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Operator
Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications second-quarter results conference call.
It is my pleasure to introduce your host, Mr.
Scott Turicchi, Co-President of j2 Global Communications.
Thank you.
Mr.
Turicchi, you may begin.
Scott Turicchi - Co-President
Thank you.
Good afternoon, ladies and gentlemen.
Welcome to the j2 Global investor conference call for the second quarter of 2007.
As the operator mentioned, I'm Scott Turicchi, Co-President of j2 Global.
Joining me today on our call is Hemi Zucker, Co-President and Chief Operating Officer, and Kathy Griggs, our Chief Financial Officer.
We will be discussing our second-quarter financial results, guidance for the third quarter and full fiscal year 2007.
In addition, we will provide you an operational update, which will include information on the ongoing price change for the eFax domestic customer base, our new voice service offerings and some new forms of marketing that we have been testing.
We will use the IR presentation as a roadmap for today's call.
A copy of this presentation is available at our website.
I would also alert you that, when you launch the webcast, there is a button there that will allow you to expand the view box so that the slides are larger and more easily readable.
If you have not received a copy of the press release, you may also access it at our corporate website at j2global.com/press.
In addition, you can access the slides there as well as our metric slides.
After completing the formal presentation, we will be conducting a question-and-answer session.
The operator will instruct you at that time regarding the procedures for asking a question.
In addition, I remind you that you may e-mail questions to investor@j2global.com at any time.
Before we begin our prepared remarks, allow me to read the Safe Harbor language.
As you know, this call and the webcast will include forward-looking statements.
Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our SEC filings, including our 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 slideshow 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 strong quarter for j2 Global.
Revenues were $54 million, up 22% from the second quarter of 2006.
On a non-GAAP basis, excluding non-cash comp expense, gross profit margin was 81.3%, up 1.3 percentage points from Q1 2007 and 2 percentage points from Q2 2006.
Operating earnings exclusive of those non-cash comp charges were $23.9 million or 44.2% of revenues, a record for j2 Global.
Net earnings before non-cash comp charges were $18.3 million or $0.36 a share, and on a GAAP basis, net earnings were $17.1 million or $0.33 per share.
Our non-cash comp expense was $0.02 per share for the quarter, and we expect that for the full year 2007, those expenses will be between $0.07 and $0.09 per share.
Funds available to grow our business rose to $233 million.
I would now like to just give you some brief highlights for the quarter before turning the presentation over to Hemi.
Many of my comments are encompassed in the first seven slides of the presentation, but I won't take you through them one by one.
Some of the highlights included adding 42,000 net paying DIDs to our base during the quarter, maintaining an approximately $17 monthly ARPU and seeing our cancel rate as defined decline to 2.8%.
In addition, we added a number of European countries to our voice services offerings, now having a total of 15 available.
In addition, we localized the language sets for eFax into Portuguese, Italian and Polish.
We also launched, as we said, the online provisioning for eVoice Receptionist.
On the intellectual property front, we signed a deal with Hostopia, a publicly traded company in Canada that does software as a service, and we were also able in our SPAM fax litigation to reach a settlement with Hot Leads, which both had a financial component as well as a benefit to our customer base to eliminate SPAM on a going-forward basis.
At this point, I would like to now turn the presentation over to Hemi.
If you're following slides, go to slide eight, and he will give you an operational update.
Hemi Zucker - Co-President, COO
Good afternoon, everybody.
Nice to meet you again.
As usual -- usually we are talking about a single topic.
This time, we will focus on the three topics that we think are of most interest to our shareholders.
In slide nine on the presentation, we'll discuss about the eFax price changes.
As you know, last year, we raised the price to $16.95, and in the last quarter we reached a price increase of 80% of the base.
This number is a little bit lower than we guided you.
We were hoping to change for 85% of the base by now, but the good news are that, while we increased only 80%, our cancel rates are lower than we anticipated, and we are doing very well.
So in a nutshell, while it's moving a little bit slower, the retention rate is higher.
As you probably noticed, this quarter our net additions is 42,000 net DIDs, and the cancel rate declined to 2.8% per month.
So not only we grew faster than we planned, also we were able to maintain our ARPU of $17.
Basically, if you really read into it, despite the fact that we're in the price change, we are growing better than expected and we really like it here.
To the next slide, page 10, an update on our voice services.
As you know, last month we acquired YAC.
YAC is an Irish company, and the name stands for You're Always Connected.
It's an Irish-based company out of Galway with a talented small staff, and they bring both fax and voice numbers.
Albeit it's immaterial in its size, it's a good building block for our European presence.
Our voice services or paid DIDs for the end of the quarter are now more than 5% of our paid base.
I'm very pleased with this result, and it's actually more than we expected.
This number does not include YAC, to remind you, because YAC was brought in July, during July.
Our growth rate for quarter over quarter for those voice services is larger than 30%.
If you remember, last fall I said that we were growing 10% month over month.
I'm happy to say that we still have those strong results that are reflected on those numbers.
