Ziff Davis Inc (ZD) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for holding.

Welcome to the j2 Global Communications fourth-quarter and year-end 2004 earnings conference call.

At this time, all lines are in a listen-only mode to prevent background noise. (Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your hosts, Mr. Scott Jarus, President of j2 Global Communications, and j2 global communications global communications and Mr. Scott Turicchi, Chief Financial Officer of j2 Global Communications.

Thank you, gentlemen.

You may begin.

Thank you very much.

Good afternoon, and welcome to our Q4 and fiscal 2004 conference call.

As the operator has mentioned, I am Scott Turicchi, the Company's Chief Financial Officer, and in addition to Scott Jarus, our President, we also have Greg Kalvin, our Chief Accounting Officer, with us today.

We will be discussing the fiscal 2004 financial results, as well as our fourth-quarter financial results for 2004.

We will use this call to discuss the accomplishments that we achieved during the year of 2004, how they have positioned for the Company for continued growth into 2005 and beyond, and to discuss the marketing operational and financial initiatives that are underway here in 2005.

In addition, we have provided financial guidance for the first quarter and fiscal year 2005.

We will use the IR presentation as a road map for today's call.

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

Also, if you've not received a copy of the press release, you may access it at the same website.

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.

However, you may e-mail questions to investor@j2global.com at any time.

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 recent 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'd now like to turn to the financial results for the year.

This was a breakout year for j2 global and has enabled us to take a further step forward as a public company.

Our revenues crossed the $100 million threshold for the first time ever.

In fact, fiscal 2004 revenues increased to 106.3 million, up 48 percent, compared to 71.6 million in 2003.

Our gross profit margin continued to expand.

We experienced 84.5 percent gross margins for the year, compared to 81.4-percent gross margins in calendar year 2003.

Earnings before taxes rose 71 percent year over year to 47.2 million in 2004 or 44.4 percent of revenue.

On a per-share basis, earnings before taxes per share was $1.86, up from $1.10 in 2003.

Net earnings for the year were 31.6 million, compared to 35.8 million in 2003, and on a per-share basis, net earnings were $1.24 for 2004, versus $1.42 in 2003.

The decrease in net earnings and net earnings per share was due to the fact that we had a 33-percent effective tax rate that we accrued for in 2004, compared to a negative tax rate of 29 percent in calendar year 2003.

Now, the results for the quarter.

For the fourth quarter, revenue was 29.8 million, a 46-percent increase over the fourth quarter of 2003.

Our operating earnings rose 55 percent to 13.1 million, or 44 percent of revenue.

Earnings before income taxes were 13.2 million, compared to 8.6 million in the fourth quarter of 2003, and on a per-share basis, earnings before tax was 51 cents, up from 34 cents per share in Q4 2003.

Net earnings for the quarter were 9.6 million, compared to 17.6 million in Q4 2003, and on a per-share basis, net earnings were 37 cents versus 69 cents in Q4 2003.

The decrease in net earnings and net earnings per share was due to a 28-percent tax rate being accrued for in Q4 2004, compared to a negative tax rate of 104 percent in Q4 2003.

More importantly, due to the extensive amount of work that we did during the course of 2004, the focus on international marketing, and other efforts, we believe the Company's tax rate will be in the range of 25 to 28 percent for 2005.

Funds available to grow our business rose by approximately 10 million during the quarter to 93.8 million.

We believe that this demonstrates the fundamental strength of our business.

At this time, Scott Jarus will take us through some of the highlights contained in our IR presentation.

Thank you very much, Scott.

As you heard from Scott Turicchi and read in our press release, we had an outstanding fourth quarter, which capped an absolutely excellent year, both financially and operationally.

In 2004, we set the stage to dominate the market by taking several key operational strategic and financial steps, which put further distance between us and the rest of the marketplace.

Some of these things include -- we added several new countries and more than 400 new cities to our network, where we can now offer fax and voicemail-to-e-mail services.

We expanded the international localization of our services to include several more languages, currencies, and targeted marketing programs.

In addition, we grew the number of distribution channels through which we acquire paid customers.

And, we significantly grew and enhanced our portfolio of patents and intellectual property and added many new marketing partners, including some very big names.

We now have 28 partners, up from a little over a dozen a year ago.

In going through the presentation, I'm not going to hit on every one of the slides, so I will point you to the slides I will be speaking about.

The first one is slide #4, which is our mission statement, if you will.

As is evidenced by my previous comment, we continue to fill out our mission statement.

In addition to the expansion of our core services, we also made several acquisitions in 2004, including -- most notably -- Electric Mail, our growing hosted e-mail virus protection and scan detection company, targeting the SME market, and OneBox, our full-suite unified communications services company.

Turning to slide #5, which shows our brands, I want to, again, highlight -- as I have done in the past -- that the brands in the old will represent our DIDs or telephone number-based businesses, which will be discussed with more financial detail later in this presentation.

Turning to slide #6, the unique assets.

Since last quarter, we added more than a million new subscribers to our customer base during Q4, which represents a total subscriber increase of more than 3 million subscribers in 2004 over the previous year.

This was the result of our sales and marketing expense throughout the year and our continued success at attracting customers directly to our Web site and converting free customers to our paid subscription services.

In addition, as previously stated, the number of marketing partnerships we now have has increased, and we're continuing to explore new and diverse opportunities in this regard.

We added 2 new countries in Q4, Singapore and the Philippines, and plan for continued expansion throughout Asia.

