Ziff Davis Inc (ZD) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications First 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.

Thank you; good afternoon, and welcome to the j2 Global investor call for the first quarter of 2008.

As the operator just mentioned, I'm Scott Turicchi, Co-President of j2 Global and with me today, is Hemi Zucker, Co-President and Chief Operating Officer and Kathy Griggs, Chief Financial Officer.

We will be discussing our Q1 financial results, as well as providing you with an update on operations.

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

In addition, a copy of the press release is also available at our website at j2global.com/press.

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

After completing the formal remarks and presentation, we will conduct a question-and-answer session.

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

In addition, you may email at any time, questions to investor@J2 global.com.

Before beginning 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 various SEC filings, including our 10-K filings, recent 10-Q filings, proxy statements and 8K 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 the Safe Harbor language, as well as forward-looking statements.

As we noted in the press release, we were very pleased with the operational results for the first quarter, especially given the changing and challenging economic environment.

Consistent with j2's operating philosophy, we remain disciplined on our subscriber acquisition costs in generating new customers, and focused on improving the overall cost structure of j2.

This resulted, as noted in the press release, in record free cash flow fro the quarter.

I'd like to now turn the presentation over to Kathy on slide 9, who will give you additional details on the quarter.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

Please refer, as Scott indicated, to side nine of the presentation.

Before I begin, I want to point out that as we mentioned in our last call, we will be presenting and reviewing GAAP financials.

However, for your convenience, we will continue to provide you with 123R information.

Pre-tax 123R expenses for the quarter were $2 million, and after-tax 123R were $1.4 million, which is approximately $0.03 per diluted share.

In addition, you will find in our 10Q and in our press release exhibits the allocation of the $2 million by expense category.

Q1 revenues were $58.6 million for the quarter compared to $52.1 million in Q1 of 2007, which excludes the $2 million of revenue recognized in Q1 '07 from our patent license settlement.

This amounts to an increase of approximately 14% quarter-over-quarter.

We are pleased with this growth to the continued softness in our economy.

In the past few discussions, we've shared our concerns regarding the impact of the economy on our variable usage revenue.

We are encouraged that in Q1, we are seeing some stability in usage for both our credit-sensitive and non-credit-sensitive customers.

Usage for both segments grew in line with the increase in business days from Q4 '07 to 1 '08.

We are particularly pleased that the credit-sensitive sector did not [assist] the decrease in usage that we saw in Q3 and in A4.

Please refer to slide 18 for additional details on usage.

In this quarter, we continued to generate strong DID growth while maintaining a stable cancel rate.

Our Q1 net DID additions of approximately 35,000 compared to 23,600 in Q1 of 2007.

Our voice brand and corporate fax segments continued to perform the strongest.

Our paid DIDs are approximately $1.1 million.

Q1 GAAP operating profits were $22.5 million, or 38.4%, compared to Q1 of '07 of $19.8 million and 38%, excluding the call leave revenue referenced above.

Compared to Q4 '07, our margins are 1.1% better.

The improvement in our margins reflects our continued effort to improve efficiencies, manage our costs, and streamline our processes.

Our diluted GAAP EPS was $0.35 a share, which is consistent with our expectations.

Moving on to the balance sheet, our free ash flow, as Scott indicated, was approximately $27 million, which is a quarterly record.

Please refer to slide 17 for the free cash flow computation.

Our cash and cash equivalents, short and long-term investments decreased from the prior quarter of $229.8 million to $181.3 million.

The decline in interest income is due to lower interest rates on our investments and lower cash balances due to our repurchase of j2 common stocks.

During the quarter, we purchased approximately 3.5 million shares of common stock, totaling approximately $76 million.

In Q1, we provided our investors with a healthy return on equity of 6.6%, or annualized 26.4%.

I'll now provide you an expense overview.

Q1 of 2008 GAAP selling expense was 17.4% of revenues; R&D was 5.4% of revenues; and G&A was 19% of revenues.

G&A was slightly higher than prior quarters due to non-return professional and litigation fees.

We continue to execute a disciplined approach to all costs across the organization, including careful review and tracking of [SAC] costs, consolidation and rate negotiations with telcom vendors, prioritizing capital expenditures, and ensuring optimal staffing.

Overall, aggregate expenses were in line with our expectations, as well as prior quarters.

I'd now like to turn the call over to Hemi, who will provide you with an operational update.

Thank you, Kathy and good afternoon, everybody.

Today I broke out my presentation to two slides; one for [commercial] fax business and one for our voice business.