The products including the YAC product that is similar to our eVoice Receptionist are mostly geared to SMBs with 2 to 15 people.
This is our sweet spot, not to say that we have some other customers that are larger but take this service because they are very distributed, but the sweet spot is 2 to 15 people.
Most of our focus on marketing on those products was initially on the eFax and our free and paid base.
We didn't exhaust this opportunity at all; we just sent one or two message to each customer, so there is a lot of upside potential ahead of us.
We began to test external marketing venues.
If you remember, we said last year that we would use some money to test new venues.
We started to do some radio ads, which brings me to the next slide, slide 11.
Our new marketing test -- through the years, j2 was known for being a strong online player, and we did a lot of marketing initiatives on the Web.
This year, during January, we started to try some radio shows.
We are going to play for you today two of those spots.
I hope you are going to like it.
While we spread ourselves all across the radio channels, most of our focus was on tech shows like Kim Komando and sports shows like Colin Cowherd.
So, with your permission, let me play you first an example of an eFax radio Spot that was played on the Colin Cowherd on ESPN radio.
(audio presentation)
In fact, it is so convincing that just as you listen, I just went and signed for another account.
Okay, now we are going to play you an example of our eVoice advertisement.
My esteemed colleague, Scott, is going to run it for us.
(audio presentation)
Since I know many of the analysts have covered us, I can imagine your faces when you're listening to those ads.
In any case, we are working on those ads.
We're perfecting our corporate position.
As you see, the results are coming in, and we are very pleased with our new endeavors.
With that said, I'm going to pass this call to Kathy.
Kathy is our new CFO, and she's going to cover the financial highlights.
Kathy?
Kathy Griggs - CFO
Thank you, Hemi.
Good afternoon, ladies and gentlemen.
Please refer to slide 13 in the presentation.
Our revenues were approximately $54 million as compared to Q1 at $52 million, which excludes the $2 million in other revenue, due to our licensing agreement entered into with CallWays.
Year-to-date revenues were $108 million, up from $86 million in the prior year-to-date period, reflecting an overall increase year over year of 25%.
Non-GAAP gross margins were 81.3% as compared to the previous quarter at 80%.
This reflects continued focus on telecom efficiencies and is reflective of the continued success of our price increase.
When comparing to the same period last year, our gross margins grew more than 2 percentage points to 79.2% to our current 81.3%.
I will spend a little more time on the margins on the next slide.
Moving over to operating expenses, our sales and marketing were up 1.3% over the prior quarter, due primarily to advertising expenses associated with testing radio spots, which Hemi just discussed.
However, G&A went down a corresponding 1.2% over the prior quarter, as a result of reduced professional fees.
Operating profits on a non-GAAP basis were $23.9 million or 44.2% compared to Q1 at $23.6 million and 43.5%.
Our diluted non-GAAP EPS, which excludes stock compensation expense, was $0.36 a share compared to $0.35 in the prior quarter on a fully-diluted basis.
This reflects improvement in the operating margins, as discussed previously.
We had 51.2 million fully-diluted shares outstanding for the quarter, and free cash flow was at $20.6 million during the quarter.
You will see that on slide 20, the computation for the free cash flow.
Net cash flow provided by operating activities was $23.1 million.
Our cash, cash equivalents, short and long-term investments increased to $233 million in the quarter.
We did not buy back any stock during the quarter, as the market price was above our agreed-upon purchase price for the prior 90 days.
Let's move to slide 14, margin trends by year.
Our non-GAAP gross margins improved to 81.3% from 80% in the first quarter, as I previously noted.
We attribute these increases to our price change announced previously, which was approximately 80% complete.
In addition, we are experiencing enhanced utilization of our network capacity.
This obviously flowed to our operating margins.
However, there are a few areas of note.
Previously, we experienced higher levels of G&A expenditures, which were due to professional fees we incurred.
This has abated, and G&A has returned to a more normalized expenditure level.
Engineering has increased due to hiring requirements and is within our range of expectations.
Finally, our marketing spend takes into account the fact that we have been testing radio and its ultimate effectiveness in driving revenues.
As we have stated before, on a quarterly basis, sales and marketing as a percent of revenue can fluctuate between 15.5% and 18% of revenues, but on an annual basis it is usually between 16% and 17%.
Overall, our EPS improved to $0.36 per share as compared to $0.35 a share in the first quarter.
Please move to page 15.
Let me now move on to our financial guidance for Q3 2007 and the 2007 fiscal year.
We expect our revenues to range between $56 million and $57.5 million in the quarter ending September 30, 2007.
We expect revenues for the entire year to range between $217 million and $229 million.
Finally, we expect non-GAAP EPS to range between $0.36 and $0.37 a share.
Remember that non-GAAP EPS excludes the effect of non-cash stock compensation expense net of tax benefits.
We also assume an effective annual tax rate of approximately 30%, on 51.2 million fully-diluted shares outstanding.
