Ziff Davis Inc (ZD) 2005 Q3 法說會逐字稿

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

It is my pleasure to introduce your host, Mr. Scott Turicchi, Co-President and Chief Financial Officer of j2 Global Communications.

Good morning, everybody and welcome to j2 Global's Q3 2005 investor call.

As the operator just mentioned, I'm Scott Turicchi, Co-President and Chief Financial Officer and joining me today is Hemi Zucker, Co-President and Chief Operating Officer and Greg Kalvin, Chief Accounting Officer.

We will be utilizing this call today to discuss the Q3 financial results, guidance for Q4, as well as our initial outlook into 2006.

In addition, we will provide an update on our three major initiatives, the large enterprise sales, our international efforts and our newest product, eVoice.

We will use the IR presentation as a roadmap for today's call, a copy of which is available at our website.

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

In addition, you will be able to access the webcast from this site.

After completing the presentation, we will 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 email questions at any time to investor@j2Global.com.

Before we begin our remarks, allow me to read the Safe Harbor language.

As you know, this call and the webcast will include forward-looking statements.

Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we have included as part of the slideshow for the webcast.

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

I'd now like to turn to the results for the quarter.

This was another strong quarter for j2 Global.

Our revenues were 37.7 million, up 36% from the same quarter in 2004.

Our gross profit margin for the quarter was 78.5%.

This margin, during the current quarter, was lower than our most recent couple of quarters due to the fact we made substantial investments in our network that did two things; increase the capacity in certain key cities as well as significantly expand the breadth of the network.

As you will note in today's press release, we now cover more than 2000 cities in 26 countries.

Operating earnings were 16.3 million representing 43.2% of revenues versus 43% in Q3 2004.

Earnings before taxes, before the gain on the sale of our Oasis investment, rose 37.8% year-over-year to 17.2 million.

Net earnings before the gain on the sale of investment were up 54% to 12.5 million compared to 8.1 million in the same quarter last year.

On a per-share basis, net earnings before the gain were up 55% to $0.49 per share versus $0.32 for Q3 2004.

Funds available to grow our business rose to 131.6 million through a combination of our quarterly free cash flow plus the approximate 9.3 million received from the sale of the Oasis Semiconductor stock.

Now let me turn you to some additional highlights and commentary for the quarter.

I want to draw your attention first of all in the presentation to slide 5 -- the breadth of our network.

You have seen this before on many occasions.

Let me highlight some of the key additions during the past several weeks.

One, we have taken the network up to 2000 cities.

We added an additional country, which is Taipei.

We also added though major cities in the U.K.

More than 170 in the United Kingdom are now alive as well as some additional major cities in Italy, such as Rome and Bologna.

We also added a number of smaller cities within the United States.

You can also see within the bubble that the number of people that we now have the potential to access also increased predominantly in the international portion of the marketplace.

At this time, I would like to turn our presentation over to Hemi Zucker, our Co-President and Chief Operating Officer, who will give you a little bit deeper insight into how we think about the business as well as customer acquisition.

Hemi.

Good morning, everybody.

Today, I will try to discuss the operational outlook of j2.

Next, turning to slide 11, we take an analytical approach to our business and one of the things that we carefully watch is the number of pages that on average our paying customers are getting on a monthly basis.

As you can see here by the chart, the number of pages have stayed steady for 2003, 2004 and year-to-date.

What does it mean?

We are growing our base in the rate of 40% annual rate.

Still, the number of pages that are getting in are steady.

It allows us to basically deliver value to our customers on a daily basis and we have regular interaction with our customers.

Let's go to slide 12.

Slide 12 is an example of our branded (ph) format that we started to use approximately the beginning of this year.

What does it mean?

Every time a fax is being delivered, we deliver an attachment on the fax and then there is a full-page, which we use to talk and discuss and interact with our customers.

Our messages are targeted based on the database and on the age of the customer, the stage of the customer, the brand of the customer and a lot of factors that we take into equation.

Let me show you some examples of page 13 -- slide 13.

Here, we see samples of what we call skyscraper.

Those skyscrapers are meant for example to enhance collection with our customer support, customer complete can discuss with our customer support, which we use to support a customer and also many times to do our up sales.

Others are introduction of new customers.

We see here the new servicing launch, eVoice.

Our eVoice is new service and we started marking it to our existing customers.

There is a sample of our eFax Pro.

