Ziff Davis Inc (ZD) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome me to the j2 Global fourth quarter and year-end results conference call.

Joining us today are Mr.

Scott Turicchi, President of j2 Global Communications, Mr Nehemia Zucker, CEO and Ms Kathy Griggs, CFO.

All lines have been placed in a listen-only mode.

There will be a question-and-answer session following the formal presentation.

It is now my pleasure to introduce you host, Mr Scott Turicchi.

Mr Turicchi, you may begin.

Thank you.

Good afternoon, and welcome to j2 Global's investor conference call for Q4 2008.

As the operator has just mentioned, I'm Scott Turicchi, President of j2 Global and with me today is Nehemia Zucker, our Chief Executive Officer and Kathy Griggs, our Chief Financial Officer.

On this call, we will be discussing our Q4 financial results as well as an update on our operations and an outlook for fiscal 2009.

The IR presentation will be used for today's call.

A copy of that is available at our website where the webcast is available but it is also available for download, so that you can have your own copy and see it in larger format.

In addition, there's also a separate file with all of our metrics.

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

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

After completing this formal presentation, we will conduct a Q&A session.

At that time, the operator will instruct you regarding the instructions for asking a question.

In addition, any time you may e-mail questions to us at investor at j2 Global.com.

Before we begin our formal 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 include have included as 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 was noted in our press release, we are pleased with the operational results for Q4 and for all of fiscal 2008.

Especially in light of the significant deterioration in the economy in the latter part of the year.

Our focus this past year as with estimated almost a year ago was to put our energy into the areas that we knew we can influence.

Those included margin enhancements, profitable organic revenue growth, and the deployment of our cash balances and free cash flow into higher yielding assets exam investments.

Kathy and Nehemia will provide you with financial details for the quarter and our analysis of each of the business segments.

I will return a little later to discuss our fiscal 2009 guidance.

At this time, I will turn the presentation other Kathy.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

would like you to please refer to slide nine on the presentation on the web site for a recall of our Q4 and full year GAAP results.

I am pleased to announce that annual revenue improved to $221 million to $242 million a 9% increase or $21 million increase.

We were able to continue our double digit growth trend for subscription revenues, which improved 11.5% from 212 million to 237 million.

Total Q4 revenues increased to 60.6 million compared to 56.8 million in 2007.

And this is an increase of almost 7% or almost $4 million.

Our subscription revenue grew 8% or 4.2 million, and the continued strength action continued strength of the US dollar compared to the Euro and Pound within the quarter continued to have adverse revenue impact of approximately 600 K.

Throughout 2008, we continue to focus on efficiencies and increasing our growth and operating margins.

Our success is reflected in our financial results.

Our margins have steadily improved throughout the year.

In Q4 our GAAP gross margins peaked at 81.5%, which is 1.9 percentage points higher than a year ago.

We are also pleased to announce our GAAP operating margins are also at an all-time high increasing by almost 6 percentage points from 37.3% in Q4 of 2007 to 43.2% in Q4 of 2008.

This quarters selling expense was 16% of revenue, R&D was 4.7% of revenues, and G&A was 17.6% of revenues.

For 2009, we plan to continue our efforts to improve operational efficiencies, and provide -- continue to provide excellent service and valuable services to our customers.

At the end of November, we acquired two US based companies, Mijanda and Mail Wise.

Mijanda is fax and voice, Mail Wise is e-mail related products, which brought our 2008 total acquisitions to four.

Our diluted Q4 GAAP EPS improved to $0.45 a share, which is improvement of $0.11s or 32% from Q4 of 2007.

Our Q4 2008 tax rate was lower than normal due primarily to the restatement of the federal R&D tax credits for the full fiscal year which occurred in the quarter.

Full-year EPS is $1.58 per share.

And in 2008, we were able to meet our guidance of both revenue and exceed the top end of the range for EPS.

For those focusing on our non-GAAP EPS, you will need to adjust for 123R of 2 million pretax of 1.4 million after tax.

The after tax impact of 123R is approximately $0.03 to $0.04 per diluted share.

Excluding 123R expense our non-GAAP EPS was $0.49 a share.

Our 10-K and our press release exhibits will provide additional detail by expense category.

Moving on to the balance sheet in 2008, we provide our investors with annual return on equity of 29%.

If I don't move to slide 19 in the presentation, you will see a summary of our quarterly free cash flow.

Free cash flow for the quarter was 25.4 million, an 88.2 million for the year.

A new annual record for j2.

During the year, we deployed over 150 million in cash to repurchase stock and four acquisitions.

There are several slides at the end of the presentation that includes j2's metrics for quarters in two fiscal years as well as free cash flow calculations and other schedule.

Now, I will turn the call over to Hemia, who will provide you within operation view of 2008 and our 2009 outlook.

Thank you very much, Kathy.

Thank you everybody for joining us for our 2008 annual earnings call.

Today, I will discuss both our 2008 results and also provide outlook for 2009.

During our fourth quarter, we have added 37,000 new users.

As we speak now, we are approaching 1.25 million paying customers.

A big achievement for j2.

Let's go into 2008 and review it, Page 11.

Our fax date have increased to approximately 1,050,000 customers, and we have ended the year with also 190,000 voice.

Together approaching 1.25 million customers or DID, as we refer to them in our presentations.

Through 2008, we have been successful in launching multiple pricing programs, and as you know, we sell multiple brands, multiple countries, multiple currencies, and all this work was coordinated well and we are able to serve customers in each market in an optimized way.