The number of cities in our network, where we can provide local fax and e-mail and voicemail/e-mail numbers to our customers, also increased significantly during the quarter.

Our total inventory of telephone numbers rose by more than 0.5 million during the quarter, many of these being in international locations.

Our patent portfolio continues to increase and to be enhanced, and in anticipation of a question regarding our current litigation against the Finale and CallWay for patent infringement, we are currently in the discovery phase with both, and I can offer no additional comments on either action, except to tell you that we did amend each of the complaints to include additional patents.

Our cash and investment position continue to grow in Q4, now totaling almost $94 million, an increase of almost $10 million since last quarter and $30 million for the year.

This is after we had spent $20 million to acquire several companies, expand our patent portfolio and on PP&E.

Turning to slide #7, our subscriber profile.

In addition to the continued strong penetration into vertical markets listed on the slide, within the individual and SME segments, our enterprise sales organization continues to win very big, very large corporate accounts from within the FORTUNE 500 community, in many cases resulting in the deployment of thousands of telephone numbers per account.

Turning to slide #8 on subscriber acquisition.

As we 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 to our various websites and pay via credit card or, in the case of our international business, utilize calling party paid services.

It also includes small-to-midsized businesses looking for simple, efficient, and cost-effective messaging solutions and large enterprises and governmental agencies looking to improve their processes, eliminate costly infrastructure, and enhanced their internal communications.

Our number of domestic U.S. marketing partnerships, particularly in the areas of the individual and SME marketing activities, increased to 28 during the quarter, including the addition of AT&T through its WorldNet and CallVantage service offerings.

This represents a two-fold increase over 2003's marketing partnerships.

We've also entered into a number of international marketing partnerships, including some very large international ISPs and portals.

Turning to slide #9 nine.

The high drivers of paid subscriptions are ranked by the longevity of how we have been acquiring paid customers -- meaning it is ranked by those which have been around and we have used the longest.

Usually, the direct-to-web site is #1 way the Company acquires paid customers.

The order of the remaining 4 drivers changes from week to week, month to month, and quarter to quarter, depending upon which programs we have in place at any particular time.

As a marketing goal, we're working to expand the number of ways in which we acquire paying customers.

For example, we are in the early stages of our acquisition of international customers, which appear to have a different acquisition methodology than our U.S. customer base.

On slide #10, we describe the active telephone numbers, or DID, and ARPU for our customer base.

As I've previously stated, we had a very strong quarter of paid DID growth, and we grew our free basic customers by more than 1 million subscribers.

Our cancellation rate increased slightly over the previous quarter but still remains within the range of our historical lows -- does move modestly, quarter to quarter, within that range, as you can see.

Our ARPU remains within the $17 monthly range we expected and does move, plus or minus, based upon a number of factors, including the number of business days in a quarter and any seasonality of that particular period.

Turning to slide 11, our total revenue.

As a reminder, our DID-based revenue -- our telephone number-based revenues -- are all revenues which are associated with telephone numbers.

And these include not only the revenues from paid DIDs but the revenues received through our free advertising-supported and calling party-paid DIDs on international basis.

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

A couple of the highlights for this quarter -- DID-based revenues grow within a fairly narrow band for the past 11 quarters, and historically, the revenue growth between the third and fourth quarters is our lowest, except, of course, when we did the price change in 2003, and this is mainly due to the seasonality during that particular period.

Our non-DID-based revenues include our jBlast service, Electric Mail, our M4 Internet service, and our licensing program, which is primarily our software sales of PaperMaster Pro.

As you can clearly see, the growth rate for our non-DID-based revenues moved around.

I will remind everyone that the jump in non DID-based revenues from Q1 to Q2 of this past year was due prominently to the first full quarter's inclusion of Electric Mail's e-mail business during that period.

Turning to slide #12, I'll only state that we have now 56 POPs worldwide, in which 31 of them are in the United States.

And those support more than 1500 cities in which we could offer local telephone number service for our fax to e-mail, voicemail to e-mail and other messaging service telephone numbers.

As previously stated, we're continuing to see success in the expansion and enhancements of our international offerings.

The localization of language, currency, and marketing programs in Spanish, German, French, and Dutch, which we completed in the latter half of 2004, have been successful.

I will talk about this further in the next slide.

Turning to slide 13, since the introduction of our localized services in the latter half of 2004, we've seen a marked increase in the number of non-U.S. visits to our selling website, which grew 29 percent from Q4 2003 to Q4 2004.

And we are seeing significant traction in this regard.

We are continuing expand to expand our free offering throughout Europe and anticipate adding additional countries in 2005.

This is in concert with our increasing localized marketing campaigns, not only in Western Europe but also in the Pacific Rim and Asia.

Turning to slide 14, our product roadmap, as you will recall from last quarter, we launched a storage and archiving service for our paid subscribers.

Bundled into the customer's existing subscription rate is a week's worth of message storage, and very shortly, we will be offering an opportunity for subscribers to increase the amount of storage for an additional fee and, therefore, increasing hopefully the ARPU for those subscribers.

I'm now going to turn it back over to Scott Turicchi, who will walk you through the financial highlights for the quarter and the year end.

Thank You, Scott.

Beginning on slide 16 -- you've seen this before.

We are proud to report 31 consecutive quarters of revenue growth but, more importantly, 12 consecutive quarters of positive and growing operating earnings.

On slide 17, you see how we report our revenues.

As we mentioned before, they break out into 3 categories, the most dominant of which is subscription-based revenue.

It accounts for approximately 96 percent of our total revenues.