Our eFax Pro is our premier service that we are up selling our regular eFax customers to Pro and there we can see other examples of our corporate service, etc., etc.

What do we get out of all those constant target communications?

We are getting more and more customers to come to our site and to have the brand being more and more famous.

Let's go to the next slide, which is 14.

All this interaction, basically with the customers, helps us to drive our subscriber acquisition costs.

Here in the chart you can see as of the second quarter of 2004, we had three months of pretty much stable cost of acquisition that in Q1 2005 has been dropped.

What happened during this first quarter?

First of all, as you can see, we started to spend money outside of the U.S. internationally.

Plus, slower analytical approach with the help of our targeted database and all the other things that I talked the page before, we were able to drop the prices even though it is not visible, Q3 actually, our subscriber acquisition cost is still lower than Q2.

So you can see here a decrease in cost per new customer.

Why do we have it?

First of all, we have very good relationships with all the network and we have first seat at the table.

We can negotiate our rates.

We can pick the right campaign.

Secondly, the number of customers that are coming directly to our website are because you no direct subscription is increasing and we are very satisfied with the level it spends now.

Before I give the -- before I forward the discussion to Scott Turicchi, let me just remind you what are our direct customers.

Those are customers that are coming to our website by clicking or by entering www.eFax.com or (indiscernible).

Those are customers that are calling to our telesales line that are also published on the website.

Those are customers that are upgrading from free to pay through our various campaigns and e-mails and the examples I showed you before.

Those are also customers that are upgrading to our messenger with applications that we are running every time a fax is being delivered.

It opens to the messenger and customers can upgrade.

I think I kind of included all the direct channels and I'll pass the conversation to Scott.

Thank you, Hemi.

And part of all of the direct to website activities that have been occurring over the last several quarters have not only been driving down the customer acquisition cost but also enabling the company to meet and to achieve very high net DID addition growths.

I would like to point out that in this most recent quarter, it was our largest net DID addition in the company's history.

Slightly under 50,000 net DIDs and as you'll notice from slide 16, our sales and marketing costs were only 15.2% of revenues.

So although we spent more money in Q3 than Q2, we did not see a material appreciation in the percentage of revs that sales and marketing accounted for.

As I noted earlier, the gross margin did come down from the prior couple of quarters because of the substantial investment that was made in the network.

We think this positions us well not only for the next quarter but for the next several quarters.

So I will anticipate that over time that gross margin will drift back into the low 80% range.

Rolling it altogether, we had a 43.2% operating margin for the quarter.

I would now like to give a few comments on the guidance.

First of all, for the fourth quarter, we are estimating revenues of 39 million to 41 million and earnings per share of $0.50 to $0.54.

Let me just make a couple of comments on the revenue.

It is a wider revenue range than we usually estimate and there are a couple of reasons for that.

As you will observe from the metrics slide and also from the conversations over the last couple of quarters, about a three percentage point shift has occurred in the mix of our revenues from fixed to variable.

The implication of that is that we are generating about 175,000 per business day in variable revenue.

And as we have noted before, Q4 tends to be a seasonally weak quarter.

The calendar will show 62 business days but there is slowness particularly in the latter half of December and we also have some fractional business days such as a Veterans' Day and Columbus Day.

So because of that, there is about a four to five-day range that this quarter could behave like.

And as a result, that has added about 6, $700,000 to the normal range that we would have.

So the upside, we have begun to generate additional revenues through our patent licensing program.

You have heard us discuss this in the past.

We have a small amount of revenue in the current quarter but we have a robust pipeline of various transactions that are in negotiations that we expect will settle over the next several quarters.

Some of that revenue could fall into Q4 and be bookable in Q4.

Other revenue will occur in 2006.

So that is why the range looks a bit different than usual.

Now let me give you an update in terms of 2006.

We continue to be in the midst of our budgeting process and as we have done the last couple of years, we want to give you an insight as to our current best estimate for the growth rates of top and bottom line for the next fiscal year.

We will come out with the actual range of guidance in terms of revenue and EPS probably sometime in January or in conjunction with the Q4 call.

Currently, we're looking for revenues to grow approximately 30% year-over-year and for the bottom line to track the same with continued investment in the corporate sales force where I expect we will have more sales representatives not only in the United States but also in Western Europe, additional money spent through our international channel for the acquisition of individual customers as well as further marketing dollars spent on eVoice.

