Ziff Davis Inc (ZD) 2009 Q1 法說會逐字稿

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

It is now my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global Communications.

Thank you.

You may begin.

Thank you and good afternoon and welcome to our Q1 investors' conference call.

As the operator just mentioned, I'm Scott Turicchi, the Company's President.

And joining me today is Hemi Zucker, our Chief Executive Officer, and Kathy Griggs, our Chief Financial Officer.

We'll be using this time to discuss our Q1 financial results as well as provide an update on operations and an outlook for the remainder of fiscal 2009.

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

In addition, if you've not received a copy of the press release and the related slides, you may access them at our corporate website at j2global.com\press.

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

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

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

Before we begin our 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 uncertainty 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 facts that we have disclosed in our SEC filings including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we have included as part of the slideshow for the webcast.

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

I'll now turn the presentation over to Kathy, who will take you through our financial results, which are on slide four, for the quarter.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

As Scott indicated, please refer to slide four in the presentation for a recap of our GAAP-based results.

2009 Q1 revenues were $60.4 million, an annual increase of $1.7 million or 3% over Q1 of 2008.

Our revenue growth was driven largely by higher subscription revenue, which increased $2.4 million or 4.2%, offset by lower usage-based revenue primarily in Europe.

Similar to prior quarters, voice revenue was our strongest growth segment with an annual increase of 95%.

The continued strength of the US dollar compared to the euro and the pound had an adversely quarter-to-quarter revenue impact of approximately $200,000 on our revenues.

This quarter, we also completed our 22nd acquisition with the successful purchase of CallWave's fax to e-mail assets in February.

In Q1, we added approximately 38,000 DIDs for a 3.1% increase.

Corporate Fax, our lower cost fax brand, and Voice products all continued to show sustainable growth.

In fact, compared to a year ago, we've added over 175,000 DIDs for a 16% growth increase.

Voice DIDs and lower priced fax products have increased by 100% and 110% respectively, while corporate DIDs have increased by 19%.

Total Q1 ending paid DIDs are at $1,274,000.

Our continued commitment and success in managing our cost structure is reflected in the quarterly results.

We have been able to support a growing customer and revenue base with essentially the same infrastructure.

In fact, we've been able to keep most costs at or below Q1 2008 levels.

Q1 2009 GAAP gross margins of 81.1% is approximately 1 percentage point higher than Q1 2008's margin of 80.2%.

This quarter's selling expense was 14.7% of revenues.

R&D expense was 4.9% of revenues, and G&A was 17.7% of revenues.

Total GAAP operating profit for the quarter was $26.5 million.

Operating margins for Q1 2009 was 43.8%, a record profit for j2.

Q1 2009 operating profits are 60 basis points higher than the prior quarter and 5.5 percentage points better than Q1 2008.

Our diluted GAAP EPS of $0.42 a share is an improvement of $0.07 or 20% for Q1 of 2008.

To calculate our non-GAAP EPS, you will need to adjust for 123(R) of $2.3 million pretax or $1.6 million after tax.

The after tax impact of 123(R) is approximately $0.036 per diluted share for the quarter.

Excluding 123(R) expense, our non-GAAP EPS was $0.45 per share.

Going forward, we expect our after tax 123(R) to be between $0.04 and $0.05 per share.

Our 10-Q and our press release exhibits contains additional details by expense category.

Moving to the balance sheet, our Q1 annualized return on equity is 28%.

Cash and investments at the end of Q1 is $179.3 million, an increase of $17.4 million for the quarter after spending approximately $12 million to acquire the fax assets of CallWave.

We continue to be well positioned with our available cash plus our undrawn line of credit of $25 million.

Slide 11 is a summary of our quarterly free cash flow.

Free cash flow for the quarter was $30.4 million.

This is a new quarterly record for j2.

Last, let me point out that in the supplemental information section, there are several slides that include our quarterly metrics, free cash flow calculations, and usage charts.

Now, I'll turn the call over to Hemi, who will provide you with an operational overview of our business.

Thank you, Kathy, and good afternoon, everybody.