We have added and extended our network to 46 countries to the best of our ability.

There is no other Company that serves such a large -- provides coverage of this size.

We have added this year [Carashia], South Africa, [Slyvania], Cyprus and the Czech Republic.

During the fourth quarter, as mentioned before, we have acquired Mijanda.

Mijanda has multiple brands and for customer base, as we talk now, we are working in integrating Mijanda in the brands that we select to keep.

The most well known brand of Mijanda is SmartFax.

During 2008, we have seen strong corporate sales.

We actually had 23 wins in 2008.

26, 24.

All right 24, even better.

And if you look at our supplemental information, we have done four of them in the first quarter, then five, six, and eight in the last quarter.

During 2008, we have perfected and continued to work on our approach, ROI based approach of advertising, it contains most of it has been done through the excellent management and discipline of our marketing team together with our strong financial inputs.

Our growth during this year was 172,000 customers.

This was done despite the head wins that we had in usage, in retention, and the economy deteriorates, we are seeing again our supplemental churn rate have been in the first quarter 2.8%, second quarter 2.93%, 3.0%, and 3.1% during the fourth quarter.

Despite all of that, sales 170 new net customers.

As you know, we have a nice portion of our revenue coming from foreign currency.

The strength of the US dollar our international revenues, mostly in Q3 and Q4.

And we believe that in '09, it will continue.

Let me move now to our 2009 outlook.

We believe we will continue to leverage j2 advantage when it comes to corporate customers.

Those customers today more than ever are seeking established, profitable, trusted, and well capitalized providers.

They no longer can tolerate a weak player.

We at j2 provide all of the above and then, we also provide redundancy, recovery, the recovery center, multiple flavor of security, and the list goes on and on.

And we are very proud with our achievement there.

For 2009, we are going to increase our focus on top European countries and especially on Canada.

So our multiple currency, multiple pricing, we are able to serve those markets in very attractive and competitive pricing.

We have made significant investment over the years, especially in 2008.

We have completed a large investment in our data warehouse.

We are analyzing a lot of pieces of information, both with our tools and mostly with our people.

And for 2009, our marketing team are going to implement secretive way to even better target and find a better, I would say, multi-dimensional ROI approach to get more customers for less money and drive it to the bottom line.

And we have also launched some new fax and other features in '08.

We started with fax indexing, we did a test.

The test was successful.

We are going now to launch it across our entire eFax base.

Other features, and potential additions will be announced as we launch them.

And we believe that in 2009, the economy will yield additional, lighter than average usage, while you know, I cannot predict exactly, we saw this product to assume that the economy will be -- continue to be weak resulting less fax and voice activity.

We are continuing to focus on our M&A.

We are currently working on very active -- very actively on late stage deals.

Let's turn to Page 12 and talk about our voice services.

Our voice services was a major success during 2009.

In '08, sorry.

We have more than doubled our base from 80,000 to 190,000 users.

As you can see, today, approximately 1/12 of our customers are voice users, and they provide approximately 1/10 of our revenue and growing.

During 2008, we began a -- we launched a receptionist, which is our voice service for our international markets.

We deployed it in some European countries.

We have added speech to text in the US, highly recommended service, those who use it find it addictive, and especially in the current environment.

People who use PDAs, it is a great service and a highly recommended.

We will continue to do it in 2009.

We have increased our sales staff and extended our customer support both in Dubois and on the fax services.

We continued to do cross selling to our fax customers in 2008.

And we have acquired our largest voice acquisition, our largest acquisition during 2008.

For 2009, we are planning to extend our marketing leadership, both organically and with your M&A growth.

The market faces competitive and many opportunities for us.

We will continue to refine the user experience.

Those voice services we are selling have been around for many, many years.

It is an art to sale them and to package them and I am very pleased with the success that we and other competitors in the industry have provided in validate this product.

For 2009, we are planning to do one cross selling between our fax and voice customers.

Today, those customers are being approached by us, but we have to help them, and it is not fully automated.

We will work on that.

We are testing additional services.

Cannot talk too much about them.

But our voice team has some very creative ideas.

They're going to refine our strategy for 2009.

We are going to do better positioning.

As you know, we are operating in the US with three brands, Phone People, eVoice and Onebox.

Each of them is served in different market.

We are going to continue to better position them.

Internationally, as we said, we are offering service in 16 to 20 countries around the world, but all of the services are offered in English.

So US, Canada, Ireland, and the UK.

For 2009 we are going to localize our web site, localize the user interface, launch foreign currency, and better leverage our assets in Europe to introducing services.

Potentially, we will also introduce a new exciting service that -- fits the era.

Free service, when the customer get it for free and we make money.

That is about it regarding voice.

Lets go to the next page, page 13, our auto businesses.

I am very pleased to say that our email company, Electric Mail, in Vancouver have acquired last year a Company called Mail Wise.

Mail Wise is a provider or in the layman terms, it is a Company that provides the virus and the (Inaudible).

It is the first time that our Electric Mail Company is doing an integration.

As you know, we have experience in fax integration, voice integration.

As far as e-mail, it is the first time that we are doing it.

We are very pleased to say that the integration is moving very well, ahead of the program.

And also because those customers come from (Inaudible) have with us only virals and (Inaudible).

We are offering them all of the other services of Electric Mail, accrue them on e-mail, archiving et cetera, et cetera.

We are hoping and we assume already beginning success of cross selling to those customers.

We are currently evaluating some additional opportunities on the e-mail sector and when they happen we will be happy to share the information with you.