On the eFax Services, slide 11, this was a very nice quarter for us.

We focused both on growth and on improving efficiencies for the Company.

On the Web Channel, despite the tough economic environment, as you can see, we were able to stabilize our cancel rate, and we are pleased to see that we continue to grow in our eFax brand and with our secondary brands.

Our secondary brands are fax.com, RapidFAX, and Send2Fax, and they are growing a little bit faster than the eFax brand.

Also as you know, very key success factor for j2 is our capability and ability to communicate via our creative both content and design.

Our marketing message is communicated through the creative talent that we have here in-house, and this quarter, the team won three second-place awards for content and for design.

The Telly Award is something that is very similar to the Emmy Awards for the creative world.

We won second place in three places out of 14,000 competitors from around the world, and those of you interested can go to www.efax.com, select awards, and see the winning creatives.

On our corporate channel, it was a very strong quarter for our corporate channel.

We saw high conversion rates, and our pipelines that continue to grow are converting better than before, and we are seeing that we have higher success rates in converting and replacing fax servers.

This translates into new 7 large contracts; usually our large contracts are the area of 1,000 or more.

Together, we now have 47 large customers around the world, and of those, 350 customers are international corporate customers.

Our pipeline is still healthy, and we have 54 large active situations in our pipeline.

On the international front for the fax, we have now added another two countries, Slovakia and Slovenia.

We have now 44 countries, and year-over-year growth was 41%, but the 41% is fax, voice, and email.

Fax only is approximately 25% for international.

Go to the next slide about voice services; in the U.S., we are operating mainly under two brands, eVoice Receptionist and OneBox Receptionist, and we are approaching 100,000 paid DIDs.

This is critical mass that helps us to define our leadership in this space.

There is on clear leader in this space yet, but we are working very hard and strive to become the obvious leader in this space.

New features that we have introduced this quarter; we have launched a Live Receptionist basically for those customers that besides the automated services that we offer require to have a live person, we're offering it.

We're also extending our coverage into 50 U.S.

markets, and we began to roll out voice-to-text.

Let me explain a little bit about it.

As you know, there are several companies out there offering translation of voice to text, and as any new feature, people are on the adoption curve.

Unlike many of the other services, this is a semi-manual, semi-automatic so to give try before you buy to all our customers is something that is costly, but because of our size and our capability and our marketing muscle, we were able to negotiate with a leading text-to-speech company to allow us to offer to all our 100,000 paid customers a trial in which they will each get it for I think a month or so in which they will be exposed, they will see how special it is, and we hope that through this exposure that will not cost them money, and in cooperation with the company allowing us to do it, we will traction, educate the market, and do it as an upsell that will add basically to the output of the voice channel.

On the international front, eReceptionist is the way of the brand that we are going to operate in Europe.

It's ready to launch, as you see here.

There is a launch website, and it should be launched either tomorrow or later this week, and on YAC site, which we have a product that's called a co-Manager, we have redesigned it and also are going to start to do cross-sales between our fax customer, free customers, and try to sell them the voice services.

I'm going to forward the call to Scott to discuss about the guidance.

Thank you, Hemi.

A couple of final comments, then we will turn it over to questions and answers.

Before commenting on the annual guidance, I want to give just a brief update on M&A, as we discussed in the context of the Q3 and the Q4 call, as the economy weakened, we saw a pickup in the pipeline of our M&A activity, which continues to be the case.

However, as you will note, to date, we have not yet closed a transaction, and that is in large part because although the expectations, the valuations have come down somewhat they have not fully adjusted to the new market realities.

And consistent with the Company philosophy on its disciplined approach in its other areas of cost, it is also an area we intend to maintain and stay disciplined on in the area of M&A.

So we have several situations that we are pursuing, situations that are active in discussions and negotiations, but there is still some degree of [bid-out] spread between the seller's desire and what j2 believes is a fair value for the target company.

So we will continue to pursue those activities and discussions, and to the extent that the deal closes before we have the next quarterly call, we will inform you through either press release or 8K.

As it relates to the annual guidance, it's being reaffirmed; it's the same range on both revenues and GAAP EPS you saw on February 19, which is $240 million of revenues to $270 million on the top line, and $145 million to $165 million of GAAP EPS on the bottom line.

I would remind people that in the GAAP EPS in Q1, there was roughly $0.03 of 123R expense, non-cash compensation, that will move around quarter-to-quarter based upon both the granting practices of the Company as well as the variables involved in calculating through the Black Shoals model what those expenses are.