Today Scott has asked me to keep it short, so I will so we'll have more time for the Q&A.

On our Fax business, our Fax business continues to grow.

And especially we are seeing a growth of -- as Kathy said, we more than doubled in the last year our lower price segments of the Fax to Email products.

On the Corporate side, we have now had 70 large corporate deals.

Of them, seven were added in the last quarter.

Four of them are new, and three of them are Corporate accounts that were smaller, and through the addition of phone numbers, grew to become what we define as large corporate deals, approximately 1,000 units per account.

Mijanda.

As you know, we acquired Mijanda last year, last quarter.

We by now have migrated all the Mijanda customers into the j2 platform.

They had five brands.

We kept only one, which is SmartFax, and the other smaller brands were moved into our Fax.com brand while keeping the customers on this brand.

The main point for this quarter was the usage and the cancel rate.

The usage is continuing to decline as the economy, and the cancel rates are affected on the Consumer side by customers hitting their credit limits.

And on the Corporate side, some of our customers had to do reduction of the workforce.

We see that while they are not cancelling the account, there is reduction in accounts due to adjustments to less people.

On our Voice business, our Voice business is doing very well.

Last time, if you recall, I said that we had approximately 190,000 customers.

Now, at this time, we are approaching 200,000 paying DIDs.

Europe has been strong.

In Europe, we are operating under eReceptionist, and the results there are actually exceeding our claims, which is very good.

On the Local market, we are segmenting the market by three brands.

First brand is People Phone.

This is basically -- oh, Phone People.

Sorry.

Basically, the service is toll free numbers for smaller businesses that need those toll free numbers for promotional and service functionality.

Then, the second one is eVoice or eVoice Receptionist.

eVoice offers multiple area codes and basic functionalities.

And then, our top brand is Onebox.

Onebox has more features, more tools.

It's higher priced and usually it's taken by larger customers.

And surprisingly, while being the most expensive brand, it also does better in terms of sales and cancellations than the other lower end brands.

Let's turn to page 12, our Email business.

As you know, last year we acquired MailWise.

MailWise was a company that provides anti-spam filtering and virus protection.

All the customers of MailWise have been successfully moved and migrated into our platform in electric mail.

And now, we begin to offer those customers, in addition to the filtering, also services like e-mail hosting, archiving, and all the other services that we have in electric mail.

We are looking for additional M&A opportunities in the e-mail front, mainly focusing on English-speaking markets all across the world.

On the patent licenses, as we acquired both Mijanda and CallWave, those companies were paying us royalties.

As the result of the acquisition, we no longer get those royalties and it has impact on our revenue.

But, on the other hand, three of our core patents are now out of re-exam, and the related stays of those patents are lifted.

And I am sure that you will see us now being much more active in pursuing those patents.

Advertising and broadcast revenue.

As you recall, early on, let's say in 2007, the combination of advertising and broadcasting fax were counted for 3% or even 4% of our business.

As the economy gets worse as j2 is growing, both are suffering, and now they are representing less than 2% of our revenue.

And as far as we are concerned, we think that it's the sign of time that fax broadcast is less desirable as an advertising venue.

The big story of this quarter is our operational success.

I am very happy with the great job that everybody here in j2 has done in increasing efficiencies.

Our gross margins have moved up 1% from 80% to 81%.

We are very proud in this achievement.

Our operating margins did even better.

They moved more than 5 percentage points from 38.3% to 43.8%.

It's a record margin.

We have done it since mid-2007 where we had 400 people.

We had decided to keep the headcount stable and run for improvement.

And so, while the Company was growing during the end of '07, '08, and now '09, we kept our employee base the same.

And all this has helped us to have those great results, and including our record free cash flow that is now at more than $30 million for the quarter.

I think I am done now.

And we'll move to Scott.

Thank you.

On slide eight, we're reconfirming the guidance that we provided last quarter, which is we believe that we will continue to have modest increases in revenues and non-GAAP EPS for 2009.

A lot of the commentary that we provided on the last call we believe still stands, which, as Hemi and Kathy have mentioned, clearly the economy remains weak.

