Ziff Davis Inc (ZD) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications Second Quarter Earnings Conference Call. It is my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global Communications. Thank you, Mr. Turicchi. You may begin.

Thank you very much. Good afternoon, and welcome to the j2 Global investor call for the second quarter of 2008. As [Kelly] just mentioned, I'm Scott Turicchi, President of j2 Global and with me today, is Hemi Zucker, our Chief Executive Officer, and Kathy Griggs, our Chief Financial Officer.

We will be discussing the second quarter financial results, as well as providing you with an update on operations. We will use the IR presentation for today's call, a copy of which is available at our Website. Also, if you have not received a copy of the press release, you may access it through our j2global.com/press. In addition, you will be able to access the Webcast and the related slides from this site.

After completing the formal presentation, we will conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. In addition, at any time during this call, you may email questions to investor@j2global.com.

Before we begin, I will read the Safe Harbor language. As you know, this call and the Webcast will contain 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, various proxy statements and 8K filings, as well as any 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 our press release, we were very pleased with the operational results for the second quarter. Our focus this year has been on continuing to improve the already excellent margin profile of j2 Global, as well as to deploy our cash balances and free cash flow into higher yielding assets.

Consistent with this philosophy, we have remained disciplined in our overall subscriber acquisition costs, and have been successful in both improving the gross and the operating margin.

For more specific details, I'll turn the presentation over to Kathy, who will walk you through the second quarter results on slide 9.

Thank you, Scott. Good afternoon, ladies and gentlemen.

Please refer to slide 9, as Scott has indicated, in our Web-based results. I am pleased to announce that our subscription revenue grew 13%, or approximately $7 million.

Despite the current economy, our international revenues grew 26%, and our domestic revenue grew 10.5%. Total revenues for Q2 were $60.7 million this quarter compared to $54 million in Q2 '07, for an increase of 12.4%.

Similar to last quarter, we continued to generate strong DID growth, while maintaining a stable cancel rate. We added 64,200 DIDs in Q2, our best quarter in the past six years. A majority of our DIDs this quarter came from our two acquisitions.

Currently, we expect our quarterly organic run rate to be more in the neighborhood of our Q1 performance going forward.

Our voice brands and corporate fax segments [continue] to perform the strongest. We continue to benefit from our corporate customers' trend of outsourcing IT services, and new voice customers who are benefiting from the intrinsic value of our voice products and features.

In total, Q2 ending paid DIDs are approximately $1.16 million, a 20% increase over a year ago.

And now for an update on usage. We are encouraged that our usage levels are relatively consistent with the current supporters, despite a continued deterioration of the economy as a whole.

Overall, variable revenue continues to be stable at the low 20% range of our total DID-based revenues. You can refer to slide 22 for additional details on usage.

Compared to last quarter, we have improved both our gross and operating margins. Our gross margin improved by 0.5 percentage point to 80.7%, and our operating margins improved by 1.3 percentage points to 39.7%. In our last call, we indicated that our goal was to reach a non-GAAP gross margin of 81% by the end of 2008. I am pleased that we have been able to achieve this in half the time.

Overall, the expenses as a percent of revenue declined across the board. Q2 GAAP selling expense was 17.5% of revenues, R&D was 5% of revenues, and G&A was 18.6% of revenues. The improvement in our margins reflects our continued commitment to managing our costs and increasing our efficiencies across our entire organization.

Our diluted GAAP EPS was $0.37 a share, with an improvement of $0.02 from prior quarter. While we grew our revenue 3.5% from Q1 to Q2, our EPS grew 6%, which again reflects the successful management of our overall costs, as well as the effectiveness of our stock buybacks.

To get to our non-GAAP EPS, you will need to adjust for 123R of approximately $2 million pretax, or $1.4 million after tax. The tax impact for 123R is approximately $0.03 per diluted share. Excluding 123R expense, our non-GAAP EPS was $0.40 per share. Our 10Q and our press release exhibit will provide additional details by expense categories.

Moving on to the balance sheet, in Q2 we provided our investors with a return on equity of 29.4% annualized. We continue to generate strong cash flows, and in fact, our year-to-date free cash flow of $50 million is a new record for j2. And during the quarter, we effectively deployed over $50 million of our cash by acquiring two entities, one in the United States and one in the UK, and the repurchasing of our j2 stock.

As a result, our cash and cash equivalents, short and long-term investments decreased over the prior quarter of $181 million to $151 million.

