Ziff Davis Inc (ZD) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications first quarter 2007 earnings call.

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global Communications.

Thank you.

Mr.

Turicchi, you may begin.

Thank you.

Good afternoon, everyone, and welcome to the j2 Global investor conference call for the first quarter of 2007.

As the operator mentioned, I'm Scott Turicchi, co-President and Chief Financial Officer.

With me today is Hemi Zucker, co-President and Chief Operating Officer, and Greg Calvin, our Chief Accounting Officer.

We'll be using this time to discuss our Q1 financial results, guidance for Q2, as well as for full fiscal year 2007.

In addition we will provide additional information regarding our new voice services.

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

A copy of this presentation is available at our website.

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

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

After completing the formal presentation, we'll be conducting a Q&A session.

The operator will instruct you at that time regarding the procedures for asking a question.

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

Before beginning my remarks, allow me to read the Safe Harbor language.

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

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

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

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

I would now like to turn to the results for the quarter.

This was another outstanding quarter for j2 Global.

Our revenues were $54.1 million, up 29% from the first quarter of 2006.

These results in the first quarter of 2007 include approximately $2 million in patent license revenue from CallWave.

Our gross profit margin for the quarter was 80%, consistent with fiscal year 2006.

Operating earnings, exclusive of FAS 123(R) charges, were $23.6 million or 43.5% of revenues, and net earnings before 123(R) charges were $17.7 million or $0.35 per fully diluted share.

On a GAAP basis net earnings were $16.4 million or $0.32 per share.

We had 123(R) expenses of approximately $0.02 during the quarter and expect that for the full year, 123(R) expenses will be between $0.07 and $0.09 per share.

Our funds available to grow our business rose to $210 million after expending $10 million for stock repurchases aggregating approximately 400,000 shares.

I'd now like to turn to the investor presentation.

We will not spend time on every single slide, but I do want to highlight a few areas before handing the presentation over to Hemi, so he can discuss in greater detail our voice services.

You'll notice that on slide 4, the messaging and the service slide, we have added the recently-launched eVoiceReceptionist logo under voice services.

That was actually launched during late Q4 of 2006.

The total inventory of telephone numbers grew to 16.9 million during the quarter.

The network continued to expand in terms of cities covered, now crossing more than 2,800 cities in 40 countries on five continents.

We issued a couple of press releases during the quarter announcing some new country coverage as well, and our total subscribed telephone numbers crossed 11.3 million.

Total patent portfolio grew to 50 during the quarter.

I think most importantly, though, is the coming to fruition of the intellectual property program, which produce both the ongoing recurring licensing revenue as well as the settlement and license reached with CallWave, which was $4 million in cash, and then a percentage -- 10% or greater of their fax revenues beginning June 1 of 2007.

As I mentioned earlier for Q1, we booked approximately $2 million of that $4 million as revenue relating to prior periods infringement.

We, as I mentioned, have $210 million of cash and securities and were able to repurchase about 400,000 of shares during the quarter.

I'll now leap ahead to the slide 8, which is the service roadmap.

I want to highlight a couple of things that have been evolving over the last couple of months.

We're going to be rolling out an additional phase of the bring-your-own number program in the summer of 2007.

The outlook plug-in feature set is currently in customer beta with some of our corporate customers.

We are working in the voice services area on voice-to-text delivery, as well as eVoiceReceptionist online sign up to make it easier for the customer to actually sign up and take the service online.

So those are some of the few enhancements that are coming to the service roadmap that you've seen us present before.

At this time I'll turn the presentation over to Hemi to discuss in greater detail our voice services.

Hello, everybody.

Glad to meet you all again.

As usually, we are trying to focus every quarter on another operation of (inaudible) our business.

Today I will tell you about our voice services.

From the beginning we have strategy to offer broad away of messaging in services that are involving voice services to our business users.

Now, during the second half of 2006, we have been increasing our investment and our focus in voice services and I would like to share with you some of our accomplishment and educate you on our current situation and success.

First of all, let me discuss with you the current situation and advantage that j2 has when offering voice services and opportunity [sides].

We are perfectly situated for the opportunity.

We have 16 million numbers in 40 countries and 2,900 cities around the world.

The immediate potential customers for these services are the SMBs and the [source].

They are known to be our sweet spot, as we resolve an immediate problem for them and they can deploy immediately a system and service that is available now only for large organizations and corporations for the fraction of the cost and they can do it almost instantly without any professional help or installation.

Cross-selling opportunity is very large.

We have tried to do some cross selling to our large customer base and the initial results are very encouraging.

From an ARPU standpoint, our ARPUs and margins on the voice services are similar to our core service offerings, and also the telephone numbers that we are using or that we are giving our customer to be used by voice are sticky or stickier than the fax services.

The reason is that mostly the four number that is being handed out is a shared by a number of users and is very hard to depart for it.

Another phenomenon that I would like to attract your attention to is that usually a fax number is a shared resource.

In an office of five to six employees, it's most common to see up to two fax numbers.