That's a good time to give you an update now on slide 19 of how those current initiatives are going.

In the enterprise sale, we added to 1000 DID or greater clients during the quarter bringing the current number to 16.

Our largest single client has now approximately 10,000 phone numbers deployed.

The pipeline has grown from 42 to 63 qualified leads, 15 of which are now international.

Previously, that was 13.

And I will remind you that the international opportunities are without a dedicated force in Europe.

Internationally, our revenues grew 56% year-over-year.

As I mentioned earlier, we launched service in Taipei, Taiwan.

We also now have live 170 cities and area codes in the U.K.

The eVoice business almost doubled to approximately 4000 paid subscribers and we did launch eVoice internationally in the Netherlands in Q3.

At this time, I would like to open the presentation up for questions.

(OPERATOR INSTRUCTIONS).

Bill Benton, William Blair & Company.

Congratulations on the quarter.

Can you just talk about typically maybe you talk about I know all these five jockey for position but recently you had noted that the corporate side had obviously gained quite a bit of traction and I show you -- you're showing that a couple of deals closed during the quarter.

Can you just talk about that ranking and just the amount?

Well, first of all, as Hemi pointed out, direct to website, which are basically individual customers, continues to be, as it has been almost since the inception of this company, the number one driver of growth and as a result net DID additions.

So that continues to be number one and does have a meaningful lead over two through six.

It is true though that in this quarter the corporate sales, and I don't have the exact ordinal rankings here, but did jump up and if it was not number two, it was probably number three in terms of its DID productivity.

Now I just want to remind you and everybody that as these DIDs roll on, it can take upwards of a month or so for them to become fully engaged and us to recognize the full revenue potential.

So the DID gets deployed but it doesn't mean that day one we are necessarily generating all of the potential revenue off of those DIDs.

Maybe that was the genesis of my question.

The 49,000 adds, were they late in the quarter or how were they spaced throughout the quarter and were they maybe -- if they were corporate, as you said, they just generate ARPU on kind of a delayed basis?

The corporate -- it's interesting.

During the quarter, the corporate DIDs we're pretty evenly distributed over the three months, a little bit earlier in the quarter and the individual customer net adds were later in the quarter.

As you will recall from the last quarter call, we talked about how we would be starting some marketing programs post Labor Day.

And so if you looked at the July, August and September individual monthly net adds, we basically, in the individual channel, had an acceleration from July to August and then August to September.

That's very helpful and then continuing on that, the spending on the marketing, you had noted last quarter that it was hard to find deals and that you guys were unable to put as much money to work maybe in that space as you would have liked.

You're saying obviously you expect another acceleration in '06.

What is the environment look like out there in terms of being able to find attractive deals?

Hi, I will try to answer you, Bill.

How are you?

Good.

How are you doing?

Excellent.

On the advertising front, we see more and more opportunities through integrations, through deals that are out of the classical line and I think that you'll see more and more of them coming through the next year.

We have many discussions going on, many new ways of presenting to us, they are trying to grow out of their you know difficult banner and I anticipate that we will see more advertising that are going to use more (indiscernible) as a result.

Great, guys.

Congratulations again.

Daniel Ives, Friedman Billings.

Thanks guys.

Congrats on the quarter.

And thanks for doing the morning call.

Hemi, can you talk about the international expansion?

It seems like you are kind of spearheading (indiscernible) in terms of ramping up.

Can you just talk about what you're seeing there, the opportunity, and what you have been (technical difficulty) in the (technical difficulty) few months?

Good morning, Daniel.

On our international front, as Scott has mentioned, our fastest-growing segment of the business and we just launched I think Friday 170 some area codes in the U.K.

The United Kingdom, our first entrance into the international market, by now is our largest outside of the U.S. business.

And what we did here we tried to imitate the U.S. market.

Up to now, we had only toll-free numbers, local numbers and something called calling party numbers and now basically covering I don't know 18, 19 plus percent of the United Kingdom population.

We are seeing, after we started focusing in the U.K., the U.K. is the only country that we have significant staffing.

I think the number there is like ten people and we are seeing the result and we are seeing that the U.K. is growing and probably we will be able to give you more color about it in the next quarter.

Definitely, if we go country by country, starting with Europe and adding those free and paid and present currency and method of payment that we see is not completed, we will have more and more, as I said, in those markets.