At this time, I would like to just note, as you've seen in our prior presentations, slide 16 provides you with all the metrics updated through the end of the first quarter of 2008.

I would note that you saw an uptick of RPU from the first quarter of about $0.13 per DID per month.

As Kathy noted, we saw stabilization in the usage revenue, actually growth in both the non-credit-sensitive and the credit-sensitive.

The non-credit-sensitive actually grew somewhat in excess of the business grow from Q4 to Q1.

That, you will note, is outlined on slide 18.

It is the blue and the green bars, the blue representing the non-credit-sensitive sectors of our customer base, and the green representing our B2B credit-sensitive customers, plus our individual heavy users, which we deem to all be credit-sensitive in nature.

And at this time, I'd like to open up the call to questions, and if the Operator would come back and instruct you how to queue for the call, I'd appreciate it.

(OPERATOR INSTRUCTIONS)

Daniel Ives, Friedman, Billings, Ramsey & Company.

I'm sorry, our first question is with Brad Whitt, Broadpoint Capital.

Thanks for taking my question; can you hear me okay?

We can hear you fine Brad, how are you?

Great, and congratulations on the free cash flow there, just looking at the balance I was wondering if you think that's sustainable in the next quarter.

Looks like you may have to send Uncle Sam a check or two, but just curious to your thoughts there.

Well, that's correct; as you know, historically -- and you can see it in the reconciliation chart -- free cash flow modulates from quarter to quarter, and one of the largest modulations has to do with the timing of when income taxes are paid, and the estimated tax payment, so usually Q2 does take a dip from Q1, notwithstanding revenue and earnings growth, so I would not take $27 million and multiply it by 4 across the whole year.

Okay thanks, and Hemi, I think you had mentioned on the last earnings call that you may hit that $1 million per month revenue run rate for the voice services.

Just curious to whether you've gotten there yet, or when you may hit that expectation.

We are very near -- I really didn't, the guys that operate it are supposed to invite me to come visit them when it's $1 million, and I guess by the end of May it will happen.

Okay great; and then a final question.

The 7 enterprise deals looks like the most you've had in a while.

Are you noticing anything, any particular drivers there as to why the corporations seem to be shifting a little faster?

Yes, we are, you know CIOs that didn't used to give us importance are now answering our emails.

I think with all the economical change, we are seeing, the preferred solution like j2 that they have a small monthly rate of expense, and we are now seeing more and more companies that are considering us versus servers, and the bids are just closing.

Yes, I think there are sort of 3 elements; also the corporate sales channel had a very good Q4 of '07; they closed 6 large deals in that quarter, so as you know Brad, prior to Q4 of '07, the average was between 2, close to 3 big deals a quarter, and if you go back a couple of years, it was closer to 2 a quarter.

So we've seen a building, at least on average of the closed deal rate move from 2 to 3, and now for 2 successive quarters, it's been 6-plus, and I think we've got good reason to believe that it will be close to or in that range again in this quarter of Q2.

And I think some of the reasons for that are one, as Hemi mentioned, clearly over that time period, there's been a change in the economy.

We've always believed there was a value proposition that's attractive to our services.

We think that it becomes more compelling where you don't have to lay out the money for CapEx and license fees on a one-time basis, but rather pay as you go.

Secondly, I think that our team has done a very good job of being able to get a keen eye for which of the situations they're involve din are more right, and which of the potential customers are more serious in terms of taking the service.

I think, as we mentioned in past time, when the salesforce was a little younger, we spent some time on some situations only to find out that the opportunity wasn't as ripe as we thought.

And so I think that, combined with some evolution we've made in our own service set, I think better marketing, better sales, all of things have combined to begin to see a much better conversion rate against the pipeline.

Very good; thanks for taking my questions.

You're welcome.

Thank you Brad.

Daniel Ives, Friedman, Billings.

Thanks, hey guys.

Can you talk about let's look at the quarter month-to-month, because I know you do those stats after every month, do they get better February over January, March over February; can you just talk about any sort of pattern there in terms of credit-sensitive and non-credit-sensitive?

Yes I will as a matter of fact; I mean, yes there was a sequential positive progression through the quarter January through March, specifically in terms of usage pattern of the credit-sensitive, I would say they were fairly stable across the 3 months, January through March, and actually I don't have the breakdown yet for April, but if the aggregates are any indication, I would say that's true for April as well.