That revenue grew approximately 52 percent year over year.

Slide 18 talks about how our subscriber revenues break out between the fixed component and the variable component.

The fixed component is those monthly or annual fees that are paid to us by contract, irrespective of actual usage.

The variable revenue is based upon either incremental usage or various programs that some of our customers are on that are more variable oriented.

As you can see, we have historically maintained a range of about 72 percent of subscription revenue that is fixed versus about 28 percent that is variable.

That held true both in Q4 and for the fiscal year.

What I do want to draw your attention to, though, is the fact that our variable revenue grew in the fourth quarter of 2004, relative to the third quarter of 2004.

Although it's not pictured on the slide, you may recall that last year, we actually had a slight decline in variable revenue from Q3 to Q4.

As we mentioned before, Q4 is always short in business days, relative to the other 3 quarters -- both because of legal holidays but also because of vacations that people take, predominantly in December.

Slide 19 is a pictorial representation of our cost structure, our gross margin into the year in the fourth quarter at 85.1 percent -- trending up slightly, as you can see, over the last 5 quarters.

Our operating margin came in at 44 percent.

The influences of the operating margin are G&A, which declined to 18.5 percent.

Sales and marketing for the quarter was 17.5, and engineering was relatively stable at 5.1.

Slide 20 shows the dynamics of our business of being a cash generator.

Usually, we are able to produce more free cash flow than our GAAP net earnings.

That continued to be true in the fourth quarter.

We had approximately 11 million of free cash flow after spending nearly 4 million for CapEx.

The CapEx number may appear high relative to previous periods.

I would note two things -- first of all, we don't spend our capital evenly over the four quarters of the year.

Secondly, as we previously mentioned, the Company has embarked, in 2004, on a new billing and accounting system, which will become fully operational later this year and in early 06.

In the fourth quarter, we had about 1.7 million of the 3.9 in both hardware and software purchases.

Finally, on slide 21 is our guidance.

For the full fiscal year 2005, we are anticipating revenues to be in the range of 145 to 148 million and net earnings per share of between $1.70 and $1.75.

That assumes a tax rate of between 25 and 28 percent and a fully-diluted share count of 25.8 million.

For the first quarter of the year, we're looking for revenues of 32.2 million and net earnings of 39 cents.

Scott?

Just to wrap up with our recent events -- some of which I've already hit earlier in this presentation -- as I noted, we introduced free online message access and storage to our eFax Plus and jConnect Premier customers during the quarter.

Our eFax secure product, which is an encrypted link notification and delivery method, was also introduced for our corporate customers during the quarter.

We also came up with a new pricing package for our Power User customers of our fax and e-mail service, which we call eFax Pro.

Our network did expand to 22 countries, with the introduction of numbers in Singapore and the Philippines.

Our analyst coverage increased to eight firms, with the addition of Raymond James and Stanford Group.

And lastly, we acquired a portfolio of 12 U.S. and international patents in the area of messaging and communications technology, as we continue to grow and enhance our patent portfolio.

That concludes the presentation.

We will now turn this over to the operator, who will begin the process of the Q&A session.

Ken?

(Operator Instructions).

William Benton, William Blair.

Congratulations on the strong quarter.

Thank you also for holding this a half-hour later.

It's actually very helpful.

A couple of questions.

First, your outlook talks about an effective tax rate that is lower, based on, I believe -- Scott, you said, a greater percentage of international earnings, which seems to suggest that you guys are gaining some traction on the international front.

And I was wondering if you could just talk about how significant you expect that to be in terms of results, generally speaking, this year and just where we're going to see, I guess, the traction evident in the numbers?

Let me break that question in 2 pieces and start with the tax piece of it.

And I think Scott Jarus may have some additional color from an operational and marketing perspective.

One of the things -- first of all, as you know, prior to 2004, the Company did not accrue any taxes.

Because of NOLs and because of the way they were booked, we had virtually no tax rate.

As we got into 2004 and began accruing, you can look at the quarterly accruals, and you'll see that each quarter, we had a successive declining tax rate, beginning in the first quarter with about 37, 37.5 percent.

We spent about the year, even before -- we were still in '03 -- looking at a combination of factors to see, given the fact that we both had International customers within j2 -- we were looking to further extend the international business through a combination of acquisitions and direct marketing efforts -- how to be tax efficient.

And so it took about a year's worth of internal work, and as we got into the fourth quarter of '04, it became very clear that the structures we put in place both were working from a tax standpoint and also effective for our other international efforts.

We got basically a half-year benefit of those structures in 2004, which is why we got about a 33-percent tax rate or arguably 5 or 6 points lower than a theoretical match tax rate.

When we go into '05 and have a full- year benefit, that will bring us another 5 to 6 points, maybe 7 points of benefit.

And so, that is a function of, as I said, the j2 historical customer base of international customers.

Then, layered on top of that, all of the things that we have been doing to attract new customers who are non-U.S. domiciled, as well as some other transactions that exist between j2 and its various international subsidiaries.

Right, but you couldn't reckoned those against those prior NOLs without actually having some sort of income in those markets (multiple speakers).

Well, what it's actually done is, first of all, extended the amount of NOL that we had left for federal U.S. tax purposes.

We had assumed we would fully exhaust our federal NOL as of the end of '04.

We have some modest amount left that will carry us into '05.

We also have some California state NOLs that will also carry us a bit into '05.

So, we've been able to extend the life of the NOL, if you will.