We purchased approximately one million shares of common stock, totaling approximately $21.4 million, and we have now completed our share of buyback program. In total, we have purchased five million shares with an average share price of $21.59.

Now Hemi will provide you with additional operational updates.

Thank you, Kathy and good afternoon, everybody.

I'd like to refer you to slide number 11. Phone People, mid-May we acquired a San Diego company called PPHC, or Phone People Holding Corporation. The company offices are conveniently located only a few miles away from our San Diego offices, and we already have started to consolidate the offices. And next month, all of our staff will be sitting in the same office, the offices of Phone People.

We acquired a very well-managed company that had a full feature virtual PBX, and they have also individual Find Me/Follow Me and the unique feature that j2 did not have before is the vanity number search engine. Basically, customers can go enter the spelling of their name, product, company name, or whatever they like and get a vanity number right away that can become the lead number for the company.

The company that we have bought is very well-managed, and has very strong free cash flow. We have here a marketing opportunity to expand the targeting and are able to sell more customers in more targets.

We have now two US platforms. One platform is our Onebox platform, and the new platform from Phone People. We are working on consolidating the two platforms into the Onebox and eVoice platform, which again will add additional margins and will increase our profitability.

As we already said in our previous press releases, the acquisition is already accretive and is going to become more accretive after we continue with the consolidation.

Now let's move to page 12. I broke it into two paragraphs; one is dealing with the US and Canada, and the other one with Europe.

In the US, we are operating under three brands; eVoice Receptionist, Onebox Receptionist, and now Phone People. In the last earnings call, if you remember, I said that by the end of April, we had approximately 100,000 paying DIDs under the voice services. Now, by the end of July, we are having 150,000 customers. So basically, in the three months of May, June, and July, we have added approximately 50,000 net DIDs.

We believe now that with this addition, we are the leading largest company in the virtual PBX. We believe that we are the largest in the US, and we are not aware of any other company around the world that has more [attained] subscribers in the virtual PBX basis.

We are now catering to different customers in different segments. The Onebox is the Rolls Royce, has everything you need, eVoice is the basic service, and Phone People is focusing on vanity numbers and companies searching to have services more of use to their customers, customer support, sales organization, etc., etc.

We have, as I mentioned before, deployed the voice to text, basically the ability to convert voice into text. We deployed it into the Onebox base, and we were very encouraged by it, and now we are going to continue to deploy it into the eVoice Receptionist and later on to the Phone People.

I want to pull your attention that we are not advertising yet on our Website about the capability. We are doing it as an after-sale, and we have been very pleased. And in the next 90 days, we will also add it into the Website as a feature that the customer can find at the moment of decision making.

We continue to evaluate other features, and as you know, we are a marketing company. And here you can see a small sample of our new Onebox on our Website that we are testing currently, and always geared to us increasing conversion rates and increasing the convenience for the customers.

On eReceptionist, which is our product in Europe, eReceptionist and also YAC, You're Always Connected, we have started with Western Europe. We are not as advanced as we are here in the US, but we are making progress. We have started to do cross-selling to our European eFax base, and we are happy with the results. eReceptionist is covering mostly Western Europe, and we have now inventory of numbers that are covering the rest of the UK, because up to now we were covering only long-distance premium numbers, the number in our inventory.

And you should expect in the next few months to see us adding those numbers into our inventory. So we would be able to cover the vast majority of the UK citizens getting a local number

Moving to slide 13, our corporate [fax]; we are very pleased and we are happy with the increased demand for our Fax to Email Service in the corporation.

In the last three quarters, we have averaged more than five big contracts every quarter. A big contract is a contract in the area of 1,000-plus fax numbers. In the last three quarters, we have sold, in one of the quarters, we sold seven [of the] 1,000 deals, one of them four, and one of them six, averaging over five.

Those large enterprises are continuing to buy from us, recognizing the leadership and the solutions that j2 has to offer. Among others, they are buying it because they can deploy very easily across all the countries, across all the companies, corporations. With the click of a mouse, they can deploy fax numbers to email addresses, and have immediate service up and running.

They can eliminate less scaleable hardware solutions in multiple locations. We help them to comply with ever-increasing demand in compliance issues, like extra copies sent from place of control, etc., etc. And also, especially in this environment, they would like to pay as you go rather than to make an investment in capital assets.

We are continuing also to work on our available opportunities, those opportunities to (inaudible), our eFax developer. Basically it's an application that allows you to run directly from your database and your corporate environment. And a fax [that] goes directly from your system out. We are enabling companies to sign for domain levels and this means that while you don't want an inbound fax number for every employee, you do want to empower every employee to send out fax.