Another segment of our other businesses, is our patents.

Some of our most strong patents are out of re-exam.

As you know, we have 50 some patents and we are looking to acquire more.

Some of our strongest patents are out of re-exam and I am sure that you will hear more about we will launch new licensing program 2009.

Last but not least, our advertising in broadcaster.

As you know, we have a small segment of our business, approximately 2% of our revenue that is derived from fax broadcast self service, and advertising to our free and paid customers, mostly e-mail and banners.

The market very soft, the weakening economy creates a situation when advertiser wants to pay much less and get much more.

The bad news for us is that we have less advertising revenue.

The good news is, it is a very small segment of our business and because we are large buyer of advertising we are able to leverage it to acquire and and will do even stronger effort in 2009 to acquire more customers for less money and continue to improve our margins related to this significant cost of ours.

Next page, page 14, the j2 operation success.

The team performed very well in 2008, and we will do even better in 2009.

We are lucky that we have started to adjust our organization to the weak, bad economy already in the second quarter of 2007.

And the results are showing.

Let me take you through them.

In 2008 we have achieved revenue within our range, and our EPS is above the range.

I am very happy to also talk about our cost structure.

We have done an amazing job and I want to thank here all our employees in reducing costs across the board.

Our revenue grew 9.4% while our employee base kept flat at around 400 employees.

As a matter of fact, since we were using and are still using outsource services, and we were able to reduce those, the effort is paying even more.

We have increased our operational efficiencies not only during the fourth quarter but through the year.

We have new program for 2009.

We have improved our gross margins from 79.6% last year to 81.5%.

We improved our operating margins from 37.3% to %43.2.

This is an improvement of 5.9%.

And if you have a calculator here, we have freed up through this activity, more than $14 million through those efforts.

During 2008, we have done very good job with our cash, deployed it into acquisition and stock buy back.

As I said before, we bought four companies across multi-services.

For 2009, we will continue to enhance and extend our operational excellence.

We have an active pipeline of M&A opportunities, and we will leverage our acquisition and integration expertise.

So that you know, j2 has acquired so far 22 -- sorry, 21 companies, and we have developed the skill that can meet the expectations of the seller of hundreds of companies with hundreds of entrepreneurs in multiple countries, multiple spaces that we keep in touch with.

And when looking for opportunity and they want somebody to come with hard cash, they can meet us, we are sure footed.

We know how to minimize the questions.

How to quickly dive into efficient due diligence and we are providing for those smart people out of there, the entrepreneurs, quick and nice exit.

We will hope to continue to do more of it this year, leverage our talent pool across the Company.

For 2009, I said before, we are working on more effective advertising program and we continue to prudently manage our expenditures.

Let me now pass the call to Scott.

Thank you, Hemia and Kathy.

Now, we would like to address the outlook or the guidance for 2009.

Turning your attention to Page 16.

In the past, we have normally not commented or dealt in great deal to the assumption underlying our plan.

Specifically, as it relates to the economy but my feeling was this year, given that things have changed and are changing very rapidly, it was important to understand our thinking behind some of these macro variables, as well as, how they might influence or impact both our thinking on the business.

As well as, some of our own metrics.

So if we start the economy as a broad concept, we are believers that 2009 as a whole will be worse than 2008.

Specifically, there will be four quarters of GDP contraction, that this is not limited to the US but is in fact global, that there will be increasing unemployment, and that most importantly, the bottom has not yet been reached.

And so this is the mind set with which we developed our plan for 2009.

I would highlight that j2 because we are a subscription-based business and because of how we think of the business, we are flexible.

To the extent that hopefully, we were wrong on some of these assumptions.

We can take actions that we might do in better times like 2006 and 2007 that we are not currently contemplating as being realistic for 2009.

As Hemia and Kathy noted, we believe the US dollar will continue also to remain strong against the British Pound and Euro, which where the bulk of our foreign revenues come from.

So that will present some head wind, as Kathy mentioned.

It was 600 grand in the recently completed quarter.

What does this mean operationally?

Well as you have heard, continue to focus on the things we can influence and control, which is our cost structure, optimizing our margins and our free cash flow.

Most likely because of the economic assumptions, there will be continued decrease in usage revenue, and some modest increase in the cancel rate or if you will a decrease in the retention rates.

As we have seen over the last year or two, we believe there will be a continuing shift in mix of the DID sold.

Primarily into the areas of corporate, voice and secondary fax brands, which I would remind you all have a lower monthly revenue RPU than does the Company as a whole.

Next, is as Hemia mentioned, as the patterns have come out of re-exam, this will allow us to put more time, effort and money behind our intellectual property programs.

Some of that you will probably see a little later in the year come through as an amortization expense through our G&A.

And then, as we demonstrated really over the last several years, continue to focus to deploy our cash and higher yielding investments, last year we did it through a combination of M&A and stock buy backs.

We will look at each of those as well as other opportunities to have at least a portion of our cash yielding more than it does now which is very di minimus, given the fallen interest rate environment.

Clearly our preference in this area is for M&A as we believe those cannot only be at the highest end of the range in financial return but also allow us to build the business in term of customer, employee talent and in some instances, additional technology and services.

Given the interest rates have fallen and we have invested very conservatively to keep the money safe, we will probably have lower other income.

Even if the cash balances do rise over the course of the year, modestly higher share count and probably an increase in the 123R expense for those that are tracking the GAAP number.

The reason for that is it will probably hopefully be a grant at some point during this year, as the five-year block grant that was done in 2005 is becoming substantially vested this year.