We also, as you know, have a fair amount of embedded stock-based compensation that, when and if people exercise the stock options, acts as a cash offset to the payment of U.S. federal taxes but does nothing for us on the P&L.

And then, the answer is yes, through our international tax structure work, we have a very modest tax rate on international earnings.

And to kind of follow-up on Scott's statement, I think you've got to be very careful not to equate the tax decline as a proxy for our traction on the international side -- on a dollar-for-dollar basis.

All of the elements that Scott talked about that are influencing our tax reduction -- U.S. tax reduction, some of which has to do with the traction we're making internationally to acquire new customers but not all of it -- because it has to do with our tax structure and our international operations.

So, what I will tell you, qualitatively, is that our international marketing and sales opportunities are doing very well, and we've got good traction there.

And we're gaining new customers all the time, and we're very happy with what's going on so far.

But it is not -- the tax rate is not a proxy for -- the significant tax reduction is not a proxy for the traction we're having internationally.

Okay and then just a question on your customer acquisition -- I know you don't like to talk about necessarily one channel versus another too much.

But you now have a couple of quarters on the free-to-paid side with the new marketing channels.

I didn't know if you could update us on that.

And then on the enterprise side, we have recently become a customer of yours, I know, because of, in part, regulatory matters, where they can track e-mails.

And so I'm curious, I guess.

Is the financial services industry, in that respect, becoming an interesting target -- or any industry where there's a regulatory aspect, in terms of tracking e-mails versus the inability to track that become an issue.

Yes. let me deal with the second part first.

First of all, thank you for acknowledging that you are a customer of ours.

We don't typically highlight the customers.

But, yes, you guys are a customer.

And within the financial services industry -- which, by the way, is very broad and not only includes banking but also all sorts of financial industries -- from banks to lending institutions to home mortgages.

That is a very big sweet spot for us, and it continues to grow not just because of the paper intensity of the particular industry but because of what you mentioned.

Our service allows or enables a firm to have a very well-established audit trail of paperwork and digital paperwork, which is flowing through the organization without having to fill file cabinets upon file cabinets to keep all that stuff.

So, we have been very successful in the brokerage firms.

We've been very successful in the capital markets.

We've been very successful in banking.

All of those have big needs for digitization, paper work reduction, and the ability for compliance purposes and tracking their paperwork.

With regard to the channels, we don't release information specific to individual channel success.

What I can tell you is that, as we stated in the past, we have been spending more money on marketing to the individual and the SME base.

The number of partners that we have expanded considerably this quarter to 28 that are getting those dollars.

And we continue to believe that these partner marketing channels are very successful for us, and we keep experimenting with new ones all the time to see how well they draw customers -- either as free customers, which we then hope to win up to a paid position or as paid customers directly through paid acquisitions.

So we continue to have good traction, which is why you see the number of marketing partnerships continue to grow.

Okay.

And just the conversion?

I know you don't give a rate.

But I just -- is the experience in those new channels, as you've looked at them now for a couple of quarters, very similar to maybe your old channels?

Well, I kind of give a backhanded answer because each one of the partners we do business with has a different profile and demographic, and they all act very differently from one another.

So, what I will tell you is that sometimes when we are experimenting with new partners, our conversion rate may be lower, and sometimes when we find new partners, the conversion rate may be higher.

It just really depends on who we've got in the pot and what we are experimenting with at any particular time.

I guess I'd answer the question by saying that the conversion rate of our free customers to paid is within our internally acceptable range for the spend, relative to the conversion, and we're still pleased with that conversion rate internally.

Well, great quarter, guys.

Thanks.

Bill Cook, Jefferies & Company.

I just had a couple of quick questions for you guys.

First of all, in terms of your 2005 guidance -- you guys had a pretty strong 2004 in terms of your subscriber additions.

I was wondering, at least in terms of directionally speaking, if you could speak to what kind of subscriber assumptions are baked into your 2005 numbers?

Well, as you know, our guidance is financially oriented, as opposed to DID-based oriented.

But what I would say is that we -- if you look at how we get to our revenue guidance, it's predominantly through an increase in the number of net-paying DIDs.

As Scott mentioned, we have about a $17 monthly ARPU.

It varies modestly from month to month, based upon number of business days and seasonality.

But unlike 2004, there's not a price change or a price increase that is contemplated within the context of those numbers.

That isn't to say that there might not be the opportunity to do one.

But at this point in time, it wouldn't be appropriate, given the fact that we've just come off, about 2 or 3 months ago, finishing up the last of the annual subscribers to the now newer higher price points -- which, as you recall, are about 25 to 30 percent higher.

So, primarily -- if you had to break them all down simplistically -- primarily through more net-paying DIDs.

One more quick question.

I believe I heard you say during your prepared comments that the cancellation rate was up slightly in the fourth quarter versus Q3?

It's just a tenth of a percent.

Okay, wasn't there some kind of one-time event in the past quarter?

Didn't you have a big disconnect, which kind of made your turns -- your cancellation rate spike up a bit?

Well, over the past couple of quarters, we've gone through and cleaned out some noise that we've had in both our --.

One of the resellers.

Reseller agreements.

Specifically last quarter.

Reseller arrangements -- some clean up of our individual channel sales and even some customers in our enterprise sales who may have taken some numbers on trial that they just decided they didn't need anymore.

So, we've done some clean up.

But, again, I wouldn't focus on the 1/10 of 1-percent increase that occurred this quarter -- or even if you take it back a couple of quarters, only a couple of tenths of a percent -- because it's just the historical lows.