Non-GAAP EPS will range between $1.35 and $1.45 per share for the year.
As a final note, starting with our 2008 earnings calls and guidance, we will report GAAP earnings while continuing to provide the impact of non-cash stock compensation expense for those who would like to exclude it from earnings.
I would now like to turn the call back over to Scott.
Scott Turicchi - Co-President
Thank you, Kathy.
At this point, we are prepared to take questions.
So if the operator could instruct those on the line how to queue for questions?
I'd also remind you that we are also accepting questions by e-mail.
If you send them to investor@j2.com, they will be handed to us, and we will address those as well.
Operator
(OPERATOR INSTRUCTIONS).
Daniel Ives, Friedman Billings Ramsey.
Daniel Ives - Analyst
Good quarter and good radio advertisements.
First question is, of the paid additions in the quarter, many of those were eVoice?
Scott Turicchi - Co-President
I think what you're asking is how many are voice services?
Daniel Ives - Analyst
Yes.
Scott Turicchi - Co-President
Well, as you know, we give an aggregate statistic.
42,000 net DIDs was the total growth.
Clearly, given what Hemi said about the percentage that voice services represents and the growth rate quarter to quarter, several thousands of those net DIDs came from the voice services.
Also, as you can imagine at this point, there is pretty much gross adds with very, very light cancels.
Daniel Ives - Analyst
Between 2,000 and 5,000?
Is that like a good estimate?
Scott Turicchi - Co-President
It's actually more than 5,000.
Hemi Zucker - Co-President, COO
If you remember, last earnings call I mentioned that we have voice services approximately 45,000 at the end of April.
Now we said quarter over quarter 30%.
You can figure it out.
Daniel Ives - Analyst
In regards to the cash balance and potential strategic uses of that in regards to a buyback or a levered buyback, can you talk about either timing or how you guys are viewing that with the Board?
If anything in the last few weeks, with the debt market -- not that it should affect you, just given the cash generation, but if that in any way has affected your view of a levered buyback?
Scott Turicchi - Co-President
I think the broader question -- we also, by the way, received one via e-mail, so I'll tack those two together -- had to do with the increasing cash balances of the Company.
Let me just go back to reiterate.
We added over $20 million of cash this quarter alone.
There were no stock buybacks, and the M&A deal occurs in Q3.
So we know from our free cash flow dynamics and characteristics that, depending upon the exact month and the timing of estimated tax payments, it will be $20 million or more of additional cash.
As a result, we have told you in, I think, our last call or the last time we had conversations, that we had begun to study are there better uses for the cash?
Currently, pending M&A transactions, the cash sits on our balance sheet and earns basically a short-term rate of return, which is going to be anywhere from 3.5% to 5.5%, depending on whether it's tax-free or whether it's taxable.
So, beginning in May, we began to look at alternative uses for the cash.
Clearly, we would like to continue to deploy it in the area of M&A.
But as we've stated before and as I continue to believe even more strongly today, the vast majority of the opportunities that make sense for us are small deals.
They are going to be maybe larger than the YAC deal, but they are going to be small; they are going to be sub-$20 million in transaction size, and probably many of them sub-$10 million.
So obviously, at the size the Company is today, at its liquidity in the stock markets, at its cash flows, we don't need to maintain these cash balances for the M&A program or for the day-to-day operations of the business.
As we've stated before, we have begun to look at alternative uses for that cash.
From an analytical standpoint, what management is doing is looking at all of the solutions.
So option A is we will call it the doing business as usual scenario, which means we put the cash on the balance sheet, we earn the short-term rate, it goes into our EPS calculation.
Sort of think of that as the base canes.
Then we have a series of scenarios that would be just depletion of the cash.
You could look at a dividend, you could look at enhanced buybacks, you can look at adding some leverage into the equation to further enhance the buyback.
I'm sure many of you are aware of the numerous flavors of comfortable type transactions that have been done by companies in the tech space and out of the tech space over the last several number of months.
Right now, we are in the analytical phase as a management team, so clearly we will look at the vagaries of the market, be it the debt markets or the convert markets or the stock markets.
But quite frankly, we will probably not be at a decision-making point or at least the recommendation of the Board for at least another couple of months.
So we will take all the real-time data into account, but the reality is we will be much more interested in where things sit probably 60 days from now.
What I anticipate will happen is we will make a recommendation to the Board; I'm sure they will have their own views, in terms of which are the most palatable, if any, of those.
It would be only after that point that we would be in a position to articulate an answer to the marketplace, which I hope will be before year end.
Operator
Bill Benton, William Blair.
Bill Benton - Analyst
I guess maybe -- I wasn't going to ask this question, but why wouldn't you do a dividend?
Can you give us any sort of color on why you would maybe not pursue a dividend policy?
Scott Turicchi - Co-President
No.
I can give you my personal view, but -- my personal view is I think that's a less efficient way of utilizing the capital.
So I would have a preference, personally, for shrinking the base and doing more buybacks if it came down to a dividend versus a buyback.