Although there may be some signs that it is becoming less weak, it is still contracting.

We still see, on the macro level, unemployment statistics going up and more people being unemployed.

So, we're taking those factors into account as we look toward the balance of the year.

We continue, though, to remain optimistic in terms of the margin profile of the Company, the ability to deliver on improved EPS on a non-GAAP basis, and we also believe that this will continue, in this environment, to fuel the M&A pipeline.

And as Kathy mentioned, we now have $179 million of cash and funds available in addition to a $25 million undrawn line of credit should such larger deals become available and be of interest to j2.

At this time, we would ask the operator to come back on and open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question is from Shyam Patil with Raymond James.

Hi.

Good evening.

My first question is around the cancellations.

Just wondering if you guys have seen any noticeable trends within certain pricing points or geographies for fax as well as voice services.

No.

I would say that it is pretty much across the board.

What's unique about the cancel rate, it was predominantly concentrated in the month of March.

And we've actually seen a return to, albeit elevated levels, lower levels in April than what occurred in March.

So, you had this blip up in March.

I think that it was the lag effect from Q4 when the larger companies made their initial announcements of reductions and downsizing in their sales forces and across the board, which actually took effect in Q1.

And by the time they got around to looking at the services they needed for those employees who are no longer there, it happened to occur in the month of March where they did those cleanups.

I think that pretty much rippled down across the board, including the smaller customers.

But, no, it was not unique to a specific either area of the world, vertical, brand, or a price point.

Great.

Thank you.

And regarding the M&A environment, just wondering if you could talk a little bit about how valuations have trended the past four months.

Has there been any correlation with private valuations and the appreciation we've seen in the stock market, or do you think that the valuations are holding steady and coming down a little bit?

I actually think you've got kind of two groups of sellers.

You have those that, for whatever internal reasons, are motivated.

And I would say certainly relative to a year ago, the valuation expectation has come down.

I think we've demonstrated that within the last year.

If we go back and we look at the Phone People acquisition which occurred almost a year ago and occurred at the highest multiple, and then you roll forward to the CallWave acquisition of their fax assets which occurred just six weeks ago, and that was at the lowest valuation with Majanda and MailWise being in between and occurring in November of last year.

There is a second category, though, of companies who may have enough financial wherewithal either because they have hoarded some cash or operate on a cash profitable basis.

And I think we're finding there they tend to be holding out not to outlandish valuations maybe of two or three years ago, but certainly valuations more consistent with a year ago.

And those are valuations we're not particularly enthusiastic about executing against.

So, I think you have these two camps.

Our challenge is dealing with literally several hundred of these primarily small to at best midsized companies, is to try to sort through them as quickly as possible and put them in the two categories.

Those that are looking for a little bit more we kind of put to the backend of the line in terms of spending our time trying to negotiate or due diligence.

And those that have a reason to be a motivated seller, we put to the front of the line.

And I think that the volatility in the stock market, to your point, may be creating some confusion for everybody, because certainly there's a psychological factor, I think, that's at play here.

When the stock market was going down and it seemed like it was going down every day, there were probably some more that fell into that category of being motivated sellers.

Now that there's been some lift in it, still albeit well below the highs of late '07, I think it's shifted some of those into the wait and see category.

So, we're seeing that going on.

But, as I say, we're plowing ahead.

I think the key is really the underlying fundamentals in the economy which, by everyone's acknowledgement, still remain weak, even if there is some optimism that later this year or early next year there will be positive GDP comparisons and a peaking of the unemployment rate.

Great.

Thank you.

And congrats on the operational execution in the quarter.

Thank you.

Thank you.

The next question is from Michael Hubbard with William Blair.

Hi.

It's actually -- this is actually Corey Tobin from William Blair.

Just a quick question on margins.

Congrats on a great result this quarter.

What -- how would you guide us to think about what happens to margins in both a flat revenue environment or when we return to growth?

Is the current margin level that we're seeing here the new baseline, as you'd expect to see it?

Or, how would you think about the level of margins currently?