But on the other hand, when we talk about the telephone extension, each employee needs an extension.

So as the business is growing and our SMB customers are growing, on the fax scenario not necessarily you will add a number.

On our voice scenario, every new employee, every new function creates an organic growth about phone numbers.

Now let's turn to the next page, page 11.

Let's talk about our voice brands.

Evoice, as you remember, was started in 2004, we introduce a free service that basically gave the customer free -- a random DAD in the remote area code and the basic functionality was to deliver voice mail to e-mail.

Since we have launched this service, we 1.25 million free customers, most of them on UDS, but we have some international customers that are already gen -- revenue generating despite the fact that they are free because voice messages are delivered via premium numbers or calling party paid numbers and they generate revenue for us.

The paid service has an option of local phone number, one of the 2,900 cities, customer can personalized their OGM, or in simple language, outgoing message, and they can retrieve the services via multiple ways, online and also the traditional way of dialing to listen to your message.

Let's move to our next brand, Onebox.

Onebox is a company that we bought in the second half of 2004.

We've acquired it from a company that has a full-fledged unified communication services.

They had very strong (inaudible) and they have a history of multiple attempts to become profitable.

We have acquired the company and here is what they have.

They have basically the Onebox solution, which is the fax, book, and e-mail all in one books, i.e., Onebox.

They also have "find me/follow me" features with all the capabilities, many, many features, more than a human being can even understand, and they have another service that was a Receptionist product, and this product got our attention from the get-go.

Let me explain you a little bit about the product.

Imagine that there is an office with five to six employees.

They either sit in the same building or not.

They might be remote, they might be together.

When a caller comes in, in order to manage the calls, they would need a PBX.

In our situation, we will either provide the number or take a number that they already have as the main number for the office, the number will be routed to our Onebox suite, if you want, and then we will play a menu like, push one for sales, two for finance, three for marketing; or to find the employee by their last name, click this extension and if an employee is not in the office, we can forward the call to his mobile or in another scenario, when employees are not in the same building, no problem.

With our solution, we can basically forward the call to every where they are.

EVoiceReceptionist was basically a simplification of the Receptionist that we have with the Onebox.

Last year we have realized that we do need to develop a simple solution to we can sell it, it will be easy to explain it in few sentence, and you have to remember that our customers and our initial strength is selling online.

Now that we have developed an online demo and a simple explanation, we started to deploy the service.

Our service -- our receptionist service has initial very strong traction.

In the last six months, our paid service for the receptionist has grown month over month on a monthly rate of over -- almost 10%.

Our total paid extensions and voice net services are currently 5% of our entire paid base.

Let move now to the next slide, number 12.

The menu proposition.

If you understand, we are replacing a PBX -- PBX is a piece of hardware that costs thousands of dollars.

Our service does not need any initial investment.

We are using standard phones.

You don't need to replace your phone.

You don't need to modify anything, no hardware changes, we support PSPN phones, Voice-over-IP phones, and mobile phones.

The ROI for our end user is very compelling.

They get the image of a large company and includes their ability of search people by departments, names, extension numbers, direction to office, and all those functionalities.

The cost is very minimal and the setup is very speedy.

Usually customers sign either automatically online or via our telesales and we set them up the same day or the next day.

The service is also location independent, which is very critical to our (inaudible) base and the voice mails are forward to e-mail the same way we forward our faxes to e-mail.

As far as pricing, our eVoiceReceptionist product starts at $29.95.

It includes three extensions and basic feature.

The Onebox Receptionist has a little bit more features, $49.95, starts with four extensions and then for $79.95, image, for $80 you can support an organization with ten employees.

And, of course, if you order the base of employees, you can add more and more extensions.

We are very excited about the voice services and we will keep on updating you later on as we develop this rapidly growing base.

Scott?

Thank you, Hemi.

Hopefully there'll be some time and good questions for some additional discussion on the voice services.

I want to just draw your attention to a couple more slides and then we'll open it up to questions.

On slide 14, the non-GAAP financials, I want to make one other point on the operating profit and non-GAAP EPS.

We made a decision that for this quarter, the non-GAAP would only be exclusive of 123(R) charges.

There are also an additional about $500,000 of charges in the G&A that is fully expensed that relates to the additional accounting fees, primarily related to the restatements that we did for the '06 and prior fiscal years that we filed on March the 12th.

So those numbers have not been taken out of the either operating margin, net earnings, or the EPS.

You'll see that the -- on slide 15, the margin trends continue to be very strong: Gross margin's at about 80%; operating margins in the 43.5% range; a return to a more normal G&A as a percent of revs, closer to the 16% that we talked about when we initially gave guidance; sales and marketing around 16%; and then our engineering, where we did say that we would be hiring additional personnel at a little under 5%.

Slide 16 is our guidance for the second quarter and a reaffirmation of the guidance for the fiscal year.

The revenue's at $53.4 million to $54.8 million for the quarter, $0.35 to $0.36 for non-GAAP EPS.