So as Kathy pointed out, I think what we've seen coming off of the latter half of '07, 6 months of month-to-month declines, we saw possibly a stabilization, and we don't intend to predict or [call a bottom], but possibly a stabilization represented by the usage patterns over the first 4 months of this year.

Okay, and I mean does it also seem on the corporate side, I mean a lot of those are getting ramped up over the last 12 to 18 months, and now you're starting to see more variable usage from there as they ramp up, and you're starting to see that as well.

Definitely correctly, I think definitely correct because as you know, you close 6 deals in Q4, a very small fraction of the DIDs contracted for, and ultimately deployed are actually deployed during the quarter, and even those that are deployed, unless they are DIDs reported to us, there's a ramping effect in terms of those DIDs getting deployed to the end employee's hand, and then published, and then seeing traffic.

So 2 or 3 months out after you sign the contract, you should see a ramping usage on those DIDs, and I think we experienced some of that in Q1 as well.

Okay, thanks guys, good quarter.

Michael Hubbard, William Blaire.

Hi, it's Corey Tobin from William Blair.

A quick question, the free DID count has dropped fairly substantially sequentially.

I was just curious what might be the story behind that.

The story behind that is as you go back in our history over the last several years, this occurs from time to time.

We basically go through a DID cleanup, and so we had a decent amount of gross adds in Q1, but we also, by our own choice, exited a fair amount of customers during Q1, so it had about a 700 or so net decline in free DIDs.

Okay, so nothing morel than just sort of typical maintenance, or housekeeping I should say.

We are just managing it, you know I think that in the past we discussed 3 customers we break and rate them based on open rate and faxes that they get and how responsive they are to our advertising.

And once in a while, we take the bottom outward; worst customers that don't respond well, and we clean them out and then we make room for new ones, and this is what you are seeing.

Excellent great, and then diving into the DID numbers for a second; I saw the data point approaching 100,000 DIDs in eVoice Reception and OneBox, it's great.

Any other DID information that you could provide with respect to corporate, or I guess in the international segment, can you give us any feeling for a sense of growth in those 2 segments or where those DID counts currently stand?

I'll give you some color; our corporate, the number of DIDs of corporate is in the mid-20% of, a little bit shy of mid-20s, and since the output is a little bit less, so you could expect that the revenue contribution is in the 20 range, and the percentage of DID is in the mid-20s.

Percentage of total paid DIDs?

Yes, correct, correct; if they are 1.1, they are less than 25%, but close, and on the revenue, less because the output is lower.

International, Scott can help you, but our international revenue is like a little under 15%, which includes also our emails, our voice, and our fax.

From a standpoint of international fax users, I think it's safe to say that approximately 10%, give or take, the output at a higher end, we have free income coming from the CPP, which is unique for our international market, it pulls it up.

And just to be clear, can we use that proxy of roughly 10% of revenue, can we translate that to roughly 10% of DIDs as well?

No, we said 15% of revenue internationally, and --

I'm sorry, I was talking international fax.

The international business total is about 15%.

Yes, total, total; fax is the vast majority.

I think it's more than 10% fax.

Great, okay great, thank you.

Shyam Patil, Raymond James.

Hi good evening; this is Varen Shatta filling in for Shyam.

Can you talk about churn within your credit-sensitive customer base, and has there been a notable change since the last quarter?

Let me answer that one.

I would say that we had probably less activity from a default standpoint or from a bankruptcy standpoint than we've had in previous quarters.

I think total for the quarter is probably 2 or 3 that we were notified of, and I think previously, we had seen upwards of 6, 7, 8, 9, 10 in any given quarter.

So we've certainly seen a slowdown in that, but I also believe that from our perspective we're monitoring those very closely.

We stay on top of them, and if we feel that they're falling out of line, we jump on them right away.

You can see the aggregate cancel rate roughly consistent with where it was a quarter ago, so I think it smells overall as though it is, clearly there's some element that feeds through the cancel rate.

We see some of it, as Kathy pointed out, there are some discreet instances that are very obvious to us, but it is not anything that is overwhelming by any means.

I want just to add, if you read the mortgage magazines and you know literature, you'll find out that in order to get the mortgage these days, you need to get much more sophisticated, and much more data in to get the same mortgage.

So I hear that it takes 2 or 3 times more approvals to get one mortgage because of the credit sensitivity now.

So we are, we don't know but we think that those that are doing good mortgage business do need more faxes to prepare transactions.

All right, and have you seen any weakness in your credit-sensitive customer base spill onto your non-credit-sensitive customer base?

No.

No.