I'll let Hemi answer, then I just want to add one comment about the Q1 margin specifically as it relates to sales and marketing.

But, I'll let him take the bigger picture view of the question.

Yes.

Hi, Corey.

How are you?

Good, thank you.

How are you?

Good.

So, we have done a lot of work on efficiencies, and I believe that now with 400 people we can support the 1.3 million customers, 1.5.

Really, when we grow, the areas that we need to grow now are mostly customer support, and in tele sales maybe a little bit.

Mostly customer support.

We have done a lot of improvements, so unless you will see astonishing growth in customers, I think that you can assume that we can keep a very similar level of employees because, during this time, we continued to work on improvements that are basically on our infrastructure and everything else.

So, to answer your question, if the economy will turn to be positive, I expect the margins to stay the same.

And the only thing that might be a little bit more challenging is if the economy will change so that advertising steps out of the basic search and some display, then we might need a little bit more talent to bite.

But, other than that, I think that our margins are good and we, on the long run, can stay in this area.

I'm sorry.

I didn't catch that last part.

If the ad business -- can you just repeat that last part again, please?

Well, you see, our advertising now is much more basic than it used to be two, three years ago.

We don't buy display.

We don't go into radio and all this, TV.

Or as much.

We don't buy as much.

Yes, we do, but -- so, it's more simple so you can run it with less people.

But, once there will be payback for doing nice content with Yahoo, we will need people.

Right.

And I think the other point to your question is we talked a quarter ago that we thought the 46% non-GAAP margins -- we had a low sales and marketing as a percent of revs in Q4.

It was not clear to us whether that would repeat in Q1.

It pretty much did and, in fact, the margins went, on a non-GAAP basis, north of 47.5%.

I think that Hemi was commenting on the people aspect.

The other aspect is, though, it is, A, our desire to spend more money in sales and marketing, but always subject to the ROI discipline that we discussed previously.

Clearly, this is an environment where both on a competitiveness basis in search and a display/CPA or click basis in the other online areas of advertising, those rates are falling.

So, that's accrued to our benefit.

Now, at some point, probably correlated with the economy turning or certainly if it were to turn for a couple of quarters, it may stabilize or increase those rates.

So, I think that where there's likely to be the most volatility in our margins, partly based on the market conditions at the time and partly based on our own attitudes towards spending, will be in sales and marketing.

I think the 400 employees which are distributed across the four GAAP line items should be relatively stable, meaning that the people component of costs, the people component of R&D, which is almost 100%, the people component of G&A should be very, very stable.

We may see some increase in sales and marketing as a percent of revs as the economy improves, although I think that would be offset to some extent by an improvement in essentially bad debt charges in the G&A.

So, you've got these various variables that will move in conjunction, A, with the economy and then, B, with decisions that we make around how we view the economy performing and turning.

Great.

And then, in --.

I would not take 47.5 and run with it for the next three years.

But, I think that certainly we have built ourselves to a margin structure that is superior than it has ever been in the past and should be sustainable into the future.

Great to hear.

And then, switching gears just for a second on the churn level, Scott, to come back to your earlier response.

So, the number ticked up fairly significantly, I would assume, in March in order to have a 3.5% blended rate for the whole quarter.

That's correct.

(Multiple speakers.)

Sorry?

It went up in the month of March.

It was higher than 3.5%.

Right.

So, it's at 3.5% for the quarter.

And then, in April, it has come back down to its January and February levels.

Okay.

Good.

And then, where -- at this point, is it too soon, or you might not want to venture a guess.

But, as you're thinking internally, do you think those January, February type levels is what you'd expect to see for the rest of the year, or --.

I think it's hard to say, because I think if the macroeconomists are right and the unemployment rate has not yet peaked, you have an argument that it may continue to creep up, not necessarily leap up, but creep up until that has run through the system.

Now, it appears, and I'm hopeful, that from the larger corporate perspective they've done they're wringing out of their -- a rightsizing of their base of employees between Q4, Q1, and that therefore there won't be any big surprises or shocks from them.

But, I think a lot of it is very dynamic.