Just last question, when you're looking at the competitive environment on the enterprise, we're hearing more and more that you guys are going up against Capterras given the hosted solution, can you just talk about the enterprise market, specifically competitively against Capterras, trying to unseat them with the software versus the hardware solution.

Thanks.

Sure.

I think we have said that fairly consistently that our view competitively in the enterprise space is predominantly the incumbent server-based solution.

It may, in some instances, be Capterras but there are other providers, whether it is Bizcom or an Omtool.

But it's basically that hardware-based solution with the accompanying software and so not only would we say that is true today, but it has been true since the day we launched the corporate channel.

And basically the propositions, and they vary from customer to customer that seems to be effective, range from the total cost of ownership of our solution versus that incumbent server solution, the ability for the enterprise customer to mix and match phone numbers around the world as opposed to having servers in each location where they would like to have telephone numbers.

So you can take New York and Milan and now Rome and London and Los Angeles all in one mix.

Those numbers are not premium priced.

The pricing of the numbers is the same anywhere in the world.

The third piece is offloading the management of that solution from the IT department within the company and putting that onto us, which we think we have gained an expertise in how to do that.

And then there are some feature functionalities, compliance issues.

I can't comment as to other solutions and whether they would rank, where they would rank in terms of compliance, but one of the selling features we have observed in the last couple of quarters has been regulatory compliance; everything from Sarbanes-Oxley to HIPAA to Gramm-Leach-Bliley and to other various regulatory bodies that are out there.

So those are the key thrusts.

A presentation is tailored for each of our large corporate clients.

The goal is to get that initial meeting, understand the needs of the company, understand how their people are distributed and then we can work on more tailored presentation.

If they want to go down the path, and normally they do, we can also do a total cost of ownership versus the incumbent solution.

Those are the key main areas that are the push, if you will, against any of the incumbent solutions.

Let me add one little thing.

With 10 million users outside, there is always pressure on the IT department to use eFax, which is basically being used in many corporations when they still have competitor services.

They are always told to use the eFax and they are exposed to the simplicity and they come to the IT department and say if we could have that, we could have this feature, that feature and basically starting from those that are remote from the headquarters of the corporation, the pressure is building up so when we show up at the door, they know who we are, which helps.

That's a good point.

Ari Moses, Kaufman Brothers.

Nice quarter.

Just a couple of things I wanted to follow up on.

First, in terms of the international market, I wanted to understand -- I know in the past you've talk about that base, which if I read the number correctly, it was tough to see on the slide, was 746,000.

Did I get that right?

Yes.

That's free and paid -- predominantly free. 700,000 free roughly.

That was the question, the balance between paid and free.

So you have continued to see the free model because I know you've talked in the past about trying to figure out the marketing for that given the calling party pays model.

You're not necessarily trying to convert all free to paid.

So you're still seeing the balance come from -- in the free segment?

Let me answer you.

The international European market, let's talk about the European market, is fragmented.

For instance in the Netherlands, we have calling party pays up to rates that are pretty happy to give the customers on what we call the free service.

We just launched in the last few weeks in Netherlands not only the eFax Free but also the eVoice Free.

The eVoice Free basically voicemail to e-mail with ability to call and retrieve your messages.

To retrieve the messages you have to call the same number that generates for us something upward of EUR0.40 per minute.

So in those markets, you are not going to see us doing a massive push to convert free to pay because we're happy with the revenue.

In other markets when the calling party pays numbers are using low per minute revenue for us, we are focusing on more conversions.

U.K. is a good example where we have just launched all those cities and basically those markets are not all the same.

We're learning how to deal with each of them and to answer your question, we are going to see more free to pay conversion in Europe in most of the countries.

And that $0.40 EURO number that you just talked about, would that be the same ballpark for both eVoice as well as for the eFax or does that number differ?

Those numbers come from the same family.

And last question, in terms of the corporate DIDs, as far as booking them, you talked about the 49,000 you booked this quarter, not corporate but your total number.

How do the corporate DIDs get booked in terms of if you sign a contract for take your largest customer, I think when you originally announced was 6000 DIDs.

They've now deployed I think you said around 10,000 DIDs.

Did they get -- when you first sign a contract, do you book the minimum number right up front and then you book any additional as they go?

Do you book all of them as the numbers are act actually activated?

Good question and it is the latter.

They get booked as activated.