I'm sure each of our management team as well as each of our Board members will have their own view on that.
There is nothing, per se -- there's no philosophical opposition to doing a dividend, per se.
Just my vote would not go for a dividend.
Bill Benton - Analyst
On the sales and marketing side, I guess you guys outlined, obviously, where you spent your money this quarter.
We heard the commercials, obviously.
I just want to get a sense -- emphasis on where you want to put maybe the advertising dollars going forward.
I also noticed your free base picked up quite a bit, which we haven't seen in a while.
So I want to get a sense on are you focusing more on the fax or voice side, and the channel, as we think about the back half of the year?
Hemi Zucker - Co-President, COO
We are always trying to put the money to work when we get the best ROI.
We get very good ROI on our Web, we get good ROI on all three; therefore, you see that we are now spending more on acquiring free customers.
The radio is a test that we are working on reducing the set costs.
It's not where we want it to be, but it's very encouraging.
So basically, our philosophy is very basic.
If we can acquire a customer for certain multiple of months, we will just give the money back to the P&L.
Because our prices went up, we can basically afford to pay more, because we penetrate into new markets in Europe and the rest of the world.
We have some what we call virgin markets that you can get a lot accomplished with less money.
The voice is a new era for us, a new terrain.
We are seeing effective -- very effective, even -- money spent there, and we also are learning new ways which you know, on these products, sometimes there are more people that prefer to actually call rather than sign online.
So we started like that, and recently we added a sign up by the Web for eVoice Receptionist, and it shows very good results.
So now we will spend more money online.
So basically, we are testing, we are trying.
But because we have new products and because we have new markets, you will see us trying to spend as much as we can with responsible ROI.
Bill Benton - Analyst
On the ARPU side, I noticed that the fixed ARPU was kind of up little bit sequentially.
I know you said you were at 80 instead of 85, but even with that sequential tickup, I guess I would have thought we would have seen more of an impact on the fixed ARPU with the price increase rolling through on a greater percentage of the base.
I know you said people are buying annual contracts and things like that last time, but I wanted to see if you can give us a little bit of color on that first.
Then secondarily, Scott, why not throw out the low end of guidance for the full year at this point?
Or do you actually think that you could have a sequential reduction in earnings in the fourth quarter?
Scott Turicchi - Co-President
Okay, two questions.
I'll actually answer both of them.
On the ARPU issue, during Q2, a lot of the price change for eFax came in the letter month of the quarter.
So it didn't produce much revenue impact and, hence, much ARPU impact.
That had to do with the fact that, as we stated before, the first several tranches were all automated.
We call those sort of the regular customers without any unique characteristics, meaning they are not on an annual contract, who we only deal with as they naturally expire, or they don't fall into one of the other categories that requires a special program, i.e., they have multiple DIDs, either multiple paid DIDs or a free DID combined with a pay DID.
So during the quarter, those programs to address what we call some of those corner-case solutions had to be developed.
The program [then on] the price change began kicking in, in June, and we will probably run the substantive part through the end of this quarter, Q3.
So that's part of the reason.
The other part is, if you look at the receptionist pricing, which we gave you in the last presentation, the fixed ARPU is a little bit lower than the fixed ARPU for the Company has a whole.
It depends whether you are buying eVoice Receptionist or Onebox Receptionist.
But basically, those are going to have lower fixed ARPU, somewhat, than what you have seen to date.
So, given the proportionalities there of the signups of those customers, combined with the price change, you had less pickup than you probably would have expected in the fixed ARPU and you had a flattishness in the overall ARPU.
Hemi Zucker - Co-President, COO
Yes, we are selling those on penetration rates, or with penetration pricing.
So we are not as aggressive on pricing; we'd rather have great market share.
Scott Turicchi - Co-President
As to the other question on the guidance -- and I think we get this question almost every year -- we have a philosophy of actually something we've discussed with the Board, and it really is their view, that we will continue to reaffirm the complete range of guidance for revenues and EPS until such time as we either are going to violate either the high end or the low end.
So at this point, with one quarter to go, although it's clear that we're trending towards the upper end of the range on the non-GAAP EPS, we're not going to make any changes in the range.
Obviously, once Q3 is completed, it may necessitate us doing that, but until such time, the whole range remains intact.
But that should in no way be taken as a signal that we think something is going to happen in Q4 that would cause us to move downstream in terms of the range.
Operator
Youssef Squali, Jefferies & Company.
Youssef Squali - Analyst
A follow-up to the previous question.
Scott, I think you said something to the effect that the price change for eFax came in the latter part of the second quarter, so it didn't have that much of an impact on the ARPU, which was flat sequentially.
Does that imply, then, that we should see sequential increase in ARPU?
Second, you added 24,000 net adds in Q1, 42,000 in Q2.
With 80% of the price increase already in effect, is this now kind of a good run rate to work off of?
Scott Turicchi - Co-President
Let me answer your latter question first.