So you can come to us and say, "Okay, every fax that comes from a domain company.com, take it (inaudible) because this is the deal that they are having with us, and it has been successful as well."

We have affinity programs, where we will sign a deal with a major corporation, allowing each department or organization that is allowing everybody throughout the organization to enjoy the pre-negotiated price and all the other features. And we have started to do cross-selling of our voice services, and I am very pleased to announce -- I'm not sure, maybe I talked about it during the last earnings call -- I think I [did]. We have made our first voice service sale. It was 700-plus DIDs to one organization. It's an organization that has deployed a sales and service organization. When they have the full feature, Find Me/Follow Me, that can also be managed by the back office.

So if let's say you have a salesman that is now in Detroit, and is sending all this on his own mobile number, now he can give a Onebox number and they will call. And if he's (technical difficulty) got a sales person leave the company to move to another place, you don't have to bother with a new phone number.

It just continues, the Onebox number forwards to the phone number of the new replacement sales person. So we are also happy to see initial take their rate in the corporation for our virtual PBX services.

Last but not least, slide 14. Last quarter we won the Keller Award for creativity. This month, our talented creative team have won the 2008 Silver Communicator Award for eFax Direct Marketing under the slogan "You Are Here". We are very pleased with our creative team and I hope that they are listening to the call.

I will now pass the call to Scott.

Thank you, Hemi.

If I turn your attention to slide 15, I'll remind you a little bit of what the 2008 goals have been, and then talk about our guidance for 2008.

On slide 16, you'll recall in the February call to discuss the Q4 results and the initial guidance for 2008, we made an assumption that both the financial services sector and possibly broader sectors of the economy would find it difficult in 2008. As a result, we instituted a certain operating philosophy for 2008 designed to hit upon the following points. One is to grow the voice services business into a leadership position. I think we're well on our way to doing that, both with the organic growth, and also with the ability to have been able to acquire Phone People during Q2.

As I've told many of you, I was skeptical that we would do an acquisition in the voice space because of the rate of growth. Generally the acquisition multiples are much higher than we find justifiable. However, unique circumstances presented themselves that allowed us to acquire Phone People, and we've been very pleased.

Second is the focus in the fax area on the corporate and the international markets. Hemi has commented on the corporate in his slides that we just talked about.

Second, or next important is to improve the margins, both at the gross level and the operating. The next is to focus on the free cash flow generation because that we can put to work by deploying it into the combination of M&A, by adding assets to our base, and where those are not available, to buying our own stock if we find the price attractive.

And so if you go to slide 17, we're pleased that we hit the halfway mark in '08 to have really met most, if not all of the objectives. As I mentioned, voice services is well on its way to establishing itself as a leader in the space, if not the leader, having deployed more than 150,000 DIDs.

The corporate fax enterprise group continues to sign up a large number of deals. There were four that were signed up in Q2, plus there was one renewal, so there were actually five negotiations of large deals of 1,000 DIDs or more.

The international business grew approximately 30% over Q2 of 2007. The gross margins are up 108 basis points since the end of '07. Our operating margins are up 241 basis points. I think the next two points are very important, which is the incremental revenue we've added in the first half of 2008 against where we ended the year in 2007. 95% of that incremental revenue has flowed through to gross margin, 75% of that has flowed through to operating margin.

As Kathy and Hemi have both mentioned, we had a record free cash flow first half. That enabled us to repurchase five million shares of stock at an average price of $21.59, as well as to complete two M&A deals.

So we believe we are well on our way to reaching our 2008 objectives. That allows us on slide 18 to reconfirm the guidance that we've previously discussed.

I get the question from time to time to remind people it is our policy that when we go out with annual guidance, it is not our intention to change, revise, or alter that guidance unless and until it becomes clear that either the higher the low end of either revenues or EPS is likely to be violated. So we continue to reaffirm the annual guidance we gave you back in February.

There are the supplemental information following, which include a continuation of the metrics. The computation of free cash flow and its reconciliation to GAAP . And then as Kathy mentioned, slide 22 with an update on the usage characteristics of the credit-sensitive piece of the business, and the non-credit sensitive piece roughly stable and in line with where they were in Q1.

At this point, we ask Kelly to come back on and instruct you how to queue for the question-and-answer session.

(Operator Instructions).

Youssef Squali, Jefferies & Company, Inc.