The non-GAAP EPS once again only excludes 123(R) charges.

It is based upon a 30% tax rate, which is what we experienced in Q1and 50.9 fully-diluted shares outstanding.

At this time, we would ask the operator to come back and to invite you to ask questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Daniel Ives with Friedman, Billings, Ramsey.

Hi, guys, good quarter.

I have a few questions on the CallWave, just so we're clear.

Sure.

It happened in mid-March, so you got the $2 million extra in revenue.

From an expense perspective, did you -- once you had that in the bag, did you spend more, because I'm trying to understand, again, apples-to-apples EPS, because if you --

Yes.

I know it's hard to do that.

I'm just --

Here's the way I look at it.

We had about $2 million of revenue from the $4 million booked in Q1.

We had about $500,000 in incremental G&A expenses relating to the accounting, so that's about $1.5 million of net operating income.

All of those revenues and all those charges are U.S., so we've got about a 40% tax rate.

So that gives you about $900,000 of earnings, which against the share base is about $0.01 -- $0.016 to $0.017.

Okay so essentially it was a $0.33 number?

That's correct.

Apples to apples.

That's correct.

That's the way to look at that.

The answer to the second part of your question, CallWave did not influence the rate at which we determined we would spend.

As you recall from the call we had on March the 12th, we laid out a series of initiatives: Hiring for the engineering group, as well as for the international group; certain marketing activities that we would be trialing, including radio, which I'll let Hemi comment on.

And those elements were not, per se, impacted by the fact that we had the CallWave revenue.

Obviously, we were in deep negotiations with them, so we had some sense that it was possible the deal would close, but we had already set programs in motion where we were likely to spend that money in Q1.

Okay.

The $2 million extra from CallWave, is that going to be in 2Q?

No.

The other $2 million is amortized into income over the remaining life of the patents they licensed, so we'll get probably an incremental 100 and some grand a quarter.

Okay.

So really -- and just like from a bare perspective, just so you could address that, since you kept guidance the same on revenue, but you essentially have an extra $2.5 million now from the CallWave, which you weren't previously expecting, how come you didn't decide to raise the range by that amount like on an apples to apples?

If you could just address that?

Sure, I think we could have.

It's been our policy, we don't -- on the annual revenues or EPS, we don't move them.

We either reaffirm them or if it get's late enough in the year and it's very clear it will be either higher or lower, then we'll make an adjustment.

But after one quarter in, it's been our policy if we believe we're still going to be within the range, notwithstanding that we may have moved within the range, we do not change the range of guidance.

Okay.

So it's just like last year and just like previous years in regards to annual guidance?

Okay.

Yes, we keep that -- because the view is that's an annual number set approximately a year in advance.

As long as we're tracking somewhere within the range, we reaffirm it.

If it becomes clear we're not within the range, either revenues or EPS, then we'll make an adjustment.

Okay, and just finally and then I'll hand it off.

Price increase.

Based on net sub-adds, it looks like going ahead of expectations.

Can you just talk about the price increase and maybe what's surprising you on the upside?

At least that's how it looks with regards to the numbers.

I'll let Hemi comment as to the change itself, but one highlight I want to point out is that you'll notice the cancel rate for the quarter, the average monthly cancel rate over Q1 was 3%, up from 2.9%.

The last time we went through the price change in late '03 and into '04, we had a top tick cancel rate of 3.3% per month, and we had stated on the last call to expect the cancel rate to go up in Q1 relative to Q4 and that it could even touch those previously-recorded levels.

It did not.

That is a positive sign in in terms of how the price change is being accepted.

I'll let Hemi comment in terms of how much of the base we've gone through and the overall view on the recent activity of it.

Hi, Daniel.

How are you today?

Good, good.

As you know, by the end of the quarter, we have changed the price to two-thirds of our base.

During April -- I'll give you more information -- we added another 5%.

The focus is really on quality rather than quantity, so we are trying to do everything we can to keep -- and if you've seen the numbers, we are able to maintain relatively higher portion of our base without churning them.

We give up, on the other hand, speed and we try to do it in a way that we keep most of our customers.

We still believe that by the end of this quarter we'll be up to 85% conversion, maybe closer even to the 90%.

But our focus is in maintaining large proportion of our base and I'm very happy to tell you that so far we are exceeding the expectation.

Okay.

Thanks, guys.

Congrats.

Thank you.

Our next question comes from the line of Bill Benton with William Blair & Company.

Good afternoon, guys.

Hello, Bill.

A couple questions.

I actually was trying to look at our analysis of your transition on the price increase there.

Maybe I have some -- a couple things off here, but if I'm using -- I think you had 40% of the base changes in last time, and maybe I --?

Correct.

That's correct, that's correct.

Okay.

So if I got an incremental 20% of, let's all it 60% of your total base transitioning, that's about 12% of your total base and a $4 incremental revenue number, which I would have thought the fixed ARPU would have gone up maybe an -- almost double of what it went up.

Am I missing something there or is there some other moving part?