You could certainly work off this run rate.
I think there's still room for some upside in terms of improvement.
Obviously, to the extent we get more of the last 20% done of the price change in Q3, you could have some impact on the metrics, which is why, on the slide that Hemi had on the price change update, we talk about normalization occurring during Q4.
So I think the old number was 50,000 net DIDs.
I think, clearly, with what's going on in the voice services, once we clean out the excess cancels from the price change, I see no reason why that cannot be achieved again, if not even higher levels.
That just may not occur this quarter.
Your other question, if you could just repeat it?
Youssef Squali - Analyst
The other question was about the ARPU.
So we've seen flattening of ARPU because of the mix you talked about, but also we saw the price change only affecting the 20% towards the latter part of the quarter.
Should we expect an increase from there?
Scott Turicchi - Co-President
That will also depend on the exact timing of how it rolls out.
As you know, there will be a little bit of tension in terms of the variable revenue component in Q3.
Generally, Q3 and specifically Q4 tend to be lighter in their variable revenue component, which, of course, will aggregate into the total ARPU.
So I think, clearly, you will see an uptake in the fixed ARPU that may be offset in whole or in part by declines in the variable ARPU.
It just depends on the strength of that traffic.
We know we're going to be down at least one business day, Q3 to Q2, and then we have to see basically the latter part of this month how it plays down in terms of vacation.
Hemi Zucker - Co-President, COO
Also, I'd like to add -- I'm sure that you remember, but for some of the listeners -- we are increasing the price for 600,000 customers only, which is the eFax domestic.
20% of that is 120,000, which is roughly 12% of j2 as a company.
So we move only 12% of the needle, not the entire 20%.
Youssef Squali - Analyst
Then on that, there's still no decision as to whether you would consider a price hike on the corporate one and international second?
Hemi Zucker - Co-President, COO
No, no.
We are following very closely.
As you know, our largest market outside of the US is in the UK, and the British pound is doing wonders for us.
So we are not touching it now.
As far as the corporate, we are always looking to it selectively.
With the strengthening of our telesales part of our midrange of the corporate, we are seeing ARPU increases -- by the mix, not by the pricing.
Youssef Squali - Analyst
Right.
Well, I guess the currency is giving you your own price increase there, without doing anything.
Hemi Zucker - Co-President, COO
Right.
Scott Turicchi - Co-President
Yes, on the euro and on the poudn, they are not quite at the US price points.
But the movement in both those currencies makes it a lot closer.
Hemi Zucker - Co-President, COO
It doesn't justify to upset the apple cart, though.
Youssef Squali - Analyst
I guess my last question -- philosophically, this is really the first time when you guys are exploring areas outside of online and search, et cetera, with your sales and marketing, clearly.
So I'm trying to understand if this means that you have basically exhausted or virtually exhausted the online opportunity, and what should SAC look like kind of two, three quarters down the road there?
Are we in a situation where we may start seeing SAC start to creep up?
Because ultimately SAC on radio may turn out to be higher than what you have been able to achieve.
Hemi Zucker - Co-President, COO
No, absolutely not.
First of all, let me refresh and remind everybody that we have new products, which are the voice services.
Those are not even touched, so exhaustion is not even a topic there.
We are just learning there how to sell online and how to sell at all.
Secondly, if you have noticed, we have launched new brands like fax.com.
The cycles there are very, very low.
They are just ramping up.
The free customers -- those are customers that we now are going to, over the years, upsell to our voice services.
So I don't think that you will see that we have exhausted any of our opportunities.
But because online is something that we did very well and because we feel strong, we have -- this is the time to try something else.
That's why we are doing this.
Scott Turicchi - Co-President
I would just point out that, still, the vast majority of the spend -- even in Q2, where we did spend a meaningful amount in radio -- it was still spent online.
So it's not as though there was a material shift in the philosophy or how we spent our money; it was more, we have this opportunity.
We mentioned it, actually, at the year-end call, that we wanted to allocate a certain amount of dollars for new marketing activities including radio, and really let them play out, test them, refine them to see if, going forward, we could add some amount of money on a monthly basis in these new forms of media, but at a consistent SAC cost with what we're experiencing.
Operator
Brad Whitt, RBC Capital Markets.
Brad Whitt - Analyst
Can you talk a little bit the signup processes now that you have for voice services?
It sounds like you have been able to automate that, and I'm just curious as to how that's going.
Hemi Zucker - Co-President, COO
Yes, as I mentioned, we have automated these, and customers can basically sign up all the way without talking with us, and it's going very well -- very, very well.
Brad Whitt - Analyst
About what percent end up going that route versus having to speak to an operator?
Any idea?
Hemi Zucker - Co-President, COO
I don't know the exact number.
But I know that while month over month, the sales of these products are increasing, and the amount of numbers of [accounting through] telesales are decreasing.
I don't know the exact numbers, and I do know that we sell more and sell less by telesales.
So the result is that we sell more by online.
I don't know the numbers.