No, but you'll see in the usage statistics in the back of the slide, as we said in the last couple of calls, is there's a pretty noticeable divide between the way the credit-sensitive sector of the economy is behaving, and I think this is borne out by financial services firms that are pure play that have their own earnings announcements, versus those companies that operate in other sectors of the economy, and when you kind of push it all together, you see less than 1% GDP growth, but really what you've got is negative growth and weakness in the credit-sensitive sector, bolstered by a much stronger non-credit-sensitive sector, and our own usage data would support that and confirm that.

All right; what are your thoughts on the USF in light of the recent GAAP?

Does it change anything with respect to the timing of the resolution?

I think what you're referring to was the recent ruling a few days ago by the FCC to cap ETCs in terms of distribution, which they've spent probably a year since the original recommendation was made to have any action on it.

I would note that was on a straight party line vote 3 to 2, the 3 Republicans voting in conjunction with the Chairman and the 2 Democrats voting against.

So they did accomplish that; they have their own press release out indicating there's about 13 other elements of USF that they would like to now pursue.

I would note that in a District Court hearing, I think it was yesterday, the Court itself was very skeptical as to whether they could even get through inner-carrier compensation within the next 6 months, and that's one of the 12 or 13 items.

I think it will be a challenge in a political election year to move anything quickly.

Clearly, there's nothing moving at any speed in the Congress, although there are a number of bills regarding USF that are pending.

Some of them are important in that they have elements the various Senators and Congressmen are interested in the FCC taking into account to the extent they wish to address the issue.

But in terms of the Congress having any substantive hearings I think that given the rumbles in June, and this is an election year, it is unlikely in Congress.

Now, obviously the FCC can act independent of Congress, although it has to be sensitive to any oversight and review the Congress may have.

So we will continue to monitor it.

We, as we've said before, even if the commission were to go down the path of implementing a change in the contribution system, and even if they were to go to a straight numbers approach, and even if they were not to allow they carve out their exemptions, we can take you all the way back to March of 2005, that we're not going to allow that to in any way impair the economics of j2 Global.

We would take some action vis--vis our free base.

I would note that because of the price change last year and because of our focus on the price change and not on the free base, towards the end of the year, its relevance to us in terms of producing gross paid adds were down to about 5%.

So whether we would monetize the base, which is an option, or whether we would do a partial monetization and pass through the USF on an annualized basis is still something that I think is too early to discuss, but clearly we will monitor the situation.

Our views are well known to the FCC, as well as to many members of Congress through the efforts that we've had over the last 3 years to educate them that none of them seem to intend to or want to disenfranchise millions of free customers, but that's really the only update right now; stay tuned; we'll see what happens.

All right, and just one last question, in regards to the reconciliation, are you guys providing a breakout by line items?

I know that you gave the numbers for the operating expenses, but are there any other line items?

You mean in terms of the 123R expense per line item?

Yes.

Yes, that is all available in our Q, and in fact, Kathy can give it to you.

It's in the press release too.

It's also operating income the press release.

Right.

In terms of if you want to create non-GAAP gross profit margins or sales and marketing as a percent of rev, maybe you'll take a minute and go through each line item.

Yes, let me just cover that up; in the 3 months ended March 31 of 2008, the cost of goods sold line has $175,000 of 123R in it; if you look down at sales and marketing, there is $338,000 in sales and marketing of 123R; R&D $214,000 and general and administrative $1.3 million.

All right, thank you.

And if you want to tax effect that, you can use let's see, approximately 40% on that for a tax effect template.

All right, thank you.

Youssef Squali, Jefferies & Company.

Thank you very much; good afternoon everybody.

So a couple of questions; in looking at the net adds that you've had this quarter, I think there were about 35,000, could you speak to -- and so that in looking at that prior quarters, that's kind of the lowest number we've seen in some time.

I know in Q1 of last year, it was in the mid-20s, but that was the effect of the price increase.

I was wondering if maybe you could 1) in looking at the business going forward, is this kind of the new level of net adds that you kind of envisaged, or/and if you could just give us a kind of an equivalent number, maybe Hemi, to that 100,000 DIDs for eVoice that you reported this quarter, what was it last quarter?

It was last quarter -- I don't remember.

We'll get you that answer.

The answer to the first question, Youssef going back to the view particularly in a difficult economic environment, ultra strict on the subscriber acquisition cost, that's the main part.

So I guess if you believe that the economy is going to stay in the doldrums for the balance of the year, the answer is going to be yes, we're going to spend very disciplined and if that means less gross adds on a stable cancel rate, it probably does pull in the net adds.