And we should have a GAAP tax rate in the 30% to 31% range.

All of that rolls up to a modest increase in the revenues to remind you that's 241.5 from 2008 and the non-GAAP EPS which is $1.70.

As Kathy mentioned earlier, behind this slide there are the metric slides, which you are familiar with on Slide 18, giving you the eight quarters and two fiscal years of rolling metric.

The reconciliation of free cash flow and finally on Slide 20, the usage of the credit sensitive customers versus all other for now eight rolling quarters.

With that, we ask the operator to come back as we will begin our Q&A session.

Thank you.

(Operator Instructions).

Our first question comes from the line of David Eller with Raymond James.

Please go ahead.

As margins were quite strong this quarter.

How should we think about 2009 and potential for expansion and how should we expect an uptick as in 2008.

In terms of the margin, I would look first of all, I am always looking at four rolling quarters opposed to picking out one quarter.

We had somewhat lower than usual marketing expense in Q4 which is somewhat traditional.

We tend not to be as aggressive in marketing from Thanksgiving through the end of the year.

Some of that you will see reverse in Q1 if you are looking at it sequentially.

We believe in this scenario, the annual margin should increase year-over-year.

Although the 46.5 may not be sustainable through Q1 because of some incremental marketing and as I say, later in the year and the timing is hard to predict.

Depending upon the timing and the amount that is spent with regard to our intellectual property activities, some of that will flow through as amortization through the G&A.

It will not be a -- a something that will happen in Q1, but it certainly could start to build from Q2 and build throughout the course of the year.

Okay.

And then what kind of foreign exchange rates are you are assuming?

You talked a bit about your assumption, do your economic assumptions point to the revenue growth sequentially throughout the year.

Well, in terms of the exchange rate, against the Pound and the Euro, they are roughly where they are now, but relative to all of fiscal '08, that is a stronger dollar.

And probably has about 2 million to 2.5 million of negative head wind in terms of revenue.

I think it was like 140 almost during last year.

And we are thinking about 20.

On a quarter.

Then how many potential e-mail companies are you looking at right now for acquisitions.

Should we think of these in the 1% to 2% of revenue range or how should we think about those.

It is sort of like the fax business.

Many of them are small or any one of them is, you know, the 1% to 3% of current revenue but there are a few that, in fact many are very similar to a lot of our spaces.

There's a hand at best that are probably doing 10 million or north of revenue.

And the vast majority are doing 1.5 to 3.5 or 4 million.

So probably, really across all three of the spaces, percentage terms, most of the deals tend to be like a Mail Wise or a Mijanda, which are the smaller end of the range and there's a minority of them like Phone People at the larger end of the range.

And we don't have any real active discussions with one of the larger ones now.

Okay.

Then looking into 2009, how should we think about net ads, churn and RPU.

As you know, we don't guide to the net ads.

The cancel rate in light of the economic assumption probably continues to ease up.

As Hemia pointed out, it is almost like step function from 2.7 a month in Q4 of '07.

To 3.1 in Q4 of '08.

I think that may have some continued upward bias assuming that we are correct that the bottom of this economy has not been reached and there's continuing weakness that will be felt.

In terms of the net ad, our philosophy on that had been we are not going to chase the gross ads.

If we are right on the cancels and it is going to increase somewhat, there will be more cancels.

Whether there will be enough gross ads to offset them to make specific number is something that will happen in realtime as we actually spent the marketing dollars but if the customers do not appear to be profitable to a certain degree, we will not go after them.

All right.

There is no -- let me be clear.

There's no magic to any net ad for the quarter or fiscal year.

Thank you.

Our next question comes from Corey Tobin with William Blair.

Please go ahead.

Congratulations on a nice quarter.

Two housekeeping items.

What was the impact to earnings per share from the foreign exchange hit or just the net income I guess from the foreign exchange.

For the foreign exchange impact, it would have been after tax probably about $0.01 a share.

The impact there then let me just roll down to the other major impact in the quarter, which was the tax, which was the probably dollar for dollar $0.04 a share.

So all told about $0.05.

Although --

You had the opposite in marketing.

Yes.

Although in the case of the taxes, it biases the tax rate unusually in the quarter.

But because the R&D tax credit has been extended yet again through '09, in theory, that should have been spread over the course of the year.

You will see it spread over the course of '09.

So it biases the quarterly results but not necessarily the annual results, which is why I guide you to the $1.70 EPS, in terms of the non-GAAP EPS off of which we intend to grow.

Understood.

Just for clarification.

The new corporate accounts you talk about adding, those are all organic, or is it safe to assume those are all organic.

Yes.

Those are through sales force efforts.

Okay.

And then just on some other items.

It looks like from a supplemental side that the credit sensitive segment took a rather healthy dip downward sequentially this quarter.

So just curious if there was any -- any driver for that outside of the general economic news we are reading about, banks and what not.

Anything else besides that wouldn't be obvious to the head lines and is that trending thus far this quarter through the -- through about half way through the quarter.

One comment both about Q4 if you take it monthly and what we have seen to date in the month and a half.

It probably goes back into Q3.

There's a lot more volatility in the month to month and even week to week usage patterns.

That is not limited to the credit sensitive customers.

I would say that is true across the board.

So, if we dissect the three months of Q4 that were quite frankly that would not have necessarily occurred in the order which you would assume.

You would think December would have been the worst month of three months within the quarter because of all of the Holidays.

It in fact was not the worst of the three months.