There can be an exception if from a date certain, the company is obligated to take or pay for all of the DIDs.

But basically as the DIDs rollout, those DIDs are included as gross adds.

So if we have a 7000 contractual order, which is the case with our largest, they rolled out their DIDs over probably a four-month time frame because it actually gets to an email question we just got and a fair percentage of those DIDs were reported DIDs, meaning they were existing DIDs owned by this company that they sent to us.

So we had to wait until those DIDs were received by us.

As those DIDs came onto our platform then they became gross adds and deployed DIDs.

When they went in excess of 7000, similarly as those numbers were taken, they became gross adds.

For a contract minimum, is there -- I know you're saying this case was about four months.

Is there a minimum time frame in which they have to deploy or if they have a three-year contract, can they just deploy that 7000 anytime over the three years?

How does that --?

No.

There is no time frame in which they must deploy.

However they have an incentive to get the DIDs deployed as soon as possible.

Thanks, guys and again, good quarter.

Let me just take -- we have an e-mail question that I would like to address, which dovetails this question and the nature of it has to do with the accepting of ported DIDs and what that means to our business.

Today, ported DIDs are accepted for our larger corporate customers.

So we are not accepting an individual single phone number.

However, in the 16 large accounts that we have, there are -- it's usually the case that in 1000 or more DID orders, some percentage of those DIDs will be existing telephone numbers that an existing telco will port over to us at the request of the company.

So yes, we believe that is also a positive enabler of selling a corporate customer.

They don't have to take 100% new DIDs and get those numbers out into the marketplace.

They can bring whatever amount of numbers they have with them already.

That is good news for us because as soon as the ported DID is into our network, the usage should not change and so we begin generating revenue immediately off of that phone number.

Let me just add that one of the issues that is going on in the product growth in the engineering here, we are working with simplifying the porting of DIDs for our individual customers and I cannot announce it but I would be -- I will be probably talking about it -- we will probably be talking about it at the beginning of next year.

The next live question.

Youssef Squali, Jefferies and Company.

Good morning, Scott.

Good morning, Hemi.

A few questions.

So the 49,000 DIDs is obviously a record net add for you guys.

With the increased sales and marketing spent scheduled for next year, Scott you guided to in your '06 discussion, is there any reason why we should expect a decline in DIDs sequentially from this year as 180 to 190,000, which we are expecting?

No. it should go up.

Now, the only comment I would make, as you have seen over the last couple of years, it doesn't actually go up quarter-to-quarter sequentially, but if you take a four-quarter rolling average or you look at the calendar years, I would expect net DID additions next year to be up over the 2005 count, which is of course up over '04, which is up over '03.

Okay.

So that makes sense to me as well.

Secondly, any plans to hire more salespeople?

I'm trying to figure out, are there any constraints why -- I'm not sure I'm talking internationally.

I know internationally you are considering increasing -- you only have only one person there so it would make sense -- but even domestically, you only have 16 people now.

Is there any plan to hire more people to kind of even accelerate the growth that you're seeing?

The answer is yes.

Now, as I say, our '06 budgeting is not completely done.

However, the corporate channel was one of the first ones that we really dove into in terms of putting together the 2006 outlook because it is obvious to us, as I think it is to you, that they have now reached a point of, particularly domestically, really proving themselves.

I think Tom has done a very good job of getting the right people both in number today and in terms of bringing them along so that they are productive.

They have got a tremendous pipeline of opportunity.

Having said that, there are many areas of the country that are undercovered in the United States.

So his plan does call for, and it is not finally approved yet, but it does call for adding more people, some of which we are going to begin hiring now in Q4 of 2005 because, as you know, these people take a while to season.

They take a while to build a pipeline.

So just because we've hired additional salespeople, it doesn't mean that within a quarter they're going to be generating a lot of revenue.

But the short answer is yes, definitely more people domestically and internationally, we are going to start to lay the groundwork by planting some seeds first in the U.K. but I would expect in the next year you will see some number of reps in other countries, possibly Germany and France.

Have you in anyway changed your sales incentive or do you find a need to change it to get people more excited about this?

This is Hemi.

No we haven't changed anything on the incentive.

Of course, we have different levels of our salespeople and the biggest incentive now is that we have better geographical coverage, which basically will encourage our sales reps to go deeper into the market and increase sales and just to add to Scott's comment, Tom had requested to add more people and just last week we authorized him to start recruiting and you know the jobs should be posted I would say maybe last week or this week for some of the additional people that Tom is asking.