Now, whether 35,000 is a fair appropriate target or goal, for us it's really all in the margin of how much dollars will we spend at the approved SAC cost, which as we mentioned in the last call, are between 4 and 8 months' of revenue.

But that, everybody is very clear within j2 that's the mantra, those are the objectives.

Obviously, we will month-to-month, quarter-to-quarter review whether those are a reasonable SAC cost to maintain.

They're quite frankly very low.

But I think we're much, much more focused here on the margin than whether we have 5,000 more net DID adds to report in any given quarter.

So we're going for the cash flow, we're going for the margin.

And to answer your question, the 100,000 voice customers that we have is a number reflective not at the end of the quarter, but the best number that I could get yesterday, and last earnings call, which was around 90 days ago, or so, yes Scott, we had 85,000, so from earning call to earning call, not from quarter end to quarter end, we added 15,000 and I want also to say to you because of the relative small base of the voice, the shared impact is smaller there.

You understand what I'm saying?

Yes, I do, I do, and so if I strip out the voice business and just look at the web and corporate, they've kind of averaged I guess, well I think, if my memory serves me right, we've actually seen an improvement in net adds if, for just the web and corporate quarter-over-quarter; is that true?

You said quarter-over-quarter, are you comparing it to Q1 of '07 or Q4 of '07?

No Q4, because I think in Q4 your voice net adds were substantially higher.

My numbers may be kind of stale though.

I think we had an acquisition.

We did, we did, so if you take that out, I think the answer is the organic piece of net DID activity for corporate and web Q4 and Q1, probably roughly the same.

Excellent, okay.

Organic DID growth, net DID growth.

Right, exactly; that's what I was going for.

And then, okay and then lastly, if you can just reconcile a couple of things that you've said; so, I think in answering the question earlier, you said that month-to-month things seem to be at least stabilizing if not improving a little bit, and I was wondering what it is that you are still kind of baking into your '08 guidance.

I guess the assumption is you're not changing your estimates.

That's correct; I mean I think the way Q1 ended relative to sort of the mid-point of our functions, obviously the deltas are we have no acquisitions sitting here on May 6, and at the mid point of the range, we talked about some acquisition activity contributing.

On the other hand, we've seen better usage revenue, particularly from the credit-sensitive, not so much a delta in change on the non-credit-sensitive, but better usage patterns on the credit-sensitive for the first 4 months of the year than previously anticipated.

They sort of washed each other.

Yes Youssef, in other words, our, as you know, our guidance is a combination of organic and acquisition.

As Scott said, acquisitions, we are trying to do them, but we are keeping our valuations the way we believe is fair.

On the organic side, we in the first quarter delivered the organic side that we wanted but in a more cost-effective way, meaning we're able to deliver it with a better expense management.

And we are continuing as we said, all 3 of us, to be better disciplined to cost management and focus on the case load.

Okay helpful, thanks a lot.

Ray Archibold, Kaufman Brothers.

Very good, thank you; good afternoon guys.

Just a couple of quick questions I have; one is on the corporate business you've signed, the 7 deals I guess in this quarter, you've mentioned 6 in the fourth quarter.

Can you, Scott, give us a sense as to what the fix versus variable ratio is in terms of revenue stream, and has that changed much relative to the existing customer base?

Probably not a lot.

I think it's too early to tell, as one of the earlier callers mentioned there's a ramp effect, so we would know the fixed portion at this time.

I'd say that even the Q4 customers were probably not absolutely certain as to their usage patterns.

I think it's fair to say that the way on average is probably similar to what the corporate businesses exhibited in the past, which is closer to a 50/50 RPU ultimate mix between fixed and variable.

Okay.

Now, any one customer with a variety of programs, we do have some customers that want predominantly fixed, and we have some that want predominantly variable.

But they tend to average themselves out in the log large numbers, where you kind of get a 50/50 mix.

Okay, and then just on the voice business.

Now we're I guess over a year into the launch and maybe you can give us an update in terms of what your experience has been in terms of churn; has that, does it materially, is it materially different from the core fax service?

And also, are you starting to see the new customers in particular moving up or existing customers moving up in price point, because I understand, to date anyway, that the new customers have basically come in at the low end.

So I'm just curious if you've been able to walk those people up.

On pricing?

Yes.

We are still trying to bring in customers, not focusing so much on the RPU, more on bringing them on the basic value of the service, and as you heard, I mentioned that we are launching new features like speech to text and live attendant, and all those things, all those features we will try to creep up the RPU.