Obviously there's some other moving parts in there that I'm over simplifying, but I just wanted to get your thoughts on that and whether you still expect to be at 90% by end of the second quarter?

Well, let's deal with the last one.

I think Hemi just said we think we'll be at between 85% and 90% by the end of the quarter -- by the end of Q2, and that depends on how -- the speed with which we do some of the elements of the bases that are left.

We've talked previously that not all customers and not all types of customers are of equal types.

For some of them, we have to have specially designed programs or certain care in terms of how we deal with the, and we're starting to get into some of those customers as we speak.

I'd have to go offline with you in terms of your first question to walk through the math and check it with you to see if you've got your assumption correct.

I would tell you that the $4 is a little biased up because that is for the month-to-month customers who are the predominant mix of that base.

The annuals aren't going up by $4 on an equivalent basis, so I think that the average is like $3.60.

Okay.

So maybe we used a couple --

Also if let me add another important piece of information.

One of the offers that we extend to the customers is to lock the price for an annual prepayment.

Right.

Those that lock pay at $12.95 for the full year.

What we get in return, as you see our cash flow is popping up, and the customers' retention or the cancel rate goes down because they're locking the sale for a year.

If they lock for the term for the year, the ARPU not necessarily is going to jump as fast.

On the other hand, they're staying with us.

Right.

So it's good news, because we gave you the -- you see that the churn rate moved only from 2.9% to 3% and we told you that we converted two-thirds, you can come to the conclusion that more than we expected took the $12.95 and paid us up front, as is reflected in our cash flow.

Okay.

Then on the variable revenue, it picked up nicely this quarter.

I know typically it looks like -- maybe if you look at it historically it does tick up a little bit sequentially here as well.

How should we be thinking about that as you incorporate it in your guidance?

I know sometimes there's some uncertainty on vacation days and stuff like that.

There are.

Usually Q2 sets up as having the most effective business days in the quarter.

You'll notice it's one of the reasons we have a wide range in terms of the revenue for Q2.

Last year in 2006, we did not see as big a pickup in the variable revenue as we had seen in some prior years, Q1 to Q2 sequential.

In fact, if you go to the metrics slide, variable revenue was up about $800,000 Q2 to Q1 of '06, but in prior years it had been up $1.6 million, $1.7 million.

So, when we delve into that, we have never been able to pinpoint an explicit reason beyond the counting of the business days why that revenue stream had behaved in some years superior to just the increase on the business days.

Okay.

So we would say that, yes, from a pure business day standpoint, we'll probably pick up one or one and a half business days in Q2 relative to Q1 and we would expect, definitely, incremental usage for that element of it.

But whether there'll be any usage that is incremental beyond that, we don't know.

So some of our guidance contemplates that it does, but at lower end of the ranges it does not contemplate that.

Okay.

In terms of your cost of sales, if I look at that line item, I know there was a lot of noise in the fourth quarter in terms of the credits, but even if I go back to that third quarter, it jumped quite a bit.

I know you're probably making some investments on this eVoiceReceptionist product, but I don't know what else might be going on in there, so if you could offer some clarity on what might be moving around in that cost of sales line?

Well, I think -- yes, I think Q4, if you look at that as a spot margin, was a bit of an aberration as we discussed on the last call, which is why we talked about, even on that call, looking at the 80% gross margin, which was for the fiscal year as a whole, that being on a modify basis, which is where the gross margin was again in Q1.

We are seeing through some -- we are doing two things,.

Making some investments, which you see in terms of additional countries covered, as well as additional scaling for some of these new services.

But at the same time, although they don't map perfectly, there also are a variety of initiatives going through the telesales department to actually lower the cost or lower the cost per unit.

One of the things that we've done a little bit of and will do more of throughout the course of this year is the consolidation of some pops.

We have 54 pops roughly throughout the world, but in certain jurisdictions -- the United States being one and western Europe being another regional territory -- there isn't the necessity, either economically or regulatorily, to necessarily have all those pops.

So there's actually a whole program of how those pops, or some of them can get consolidated.

Like I said a few weeks ago on March the 12th, I believe you're going to see an 81% gross margin this year.

Okay.

Just a final question on that eVoiceReceptionist.

I just want to make sure I understood something.

Did Hemi say 5%?

That would suggest you have 45,000 customers on this?

Yes, that'll be paying

Yes, correct.

That are paying?

Okay.

And then could you just maybe frame to us within that, how big of that base do you think -- what percentage of that base do you think ultimately is really -- ultimate penetration that you would expect within that base over time, based on your analysis?

We are now seeing, as I said; a growth rate of 10% month over month in the Receptionist part.

We believe that this is going to be the fastest growing part of your business, but as you know, fastest and small doesn't move the needle as much as the -- the fax base, which is -- you know, there is 95% so it is the fastest-growing element of our business and we just started to see the potential.

We still cannot even deploy the full potential.

For instance, we don't have enough telesales people to take the call.

We have other scaling issues, but we definitely believe that this is going to grow faster than anything else that we have seen.