And they will be recruited as we speak.

And as eVoice now has started gaining traction, can you speak to the economics of eVoice versus just the economics of the regular fax service?

EVoice is basically sold for $5 a month.

It includes a number, dedicated number, you can choose your area code.

Then you can also call to retrieve your messages.

We have the same, even though we didn't start to deploy them, the same per usage policies and we are using it to bring into the market the beginning of the unified messaging services that basically we have seen -- we haven't seen great successes there.

But we believe that through eVoice and eFax and all those you know little steps in the right direction, we will use eFax as it will add more and more services and eVoice as we add more services to become this unified messaging thing that we don't know where but we know how to get there.

But on a standalone basis, from a profitability standpoint, is the gross margin similar?

The gross margin -- it's a shared network.

The gross margin I would say is roughly similar, possibly a little bit lower but where Hemi was leading you to was that what eVoice is today, which is a filer (ph) product, is not where we intend eVoice to be into the future.

There will be usage charges.

It is unclear whether the ARPU of an eVoice customer will be more or less than $17, which we are experiencing for the base as a whole.

There is an argument by the way it could be more.

Our Onebox customers, which are heavily voice oriented, they have ARPUs well in excess of 17, some of them hitting almost triple-digit a month.

So I think it is too early to be predictive but at $5, yes, you can expect it's a lower gross margin, a lower -- it depends on the operating profit, how we got the customer.

If they're coming from our own base, the operating income margin is no worse and possibly even better.

But as we start to spend marketing dollars to acquire the customer, I would expect that they will also be somewhat less.

Let me add some comment.

The eVoice product was introduced without any specific development or additions to our network.

They are riding on the same infrastructure that we have, which has impact on the course (ph) plus, as Scott mentioned.

So far, most of our eVoice customers came from partial introduction to our eFax base.

We did not go through an entire base to introduce the product.

We are working on perfecting the message.

So what would expect?

You would expect that those customers would come when a marginal marketing cost is lower and they would be using the same network and I hope it helps you to understand the answer.

It does.

Thanks a lot.

And again thanks for doing the call early.

No problem.

I'm not sure I would do it again this early but no problem.

Not me, not me.

Rod Ratliff, Stanford Group.

Hi, guys.

All my questions have been answered.

I was trying to get out of the queue.

Thanks.

Mike Latimore, Raymond James and Associates.

Good morning.

Nice quarter as well.

As you look to '06, you have 30% top-line guidance there.

Can you guide a little bit into your assumptions around your value added services, international enterprise?

I mean are you assuming kind of a similar trajectory to what they have been on or are you assuming some acceleration?

Just a little more color around that I guess.

Sure.

If you take -- I guess if you go to the slide I didn't comment on in the presentation, which would be -- let's find the right number for you -- slide 7.

As you know, we break our customers into three segments so let me address it this way.

There is the individual customer base, small to midsize business and large enterprise.

And so if we look at the '06 outlook, we are anticipating that the individual customer, which is now a combination of the U.S. and international, grows at roughly the same rate it has been growing at this year, a little bit heavier growth on the international side because of its smaller base, its substantially smaller base.

Small to midsize business I would say is roughly in line.

I'm hopeful that that will accelerate.

There are some new marketing programs and ideas that will be launched sometime in early '06 but since those things are not live now we have taken arguably a more conservative view.

And then clearly an acceleration in the large enterprise and government but recognize that's starting really from a peanut in terms of its revenue contribution.

So we are looking for all of the channels to continue to grow.

There is some differential in the growth rates and there is obviously some differential in their current relative proportion to the company's overall revenues.

A then on the -- did you say you have a total of 16 enterprise accounts now?

Is that right?

16, yes, of 1000 or more phone numbers.

And then just getting back to the gross margin one more time.

You're kind of tracking around 80, 78 to 80% this year after being sort of 84 to 85% last year.

Is the same rationale that you gave for this quarter that you were just sort of investing in networks and expanded the breadth of the network and that you won't be quite as aggressive on that next year so you should see gross margins come back up on an annual basis?

Yes.

Two comments though.

First of all, remember the 84, 85 from prior period had network operations people in G&A.

So there is that reconciliation slide that we have at the back of the presentation.

So if you normalize the accounting in '04 and '05, you'll see that it has been basically around 80% consistently.