If the economy has or is approaching a bottom, then that's probably more likely that that statement is correct.

If there's another chunk down in the economy, then I think all bets are off.

Understood.

Thank you.

I don't believe that we are uniquely qualified to prognosticate or guesstimate that.

I mean, the Fed chairman had some comments this morning before Congress that were, I think, reasonably consistent that there's going to be a bottoming and a pullout come the end of this year, with no particular data that can confirm or disagree with his statements.

I hope he has better data than we do.

Excellent.

Thank you.

Congratulations again on that cash flow.

Thank you, Corey.

Thank you.

The next question is from Youssef Squali with Jefferies and Company.

Hi, guys.

This is Naved Khan for Youssef.

Hello, Naved.

Just on the cancellation rate, you guys said that in April, or actually in March, it had spiked up.

Did you guys lose any large customer in that month?

No.

There were -- as Hemi pointed out, there were accounts that had 1,800 DIDs and went to 1,500 DIDs.

The account maintained itself, but there's lesser DIDs, which, as we've talked about before, is permissible provided you stay above the minimums.

And usually, most of the large corporate clients do deploy well above the minimums, meaning they have that flexibility to both add and subtract DIDs as market conditions demand.

Okay.

And I'm trying to reconcile slide number 12, which essentially shows that users in corporate and the web was actually slightly higher --.

Yes.

Quarter-on-quarter?

But, if I travel back into the variable ARPU, that shows a decline --.

Yes.

Quarter-on-quarter.

So, can you --?

Two issues there.

You're correct about that.

That slide on 12 is a raw usage slide, and it does not perfectly correlate to revenues, variable revenues.

Now, two things there.

As Kathy mentioned in her presentation, we saw a softness in international non-paid DID usage revenue.

So, when you look at our pre-DIDs of 10.1 million, we have two sources of revenue.

In the US, it's predominantly all advertising revenue.

But, in Europe, it's substantially driven by calling party paid revenue.

So, it does not affect the paid ARPU, but it does affect the ARPU on the free DIDs.

And you'll notice that it's come down from $0.07 in Q3 to $0.06 in Q4 to $0.05 in Q1.

A large portion of that decline had to do with less volume of activity on the calling party paid DIDs in Europe, meaning there's less revenue for us to collect.

That's all variable revenue.

That's a few hundred thousand dollars.

The second piece is that when you look at the slide on 12, which is the activity of our paid DIDs, you have to remember that each customer has a bucket of usage associated with their package.

And so, only when they exceed that bucket do we generate additional variable revenue.

So, you can have the aggregate statistics move up and down sequentially quarter to quarter, but not have that correlate to either increased revenue or decreased revenue, as you might think.

The third piece of it is we had usage revenue in Q1 similar to another topic that also influences the declines or the cancel rate, where the ultimate revenue was uncollectible.

So, you saw the usage.

It was there.

But, because of the customer being a credit card-based small businessperson and the uncollectability, it's not recognized.

I see.

Okay.

And then lastly, just on voice, you said that the rollout in Europe was strong.

Can you tell us when it was launched and in how many markets are you selling the product?

Yes.

It was launched a long time ago, but it was rebranded during Q4 to become eReceptionist.

And the rebranding mostly focused on the English speaking countries, the UK, a little bit in Ireland, and also we are going to launch during -- I hope that it will happen during Q2, voice services both in Netherlands and in France under the brand of eReceptionist.

Actually, I also had a follow up, if I may.

Okay.

Sure.

Can you guys break out the organic subscriber growth?

I think 38 was the overall number, which includes --.

Right.

CallWave.

Right.

And as you know, we don't do that.

But, it is the case that the CallWave acquisition made up a majority of the DIDs.

Thanks.

The next question is from Brad Whitt with Broadpoint AmTech.

Hey, guys.

A couple of quick questions here.

On the free cash flow, very, very strong this quarter, very impressive there.

We expect -- it looks like you'll probably have some tax payments coming up next quarter, I guess, Scott.

Correct.

Will we expect that the trend down, or go --?

Correct.

That's correct.