So there is as there has been, you know, a lot of noise going through the system as these companies both financial and otherwise have done downsizing, there has been some increase degree of volatile in their usage patterns and I would say that is continuing through what we have seen so far in the first half of the first quarter of '09.

I think that the -- part of what you are seeing but certainly not the whole answer from Q3 to Q4 is the traditional year end seasonality of business days.

You might recall, in the Q3 call, we emphasized that we thought there would be a million two drop off in usage revenue because of both the likeness in the business days as this calendar set up but also because of the economic malaise that was beginning.

Now, it turned out the use of revenue was actually down 1.5 million, instead of 1.2 million.

The business days played out somewhat better than we thought but the economic impact played out somewhat worse than we thought.

That's why going to the '09 guidance, we are saying we think this is going to continue.

This is a trend that will continue and you probably won't have, you know a level ground until the economy has hit some -- some bottom.

But it is not, if your question was implicitly, did we lose a customer or have a significant down sizing of a customer because they went out of business, a Lehman Brothers or a Citigroup that down sized, the answer is no.

Okay.

Scott.

Based on what you see quarter to date, do you expect that credit sensitive piece would stabilize at this level?

Potentially tick up or tick down when we come to the end of Q1.

I think -- it is first of all, understand that in splitting this data up, it is something we generally look at at month end.

So there is no mid month, February flash that split the data.

But what I would say is probably if you look at last year, it was a 75, and it ticked up a little bit to the 80, then 77 and 72 and 62.

Now, I think this year you would normally expect on whatever the base is some degree of tick up because of business days.

My hunch is that will probably be erased by the weakness of the economy.

So if I had to bet on this number for Q1 of '09, I would say between 60 and 65.

Also, Corey, let me add, all of those customers that we have, especially the financial institutions, they have within their house, core based capability of their fax service and other infrastructure to reduce the number of employees, that could go back and fall into what they have.

So we benefit mostly when they add people in activity beyond a certain threshold.

And that something should be taken into consideration, very few of them rely on us singularly.

On the financial institutions.

Understood.

At this point, I think you talked last quarter about credit sensitive being about 23% if I remember correctly of total.

Yes, it was low 20s, yes.

Consistent there now or shifted down to closer to 20.

We didn't fine tune the math.

I would say still in the same range.

We just split hairs 20 to 22.

Last one if I may.

E-mail as a percentage of total revenue at this point or at least on a run rate basis, where where would you expect at the end of '09 e-mail as a percentage of total revenue.

Two different questions.

Where it is today is call it roughly 4% of revs.

But there's a different element in terms of the answer to your question because if you look at j2's business, historically it was substantially all facts.

Then with the introduction of voice over the last couple of years, you hear historic it is 10% of our '08 more on a run rate basis of 12% of the DIDS.

E-mail is not DID but it is 4% of revs.

The real goal is through a combination of organic but I have to tell you it will be definitely much more driven by M&A is to how that piece of the business be a more meaningful and more equally weighted with some of the other things we do, IE getting it to double digit, 10% of j2's revs.

Now, how we will get there particularly supplemented by M&A is a function of sort of the ordering of the deals that can be done.

There are not many but a few candidates that could get us to that level but as Hemia noted and is true in all of the spaces there are a limited number of the larger deals and in some instances there are additional complications that we are not going to assume that a larger deal will break.

If it is a combination of the smaller deals, I would certainly hope that this is the year where in addition to the Mail Wise deal, we can acquire at least two additional email companies.

Maybe three.

We need to careful that they are timed such that they can be appropriately integrated.

It is a goal of j2 to have the e-mail piece be a bigger piece and more meaningful piece of j2's business.

M&A will be a contributor to achieving that whether it occurring by the end of this year, I don't know.

I want to add the ultimate if you glue our services together you have unified communications, one today does offer e-mail as part of the service, we just don't count it as -- as e-mail revenue because it is mostly blended into our voice services.

But, you know, we are playing with all of the companies in one day, you know, we will put them together into one big super unified messaging.

Great.

Thank you.

You're welcome.

Thank you.

Our next question is from the line of Youssef Squali with Jefferies and Company.

Hi everyone.

This is (Inaudible) sitting in.

Thanks for taking our questions.

Just two quick questions in terms of the guidance.

We know it is hard to gain any visibility in this environment.

But would with you be able to quantify what your definition is in terms of moderate growth and revenue and earnings?

Is it mid single digit, low single digit, any color there would be useful.

No, modest.

It is positive.

Okay.

Fair enough.

I don't see any reason to get into that game.

I mean let's be very clear.

The there are many companies not providing guidance in this environment.

I am sympathetic and I understand why they're doing it.

We have the advantage of being in a subscription based business where I think it is appropriate for us to give some commentary and outlook, which is what we have done and the fact I think we have actually given you more elements relevant to how you conclude on guidance for revenues and EPS than we have done in the past.

Yes, there's not a formal range of revenue X to Y or EPS A to Z, but we have given you I think all of the necessary components.

You need to figure out your own view of where you think this economy is going, where the bottom is, how deep it is, how long it will be there because then you can influence yourself in terms of cancel rate, usage trends, and activity with the specific number.

I think Slide 16 is very helpful.

Thanks for doing that.

Just another, another facet of this, you are including acquisitions in your guidance though.

So, any assumptions that you baked right now in terms of,.

It is very nominal, what we did last year which is, you know, we are Hemia hinted at.

We are very deep in negotiations on some situations.

Obviously, there's no barn guarantee that any of them will close.

