success that we have and will have.

And that's not something that someone can easily go out and build without knowing exactly how to do it and what the nature of this marketing strategy is.

So I would say that while it is certainly possible that we could gain competitors particularly those with deep pockets who could build a network and deploy telephone numbers and certainly staff up to do what they need to do, I think there is significant barriers to entry through our technology, through our expertise in marketing and lastly, through our intellectual property which we think is a good defense and protection for us as well as a licensing opportunity for those that want to complete.

And frankly, if they want to compete and license our technology from us that would be wonderful.

Can you comment specifically the type of competitors that you think -- the ones that keep you up at night thinking about?

We don't really think about competitors in the larger sense meaning look out for a behemoth as rolling down the hill at us.

We look more interestingly at more mid-sized or smaller competitors who could evolve their existing product to do things which are similar to ours as opposed to a new entrant who may just have size on its side and be able to steam roller over us.

Again, there are companies who obviously don't have any trouble getting telephone numbers such as the phone companies and the global phone companies.

There are companies who don't have a problem with web marketing such as portals and ISPs.

And there are companies who are messaging companies such as e-mail -- e-mail companies which have messaging technology.

I think the thing that differentiates us from all of them aside from the assets which I mentioned earlier is that we already do this combination of network, of web marketing and of messaging all in one and there just isn't another significant competitor out there that has that skill set.

Good answers.

Thank you, gentlemen.

Edward Chang (ph), Rodman & Renshaw.

At the end of 2004 what do you think the revenue mix is going to be geographically between the U.S. and international?

And at the end of 2005 what's a reasonable goal for you guys to hit?

I think in 2004 we'll be still 90 percent plus U.S. or U.S. and Canada if you will -- North America with the rest being the rest of the world.

I am hopeful that that mix will shift by the end of '05 with a little higher percentage international.

But obviously we have a very strong, healthy growing domestic business.

So I don't expect it to be doubling, for example, in terms of the percentage share of the overall business given the health of the U.S. and Canadian business.

But I would expect to see some strides made and some increases both in real dollars and percentage of (multiple speakers).

So what do you think your subscriber -- international subscriber growth to get to being that you are targeting the market pretty aggressively?

We haven't broken it down that way.

I think in terms of dollars and percentage of the international business will grow very aggressively next year but it will still be a small part the overall company given the health of the U.S. business.

It's fighting an upstream battle in that the domestic North American business is growing so healthfully -- if that's a word -- that even if the international business, which we expect to grow, will grow also healthfully.

It's a large growth on a small relative number whereas the domestic is also growing healthy on a very large number.

Got you.

Are you seeing a different market in Europe between enterprise and your individual subscriber?

Would they readily more adopt the enterprise products faster do you think or is that going to be a tougher sell for you guys going forward?

It's a very good question and interestingly enough the answer can't be given on just a breakdown that says international versus domestic because what we've already discovered is international even has delineations between countries.

And so I'll answer your question with a little more granularity than you asked it.

And that is that there are certain countries such as the UK where we believe there is a similar sort of opportunity between individual sales and corporate or enterprise sales and then there are other countries -- what comes to mind is France as an example, which has a different dynamic than the UK does as an example.

Whereas most people get their business services, if you will, through large corporations and don't have a tremendous amount of penetration in their homes of business services such as fax numbers or even e-mail to that regard.

So we're noticing significant differences between countries that will determine whether our push is primarily individual or small business or corporate/enterprise or a combination of the two or three of them.

So I guess what I'm saying is we're marketing it on a country-by-country basis and, by the way, when we expand into other international markets -- just to give you an example like Asia eventually -- we're already in Hong Kong.

We already know that the Chinese have a completely different method of acquisition, if you will, in that they are not particularly adept at understanding advertising.

They don't really like it.

And secondarily, they have an issue with being very monolithic in their business acumen meaning that they tend to fall into corporate structures in some markets as opposed to individual structures.

So we're constantly testing and investigating various marketing methods almost on a country-by-country basis.

So with diverse environments like that what kind of additions to head count in your international side do you guys see within the next year?

You will see additions to head count internationally in the areas of marketing, you will see some additions in the areas of operations in that we're now, frankly, because the base is already growing and will be larger next year -- we will need to be able to operate within -- more efficiently within their time zones.