If you want maybe in the next quarter or two, as we get more numbers, we will revisit the topic and give you more color.

I think 5% of our base and the Receptionist, which is the high seller of our product growing at almost 10% month over month, by small is still encouraging.

No, 5% of you base at a similar ARPU, so it's basically 5% of your business right now.

Yes, almost.

Of the DID base business, taking out the [pad] licensing, the advertising, the e-mails, the stuff that's non-DID base.

Right, it's only --

5% of DID base.

Yes.

Okay.

No, that's great.

Congratulation on that and thanks.

You're welcome.

Our next question comes from the line of Brad Whitt with RBC Capital Markets.

Good afternoon, guys.

Thanks for taking my question.

Good afternoon, Brad.

Hey.

Other than the CallWave, the $2 million from CallWave this quarter, Scott, was there some other patent revenue in the quarter?

Yes, there was.

There was -- I want to say it was fairly typical, about $650,000, maybe $700,000 in addition to the CallWave.

Okay.

It comes from the smaller, you might call it the more garden variety-type deals that we've talked about in the past.

I do actually, by the way, expect that to be somewhat down this quarter, Q2, off of that Q1 base.

Okay.

Scott, is there any way to quantify the impact on cash flow?

You have very high cash flow, it was ahead of expectations this quarter.

Any way to quantify the impact from the customers that are prepaying, that lock in the lower price?

Would you expect --?

The answer is yes.

There is an analysis to be done.

I don't believe that is the big driver in terms of that.

I think you've got the CallWave cash coming, which is going to be more material to the free cash flow in Q1than the people who have taken an annual versus on month to month.

Well, the change in the --

The change was the delta.

-- is the delta, really.

The delta I don't think is competing with $2 million.

So you did -- so $2 million -- how much of the --

$4 million.

How much of the cal --

$4 million, sorry.

CallWave gave us $4 million, right?

That goes directly to cash.

Okay, but was that in Q1 or is that going to be in Q2?

Q1, that's Q1.

Okay.

So $4 million from CallWave and then we recognized only $2, and then the increase of cash coming from NURs does not compete with the $4 million one-time.

Okay.

Also, curious, have you seen any reaction from your competitors on the fax service based on your price increase?

Yes, we saw that some of them are testing new prices, some of them took new prices, and none of them have reduced their price and I believe that the larger, more sophisticated players are learning to test prices and then they will launch a new price accordingly.

Okay, great.

Final question, Hemi, for you, looking at Onebox and eVoice and some of your voice products, what's the competition like?

What's the competitive landscape for those products?

And what's your patent -- what does your patent look like in that area?

First of all, from competitive landscape, there are competitors out there, which is very encouraging to us.

Because the facts we are the leader, not competitors, which means also it is very hard to grow through acquisition.

On this space of our visual PBX, there are several private players.

We don't know much about them, but judging on their website and sophistication, I would assume that some of them are in our size or a bit smaller or a bit larger, which is very encouraging.

We're still learning the space.

We have one thing that they all don't.

We have large -- 11 million customers that we can approach.

We know about them, their habits, where they live, what number they need, (inaudible).

I believe that you will see us growing here and do what we did early on when we acquired some of the competitors.

But at this stage, it's very encouraging and we do like the fact that we have competitors.

Very good, thanks for taking my questions.

Bye-bye.

Our next question comes from the line of Youssef Squali with Jefferies and Company, Inc..

Hi, Youssef.

How are you?

Excellent, thanks, Hemi.

Hi, guys, hi, Scott.

A couple of questions.

First, any reason -- maybe this is a question really for Hemi -- any reason why we -- you could see different churn characteristics of those still not affected by the price increase to be any different from what you've seen so far?

I honestly don't understand the question.

I think he means in the last third of the base is there any reason to believe that they will respond differently than the first two-thirds?

Well, we kept the hardest qualification to the end like we usually do.

We hope that over time those customers will have lived with the number for six to nine months, which is the point that it's hard to separate for a small increase.

So as usual, we keep those for the last, that's why we will move slower.

I don't anticipate a significant fallback or I don't anticipate that there will be worse than the original because we are moving slower with those customers, we know what makes them tick, we know what we need to do and we have save programs.

I think the save rate will be the same, but just slower.

Again, those customers, by the time we reach them, some of them will be nine months with their number, ten months, so I think that we just have to let them age like good wine.

So you're modeling for similar churn rate as you've seen in Q1?

I believe so, I believe so.

Look, because we are moving slow, if we see that something doesn't work the way we want, we can come with new creative pricing.

We can -- nobody's forcing us to increase the price, it's just a choice of ours and we'd like to do to get over with it as planned.

Also, you have to understand that the annuals are coming slowly and some of those customers also are -- it's more a fraction of them are what we called our paid heavy users, and they're already paying us extra for every page that they get, so we are not in a rush.

But your annual guidance does take into account or does assume that 100% of the base ultimately --?

Yes, absolutely.

Absolutely, yes.