And this is a range where it will probably move up and down a tenth to 2 or 3/10 of a percent in any one particular quarter.

Okay.

So it sounds like you're saying there is just some more housekeeping in the third quarter (multiple speakers).

Also remember, too, that one of our goals of the Company -- I think one thing that we accomplished in 2004 is the extension of the number of channels by which we acquire paid customers.

So if you go to that chart in the slide show and you see, at the end, one of them has to do with what we call vendor ads or direct acquisition of paid customers over the web -- as we've also talked about for international, when we are launching new programs -- whether it was in the early part of the year -- getting new "frees" in large volumes or later in the year with vendor ads or international -- we have a philosophy and approach of bleeding money into those programs, trying to allocate them over a preferably wide range of opportunities and then analyzing them over a 3-or-4-month period, throwing out the ones that are not as good or acceptable to us, and keeping the ones that are.

So, whenever we're going and we're extending the number of marketing programs, you will have a degree of trial in there, and that can come through an influence of cancel rate.

I don't think it will influence it dramatically, but it can on the margin.

Bill Cook.

Okay.

Thanks a lot.

Great quarter.

Joe Noel, Pacific Growth Equities.

Good quarter again.

Quick question.

I cannot read the paid DIDs for the quarter on the screen here.

Could you just give that to me real quick?

553,949.

Right, okay.

Could you talk a little bit about direction of expenses?

Q3, you are flat on sales and marketing, but you picked up a little bit -- still looks pretty low on a percentage basis.

Could you just talk about directionally going forward here?

Sure, I insist.

That's actually a great topic.

Where I see the most movement, as we historically said, both -- over the next several quarters -- is probably in the sales and marketing line items.

As we talked about before, we are, as in now, but will continue to be launching programs outside of the U.S.

And we do not have initially the same internal expectation for their success because you could look at effectively as a trial.

So I think the 17.5 percent of sales and marketing expense as a percent of revs probably ends up, at least in the near-term, being on the light side.

I will not be surprised to see that go up by a point, even as recently as the current quarter we're in.

I think that on the G&A side, you've seen historical trending down.

I think that continues into the future.

However, we will have a little bit more depreciation and amortization expense in Q1 that has to do with the amortization of both an M&A deal and some patents that we have, as well as you saw the increased amount of CapEx we spent in Q4.

So there will be a little bias up there, but I think, in general, we're still in a downward-sloping trend of G&A.

And then R&D -- we stated last quarter that our goal this year was to increase the headcount that would probably go up, both in dollars as well as percentage.

You see it has picked up from the 4.5-percent range in the early part of '04.

We're in the low 5s now.

I don't expect, in the near-term, for it to move a whole lot.

Possibly over the succeeding quarters of the year, it might drift up a little bit. (multiple speakers) But it's a good question, Joe.

I think what it boils down to -- and it's something I think everybody should get focused on -- is the way we're looking at our business now and the way we're operating at -- and the opportunity we have in front of us -- we are probably going to be between a 40 and 43, 44-percent operating margin, and it will vary quarter to quarter.

Obviously, if we don't go aggressively and get free customers, who don't produce revenue in the quarter, you'll see that margin go up.

You'll see the sales and marketing expense line comedown.

So, we will be spending, on a quarter-to-quarter, basis the half a point here or a point here in various areas, as we are launching new programs and testing new things.

We could certainly choke this business down and take that operating margin up.

There's no doubt about it.

Right.

Okay, so the other thing, too, is I think if you take the average model that is up there on the sale side and you move from a 35 percent gross margin or a 33, where most people are -- down to kind of a 26 percent and apply the higher earnings per share number that your guiding -- but I noticed here that you pretty much smack on the dot as far as increasing the '04 EPS by 40 percent.

And so, is that really your objective here to give the guidance to really show you're going to grow EPS at about 40 percent?

Is that how you (multiple speakers).

Well, I think it's sort of how the math all falls to the bottomline.

It happens to be somewhat coincidental that both the revenue growth and EPS growth are roughly consistent at a fortyish-percent level -- plus or minus -- maybe a hair one way or the other.

Can you just give us a real brief comment on what you are specifically doing with AT&T CallVantage?

Well, right now, it is a marketing partnership.

I believe in the next few days, or actually, it may have already -- certainly, within the plus or minus of a week, we will have a banner ad, if you will, on AT&T CallVantage's homepage to see if there are AT&T CallVantage customers who would be interested in our eFax fax-to-e-mail service.

And the same is being done and has been done, actually, with WorldNet, I think, for about a month now.

So, again it's just a marketing placement.

As we stated in the past, we believe that the customer base and the business side of VoIP -- voice over IP customers -- may have a similar profile as our small-to-midsized business customers, and we're working with various entities -- not just AT&T -- to see whether there is a synergy between the marketing efforts of the VoIP players, as well as eFax.

Rod Ratliff, Stanford group Stanford group.

Congratulations, very nice job.

Everything has been asked and answered, Scott.

I will get with you offline for some modeling/housekeeping.

Thanks.

By the way, I would remind everyone that you can submit the e-mail questions to us at investor@j2global.com.

Thank you.

Ed Ching, Rodman & Renshaw.

Congratulations on a nice quarter.

The question is what do you think the pricing environment is out there for this oncoming year?

Could it stand another price increase?

I think, as I mentioned from an earlier call -- or an earlier question, I should say -- There's nothing that we see today that has fundamentally changed the pricing opportunities available for our services.