Brad Whitt - Analyst
Scott, did you break out that patent revenue this quarter and expectations for next quarter?
Scott Turicchi - Co-President
No, but we actually just got an e-mail question that's of a similar vein, so let me address that.
I believe that in the quarter just ended, the GAAP revenue for the patents was in the range of $600,000.
I would assume a similar number, $600,000 to $700,000, for the current quarter.
That's a combination of the amortization into revenue of previous deals, as well as some running royalty rates including CallWays.
Brad Whitt - Analyst
It looks like the COGS was down sequentially this quarter.
Is there anything special going on there, or anything unusual?
Hemi Zucker - Co-President, COO
Say it again?
Brad Whitt - Analyst
It looks like your cost of sales was down sequentially?
Is that right?
Scott Turicchi - Co-President
Yes, in Q1, we did have an accrual -- we had a couple of adjustments.
In one case, there was some VAT that we had been absorbing on behalf of our customers that had been reallocated from G&A to COGS.
That is now normalized between Q1 and Q2, and we had a similar situation with the sales tax.
So those two things are now on an apples-to-apples, normalized basis.
Brad Whitt - Analyst
Hemi, could you comment, give us a little idea as far as the pricing for some of the voice products?
Hemi Zucker - Co-President, COO
We have two products; we have Onebox and eVoice Receptionist.
Per extension, eVoice receptionist is built for smaller companies, and the pricing is lower.
Once you are a larger company, you get, with Onebox, more features, more minutes and also you can grow or included are more extensions.
The mix between small and small, let's say, up to four extensions or five and more dictate the ARPU.
So with the Onebox size, it is higher.
We are also seeing a phenomenon which we like very much, unlike eFax or fax services, where you have to really sell them one by one, on the voice services, once we set an account, every employee or every, even, department or every activity that a company wants to launch, they need another line, while in the it's assured resource that phone numbers are for each head.
So customers that we signed in the past and we kind of left alone are heading on their own; they go to the website and they add extensions.
So there is this kind of organic growth in this product which we like very much, of course, and enables us to basically exceed our expectations.
We didn't predict it well.
Operator
Rai Archibold, Kaufman Brothers.
Rai Archibold - Analyst
I just have a couple of follow-up questions, one on gross margin.
As you indicated, it was about 81.3% this quarter.
I think, in the past, you've kind of targeted 80%.
So, notwithstanding your comments about some of the changes in accounting, et cetera, should we be looking at a step-up in the gross margin going forward?
Scott Turicchi - Co-President
Yes.
I think we actually addressed it on the last-quarter call, that with the price change rippling through, with some enhancements and efficiencies in our network, I think 81% becomes your new baseline target margin.
I think, over time, as we look out well beyond into 2008, there could be lift even beyond that.
But I think that yes, effectively, because of the price change and because of some efficiencies in the network, 81% becomes the new target, on a non-GAAP basis.
Hemi Zucker - Co-President, COO
Because of our size, we can drive much better efficiencies from our caller relationship, telco relationship, utility of the equipment, depreciation; everything there is a result of our size.
Rai Archibold - Analyst
Then on the YAC acquisition, can you give us a sense of some of the increments and metrics in terms of the number of DIDs and ARPU, et cetera, relative to the corporate average, if you will?
Hemi Zucker - Co-President, COO
The DIDs are -- you know, it's [in a sense] immaterial.
The ARPU is a bit lower than ours.
What else did you ask?
Rai Archibold - Analyst
Those were the two questions.
Then the last one, also just on the voice services and the ramp -- I guess, one, you talked to the mix being the lower ARPU offering that you've been experiencing to date.
I was just curious, though, is the margin profile still similar to the corporate average, or is that carrying incrementally lower margins?
Hemi Zucker - Co-President, COO
No, the margins are very similar.
We actually just tested, last month or the end of June sometime, the margins are similar, and the product builds up.
So every time an extension is being added, the margins go up.
Because you can realize that when the Company gets the line, they first of all focus on those who talk a lot, and then they move into those who talk less.
Then they give it to those people that don't talk at all, but they still need a line.
It might change into the future, but so far it doesn't look like it's going to make an impact.
We will update you down the road, if we will find something that is contradicting what I stated now.
But, Scott, you also looked into it.
(multiple speakers).
Scott Turicchi - Co-President
No, I think that's right.
The margin profile today, certainly the gross, is similar.
I think it's still an unanswered question as to when we spend money in the marketplace to acquire customers, what that amount will be in terms of an acceptable SAC cost, and as a result, an operating margin contribution.
That's something that we are testing and trialing and analyzing between now and the end of the year.
The goal here really is to use the balance of the year to refine all of the metric questions which are dead-on correct, so that as we go on into 2008, there will be a meaningful budget in terms of marketing put behind the voice services and, as a result, there will be a meaningful impact in contribution to our revenues.
Rai Archibold - Analyst
Last question, dealing with the radio spots, one, are those sort of now blanketed across the country?