Generally, you'll -- if you'll look historically, Q1 free cash flow is generally the largest.

It's disproportionate relative to the full year free cash flow.

So, it doesn't run 25% for each of the four quarters.

Usually, Q2 and Q3 bear the heaviest brunt of the estimated cash tax payments.

So, yes, we would expect a moderation.

But, even if you normalized our Q1 '09 free cash flow with the taxes that we paid in Q1 of '08, you would still be around $28 million.

Right.

Okay, very good.

And on the other income, is that about the level we should be expecting going forward?

Was there anything unusual in there this quarter?

No.

There's -- we're recording less and less and less on the -- the good news is that balance -- cash balances are going up.

The bad news is the rate is going down --.

Down.

Down, down.

Right.

So, I think we're well under a percent pretax in terms of the earnings.

And then, you also have some FX that is very hard to predict, can work for or against you.

It worked against us in Q1, and that had to do with where we hold our cash balances, the currencies that they are held in, and the functional currencies of the account.

So, I think that, yes, to be on the safer side, you've got to assume it's more like a 0.5% on the cash balances is the other income, and then usually over the course of the year, FX cancels itself out.

But, any given quarter, it might be $100,000 or $200,000 to the good or to the bad.

Okay.

I think that's the way to think about it until there's more robust interest rate environments.

Okay.

And so, Hemi, just so I'm clear, I guess, maybe you can help me a little bit on the marketing spend, maybe Scott as well.

Did you just not see the return and not go as aggressively at new DIDs?

Or, did you just see much lower online ad spend rates, that you're able to buy the same equivalent keywords, for example, for a lot less?

I mean, are you in combination or --?

We have decided that we are not going to spend more than X dollars to bring an account.

When you do that decision, it's easy to manage it on the search side, because you know the trends, how much you pay per word, every word has statistics of past experience, future experience.

It's much harder to manage it when you do it on display, display being banners and things like this.

Now, the are some networks that will agree to work with you on a small amount of a test.

And they get the test to work, they say, okay, we are now ready, especially in Europe, to say take your number and run with it.

And we believe that this will result so many signups.

And they take the risk because they have a lot of inventory.

So, I wish we could do more, deploy more money in that way, but we can't.

So, on the search, yes, the search is less expensive, less companies are sprinkling their money all over, and more players like us are more disciplined and they know what they are doing.

So, the result is that we are just buying customers for less but we cannot spend more money and buy more customers under our discipline.

Okay.

I guess my final question, too, just any updated thoughts on digital signature at all?

Are you seeing any kind of resurgence there?

I did notice -- a partner was at a Salesforce.com user group meeting recently and it seemed to be growing.

But, I'm just curious as to do you consider that a competition, a potential complement to your services, or any thoughts on that?

We definitely don't see them as competition.

And I'll give you a secret from the kitchen here.

We are always considering new areas to enter, and this was one of them.

We see it as being small.

Complementary, yes.

Competing, no.

Big, no.

Opportunistically, we would do it if the right opportunity would show up in the right valuation.

We are definitely very well aware of all the developments.

Unfortunately, it's not a huge market so it's not so tempting for us to learn a new skill for something that small.

But, we are keeping tabs and we are very well aware of the competition, the pricing, the revenue, everything you want to know.

Oh, very good.

Thanks for taking my questions, guys.

No problem.

You're welcome.

Thanks, Brad.

The next question is from Daniel Ives with FBR Capital Markets.

Hey, guys.

When you give that guidance for the year and I think about churn, I mean, could we kind of just say that churn's not going go to 4%?

Or, how should we kind of think about churn throughout the year?

I know quarter-quarter is tough, but if I just think about it where we are at the end of the year?

Yes, I think the way to think of churn is we thought six weeks ago that it would continue to sort of creep up over the course of this year.

If you look at last year, it was moving about 3 to 4 basis points a month on average.

It didn't really do that exactly linearly, but effectively that was what occurred.

Obviously, in Q1 it went north of that to get to the 3.5.

We are hopeful that the April rate is more representative of where it's going, in which case I think that if the pundits are right and we see a stabilization of the economy later this year, it probably continues to go up in that range until that point is found.