As you probably recall from maybe about a year ago, when we contemplated the last price increase.

One of the influencers is what is the cost of an alternative solution? -- the most common of which is second-line service.

So, although that is not a ubiquitous number in each market in the United States, historically, those have been in excess of not only the then price but our current price of 1295 a month.

So, I don't think, at this point -- as I said, we're not contemplating a price change at this moment in time.

We are obviously looking at the factors out there in terms of -- say alternative solutions etc.

And from a financial standpoint, I think that there will be a time during this year in which I will go to the marketing people and see whether and under what circumstances that is possible and/or appropriate.

It's not appropriate at this time, given that some of our customers, as recently as 3 months ago, just got the last price increase.

Okay.

I guess -- I don't know if this was asked before, but as you expand into Asia, what kind of change in headcounts could we see?

I don't think you're going to see a noticeable increase in headcounts.

We already have an employee in Hong Kong, who is helping us with our Hong Kong business.

You may see maybe a single growth or 1 or 2 growths in the sales, marketing, and customer service side that deal specifically with the Asian market, but the rest of the infrastructure needs from accounting to legal, HR -- all the back office stuff -- I think we already can absorb in-house.

And so the only increase may be on the revenue-generating side

Steve Levenson, Advest.

In relation to the expansion of the free model throughout Europe, I know in the past, you hadn't really been doing that because the numbers -- the digits that you had there were not free.

I see there are 460,000 telephone numbers assigned, I guess for the free model.

Are those numbers that you are paying for and using this as a promotion, or are those numbers that you are now getting at no charge?

The answer to the second question is we're getting them for no charge because they are what are called calling party-paid numbers, which means that -- we don't really have too much of a concept of them in the United States or North America -- but basically, the telephone numbers are given to our customers -- our customers -- free and the toll, if you will, for using the number is paid by the calling party.

And revenue that is generated by that calling party is shared between the carrier, who is terminating those calls to us and by us.

So, we get revenue, which is somewhat commensurate with the advertising- type revenue that we get for our free customers in North America, though it is usage based as opposed to placement based.

But from a cost basis, the cost of the actual telephone numbers is zero to us.

They are actually a bit of a revenue generator.

And by the way, Steve, we have a -- we are aggressively looking and pursuing, right now, substantial increases in the number of DIDs across many European countries for further promotion of not only CPT but direct paid.

Okay.

You're sort of leading me into the next question.

Does that mean to 460,000 telephone numbers are the most you have that you could assign to the free model there, or are their additional numbers and -- make it a two-part question -- how is it working out?

How quickly do they get subscribed, and what sort of conversion are you seeing?

The 460,000 numbers are not our total inventory.

We have more numbers available.

And, if we get to a point where we exhaust that inventory, we can get more.

So getting telephone numbers, CPP numbers -- free numbers in Western Europe -- is not a problem for us.

The challenge for us internationally is that unlike the United States, where we get telephone -- or even North America -- where we get telephone numbers from a single source, if you will -- a single regulatory source, in Europe -- as in most of the rest of the world -- we have to deal with it on a country-by-country basis.

And each country has its own regulatory requirements, its own infrastructure requirements, and its own number allocation requirement.

So, in some countries, getting more telephone numbers is as simple as asking for them and proving that you are a good corporate citizen by using what you have.

In other countries, you have to go through an extensive process of justifying your business and explaining to the regulatory authorities why you should be in the country in the first place.

And then, one thing I want point you to Steve is that it is true -- most of the DIDs today deployed in Europe or outside of the United States would be free DIDs or calling party-paid DIDs.

Under the calling party- paid methodology.

We don't have the same incentives to convert them to paid customers.

Because, their ARPUs are very distinct and different from the ARPU of a free customer in the United States, where we only make 4 cents a month in advertising revenue.

So, right now, the goal is to get more and more of the CPP DIDs, -- get them deployed to a variety of marketing relationships with ISPs and portals -- and the answer is they get subscribed for very fast -- watch the usage mature, collect the CPP revenue streams, and then put in place thresholds and benchmarks, which will then be like we have in the U.S., free-to-paid conversion.

But the methodologies will undoubtedly be different overseas because there are some very nice ARPUs to be had, even while the customer is "free".

Sounds good.

I hope the New Year will work out as well as the last one.

Thanks a lot.

We have one question that has come in via e-mail.

Somebody has asked what has happened to Oasys.

As you know, Oasys Technologies is an independent fabless semiconductor company, j2 Global owns a 17.5-percent ownership in it.

We don't sit on the board.

We don't have any influence or decision-making authority vis-a-vis the company.

They have filed in April of '04 to go public.

I believe it was in December of this past year that they withdrew the registration statement.

So, we don't know if they have any thoughts about trying to re-energize the IPO or not.

But, if they don't, we own 17.5 percent, and if they do, then we will revisit the opportunities to what we'll do with that stake.

Anymore from -- Ken?

Eugene (indiscernible), Downtown Associates.

Good quarter.

I did want to ask about Oasys.

There's no plans -- I know you just had a question come in -- but you have no plans at all to monetize.

It was a good chunk of change but pretty much nothing on your balance sheet.

So I'm just wondering if you guys can hold onto it and if you receive a dividend from its?

Well, the answer is if they go public, we obviously have a more normal way of liquidating -- which would be if we wanted to sell into the open market.

Lacking that, our opportunities are more narrow.

Oasys has no -- at least historical -- pattern of paying any sort of a dividend.

So, no, we're not a dividend receiver.