In fact last year, we will a disappointment where something negotiations at the time of the call, and we had a very high degree of confidence would close.

Never did.

So you know, we have to be a little bit careful.

But it is not the case, you should not draw the inference that this is a heavily weighted M&A driven budget and that we do no M&A you have some, you know, catastrophic results.

Let me also say --

The M&A, it is supplemental, and it is assumed to be small in nature.

It is not like there's a big deal we are targeting that we have got to do it to make the numbers.

And the deal that is we have in the pine line are small which only help us to be confident about stating that it is more disclosed.

There's nothing there that we can say is more than moderate growth.

So it is progress and we will have more of them.

We talk with you through the year every quarter we will give you more color as we have.

But now, I want to I am sure that everybody like us is trying to figure out how to model their next year.

We control our expense and we can improve -- we improve ourselves in the past.

We can do good job there.

We know we have control.

On the behavior of the customers, we can provide the best services.

We are going to make sure they stay with us, usage, and mix of products, expense versus high margin ones, very hard to predict.

So that's why we came with modest growth, and also growth in the profitability.

Very useful.

Thank you.

You're welcome.

Thank you.

Our next question is from the line of Mike Latimore with Northland Securities.

Please go ahead.

Good afternoon.

This is Bill Swanson pitching in for Mike.

One housekeeping item, the tax rate was lower in the fourth quarter and you are talking about the tax rate going through -- what is for modeling purposes what type of tax rate should we assume for '09?

We are using 30.5 for an approximate tax rate for the full fiscal year.

Okay.

It might -- actually it could be a little lower than that but I think 30ish number is appropriate.

Okay.

And can you comment on how much revenue acquisitions contributed in the fourth quarter?

About 500 grand.

By the way both of the deals we closed late in November were the deals we referenced in the Q3 call.

You may recall at the time that we talked about them being roughly 2% of j2's revenue.

But their annualized revenue would be roughly 2%.

Those two deals both closed.

We got effectively one month of revenue.

Okay.

Now on the acquisition pipeline sounds like you are fairly deep.

Are you assuming some acquisitions happen in Q1 and Q2?

I am very hopeful that the answer to your question is yes.

I am only cautious because I say last year we were very deep in a situation and at the 11th hour and approximate 50th minute, it didn't happen.

But yes, I would think, I would be disappointed.

I would be disappointed and Hemia would be more disappointed.

If we don't close deals, you know, in the next two to three months, meaning partly in this quarter, partly in next quarter.

And we have good indications that it is moving forward, but again you know, there are not so big to aggressively move the needle.

No.

Okay.

And you guys have done a tremendous job on reducing expenses, you saw the credit crunch coming about 18 months ago and started raining costs.

Can you improve costs more if and improve margins even if the mix of business shifts more toward corporate fax and voice?

Yes.

First of all some of the improvements that we pulled on '08 will have now the benefit of a full year.

Secondly the corporate customers while they are coming in a lower RPU, they're also coming in lower usage, and the end result is percentage wise.

They have a very healthy contribution to the -- to the margins.

I will buy smaller revenue because some of the corporations will buy thousands of phone numbers and will have an approach will be paying some money for a fax line but never use it.

Okay.

Thank you.

That's it.

Thank you.

Our next question is from the line of Dan Ives with Friedman, Billings and Ramsey.

Hey guys, good quarter.

Thank you.

Hi.

Hey.

I guess just kind of from a high level, you know, in this environment, you guys done a great job.

As you look in '09 and your customers is there anything that you are going to do in terms of sales, methodology, pricing?

Just giving the macro, can you just walk through from your perspective what you need, if anything, to do different to make sure that there's no hiccup, over the coming quarters?

Yes.

You know marketing is an art and science.

In '09, we will do more science less art.

What do I mean?

What do I mean?

There are ways to target certain customers.

There are ways to work deals when you pay for the advertisers.

Everybody that let me talk for a moment from a standpoint of somebody who sells advertising.

Everybody wants to pay CPA and to pay two months after they collected the money.

In the old days, they would pay you nice chunk of money before you start talking with them.

So now, in this environment, also advertisers are looking for companies that have cash and product it can be attractive and adding value to the users because that environment we believe, we have to prove it, but in this environment we believe they will take quote-quote risks with us and giving us some opportunity to pay as we go, versus the product that is less likely to sell in this environment.

So we are working on those things and I cannot extend more about our ideas.

I called it half joke, secret -- we have over the years learned to know when the customer comes to our web site, how much we are willing to pay and how good is it and how much will it stick.

And therefore we can manage our costs.

On the other hand, you know, a -- it is about people, we are able to increase the level and the sophistication of our staff and therefore, do more with less and we used to have separate --, separate people answering separate phones, so you would call for fax and then you would want a voice and we have to fax you.

We have cross trained our agents both here and in the out source to provide more of a single store, one-stop shopping.

We have shifted some of the tasks to India and some of the tasks to the US.

So, A we provide 24 by 7.

We did not provide 24 by 7 to all of our services last year.

Now to most of our brands, definitely to our top tier 24 by 7 we have cross trained and we have some technical improvement and we believe and we are seeing improved conversion rate on the phonecalls.

So although, our helping us becoming more profitable.

It is all based on the reasons that I shared with you now.

I would like to add one comment to that.

This is one of the advantage in having the multiplicity of brands that we do across the different spaces that we operate in.

Because as you know, many of the brands have different price point, different packages and service sets.

So to Hemia's points, how do we allocate our marketing dollars to get highly profitable customers and are we slotting them into the right price point, the right brand, the right of features and services.