I unfortunately have not heard one on the radio yet, but maybe I don't listen to enough radio.
If so, getting back to the sales and marketing expense, should we look at that, then, being incrementally up going forward as a consequence of that?
Hemi Zucker - Co-President, COO
First of all, we are not blanketing.
In the beginning we did a little bit more, but now we learn from our experience as we are focusing and targeting on certain shows and certain venues.
There's radio, there is satellite radio, there is technical, there is sport, there is this and that, conservative, Democrat, whatever.
So we go all over and we figured out that there are certain channels that -- I'm not going to help our competition and say which they are -- are more effective.
So if you're not listening to those that we believe are selling well, you might not hear it.
Rai Archibold - Analyst
I guess, when I meant blanketing, I meant blanketing in the sense of across various markets as opposed to various stations.
Hemi Zucker - Co-President, COO
Yes, yes, yes, absolutely.
Geographically, we are moving from market to market, but we are focusing on certain venues that are productive for us.
Scott Turicchi - Co-President
Certain of the shows, for example, that are listed in the slide have a national market reach.
So you buy the spot, you will be heard in all the major markets.
Others are local buys to a specific geographic region.
The answer is we have been doing a mix and match with both of those, and I think we will continue to do so.
Hemi Zucker - Co-President, COO
Also, while radio -- usually, you get what you paid for.
There are occasions that they would just say, you know what?
I have nothing better to run; I'll run it for you, and you pay me only if you get results.
So you might hear our ad in a place and say, though, what are they doing here?
It's just that they -- those that broker say, we have nothing better to play at this time, and if we catch something, j2 will pay.
Operator
Shyam Patil, Raymond James.
Shyam Patil - Analyst
Focusing on the international business, it looks like you added two countries this quarter.
Could you talk about what percentage of revenue that was, how much that is growing and what the uptake has been outside of the UK?
Hemi Zucker - Co-President, COO
I think that we are detailing it in our slides somewhere.
Am I right?
Scott Turicchi - Co-President
I can tell you the growth rate year over year was about 32% in international revenues.
If you give me a minute, I'll give you the percentage.
It's probably about 12% of total revenues.
Hemi Zucker - Co-President, COO
Yes, it is 12%.
Scott Turicchi - Co-President
I'll let Hemi answer more the country-specific question.
Hemi Zucker - Co-President, COO
It is 12%, somewhere between 12% and 13%.
It is growing on a faster rate than our general business, as we mentioned before.
The countries that we are focusing are, as I said -- our largest market is the UK and Canada and other developed countries.
We don't want to be very specific, but you can imagine that we are more successful in countries that have high income, high Internet usage, et cetera, et cetera.
Shyam Patil - Analyst
Focusing on the enterprise part of the business, can you comment on how many deals you signed this quarter and just in general how that part of the business is tracking relative to your expectations maybe a year ago?
Hemi Zucker - Co-President, COO
Give us a moment or two.
Scott has (multiple speakers).
Scott Turicchi - Co-President
There are, on the enterprise side, 33 now large customers.
That's up from 30 at the end of Q1.
Those are our largest customers.
They range from approaching 1,000 DIDs to -- the largest one is about 21,000; that has not changed.
The pipeline is, I think, 51 as we speak, with 10 of them being non-US opportunities and the balance being domestic opportunities.
Shyam Patil - Analyst
Is that generally tracking to expectations?
Hemi Zucker - Co-President, COO
Yes.
Shyam Patil - Analyst
When you look at the paid DIDs, the new paid DIDs this quarter, how should we think about the contribution from international and corporate into that?
Hemi Zucker - Co-President, COO
I think I spoke about it two, three quarters ago.
But I think that it still holds water that our international and corporate are growing faster than the average of the j2 growth.
Now, of course, there is a new leader, albeit small, which is the voice services.
Operator
Tavis McCourt, Morgan Keegan.
Tavis McCourt - Analyst
A couple of follow-ups on the voice services.
I think you mentioned before, Hemi, that one of the customer acquisition tools is using the existing eFax base.
I was wondering if you guys have started marketing beyond that, or has it basically been --?
Hemi Zucker - Co-President, COO
Yes.
We always try -- initially, we test to our base, because not only it doesn't cost a lot; also it's the demographic of those that sign up.
So we can then better target when we go to the outside world, because we know the profile of many of our paid and free customers.
We definitely started to go outside.
We played you our radio ad that is focused on voice services.
We are also doing affiliate programs that I think we are about to launch.
Definitely, we're going off our base in many ways.
Think about the Company we just acquired in Ireland that has these type of services.
They're nothing to do with our base.
We are now going to try -- and probably it will take us a quarter or two, but I would expect our team in Dublin and then in Ireland and Galway to start and do some effective advertising into the European market, if not by Q3, if it's too aggressive, by Q4 for sure.
Tavis McCourt - Analyst
You mentioned the fixed ARPU on those services are somewhat lower than the corporate average.