But if will be 90% conversion by Q2 and/or 85%, this is the area that we are taking our time.

Okay.

Then on the international side, we've talked about the possibility that at some point testing a price increase.

Is that still in the cards, can you update us on that?

Did you see the euro dollar ratio?

It's know as force.

Right.

The price is being -- we are very heavy with the prices there, because the pound is now two pounds a $1, so the price there is 750, so what else do we need to do?

All right, so no change there?

Yes.

And, Scott --

Yes.

You talked about -- in your press release I was surprised to -- that you actually highlighted the need to increase commitment to Onebox and eVoice.

Is that big enough that you can actually quantity it for us just to kind of see what the level of investment that you've made to grow that business?

Well, I -- actually Hemi want's to take it.

The main thing is attention, is management attention --

And hiring more people

-- hiring more people.

As I said, we don't have enough telesales to blast our entire base with, hey, take this product, so we have to -- there is a shift.

You see, on the fax product, 18%, 19% of the customers come to the website.

They read, they choose, they select, they click, they give us credit cards and they go on.

On this product the ratio is much different.

People are not so comfortable to click and boom the phone number is totally different.

They need to call, they need to ask a few questions, so we have to -- to increase our level of telesales people.

We have to automate some of the provisioning and we need also to start thinking when we introduce new product -- I'll give you an example.

We are very well known to do life-cycle management.

Life-cycle management is a process that you take the customer from the get-go and educate them, move them up the chain so they understand what they have.

We don't have it for our voice services, so we have all to work with all those things.

All those things, if we put our heads to it, will increase the stickiness, the maturity, and the power of those services.

To quantify it, a few hundred thousand dollars in people, telesales, and customer service, and life-cycle management then is the gateway to allow us to put more marketing dollars behind the program.

Right now if we don't have the capacity to take that additional spend and monetize those customers, that's just a waste.

So we're talking about a few hundred thousands dollars of incremental spend for really the internal people component.

Once that's in place, then we can accelerate the market dollars.

I see.

Okay.

Last question for me, any major customer wins this quarter?

Yes.

There were --

North of ten --?

Yes, we go 31 of the big ones at the end of the quarter.

I want to say there was one or two large ones.

I think one might have technically been under 1,000, but 900 and some that were big wins for the corporate group.

Got it.

Thanks.

Bye.

Our next question comes from the line of Ray Archibold with Kaufman Brothers.

Good afternoon, can you hear me?

Sure, how are you?

How are you, Ray?

Good, thank you.

I just want to follow-up with the voice service, and I appreciate that we're still early on.

It's only 5% of the DIDs.

I was just curious, what is the overlap amongst those that are taking a preexisting service and what kind of marketing are you crafting into the install base to lever that, if you will?

It's very basic in the early stage.

We have tried two messenger and two messages.

One with the eVoice reception would not even hit the entire base and one with the Onebox.

The difference was the creative, one is a big building and the sign "Joe" on top of the building and the other one is a guy that is like have a bicycle shop and we didn't even have all the offers to all our base.

As I said we cannot send them all at the same time because we cannot just pickup the phone, so we tried the -- we were surprised by the initial response and conversion rates calls per sales.

And we also -- we see customers that are very excited because there is a little bit wow factor here.

Everybody knows what is faxe-mail.

We spend years years educating the market.

In this space, people don't even know that there's a possibility to outsource a PBX that look like big, so it's a much different excitement there.

Okay, very good.

Thank you.

You're welcome.

Our next question comes from the line of Tavis McCourt with Morgan Keegan & Company.

Good afternoon, gentleman.

Another question on the voice business.

Hemi, can customers port their numbers over to your service yet, or is it --?

Excellent question.

It's excellent, because I have the answer.

(LAUGHTER) If I don't have it's a very good answer.

Yes, we are -- we see two type of customers, some that wants to come with their own numbers, which includes porting.

We have a department of telecom that part of their task is to do porting of numbers, and those customers usually will say it will take however it takes way from the carrier and we do port numbers.

Usually they will port the main number.

But many other customers, they have a bunch of numbers but they don't have a main line.

he other one is tool free, or they want a number in a city that they really don't seat, as you understand.

So they are in Brooklyn, they won't even have the number.

So we have both -- I'd say that more than half the customer take our number, but significant parts of customer bring their own number and we are glad to do it.

And then the service is even stickier, because they don't have two other types of number.

Their phones get ringing from day one.

And in both cases, is it like your eFax service where you become the customer of record in terms of future porting?

Yes, but because when a customer bring us our number, we allow them to take it back for a fee, because they bring the number.

I don't know the you answered the -- there was a previous question on, do you have a guesstimate on what percentage of the 40,000 to 50,000 voice subs now are existing j2 Global customers or is there some customers that came through acquisition or so forth?

Only in the last six months or less, only maybe the last three or four months we started to advertise directly to our customers.

It doesn't mean that the customer could not come to our Onebox website.

Only lately we started to go after existing base, so I would guess, even though I have to be careful, that most of them are customers that came for a need and not because they are also eFax customers.