Hey guys, this is [Novat Kahn]. My first question is on eVoice. Can you break out the organic growth in this business during the quarter?

No, as you know, we give you the aggregated metrics. I think as Kathy mentioned, the majority of the 64,000 net DIDs added to the Company, as a whole, came from the two acquired businesses, Phone People being bigger than the Media [Bursiel].

But no, there's no split, and I don't think we intend to give one.

If we compare the growth rate with the first quarter, would you say that it was relatively same, or did it go up or down? Any more color?

As we said, the organic growth rate in Q2 was the same as Q1, maybe a little bit higher but very similar. Anything above it, you can assume came from the acquisitions.

Okay, good, and then just looking at the cancellation rate, it went up slightly quarter-on-quarter. Was there anything specific going on here?

No. I think, as we've said before, the weaker economy clearly has biased it up a little bit higher than we would have a, liked and b, expected say relative to a year ago. With the price change rolling off, something anywhere in the 2.50% to 2.75% range would be acceptable with an ideal target somewhere in the mid of that range, like 2.6%, 2.65%.

I think the delta that is higher than that is the weaker economy. I think we see some of that. And also as you roll out new services, they tend to have a higher degree of cancel initially as people are getting used to the service, and really understanding what it is that they have bought.

We also have a large corporate account that canceled some numbers the end of the quarter and took them back in the beginning of next quarter. This might also have some impact.

Usually it's not cancellation. It's just the [migration] of moving this margin up.

Okay, but for the remainder of the year, do you expect cancellation rate to stay around this level or trend back down?

It's about the economy, but I think that the weak ones already weeded themselves out. So I would expect it to be same or better. But -- I see Scott and Kathy nodding with their heads, but you cannot tell.

Not affirmatively.

I would assume it will be just better, but it's a forecast.

Okay. Understood. And lastly, just on the use of cash, would you consider increasing the [half-price] share buyback?

Would we consider another share buyback?

It's opportunistic.

I think the answer is, I mean to your point, we recently, I mean literally just about three weeks ago, the existing five million share program was exhausted, and so yes, we will look at now obviously, we still have a meaningful amount of cash and very strong cash flow. So we'll look at ways to continue to deploy that cash, one of which will be additional stock buybacks.

That obviously is a Board decision. We'll put that in a broader context. At the immediate moment, there is on plan, but I think that is something we will address again. We, as a company, I think collectively, including the Board and everybody, have been very pleased with the execution of the buyback, and what it has done for us. So we are certainly not only not adverse, I think we're supporters of buybacks.

Thank you.

Brad Whitt, Broadpoint Capital.

Hey guys, thanks for taking my questions. Going back to, I think, Kathy's comment about revenue going back to the Q1 revenue run rate, can you just run through that again and give us a little more color there ?

Yes, as I indicated, we said that the majority of our DIDs this quarter, Q2 came from the two acquisitions that were previously discussed. We do expect that our quarterly organic run rate to be more in the neighborhood of what Q1 was, which I believe was in the 35 or so range, mid-30s.

Okay, I thought you were saying the revenue, Q1 revenue --.

Oh no, DIDs, we were talking about DIDs.

Okay and Hemi, can you talk a little bit, maybe give us a little bit more color around targeting voice toward your corporate customers? Is that something that you had started or something that just happened in the quarter with one customer, and how do you think customers will look to deploy that service potentially, corporate customers?

The customer that we got, the call or the sale was not done by our corporate sales team. It was done by our telesales team or the telesales team that [talks] within voice services. Encouraged by that, we are just now starting to deploy several upsales, upsales mostly when corporate customers call us to our service or telesales.

And we are testing emails. One of the keys for success in corporate. you don't want to broadbrush the entire base and get some people annoyed. (technical difficulty)

You know, in marketing, you do the corporate base is an art that is different than the one that you do on the regular base. We started and we are encouraged by the results, as again, corporations have large PBXs deployed. But there are certain segments of the organization, like the example that they gave of sales customer support 24/7 to all those that we believe and experience are going to acquire the service.

And again, as usual, it's a fast business. We do have already an existing voice, the Sound Logic Corporation that made a department initiative or something like that that took the numbers.

So to answer, we didn't start yet. But we are in the process of doing it now.

Mark Murphy, Piper Jaffray.

Hi, this is Brian Schwartz in for Mark Murphy. I've got a question building upon the churn which ticked up here a little bit.

Could you give us an update on the churn within your credit-sensitive customer base? Has there been any change here throughout the quarter, maybe so far here through July?