But the goal is not so much on RPU, if you remember in our eFax business, we started by getting the customer base, and then through the introduction of improvements, and so introductions were featured to pick up the price.

So we are still very much the same; we are thinking about value, and we know that we are providing tremendous value to those (inaudible) customers.

In a way, much higher value, the mature fax customer is getting for his dollars.

But it is part of our strategy now.

Regarding the churn, the churn rate is not higher than 5, but we have a lot to learn.

Unlike the fax service where you are selling a solution for one customer, one phone number, one email address, here it's more the system approach, and we do need to learn how to improve, and we are following up with customers to make sure that they set it up the right way, and we are learning and we are doing a better job, and because we have a lot of copycats out there -- I'm not going to discuss too much in details what we are doing -- but we are learning how to improve the generator.

Okay, and then just 3 real quick questions; one, you talked of your approach saying about 100 DIDs, and this may be dovetailing on your last answer, is how many specific companies, if you will, or customers is that?

I guess the question is how many DIDs per customer are you getting on that?

The average is between 3 and 4.

Okay, and then secondly is on the voice to text; is that technology that you all have acquired, or are you licensed for that?

No, licensed; there are several companies out there, and while I'm not a technical expert, to get those engines to improve, they have basically to analyze -- I'll give you something funny -- every time I leave a voice message to Scott or to Kathy or to anybody else, and I say "Hemi", they don't know what Hemi is because it's not a very common name, so it used to be something oddly, not it's "Tommy".

We know who Tammy is.

They know who Tammy is, but there is a day that the machine will know, "Oh there is a Hemi", but how it works is very basic.

Every time the machine runs into a word that it cannot decide, either because of the accent, or because it's something it didn't hear before, it goes to a human person, and those humans are saying, "Okay from now on when you leave "Hemi", it's Hemi, it's not Tommy, it's not Tammy, it's not Chumie.

So what we are doing is all these engines are getting better, and as they get better, they can drop the costs.

Can you tell us-- I'm sorry, go ahead.

Yes, and so now there are 3 or 4 dominant players out there, they all want to work with us because we represent a big market for them, and we think one of them is we believe is the best one, and we basically say they are interested in selling more of their service, and we are the target, so we made deal that we would make the introduction to all those 100,000, hoping for both us and them, that it will catch, and then we have an arrangement that we pay them beyond the test per customer, per message, per variable metrics.

Okay, and who did you get the license from?

I don't think I can say.

Okay.

But it's one of the big ones.

Understood, all right, very good, thank you.

Rod Ratliff, Stanford Group.

Hello, Mr.

Ratliff?

It looks like his line is disconnected.

[Chetra Endarem], Cardinal Capital.

Thank you, congratulations.

Two questions; the first is on the RPU trend, so the sequentially looking at it at 16.2 a month, 16.21 a month, which is just about 16 in Q4 '07, but should we understand that been primarily because of better or improved usage?

Yes, that would be correct.

Okay, and then in terms of sales and marketing, since -- as a percent of sales that declined again sequentially -- I think you talked about the discipline on the S&M side, so as we look for the rest of the year, is that kind of the percent, the ratio that one should think about, or is it likely to track up again to closer to 17%, 17.2%, you know what I mean, looking for a rate.

Yes Chetra, it's a very good question.

We are trying to work with more a general partners on CPA versus CPN.

If they want to work on CPA, we would be very happy to increase our spend.

But there is also adjustment to the economy that has to be taken care of by advertisers, so today, the discipline is basically showing a lower spending on marketing if we find, and we do find more partners, because of our sheer size and reputable brands, want to work with CPA, then the marketing costs might go up, alongside hopefully also the sign-ups.

I see, with an increase in sign-up, then you would, okay.

Yes.

And when you say CPA, I think what you're saying is if we got more people to partner with us instead of pushing the product, then we would be willing to sell.

Yes.

In layman's terms right?

Yes.

Okay, and then in D&A, again I found it had tracked up a little bit.

Is that the run rate for the rest of the year?

It better not be.

No, as Kathy pointed out, first of all you have some seasonal expenses that usually hit Q4 and Q1 in professional fees and accounting; it's not purely accounting, but it's a variety of things we do in combination with the fiscal year end, the filing of the K, confirmation of the tax provision, a whole bunch of professional fees that you would probably generally aggregate as accounting related that spill into Q4 and Q4.