At the this point, there's no view on altering the current set of services and the relevant pricing associated with that.

Thanks.

You're welcome.

One question before we take the next question came by e-mail.

What is the percentage of international DIDS as a percentage of the total.

The answer is about 10%.

Are there anymore live questions?

Yes.

We have a question from the line of Brad Whitt with Broadpoint Tech.

Please go ahead.

Hey, guys.

Thanks for taking my questions.

Scott, did you give any guidance on the CapEx for '09 and how that might compare to what you did in '08.

No but we are happy to talk about it.

I think it wasn't very large in '08.

It was about 2.5 million, I think we said the range last year would be 2 million to 4 million, probably we could narrow that 2 million to 3 million for this year.

We are obviously reviewing every capital expenditure project with a fine-tooth comb and also, looking for ways where equipment can be purchased at cents on the dollar.

This is something we experienced a few years ago during the last recession and when the, you know, tech world had difficulties when the (Inaudible) was imploded and there was a lot of very good, in many cases unused equipment available at $0.10, $0.15 on the dollar.

So we may actually be able to spend less in CapEx but do buy more of the things we typically buy in the course of the year.

From you modeling.

you can hold it roughly equal with last year and you will probably be okay.

I want to add that our hardware providers are much easier this year when we negotiate with them.

They like to think that they know that we are, you know, strong customer with them.

And you can buy not only the advertisement also in the hardware, you can buy more (Inaudible) and software.

Software absolutely, license.

We are doing to our vendors as the world is doing to us.

Lower -- RPU's.

All right.

That's helpful.

How is the -- how should we think about patent royalties right now, a run rate there, Scott.

And you mentioned that you may hope to see a tick up in that the second half of the the year.

This is the way it is working.

I want to say, right now, it is at a heart beat of maybe 2.5 to $3 million a year.

So it is 700 grand a quarter.

Now depending on the timing, and if you go back to '07 time frame, depending on the timing and obviously, who it is that is signed up, you start to bring in additional revenues and they can occur really in three flavors.

There's the running royalty rate flavor, which is just you know every month we get a certain percentage of the revenues.

It is generally paid on a quarterly basis and audited on an annual basis, so that would be incremental basis.

We need to sign new licensee for that to occur.

The other flavor is a fully paid up license where there's a lump sum settlement and a portion of that is based on prior damages and it is fully brought into income at that moment in time revenue.

And then the remainder is put on the balance sheet and amortized in over the remaining useful life of the patents on which the license was granted.

The third is a combo deal.

Like we did a couple of years ago with Call Way, where there was a certain amount of up front money and then in addition, there was a running royalty rate.

So there's all these different flavors of how it can occur.

But the key is, either signing up new licensee and/or winning some the cases that are currently pending and many of them stayed because the patents.

That's helpful.

It will take a while so you are correct to think of it as more of a back end loaded as it relates to fiscal '09 event and something that is more stable as it relates to Q1 and Q2?

Okay.

And then, on the cash flow from operations front.

Were there any particular working capital benefits, you experienced this year or should we just model the same trends for next year?

Well, it is as a matter of fact or we said we will have more cash with lower yields.

So.

Yes.

Definitely.

We anticipate significantly less millions of dollars interest income.

The one that always moves around is income tax payable from a cash flow from operations but that tends to run in your second and third quarters, slide in the first and tends to be heavier in the second and third and light in the fourth.

You look at the tax rate and you can pretty much figure that one out.

They're going fluctuate what we have seen.

-- relates to receivable, payable, the deferred.

It is probably the case that an environment like this there will not be many if any exercise of stock options as a result there will be no cash tax benefit, but that's something we have already experienced in the last two quarters.

Okay.

And just finally, Hemia, you mentioned you talked about some new features like fax indexing.

Is that something that would now be part of a standard product or extra for that.

Yes.

Thank you for asking.

We -- we took I think hundred some thousand eFax customers.

We took all of their faxes that we hold in storage, if you remember we provide one of your storage and we scan the faxes.

So they can go now into their message center and key a word and this -- and to rapidly go and find the word at the end of the faxes because we take all of the faxes and convert them so OCR.

So this service it is available for hundred, some thousand customers, will be available to more customers.

From our angle, we are priced at 60.95 as the highest product out there.

We are trying to provide more value.

You know, many companies provide more pages but most customers don't need it.

So what is the point of pushing the page count up when people don't need it.

But what we are trying to do is increase value and people appreciate it.

And definitely, we believe that it is innovative to search your faxes.

A lot of customers of the legal field appreciate it.

I am going to talk with about other features we are having.

But basically, we can because of our infrastructure and patents and knowledge, add value to justify our environment buying the prime product.

So I hope I answered your question.

You did.

Final question is that a unique future that competitors don't have?

Yes, as far as I know no competitor has search faxes.

We have filed patents.

It is also not so easy to do.

We are ready --

Patent.

Patent pending.

Scott if helping me.

There you go.

It is not easy and cheap to do unless you have -- you have to remember, we also own an email company.

So the combination, this discipline belongs more to the e-mail industry rather than to the fax industry.

And combining both gives us an advantage.

Others can do it.

I think it will come for them much more expensive.

Very good.

Thanks for taking my questions.

Thank you.

(Operator Instructions).

Our next question is from Corey Tobin with William Blair.

A couple of quick follow ups.

Scott, you mentioned in the past that the voice market is growing at about 100% a year or so.

Granted it was a while back.