No, I don't believe, I think it's been fairly consistent probably for the last two or three quarters.

Fairly consistent in that it's leveled out or you're seeing improvement?

Yes, it's been roughly the same over that timeframe.

And most of the credit-sensitive customers are what we have seen, not any more, dropping usage, but not really cancellations.

Daniel Ives, Friedman, Billings, Ramsey & Co.

Hey guys, question on the month-to-month patterns because I know you always get that feedback when you've met April, May, June. Was there any sort of anecdotal sort of pattern that you talk about month-to-month? Did it finish stronger in June in terms of usage?

Let's see. The usage patterns, if I recall April and May were fairly consistent with each other. I think June was a little lighter, and July was a little stronger.

But they're all sort of modulating around a mean line that is fairly consistent. I don't want to use the word "stable" because I think that there are elements of the economy that could change those patterns.

But in terms of the actual data that we've seen, they've been fairly consistent on average month-to-month, with some variation based in part on business days and in part based upon elements that are not exactly discernible in terms of why there are movements positive and negative around the mean.

Shyam Patil, Raymond James & Associates.

This is [Vyron Chatoff] in for Shyam. Could you talk about the credit-sensitive credit component down to the fixed [portion] of the variable revenue stream?

We'd have to pull it. I would want to say based upon the aggregate metric, it's probably similar to Q1, which would be slightly in excess of $7 million of fixed revenue and $5.5 million, $5.75 million of variable. But we'd have to actually double check that. But it's going to be in that range.

All right, and how should we think about sales and marketing expenses for the balance of the year?

Well, as I mentioned, we're continuing with the philosophy that we entered this year, which is very disciplined, so the sales and marketing dollars are being allocated by brand and by region of the world, based upon a number of months' payback. It's not capped in the sense that if a brand or a region of the world was able to deploy more marketing dollars at their target months' payback, they will be allocated that.

What we are not doing this year is trial marketing, a lot of testing, anything like would be equivalent to the radio spend of last year, which was a separate budget with basically a view that this would be money spent with a future payback, but very little [curve] in return.

So I think you -- and that's true not only on the dollars spent with vendors side, but it's also true on the people side. So I think you should continue to see fairly tight sales and marketing as a percent of rev, with probably not as much variation quarter-to-quarter as you may have seen in previous years.

Let me add [onto that]. You are trying to basically trying to correlate the spend of the economy, so how do you do it?

If you say to yourself you can spend a fixed amount which correlates to the monthly usage of each service, if the economy is better and they sell more, they will spend more. If the economy is weak and people don't click and don't buy, they will spend less.

So what you are seeing in the modeling basically is the economy goes strong, we sell more, we spend more; the economy is weak, it is less. And because of the nature of our business, we are able to manage it pretty tight in correlation with our sales.

Rai Archibold, Kaufman Brothers.

Thank you. Hemi, in the past you have given us some update in terms of some of the pricing trends on the voice side. And you were looking at perhaps tweaking some of the pricing, so first question relates if you can give us an update in terms of what the pricing trends have been on the voice service.

Hi Ray, yes. I did talk about this in the past, and I mentioned that the way that we are going to manage the prices up, which was the ARPU, is the [omission] of features. So for instance, if you elect to take the speech-to-text, you will be charted another $10 for the basic, and $30 for the more advanced service. And so with the Live Receptionist and so with everything else.

So because we are entering the market now and we are trying to grid market share, the prices are where they are, but the addition of features are helping us to drive the ARPU up, and while we don't discuss it, based on the conversation that I had this morning with the guy who manages it, the ARPU is inching up.

Okay, and my second question is on the corporate business where you highlighted that you've been averaging about five large contracts over the last, I guess, three, maybe four quarters.

So I have two questions. One is, could you give us a sense as to what the backlog of DIDs are in terms to deploy because I understand that that account takes time to ramp, so where are we in terms of how many DIDs are yet to be reployed -- deployed?

Okay, we measure it in how many DIDs we have in the pipe, and there is also DIDs to be deployed. The DIDs to be deployed is the guesswork between how many contracted DIDs we have versus how many deployed.

I don't know, but maybe about (multiple speakers) 10,000.

My recollection is about 10,000 DIDs that have fallen under contractual negotiation, but are yet to be deployed. And as you pointed out, usually those will be deployed within a 90-day period from the contract being signed.

So DIDs and deals signed up in Q2 will deploy throughout Q3. Some have already deployed, but they should be fully deployed by Q3.

And as far as the pipelines -- .