They did, 2 years ago -- although, once again, no pattern to it -- did a buyback from just excess cash generated.

We participated in a modest way in that.

So, the options for us, if we wanted to monetize the holding, would be really to either sell it back to the company or sell it to a third party.

One more question.

What was the headcount, again, on the sales and marketing for especially the corporate users?

Our corporate sales force is made up of 12 account managers -- 2 in-house corporate salespeople.

And then we have a telesales organization as well.

Great quarter.

Thanks a lot.

Melissa Chadwick Dunn, RS Investments.

Can you give a little more color on the corporate channel?

How's the pipeline, and is the corporate channel growing more quickly than the more consumer and small-business channels?

The pipeline in our corporate or enterprise sales channel is very healthy.

We try every quarter to see if we can't give you a flavor for the types of corporate customers that we have sold into and penetrated recently.

And unfortunately, most of our enterprise customers, specifically the larger ones do not permit us or don't really want us to list their names.

But I can tell you that within the top companies of the country -- and in some cases the world -- we have made significant inroads into these companies -- to the tune of where we are now placing thousand plus telephone numbers within their enterprise as a starting point for growth within those accounts -- as either a replacement to their fax infrastructure or as an augmentation to their messaging infrastructure.

So, the pipeline is very good.

They have some of the biggest names that you could think of in U.S. or world business.

We have seen tremendous levels of interest from all industries and market segments -- all the way from consumer electronics to banking to large multinational consumer product manufacturers to healthcare to large banking institution -- multinational or domestic institutions and very large legal firms -- some of the top legal firms.

Some of the largest and most well-known legal firms in the world are our customers.

And so the traction is very, very good in that regard.

Are large customers doing a lot of pilot activity right now.

And what's the conversion cycle from pilot to (multiple speakers).

That's a very typical pattern for them.

What typically happens is that we go in, make the case, and because they typically already have a fax infrastructure in place, we're not parachuting in to save the day -- though in a couple of cases we have done that.

We typically go in and they do a pilot of our service within a division or within a small operating organization of maybe 100, 200 to 500 employees.

They will deploy those for a period typically ranging from 4 to 6 months, during which time they will evaluate our ability to support them, to make sure that the efficacy of the service is good for them, and then, shortly thereafter, they will -- assuming that they are sold on our service -- will grow the use of our service throughout the organization.

This is all done, though, based upon a contract that we typically have with these companies at the outset, which gives stair-step approach to their commitments and their pricing, relative to how many of these things they deploy.

So, clearly, the incentive is not only on us to deliver great service but on them to get more people on so that the price points become more attractive.

And second question.

On the new products, can you give us a sense for what you have in your expectations for the 2005 guidance for new products and an update on the product roadmap for more the -- the call screening and different buildout, if you would?

Well, I would tell you that the guidance we're getting for 2005 does not include an exceptionally large or significant amount of growth -- contribution not growth -- contribution from these new products, which we are rolling out or have rolled out during this year.

There is some amount of contribution, but it's not significant.

And that's because these things take time to develop and germinate and test, frankly, to make sure that there we're marketing them correctly and that the market is where we think it is.

The areas in which were focusing right now typically come in two main areas.

One is in our invoice services product suite, which -- as you can see from the product roadmap -- involves what you might call enhanced voice mail services -- the call forwarding and call screening capabilities and the ability to do what we call voicemail interrupt and virtual answering machine.

And the second area of focus is in simplifying and growing the unified messaging services that are premised somewhat upon our OneBox acquisition and the technology that it brought along.

And then lastly, I guess I would add that our Electric Mail e-mail services product suite and the concurrent virus scanning and spam detection or spam control services that they offer is also another area where we're very excited about the opportunities that come, because frankly, we believe that for small and midsize businesses, the service offering -- the hosted e-mail, spam control, and virus filtering that we offer through Electric Mail -- is one of the best products on the market.

And now the challenge for us is to make everyone aware of that and convince them that they should be outsourcing their e-mail virus and spam control to us.

So the timing for the voice would be when?

Well, e-Voice has actually already rolled out in some test platforms.

We have a free e-Voice offering now that we use as a market test to find out how we're doing on some of our voicemail services.

Some of the other features that you see on the product road map are certainly planned for the next quarter or two.

And so I think you will see them come out in stages during that period.

Joe Noel, Pacific Growth Equities, Inc.

Yes.

Just a follow-up question here.

A couple of years ago, the gripe against J. Common -- that a lot of investors had on owning the stock -- is the fax market is going away -- it's giving way to e-mail and other electronic transmission.

I haven't really seem that happen over the past couple of years.

I was wondering if you could give your ideas as far as what happened to that market over the past couple of years and what you see going forward here.

I think you'd have to have your head buried in the sand to not believe that the fax market in aggregate is declining because of the replacement technology of e-mail.

That being said, though, the market is huge.

It's just a very, very big market, and the decline that has been going on -- specifically domestically in North America -- has been relatively small over the last couple of years.

There was a big decline, obviously, when e-mail was first adopted as a business tool.

But since then, it has stabilized, and the decline is relatively small on a very, very large number.

There again, there is no qualitative data that I can point to because the last study, if you will, was done by a consulting group on the fax industry was, back in 2000, based upon data from 1999.

So it's very dated.

But, if you just take what that study said -- and you can discount it as much as you want -- that study said that the fax transmission costs -- not the machines, not the supply, just the transmission costs -- was an $80 billion market.

And half of that was for inbound service.

So, that would be 40 billion.