I am sure it has probably slowed now but what do you think the growth rate for the voice market at this time?

You know, it is hard to say.

By the way, you are correct.

Earlier in '08, by the way, I think it is a fact from '06 to '07, it probably doubled as a space.

The expectations in early '08 is that it would double yet again.

I think you are correct probably if people were polled later in the year they would have lowered that expectation.

Very hard to know because as we have talked about before, this has been an internal exercise that we have done to glean information since all of the companies were talking about it in this space are private and there is no -- at least we have not identified any third party that has attempted to survey them or aggregate them, it is, you know, little fact we pick up along the way and aggregate.

I think you are right today people would have a less robust view of growth in '09 than '08 but would view it as a growth business.

The challenges for the space are that it is still a service that is being defined in the marketplace.

There are certain advantages in the fax space and e-mail space.

Very well understood services.

The issue is how are you going to deploy them and whom are you going to use to deploy them.

The voice service, the virtual PDX, given that it is primarily catering to an SMB customer, you know, the first issue is well if you don't have a traditional PDX, the idea of calling it a virtual PDX doesn't really resonate with you.

It is the understanding of that customer base and making them aware of what it is.

What is the value proposition.

How is it deployed.

How does it make their business more efficient.

There's still an educational process going on I think that is an industry issue.

Separately, Hemia, and he's going to talk, but separately, Hemia mentioned in his part of the presentation within j2, there is some brand segmentation evolution that is going on and that you will see over the course of this year.

Yes.

I want to say here, we are doing voice for several years.

Companies that sale voice only have rough time ahead of them.

They're private companies I don't know if they agree or their numbers show.

But we get -- numbers show.

But we get quote free customers by selling to a fax base.

They don't have it.

Secondly, the churn rate on the voice are higher, due to the reason that if you are in business and you have a phone number and a fax line, canceling the service on the fax, you just no longer have fax.

Canceling your voice service, you are still in business because all of the virtualization of voice is a number that is being forward to another number, the other number being your land line or your mobile phone still exists.

So it if times are hard, you just tell people I got tired of my, you know, X X dot voice business.

Call me directly.

You can basically give us up on the receptionist part if times really hard.

Something you cannot do is the fax line.

So I believe that the voice products are going to suffer harder in bad economy than in good economy.

Those that use the service to eliminate overhead instead of a secretary, that's the upside.

Right.

Those that want to show up big like one guy playing with four extensions, he's one for sales and he's answering two for accounting and he's answering.

You know, those guys are in this environment, my suggestion for them is to go back to the basics.

So this is basically what we are seeing in the voice services.

And we are focusing and surprisingly are doing well with the more expensive product because those represent a real need.

And have a real replacement opportunity.

Because some of those players might be considering or might have access to a PDX infrastructure or a human receptionist.

Which also helps explain why we have a hard time predicting the numbers because there are so many forces in the opposite direction.

I appreciate the explanation.

Just to close out this topic.

If you had to guess what the caveat of course it is difficult but if you had to guess, would you guess did market is still growing over 50% a year?

I would say no.

Great.

Then shifting gears on the corporate side a lot of success there this year, as you think about all of the reasons people would choose j2 over smaller providers, do you expect that to continue there and do you expect the opportunity percentage.

I think -- I think we see that our competitors are getting more desperate.

They do have infrastructure, some but they do have infrastructure they can add customers.

When you lose a customer, bring a new one, the cost is already they're baked in.

So what really will matter is how much importance the corporate customer putting on price versus quality and how good are sales people.

I am pleased with the quality of our sales people.

I think because you are talking about, well to start with low prices.

I hope that local operations say I am working with JCOM and it is 20, 30% more but it is only half a dollar.

We will continue to strive to do those deals.

If the work will implode and only the price will count, our competitors will do better.

Except we do see and do believe they're valuing the, the intangible benefits of a financially stable company that has been in the business a long time and this is what they do.

The coverage we provide.

Also it has to do with compliance, and again not to talk down, some of our competitors probably provide everything we do, but many don't.

And I think the answer to your question is yes, the pipeline remains healthy.

There have already been wins in Q1 even as the economy has deteriorated.

As we stated before, we think actually there's a great value proposition in a weakening economy for outsourcing these two service providers.

So yes, we believe that it will continue to be an increasing percentage of the DIDS and the overall base.

Also I have to say that just having competitor is not enough for the corporate world and very significant investment in administrative tools and infrastructure just for the price is not enough.

You have companies that want to slice and dice by departments.

You have those that want to have others.

I mean there is, it is a pretty complex world out there, and we are even seeing some companies who want to buy with the outbound solution we provide to send a certain fax alerts or bids or many things.

And being in a one stop shopping environment when they can pick up the phone and talk with one person have and I sure hope and believe based on our pipeline that we continue to have healthy growth there, relative to -- To the environment.

Great.

Thank you.

You're welcome.

Thank you.

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

I would like to turn the call back over to Mr Turicchi for any closing comments.

Thank you all for joining us for Q4 call.

We will be on the road over the next few weeks.

I will be presenting on Thursday, the 26th of February in New York at the Jefferies Conference.

And then, a couple of weeks later in Orlando at the Raymond James Conference.

Also, over that four-week time period, we will be on the road meeting with investors in various parts of the country in our traditional road shows.

So feel free to alert us, if you are interested in a meeting.

We will, as we get later in the quarter, announce the timing for the Q1 results, but probably would be scheduled for the first week of May.

We thank you all.

We look forward to talking to you in the near future.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.