What are -- not in terms of numbers, but what is the usage-based fees on that type of service?
Is that every time somebody picks up the phone, or just when they are dialing extensions?
Hemi Zucker - Co-President, COO
It's not dissimilar to the American mobile phone.
You buy packages, and most of the customers start buying either less than they need, and then when they get the penalty they move to the next one, or they buy more than they need, and they never fully utilize it.
So there is breakage in this model.
Scott Turicchi - Co-President
That's, by the way, I think, one of the things, too, that we intend to look at and potentially further refine as we go into 2008, is do we have the right number of packages?
Do we need more packages?
Do we need to alter either the mix of included minutes or the mix of lines or take the price up?
There's a variety of combinations of variables there.
Right now, we are studying it with the current packages that we discussed a quarter ago.
I can tell you that as we look at the competitive landscape of this place, really the virtual receptionist, the virtual PBX, we are probably mid-tier priced right now.
You will find a few that appear to be cheaper than us, and you'll find probably a handful or more that are more expensive.
Hemi Zucker - Co-President, COO
I think, also, one thing that is important -- I think that we are also, from all the other companies, we are the most straightforward, meaning we tell you how many minutes versus all these games.
Basically, we have most of the customers either take the 1,000 inbound minutes or the 2,000 packages.
We don't have a lot of flavors in between, but you might find some others that, you know, have a lot of small print.
We are following them to see if they're successful, but so far we have seen that the straightforward approach has -- the differences in the price are not significant enough, so most customers will just take enough minutes so they won't need to bother with overages.
Tavis McCourt - Analyst
So the usage is based on the inbound minutes?
Hemi Zucker - Co-President, COO
Yes, sure.
Because for the outbound minutes, they use their own lines.
The inbound comes through us, and we route it to their systems.
Tavis McCourt - Analyst
If they're transferring within, does that count as an inbound minute?
Hemi Zucker - Co-President, COO
Yes.
Tavis McCourt - Analyst
Then in terms of, Scott, the share buyback, are you just waiting to hold off on any share buybacks until you make a larger strategic decision?
Scott Turicchi - Co-President
No.
We still have the 10b5 plan, which is the automated formula that Kathy referenced in her presentation.
That formula did not kick in during the second quarter.
I can tell you it actually did kick in briefly and modestly so far in the third quarter, but I think that in terms of broader buybacks, yes, we would probably wait until we have a more global recommendation.
So I would anticipate that during the third quarter, the formula, the 10b5 program, will govern how much we buy back, if any, although we have already bought back a little the it.
Then, coming out of the third quarter, I think we will be at a point where sometime during Q4, we should have a more global answer.
It could take a variety of flavors, but that would than either be melded into the more global answer or, if there isn't a global answer, then we may choose to buy in addition to the program.
Tavis McCourt - Analyst
In terms of the non-DID-based revenues, is -- I forget the reason it was up so much in Q1.
But is the level we saw in Q2 the base level we should be looking for, going forward?
Scott Turicchi - Co-President
Q2 is more normalized.
Q1 had the approximately $2 million of revenue booked for CallWays, and that was because they had paid us a $4 million upfront payment in addition to a running royalty rate.
So the accounting is on the fixed payments you receive upfront, how much relates to prior periods -- you can go back up to six years -- and then how much relates to the future?
So we do some analyses on any deal that has a fixed dollar amount component paid upfront, to determine how much gets booked from a GAAP revenue standpoint.
We collected all the cash.
Roughly half of it was booked in Q1.
The remainder is being amortized into revenue over the next, I think, eight years.
Tavis McCourt - Analyst
So in terms of the revenue guidance for Q3, it's a similar level of non-DID-based revenue as Q2?
Scott Turicchi - Co-President
Yes.
Maybe up a little bit.
It all depends on exactly the success of the patent licensing program, which is a little bit -- you don't exactly know.
You have got your pipeline; you don't exactly know how many will be licensed during the quarter and under what form.
Operator
There are no further questions.
I would now like to turn the floor back over to management for closing comments.
Scott Turicchi - Co-President
We thank you all.
We received another e-mail question, but I think it has already been answered.
It had to do, really, with the enterprise customer pipeline, which we just discussed, I think, with one of the analyst questions.
So with no further questions, either live or via e-mail, we thank you for your participation in the Q2 call of j2 Global.
We announced through a press release last week we will be at two investor conferences tomorrow -- Pacific Crest in Vail and then Wednesday at RBC in San Francisco.
So there will be live webcasts of each of those presentations and the Q&A session, although I think, given that our call just took place today, you should expect them to be substantially, if not exactly, similar to today's call other than the Q&A.
Then we will anticipate hosting a Q3 call, either the last week of October or the first week of November, and sometime during early October we will be out with a press release to to give you the exact date and time and the specifics for calling in.
Thank you.
Hemi Zucker - Co-President, COO
Thank you very much.
Kathy Griggs - CFO
Thank you.
Operator
Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time.
Thank you for your participation.