I believe it's 62, it went up from the previous quarter where it was in, I believe, the mid-50s.

Right.

So the pipeline stayed healthy. There are some DIDs yet to be deployed, which means that right now they're coming in at modest revenue, if any. And as they get deployed, then the usage starts to build up and we see higher ARPUs out of those DIDs.

Robert Brazier, RBC Capital Markets.

Thanks, one quick housekeeping question. Kathy, the tax rate was a little higher than what I anticipated. Can you give us any kind of guidance on how we should think about taxes for the second half of the year?

Sure, Rob, no problem. The tax has been impacted and will continue to be impacted going forward based on the fact that we have a couple recurring items going on in the tax rate. Previously, to the extent we held cash balances in our domestic investment accounts, we had interest that was basically tax-exempt. That tax-exempt interest was obviously a deduction to our income in terms of calculating the taxes.

We no longer have those kinds of balances in the United States, based on the stock buyback and the acquisitions. Therefore, we don't' have that deduction any longer from our income. So that's affected the tax rate.

The second thing is that we're accumulating more cash overseas, as well. And the interest that we generate off of that tax overseas is taxable in the United States as what we call sub-part F income. So it's a little complex, but those are the two basic reasons.

Also of primary note here is that the R&D tax credit was not renewed by the Congress, the House Ways and Means, and was not presented to Congress, it was not renewed, and therefore, we don't have that additional deduction going forward.

So at least in the sort term, until some of these balances change and are redeployed, you will find our tax rate will probably hover in the 31% to 31.5% range.

Great, that's helpful. And maybe just kind of the last question.

Scott, I understand the philosophy around the guidance violating the upper and the lower range, but I guess I would have expected with two acquisitions, we're halfway through the year that maybe the range would have been tightened a little bit. Can you kind of at least talk us through, are you thinking about more acquisitions here? Or what's really going to -- because it's a pretty wide range on a relative basis, so could you maybe just talk us through what, could you expound upon the philosophy there?

Well, let's take it in two pieces. The real philosophy on guidance is that we obviously do annual budgets, and those drive a lot of elements within j2. They drive the guidance for the year, they drive compensation programs, etc. And the philosophy is that once we state that range, irrespective of where we're falling in that range on revenue EPS, it is the range. It just stands there.

Now, if it becomes clear during the year, whether it's through M&A activity, through stock buyback, through deployment of cash, through organic growth, through any series of variables, that a bound in the range is likely to be violated, then we would readdress, rearticulate in that range to take those events into account.

But under the analysis and the assumption that we're still falling within the range, the range remains reaffirmed. That is a philosophical viewpoint of j2 as it relates to guidance.

So it is not meant to signal that, well, we have XYZ in our pocket, which would take us from where you may think we're currently tracking in the range to some other level of the range. It's merely to say this is consistent with our budget, this is consistent with where we are mid-year. We reaffirm it.

Now, separate from that, the answer to your question is, yes, the M&A activity and the M&A pipeline continues to remain active. Those deals, much like the stock buyback and much like our other activities are really ROI-based.

So as we've commented in the last couple of quarters, and maybe we're starting to see a little bit of light here as we did in Q2, it's taken a while for the sellers of assets to have an adjustment in their valuation expectation. And so we're probably a year into the economy being weak, and only in the very recent past to maybe as we speak are some of those valuations in some instances becoming more rational.

There are still many out there who have hope certificates that either something will turn quickly that will change people's view on valuations and take them up, or they're just going to hunker down and wait for an exit strategy in a better environment.

So the two really are not, those two are really distinct questions. The guidance is a philosophical viewpoint endorsed by the Board of how we articulate our guidance, and the M&A is really how do we deploy our cash? Can we get the right rate of return, can we buy at the right multiple. And if we can't -- it is our preference to use that cash and the cash flow in M&A, but to the extent we cannot, and we build it at the rate we're building it, then at certain levels, we also find the stock attractive.

Rai Archibold.

My question was just answered, thank you.

Okay, are there any other questions?

There are no more questions in the queue at this time.

Okay, we appear not to have received any questions by email, so we will take it that everybody has had an opportunity to ask their questions. I will be presenting at the RBC Conference this coming Thursday in San Francisco at 9:00 a.m. Pacific. You will probably hear a lot of what you've just heard, but we will be having that presentation, a day of one-on-ones.

There will probably be some conferences coming up between now and the next earnings call, which will be slated for some time in early November to discuss the Q3 results, and we thank you for your participation.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.