So, I think it continues to go up.

I don't think it gets to 4%, but that's under the assumption that there's not another big lag down in this economy.

Got you.

And just in regards to the cash, how should we think about a buyback?

I mean, is there a certain level where you hit where it's maybe a trigger?

Can you -- just how should we think about buyback relative to your M&A opportunities?

Thanks.

I think the best way to think about it is sort of what we did a little over a year ago.

First of all, from a pure rate of return standpoint, the M&A yields -- I mean, if the stock were to go to a very low level, this may not be true.

But, anywhere from where the stock has been, even when it hit a low of 13 sometime in Q4 of '07, we're generating higher cash on cash returns on the M&A because they're yielding, at the way we're buying them, in excess of 20% after tax cash on cash returns.

You can figure out the yield based upon a spot stock price of what it would be.

I think last year we bought 5 million shares at 21.5.

Given the then free cash flow characteristics, we got about a 12 yield on that.

And although it didn't look so good in Q4, that clearly has performed over the course of the last year.

So, one framework is where are we going to get the best yield?

And the best yield has historically come from the M&A, and we believe that continues to be the case.

Now, we're realistic that there's not a lot of large things for us to buy.

And so, as occurred in '06 and '07, if we continue to pile up cash because we can't deploy enough in either a single deal or a series of deals, then I think you start to look at, "Okay, where can I get better yields," because obviously getting a half a percent on $180 million is not very exciting.

And so, whether the spot yield is a high single digit or a low double digit, that certainly becomes, on a relative basis, more interesting.

Now, I don't think we're at that level yet.

The last time we made this decision, we had $230 million of cash in our balance sheet, not $180 million.

So, the implication, I think, is even if we do no M&A, it's still a couple of quarters out before we would probably seriously grapple with that question.

And I remain hopeful that between now and a couple of quarters out, we will be putting that cash to work in M&A because I think it not only give us a better yield, but it also helps to build the overall Company through brands, customers, technology, and people.

Thanks.

The next question is from Mike Latimore with Northland Securities.

Yes, good afternoon.

Just curious on the mortgage side of the business, so that vertical.

Obviously, applications were up in the first quarter.

How did you see that influencing your business?

And I guess if it stays heightened, what would be the potential benefits in the maybe second or third quarter here?

Yes, the -- when we dive into slide 12 and we sort of fracture apart the credit sensitive piece of it, we have the best granularity when we talk about our corporate data, because that's very explicit in terms of a company and how they're categorized and what book of business they're in.

The corporate only, so leaving aside the small business and the individual users, but the corporate piece of that green bar actually moved up much more aggressively from Q4 to Q1 than the, oh, 4% to 5% you see reflected here.

I believe that it's highly correlated to the phenomenon that, generally speaking, credit and lending began to unfreeze in the middle of December of '08.

Now, it's been most noticeable and it's most trackable with mortgage data because those are publicly available statistics.

But, I think it's even broader than that.

So, to the extent that that continues, and I think it's been continuing, but to the extent it continues at these levels for the remainder of the year, we would expect to see a couple things.

One, on the graph on slide 12, the green bar going up in terms of increased raw usage.

Now, as I mentioned earlier, not all incremental raw usage generates any incremental revenue.

Remember, these customers who are at a 64 level now used to be north of 100, if we roll this chart back into earlier times.

So, there's probably a 20-some percent lift in usage on average that has to occur before an account gets into an overage mode, meaning that they've fully used the package they bought, they then exceed the package, and it's only on the excess that they pay for "variable usage."

So, it is a positive trend to see growth in the credit sense.

It was a positive trend to see it in the real estate related sector.

But, the first chunk of growth there probably has very little, if any, revenue benefit to us because of the dramatic falloff in volumes from 18 months ago.

Also, Mike, I want to say that now for every mortgage deal, you are required to provide more data, more pages, more revenue per deal.

And this is really what we care about.

Yes, that's a positive.

It's no longer a one or two page application.

Yes.

We have suffered from this, huh?