Or if they're eFax customer, it's by coincidence that they fell on us because there are some options out there.

Right, and then --

But none of them came through acquiring of companies.

Got you, got you.

Scott, two for you.

First, can I assume that the $2 million of the CallWave cash that was not booked to revenues, that that's in deferred revenues this quarter?

Yes.

Okay, and so it looked like deferred revenues were up a little bit more than that, that difference would be the annual subscriptions?

Yes, and other parties, but mostly the annual.

In terms of those annual subscriptions, will they need to pay the higher rate when that subscription is up next year?

Yes, that's correct.

Okay.

They will have a choice of monthly $60.95, or I think $169.50 for a full year, which is more than what they are paying now for a full year.

Should be $16.95 times ten.

Okay, so they -- and that's clearly communicated to them?

Yes.

All right.

And it's kind of tough looking at the OpEx sequentially, I know, because there was a lot of noise in the Q4 numbers, but R&D was down sequentially very little.

SG&A was down, I know there was some excess SG&A in that Q4 number.

Generally, where should we look going forward on some of these operating expense line items?

Well, I think if you go to slide 15, as I mentioned, we've got an 80% gross margin that as I see it, it's going to 81%.

Obviously it's not in the yet-published numbers, so you've got a little bit of lift on the gross margin.

I think the G&A should continue to fall, particularly in Q2 and Q3 as a percent of revs.

Our accounting and professional service fees generally dropped in those quarters, since they're expense as incurred and we're getting, obviously, farther away from the restatement which burdened the G&A in Q4 of last year and Q1 of this year to some extent.

And then, of course, the investigation last year burdened Q3 and Q4.

You'll probably, if we're successful in the hiring, see the R&D as a percent of revs, it should be in the high four's to even the low five's.

That's purely a function of the timing with which we can hire the people and train them.

It's in the budget, but like everything you've got to go through a process to hire them.

Then the sales and marketing I think will clearly, on a quarterly basis, bounce around the range it's historically been in, which is generally anywhere from 15 and change to the high 17's.

You're talking about a two percentage point movement within the range, [X] 123(R) and then over the course of the fiscal year, it should probably be in the low to mid 16's.

Great.

Thanks a lot.

Bye-bye.

Our next question comes from the line of Rod Ratliff with Stanford Group Company.

Thank you.

Hello, Rod, how are you?

Doing well.

How are you guys?

We're good.

Scott, the CallWave license revenue, aside from the $4 million make-whole payment here of which, obviously, you booked $2 million in the quarter and the other $2 million's going to be amortized, but the on-going license payments from CallWave, is that going to be relatively predictable, or is that going to jump around a little bit?

Well, understand, it's a percentage, so it will be a function of their revenue.

As you know, they're a public company, but the piece on which we're getting the license fee is not separately broken out.

So right now there's no way for you to look at their financial and impute the amount of monthly or quarterly revenue we will get from them, because it's not 10% of all their revenue.

It's 10% of their fax revenue.

We've been given information to negotiate the license on a confidential basis, which we cannot share.

I think the answer to your question as to whether it will be stable or growing or shrinking is really a function of what they do with that business.

To the extent they are marketing it and they're adding customers, then once we book the June revenue, I would expect it to be a growing piece of revenue.

If they don't do much with that business, then I would expect it to be stable.

If they really do nothing with it, I would expect it to decline over time.

I think it's a win-win for us anyway you look.

If the business is growing, they're paying us most licenses, if it's not, it means we took the customers.

I could live with that so --

The the short answer is, though, it's not going to be terribly material to us in Q2 given the licensing stream doesn't start until Q1, so we will only have one month.

Whatever numbers you want to create, it can't be terribly impactful because we only get one month benefit this quarter.

Okay.

So just given a general, sort of a foggy visibility here, you're being a little bit conservative with that?

I can also tell you too, at least, as we can see from their publicly-released price points, they have, like many of our competitors, low price points and from what I can tell at this point they've made no attempt to raise those price points.

Okay.

Did you -- most everything I had was asked and answered.

Did you say that paid Onebox Receptionist was 5% of the base or all the Receptionist was --

The voice services.

All the voice services, and the voice services are extensions of Receptionist, but also we have the traditional "find me/follow me." We have some also in the UK that are similar to Receptionist, but mostly "find me/follow me." But all those are growing very moderately.

The piece that is growing at almost 10% is the Receptionist.

All the rest are slow growth, very slow growth, the traditional what Onebox had when we bought it.

One last one.

You may or may not -- we have a policy research arm at Stanford, and so I know there's been some noise on the USF font -- or USF front.

Is there any changes so far as j2 goes?

At the moment no.

There have been, as we talked about on March 12th, at the time there were a couple of bills introduced.

On the house side, [j Embouche], who had a bill in the last congress, have reintroduced essentially the same bill into the current congress with some modification.

I think of all the bills that we looked at in the 109th congress, they probably had our favorite bill, not that it was perfect, but the favorite amongst those that were on the table.