We're already a 24 by 7 organization, but the truth of the matter is that at 2:00 or 3:00 in the morning there's less people than there are at 2:00 or 3:00 in the afternoon here and so we want to make sure that we're giving the level of service and the level of operations internationally that we do here.

So we will be placing some operations people in Europe that can handle the time zone differences.

I think you may see some small, very small number of G&A over there but nothing material.

Great.

And my last question is -- I know Vodafone is working on some sort of service where you can push SMS out from the desktop and actually receive it to the desktop from someone on a mobile device.

Do you guys see -- is it worth your while to maybe explore that with SMS and MMS getting so popular?

As you will see on our product roadmap, we have been talking about and have been investigating the impact of instant messaging and SMS or alternate message delivery methods for quite some time.

We are very interested in mobility and the ability for mobile users to receive their messages both faxes, voicemail as well as other things like find me/follow me and other unified communications or unified messaging services on their mobile devices.

And I would think that in the not too distant future you'll see some announcements from us of services or tweaks to our existing service which are geared towards the mobile environment.

And that market would be -- do you think that would come out primarily quicker in Europe or in the North American market?

I don't know the answer to that.

The mobile market in the United States is interestingly enough growing very fast, especially in the last 6 to 8 months interestingly.

And I don't know what the future will bring on the mobile side with regard to market penetration.

I was just saying that because I would think the Europeans get the better (indiscernible) the cooler phones before we do.

They historically have, but interestingly enough we're beginning to see somewhat of a shift -- not an entire shift.

As an example, I -- just one of our employees today just showed me he had just acquired the new Blackberry phone which -- I guess it's still called the Blackberry -- but it's a very highly functional PDA that's very slick and that came out here I think first.

Okay.

Thanks, guys.

Steve Levenson, Advest.

Good afternoon, Scott and Scott.

You've been able to keep your gross margin at this level for a while now.

Have you been able to get continued network expense reductions on your back haul arrangements or is there something else doing it?

Let me bifurcate the question in two parts.

On our core, if you will, eFax jConnect business the network cost reductions, while we're always paying particular attention to it, are not going to change materially or have not changed materially because we were I think very, very successful in getting them down to the levels they're at.

That being said, we are working on reduction of our network expenses when it comes to the acquisitions we've made such as Jump internationally, such as Call Sciences/Onebox domestically.

And so while currently our network expense is higher than it would be -- you wouldn't notice it because it's such a small number, but that will be coming down as well as we gain some more efficiencies with the recent acquisition.

So I think in real dollars -- I forget as a percent of revenue -- but in real dollars I actually think you'll see our networking costs go up slightly over the course of the year primarily because we're adding new locations, particularly internationally, which require us to put POPs in country or have network to that country.

And as I mentioned in the presentation, we have a couple of countries that we're very excited to be able to introduce in the very near future which, again, cost us money to do.

But I don't think you'll see a significant increase, no.

Second item -- sort of a two-part question.

There was a discussion before about competition.

But since you've been acting as an outsource provider of fax document management, messaging services to small-business, small to medium-size businesses and individuals, do you see a possibility of providing this service to other telcos or other telecommunications companies on an outsource basis including the voice over IP telcos?

The answer generally speaking is yes.

We think there is a significant opportunity out there for us to partner with various carriers, including the VoIP carriers, to provide a fax to e-mail solution with local number capabilities specifically in North America.

And we have been looking at that and we've been in discussions with various carriers about the opportunity.

I don't have anything that I can put my finger on right now and announce.

But again, we think there are some synergies out there, obvious ones, and we'd love to be able to leverage the carrier's ability to get directly to customers with our ability to provide them a functionality which they would find it very difficult and/or expensive to provide themselves.

Sounds good.

And in relation to that, you've got a lot of cash and you've been acquiring these intellectual property building blocks.

So what's the next step?

For both.

The cash remains a challenge for us.

It is something that we talk about internally all the time within management and within the Board.

I don't have anything to tell you other than we look at all of the options on a going forward basis and we are an inquisitive company as, you've seen over the course of the last 8 to 10 months.

The challenge for us is to be able to acquire something of substance, of size and so far we have not found a candidate that meets our strict requirements -- business requirements that is of size.

So we continue to make these small acquisitions where we can roll them in and make it an accretive business for us.