Well obviously, the K was filed in late February, so those expenses are behind us.

The other piece that also influenced both Q4 and Q1 that you'll notice when we file our Q -- these costs have ceased -- had to do with litigation that we were subject to by an entity called Bear Creek that claimed that we infringed one of their patents.

In that case, during this past quarter, was stayed pending a re-examination of their patent.

So literally a few hundred thousand dollars of expense on the legal side between Q4 and Q1 has now ceased pending the Patent Office's review of that patent, and the various claims associated therewith.

Okay, and then on the depreciation and amortization the rate of 3.1, that was a little bit more than Q4, but certainly year-over-year, it had tracked up.

I'm assuming because of M&A; is that a run rate that one should assume at 3.1 million?

Yes, the [3 days] in amortization yes, and obviously, and we are very hopeful that when we do an M&A transaction, you will actually add to that amortization.

Oh certainly.

As we allocate the purchase price and then have to run it through the P&L.

Yes, very good, thank you.

We have 2, before you go tot the next live question, we have a few questions that have come by email, so let me try to -- I think some of them have already been answered, but let us run through them fairly quickly.

One ha to do with CapEx; as we mentioned on the Q4 call, we believe this is a maintenance year for CapEx, so '07 was on the high side.

We had some special projects that had to do with enhancing some of our data centers and disaster recovery areas.

Those will occur from time to time, but they're not slated for another few years, so we believe that this is a maintenance year, probably in the $4 million range of CapEx.

As you know, we don't spend the CapEx ratably over the 4 quarters, so there will be some seasonal ups and downs on a quarter-to-quarter basis.

And the next question had to do with in the corporate business with our large customers, yes these are defined the new adds that we had are 1,000 or more DIDs contractually.

As I mentioned, when they actually deploy it is likely they will deploy on average in excess of that, but that's their contractual minimum.

And then I think we discussed the RPU, we did have, as you just heard on the last call, a pick up in RPU from Q4 predominantly driven by the improvement in the usage which was a combination of more business days in Q1 than in Q4, but also the stabilization and some improvement in the credit-sensitive usage activity.

A few other questions; we did mention it back to the corporate opportunity, 54 in the pipeline, that's 5-4.

The question is, is there any corporate voice receptionist; that really depends how you define it.

All of the receptionist activity is corporate business, but it's SMB business, small business.

As Hemi mentioned, you're talking about 3, 4, 5, 6 DIDs on average being deployed.

We're not looking for the multi-hundred or multi-thousand DIDs with that service and that technology.

And the last piece was the breakdown between the U.S.

and the international and the DID growth.

It was still with a combination of corporate and domestic web, weighted to the U.S.

vis--vis the international in terms of those roughly 20,000 net DIDs that were added in Q1.

Next live question.

Michael Hubbard, William Baird.

Hi, it's Corey again; just 2 quick follow-ups if I could.

Any change to the trends that you've discussed here today, particularly with respect to either cancellation rate or anything else in terms of the credit-sensitive customer base; any change in those trends through April?

No.

So the month of April has been fairly consistent with what you saw in the first 3 months of the year, is that a good way to think about it?

Yes, I think not that usage always is perfectly correlated with other levels of activity, but I think that basically, we've seen a stable book of activity for the first 4 months of this year through April 30.

Okay great.

Understand not how it was billed, not all of the numbers have come in for the month of April but the snaps, the flashes, etc.

appear to be consistent with the first 3 months of the year that had stability vis--vis what we observed in the latter half of '07.

Very good, okay; and then shifting gears, on the voice, on the growth in the voice business, I think last year you talked about sort of 100% plus year-over-year growth in '07, and if memory serves, there was some commentary with respect that could remain at that rate through 2008.

Is that still the proper way to think about the potential for that business in the near term here?

Yes.

Great, thank you.

There are no further questions at this time.

I'd like to turn the floor back over to Mr.

Turicchi.

All right, I appreciate it; we thank you all for joining us on this call.

As you are probably aware from our press release that we put out a few days ago, the Company will be presenting at 4 conferences over the next 3 weeks, the first one being Thursday of this week, May 8, and the last one on May 29, all in New York City.

There's details in that press release in terms of how to either listen to the webcast; 3 of the 4 of them will be webcast, and on a couple of them, I think there's still some room for some one-on-one opportunities if any of our investors happen to be attending any of those conferences.

And then we will look forward to speaking to you again to discuss the Q2 results, most likely the first week of August.

Thank you.

Thank you, ladies and gentlemen [audio ends here].