What's interesting with USF, and you do a little bit of research, you'll see they'll -- there seems to be a shift in the 110th congress that is focused more on the distribution side.

There've been some hearings actually already, but they focused on really two elements.

How much money should be funded into USF in aggregate dollars and then what services should those funds be utilized for.

So there have been not been hearings on USF contribution to date.

There may very well be some scheduled at this point this summer or later on.

I would say that, based upon the feelers that we keep out and our own diligence, that I would stand by what we said a few weeks ago, which is very doubtful that you get something implemented and effective before late '08 or early '09.in terms of an actual change in the way the revenues are collected.

That isn't to say congress won't have hearings, that isn't to say they may not even pass some bills, but the bills are currently structured to send it to the FCC for them to do some additional analysis and additional work and then actually implement a change if that is what they wanted to do.

Great.

I'll get out of the way.

Thanks, guys.

Thank you, Rod.

Our next question comes from the line of Shyam Patil with Raymond James Financial.

Hi, Simon.

It's Shyam.

Hi.

Shyam, sorry.

I think you mentioned before the price increase about 20% of domestic eFax base was on an annual contract.

Yes.

Where do you expect that to be after the price increase?

It will probably biased up a little bit given how the save program works, but I would doubt it would be much more than 25ish percent.

We'd have to do a little bit more work to give you a better or more precise answer.

All right.

What percent of your revenue was international this quarter and enterprise, and what were the growth rates year over year for those?

The international revenue, I can tell you year over year grew about 38%, so that would tick it up to close to 12% of total revenues.

I'd have to take a look at the percentages, but I know the quarter -- the year-over-year growth rate Q1 '06 to Q1 '07 was 38%.

And it's still growing faster than the rest of the business, not including the voice services, but the base is larger.

And do you have the enterprise number as well?

I don't.

I think it was growing consistent with the growth rate of the Company.

All right.

Just in terms of your M&A strategy given the cash, any requirements there?

Are you looking for specific a operating margin target before you enter an acquisition?

There's two kind of acquisitions that we do.

One of them are -- people like to think of them as roll-ups because we already have a platform, a network, and most if not all of the people necessary to run the target business.

So those generally are very accretive very quickly.

The way we will look at those deals is what are the target's revenue stream, what are the exact segments in which they are deriving that research, how well do they map to our platforms and our business units and our price points, and then we do an analysis that looks at what happens at the moment the deal closes based upon the purchase price?

Then there's generally anywhere from a three to six-month integration program, where we take the customers, we bring them on to j2's platform, we integrate the people within j2, and then sometimes at the end of that process or as a separate process, we also look at the pricing.

Because in many instances, as you've heard us say over a number of calls, the numbers that we get through an acquisition tend to be lower priced than where we're currently priced.

So a second phase would be then to look at whether a price raise makes sense for that customer base given who they are.

So those deals generally from almost the moment of acquisition are accretive to really all of our margin structures and certainly our bottom line.

I would not say that is an absolute must criteria, but given that they're roll-ups, you would expect that and that's what we've experienced.

Now there is a second type of transaction that we have looked at that would not be a roll-up, per se, but would really be additive to j2's suite of services.

And in fact, the Onebox deal we did in late '04 was a hybrid.

A certain amount of their customers that we acquired at the time of acquisition did, in fact, integrate into j2, into our platforms, but then there was also a piece of the business.

which is became Onebox and eVoiceReceptionist, which did not map into our current business at the time, and so we left that stand-alone.

So to the extent that we're looking at acquisitions that would bring new technology and new services, they may not be necessarily accretive at the moment of acquisition or shortly thereafter.

So we look at two flavors.

We've had a historical bias for doing the roll-up deals, which bring in the immediate benefit, but I don't think there's a philosophical opposition to looking at the other category of deals.

We just have not really done many of them in our history.

Plus we also are looking on acquiring companies in the e-mail space.

Yes, the e-mail space, the voice services, the IP fax, and also we look at acquiring companies internationally.

All right.

We also look at patents.

Patent portfolios, though, we value separate.

Those have a different metric or analysis for evaluation.

All right.

Lastly, what percent of your customers or percent of gross adds came from the free to pay channel this quarter?

This quarter, it was less than 10%.

I want to say it was -- of the total gross adds, it was probably 5% plus.

Great.

Thank you.

Seeing that there's no further questions in the queue, I would like to turn the call back to management for any concluding remarks.

Okay.

We'd like to thank you all for having joined us.

If you do have additional questions, please feel free to call us or to e-mail us.

We will be presenting at several upcoming investor conferences over the next few weeks, specifically Credit Suisse First Boston in Boston and Friedman, Billings, and Cowen & Company in New York later in the month.

So we look forward to meeting you either at one of those conferences or if you happen to be or want to come to Los Angeles, we're here.

We will announce a little later this quarter the timing for the second quarter earnings call, but I would expect it to be the first week of August.

Thank you.

Thank you very much, everybody.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for your participation.