Now yes, in this quarter the gross margin is lower than that historical trend of 80 and that was -- from an investment standpoint, we made a large investment this past quarter both CapEx wise, which you'll see in the free cash flow calculation as well as operating expense wise.

That is really gearing up for the future.

So I don't expect to see the telephony aspect of our cost of goods sold moving up fairly dramatically over the next several months.

I expect that cost to be relatively stable and as a result, as the revenues grow, the gross margin should come back to the 80% you have experienced.

Also let me add that in certain instances like the companies (indiscernible) based on call, we might be running four quarters, two sides parallel, where were are migrating from the old to the new.

The same in the United Kingdom when we added all those extra capacity.

We were running the old infrastructure, the new infrastructure and new area codes.

So you are seeing a quarter that is unusual from this point of running several sites in parallel.

Right.

That's a good point.

Last question, sales cycle in the enterprise market similar to what it has been?

Yes, no fundamental change.

Tavis McCourt, Morgan Keegan.

First, can you tell us what the cancel rate was?

I can't read it on the slide here.

2.8% monthly cancel rate.

And then just to kind of dig into your licensing strategy a little bit, you kind of hinted towards some deals you guys are working on.

Are these with existing competitors in the fax to e-mail space or are you getting interest from potential competitors that recognize the validity of your patents and want to come into this space but would like to do it through licensing your technology?

Well it is actually a range of potential licensees and that is what I would call them at this point is potential licensees and it is not always the same patents for each of the licensees.

So in some respects, yes, it would be people that you might think of as being competitive with us.

And in other cases, probably less so.

But they are involved in certain technologies, predominantly in fax, where some of our patents are applicable to what they do or how they do what they do.

So it is a fairly broad range.

I mean the pipeline of people that we are in discussions with is fairly large.

In terms of -- obviously it looks like you are starting to get some traction on the corporate side.

Are you going to break out at some point what percentage of the gross adds or net adds in particular quarter come from corporate or is it still very small?

As you heard on the earlier question, I think the first question of the day, it was a larger percentage in Q3 than it has been in some prior quarters.

Still though, although the ordinal ranking might have shifted, did not displace the individual direct to site customer, which continues to be number one and has been.

We have stated that yes at some point as the corporate business in its entirety becomes a larger share of overall revenue or a larger share of net DIDs, we will probably break out or have some additional metrics to address it.

But right now it is still on an aggregate basis.

The ARPUs are behaving as we would expect in the aggregate.

The cancel rate -- at this point, I don't see us breaking it out but I would be hopeful that at some point during '06 that would be necessary.

My final question is just the cash continues to build, by this point next year you might be up to 200 million in cash.

I hope you are right.

What do shareholders look forward to in terms of cash usage?

Where do your priorities lay at this point?

It's hard to even build a scenario where you would even have any particular month where there would be a cash outflow from an operations basis.

From operations, no.

I think you're right.

I mean even when we have "heavy CapEx quarters" we are talking 2.5, $3 million of CapEx.

We are generating that in less than a month.

So where is the cash going to go?

Well as we articulated before, our primary desire is to utilize the cash to enhance the overall business.

And that would generally imply M&A.

And if you look at M&A, there are sort of three types of M&A that we are engaged in, two of which are generally small in dollars.

There is what I call the rollup of the IP fax/unified messaging business.

This is very representative of the Data On Call deal, the Call Sciences deal we did a year ago where the targets have one to three million in revs.

We have pretty much a multiple formula that we are willing to pay for those companies.

We are in regular dialogue with a number of them and when the time is right we sign the agreement, announce the deal, over some period of time integrate those customers onto our network.

They generally are nicely accretive albeit small.

So that is what you have seen us do.

We also have a program though that we are looking to enhance the e-mail services vertical of j2's product suite.

And there are a number of, once again, generally small, third-party e-mail service providers and we are evaluating the landscape to see whether it makes sense to acquire any of them.

I don't anticipate huge dollar outlays though from anything in that vertical.

Then the last piece which I think is potentially the most interesting from a futuristic standpoint and goes maybe more towards overall corporate strategy is if you take a look our product roadmap we have articulated five verticals that grow from IP fax to unified messaging.

Now we just discussed three of them;

IP fax, e-mail services and unified messaging.

There are two others we didn't discuss, voice services and document management.