Now, you can discount or whatever you want.

Let's cut in half and assume it's a $20 billion inbound market.

Well, on a $20 billion inbound market -- and we're doing $106 million this past year -- we have a long way to go before we have significant penetration into that.

And, by the way, time is in our favor because the infrastructure that supports that 40, 20 or whatever billion-dollar inbound fax market is aging, and people are wanting to get rid of their fax machines, replace them with better technology, better systems, better processes.

And we believe that we are the replacement technology that will not only continue to promote fax as a viable and healthy messaging platform but will continue to encourage it, rather than discourage the use of fax.

And I have one follow-up to that, Joe.

As we have pushed the corporate sales force in 2004 to go after the larger SME and enterprise base, what we're finding is although some of those deals have taken a little longer to come to fruition in terms of actual sales, closings and revenue productivity, these are companies -- major FORTUNE 100, 500, global 500 companies -- that are entering into multiple-year agreements that are several hundred thousand dollars in annual commitments, specifically to deal with their faxing needs.

So, that means they are locking in now for the next 1, 2, and 3 years going out.

So, we don't see any diminution in that pipeline -- in fact, quite the contrary.

It is growing daily.

Our corporate or enterprise channel is beginning to take on the snowball effect, if you will -- in that as we get more and more of these big customers, not only are we getting better at figuring out how to sell into them and support them, but the word is spreading and we're getting more and more of these big customers, who then act as references for other big customers.

And it just picks up.

It becomes a natural thought process for them to believe that there is a better way to handle their fax messaging within their corporate environment -- just for the very issues of efficiency, compliance -- which someone raised in the very first question -- and security.

We have one e-mail question here that we will get to.

As has been pointed out, we have a little under $100 million of cash or cash and investments.

The question is what are the options and any discussion of a buyback?

As you know, we have virtually no debt.

So really, there are only three options for us -- build cash, invest it in the Company or acquisitions, or return it to shareholders in some form -- all of which are on the table.

It is a regular topic of conversation at our Board.

We do not, at this time, have any current buyback program in place or any dividend that we pay, but those issues are discussed fairly regularly at the Board level.

However, as you'll notice in 2004, as Scott mentioned, we spent about $15 million in the acquisition of intellectual property as well as businesses.

I believe that there's also a very strong pipeline for further acquisition of intellectual property and other business companies.

However, many of those -- if not all of them -- will probably be small in dollar or transactional nature.

But I think that we are set up now, having done 2 or 3 of them last year, to do an equal or greater number this year.

Obviously, we will have to see if we can negotiate with the various parties to make this come to fruition.

I think we'll take one final question from the phone.

Ed Litman, William Blair.

Just a quick follow-up.

You mentioned, I think, you had 12 sales managers -- 2 in-house.

Is that down, or is it flat?

I got it's down maybe a little bit from before?

It's down slightly.

As I said in the past, you hire.

You hope, and if it doesn't work out, you cycle through and bring new ones in.

So, it's down slightly but only because we're going through the normal process of selecting the best people that we can get for sales.

And we have requisitions out, and we're searching for new salespeople in several markets right now.

So it wouldn't surprise me if next quarter the number is back up again.

I do have, I guess, a target there and a related question.

Are the sales cycles -- I know you said they were relatively long.

But I got the sense that actually -- from discussions of prior calls, I think you talked about kind of the pipeline looking quite good.

And it sounded like things may be moving closer to fruition in some of these enterprise opportunities.

Has the sales cycle shortened.

Has it lengthened.

Did it stay the same, and are you kind of at a point where there's a bubble of opportunity that may be coming up?

I think that's a good way to look at it.

I think there has been and is the bubble of opportunities of things that we've been selling into for quite some time now.

And obviously, our goal is to keep that bubble as big as we can -- moving through time.

And that's kind of what we're saying.

As for the length of the sales cycle, I think -- and this is just a gut feel.

I don't have any data behind it, but my gut is that the sales cycle has probably shrunk a little bit, only because we have gotten very good at knowing what is needed by the customer and what is needed by us.

And the process of the dance -- the sales dance -- has gotten much more mature and much more understandable.

There're very few surprises.

And so, when you eliminate the surprises and everybody kind of knows what the game is, you can cut to chase and get things done a little bit faster.

And I think that is a sign of our maturity within the corporate enterprise sales cycle.

Okay.

Do you have a target, in terms of your sales force size through the year?

No, not specifically.

Again, I know we have a couple of open hires in that area that we want to bring in.

And I also know that at some point throughout this year, we're also interested in expanding our international enterprise sales force, but there isn't a specific point estimate of how many salespeople we anticipate having at various points throughout the year.

Okay.

Then, a nitpick on the financial side.

You had -- I guess in the net interest income line other -- it bounced around a lot.

Last quarter, it was $0.5 million.

Now, it went down to whatever, 100,000 or so.

What may be driving some of the volatility there, recently?

Actually, you should expect it to be on a positive trajectory because that is usually dominated by interest income.

So as our cash balances have grown, as you know, interest rates have been going up.

That accrues to our benefit.

However, in the fourth quarter of this year -- and as you know, in every fourth quarter, there are accounting adjustments and in clean-up.

So that number, which would have been north of 500,000, got degradated this quarter by some postclosing adjustments.

But if you look into Q1, I would expect it to be at or in excess of a 500,000.

All right.

I think that wraps it up for this conference call.

I appreciate everyone's attendance, and we look forward to talking to you next, when we release our Q1 2005 results.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.