With regard to the intellectual property specifically, we obviously acquired the additional patent portfolio from NetOffice Solutions because we believe two things.

One is we want to offer additional services within the j2 Global suite and we're a firm believer that you need to have control over intellectual property before you can simply roll things out and hope for the best.

Secondarily, we believe that the portfolio also provides us some additional defense in some cases and some additional licensing opportunities for future revenue opportunities going forward.

Discipline is a good thing on the acquisition side.

Just one last one.

I noticed on the new marketing rather than in some instances looking for free people, you're giving them a month free and their choice of a number right there.

What's the hot spot or is it toll-free and do you have access to enough numbers to keep it going there?

We definitely have enough access to telephone numbers.

Obviously certain numbers are heavily restricted 212 in New York would be a classic example.

But generally speaking we have more than enough numbers to be able to offer local telephone numbers to our customers and we have access to get more.

The promotion that you're talking about is our paid promotion where we offer 30 days free and then they roll into a paid subscription model.

That's also been a successful program as well.

That one is actually not relatively new.

We've been doing that on an off for years now.

It goes into a cycle as to whether we believe it's time to energize that again and bring in direct pay customers.

And the hot spot is?

The hot spot for what?

Requests for numbers.

Geographically where are the hot spots, is that what you're asking?

Yes.

If you just take the top five markets in the United States you'll hit the top five markets for where we get local telephone numbers.

This is an example -- the 212 area code numbers, we get sporadic numbers here and there either from customers canceling or -- well, actually getting some 212 numbers from the Onebox acquisition.

Now they're not currently in our inventory because we have to migrate some customers around, but those will go into inventory and I can tell you that within hours or, at the very latest, days they will be gone.

So if you take the top five MSAs in North America and you've got the top five cities that are hot for us.

And by the way, we also have a very robust clientele who want toll-free numbers, U.S. toll-free numbers.

And that base of numbers is continuing to grow.

Thank you very much.

By the way, before we get to the next caller, assuming there is someone, I want to remind everyone that they can e-mail us questions directly right now to investor@j2global.com.

Okay, operator?

Tracer (ph) Thomas, Tracer Capital

Great quarter.

Quick question on the Advanta agreement.

I was wondering whether you got any subscribers from that towards the end of the quarter and what effect that might have had on the ARPU given the way you calculate it?

The simple answer is, yes, we've gotten some subscribers but it occurred at the very tail end of the quarter.

So the number of subscribers is completely de minimus at this point and would have no effect on ARPU.

Again, it occurred just at the tail end of the quarter, so no material impact on anything frankly from the Advanta thing yet.

Okay, great.

Thanks.

Youssef Squali, Jefferies & Co.

Just a couple follow-ups. (indiscernible) I was wondering if you could just go through the reasons why churn went up in a quarter where obviously you didn't have any price increase or anything?

It's been coming down nicely over the last several quarters?

That's one.

And -- well, I'll let you answer that before I hit you with the second.

Well, I don't think it moved in a range that was necessarily material.

The only thing that comes to mind is that we had one reseller relationship in Latin America that they want a take or pay program and we weren't getting payment from them.

So we decided to terminate that relationship and cancel those DIDs.

That probably modestly influenced the cancel rate negatively during the quarter.

But there was nothing that really stood out.

When you normalized your rate for that, would it have been flat at 2.4?

It probably would have been close.

In actuality, if you take it out to one more decimal place, it was something like 2.44 a quarter ago and something like 2.55 now, so it rounded 2.6.

If you take out the one reseller relationship it would have probably been very close to flat.

Okay.

And lastly, I think on last quarter's call you said that mortgages -- financial and mortgages accounted for roughly 10 to 15 percent of your total traffic.

Is that still the case here?

I would still say it's within that range, although it's probably migrating towards the lower end of that range.

I don't have a specific number for you right now, but it's certainly no larger a percentage of our business today.

It's a smaller percentage of our business today in Q3 than it was in Q2.

Thanks a lot.

Okay, we don't have any e-mail questions here.

Operator, is that it for you?

Yes, sir.

Okay, thank you very much.

Thank you and we look forward to talking with you again -- it will be in late January, early February for our Q4 results.

Thank you.

This concludes today's teleconference.

Thank you all for your participation.

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