We have been exploring more on the document management and related areas the landscape there for a number of emerging technologies that basically are designed to give anywhere from the individual up through the small to midsize business a more or better way of how they handle within their groups virtual documents.

How do they store them?

How do they archive them?

How do they retrieve them?

Now these kind of deals a la an Intranets that WebEx bought a quarter ago would be larger in transactional value.

To use that as an example, I think WebEx paid 45 million, roughly three times revenue for the acquisition of Intranets.

I am not saying we are going to go down this path and necessarily buy anybody in this space but it is something that we're looking at as a way to enhance the document management piece of j2's overall strategy.

We are also looking though beyond the five verticals because there are a number of technologies that are emerging or have emerged that are complementary to our messaging services.

So we are evaluating whether these spaces are for real, whether they have a real life and longevity to them, and what we would be willing to pay to get access and get entree into them.

So I do think there are opportunities to do larger deals than the ones we have done.

At this point no promises because we're still very much in the evaluation stage.

Got you.

And just to confirm, with any of these, you would be looking at the service side of the business, not the technology sales side of the business.

Yes.

My last one was just a follow up with you, Hemi.

You had mentioned on the subscriber acquisition cost coming down.

One of the points on that slide was due to international, are we to take away there that subscriber cost at this point are lower internationally than they have been domestically or did I read into that the wrong way?

No, I think that the answer is like this.

We did start to spend money on the international market and I say that the spending there is both initial and fresh and we're still learning.

We have seen success there but we just started.

Most of our subscribers I mentioned are coming direct to site and this was the driver of the reduction when you talk about the spend to these local and internationally.

Again, in the international market, we see less competition but we on the other hand are in the learning curve -- on the learning curve.

Thanks a lot.

Great quarter.

Joe Noel, Pacific Growth Equities.

Congratulations on another good quarter here.

Most of mine have been answered but Scott, could you -- is there anyway to look at the business as far as what the traditional business has been growing at versus the new services that have been rolled out over the past year?

If there anyway to break those down to get a gauge on how quickly the new stuff is growing?

Well yes maybe we can go back to slide 19.

Let's take them from a service perspective.

EVoice is still very much in its infancy.

I mean 4000 paid DIDs at five bucks a month doesn't really move the needle.

That is really more to show that there is traction in rolling this product out.

I think the bigger successes really come next year but it is a marginal contributor revenue wise today but obviously up from a couple of quarters ago when it was zero.

International, we have kind of given you the number.

The international business year-over-year is growing 56%.

The company as a whole is growing about 36% in revs.

So the international piece is growing 20 percentage points faster than the company.

No doubt about that.

I don't have a specific number for enterprise sales.

Although if you take the enterprise, not the smaller corporates, the small to midsize, but the enterprise, it is also growing faster than the company as a whole.

As I say, I don't have off the top of my head an exact number to give you but it would be growing north of 36% as well year-over-year.

So all of those are growing healthfully and faster than the rest of the company but obviously off of a very small base.

Youssef Squali, Jefferies & Company.

Just a quick follow up.

Scott, on the gross margin question, was down 100, 200 basis points this quarter primarily on investment.

Are you expecting any investments or similar investments in Q4 to maintain that gross margin at that level or should we expect it to reverse as early as this quarter, as Q4?

Well, be careful how you define reversal.

Let me be a little more specific.

No, we don't anticipate any additional spend whether it is CapEx or operating expense.

So I look at the aggregate dollars to be roughly the same in Q4 as Q3 and as a result, I would expect our gross margin to probably be in the 79% range for the fourth quarter.

It will take a while to bleed in all of the spend and to get back to 80% but don't expect to go there in one quarter.

Ladies and gentlemen, there are no further questions at this time.

I will now turn the conference back over to your host to conclude.

Thank you.

We appreciate all of you for joining us early this morning to discuss the results.

We will have -- I just want to make a couple of final comments.

We have a couple of engagements -- speaking engagements between now and our next call.

There is a presentation on November 15th in New York at the Pacific Growth Equities Investor Conference and then we have got one at First Albany in early December;

December 7th I believe.

So you will be hearing from us on those two speaking engagements.

As usual, we will have a webcast.

We will also have a slide presentation filed as an 8-K and then we will look forward to speaking to you regarding the fourth-quarter results and year-end results in either late January or the first week of February.

Thank you very much.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you all for your participation.