So, I think it's a positive trend.

But, in the near term, probably doesn't generate much revenue.

Okay.

And how about, I guess, the environment?

It sounds like in terms of the influence on the cancel rate, it's a little bit better in April here.

Have you started to do more marketing now in April and early May relative to March?

Yes, a little bit more.

A little bit more marketing, a little bit more encourage the marketing guys to spend all their budget rather than return some of it back.

Okay, got it.

And what's been the general outcome there?

Are you finding that the prospective customers are the kind of you like to see, with good, profitable outlook or are they -- is the traffic coming and not converting to paid subs?

Any color around that?

No, the conversion rates are good.

The real issue is to bring the leads.

Once we get them, the conversion rates are good, the sales are good.

It's really that there is a step from paying good price or good customers, and then when you increase the spend, then you have to make a huge jump and you jump from good ROI to better ROI too quick.

Okay.

Got it.

And then, just last.

Scott, in terms of just your acquisition pipeline, what's the general visibility into sort of the next acquisition?

The last few quarters, you've had pretty good visibility into a perspective close.

How does that look now?

Because we didn't mention it, we don't have anything big and hot.

You won't see a question (multiple speakers).

No, there is a lot of balls in the air in a lot of different both spaces and jurisdictions, meaning international and domestic.

But, I think to what Hemi alluded to, no, you're not going to see anything within the next four or five days being announced.

Yes, usually we need to do several rounds with the big deals because it's not like one meeting, they like the price, we like everything, we sign and go.

And several of our deals are now into round two, round three.

We have a lot of sellers that have a number in their mind, and when the come to us they say, "This is the number." When we tell them, "Here's what we are willing to pay.

And why won't you got and try and see if somebody else will pay you more?" They never come back and say, "Somebody offered us more."

So, a lot of them has to go through the reality check of what j2 is offering is fair and is a good price.

And some of them are still doing this negotiation with themselves.

We are very willing, eager buyers, but we are very disciplined.

And I think those of you that have been with us, we didn't lose any deal for somebody who overbid us.

So, we know it's a game of patience.

Right.

Thank you.

The next question is from Mark Murphy with Piper Jaffray.

Thank you.

You had commented on the cancel rate in April.

Do you have any thoughts on the variable revenue usage trends in April?

Is that also stabilizing or improving?

Well, I think the usage is clearly stable.

I don't yet know how that turns into revenue.

Understood.

Okay.

We'll have a April revenue flash in a few days.

But, obviously the quarterly call on the Q take precedence.

So --.

Okay.

And then, relative to your guidance, you're calling for a modest EPS growth in the course of this year.

But, in Q1, your pro forma earnings are up about up about 22%.

Can you help us think about what are the kind of definitional boundaries around the term modest?

Maybe you took back into the future, right?

That's what you are looking for?

We don't know.

There are certain events that I am not sure will happen again, like the marketing spend and some other things.

I believe that our guidance still, on an annual basis, is good.

The quarter that we delivered now is either a deposit towards the future or maybe something that signifies our ability to improve even further.

But, I think that, unless Scott has something else, we will stay comfortable with any of the numbers.

Yes, I think modest -- look, modest is meant to be a qualitative term without specific quantitative definitions around it.

Otherwise, we'd have given a quantitative range.

So, I think we look at the nine or the ten analysts that cover us and everyone's got a slightly different interpretation of what that means.

I don't think anybody seems to be wildly too one extreme or the other.

The two comments that I would make, though, about where we sit today and looking at the next three quarters is, one, it is the goal to fully spend the marketing budget, which has been under-spent the last couple of quarters, meaning Q4 and Q1.

And secondly, as Hemi alluded to, the three core patents have come out of reexamination.

And as we talked about on the Q4 call six weeks ago, we were optimistic that the stays would be lifted sooner than they were.

But, they now are being lifted.

That will now reengage and reenergize the whole patent-licensing area.

Now, there's two pieces to that.

The stays get lifted, litigation recommences, we will start paying legal fees that will affect us dollar for dollar in terms of free cash flow.

A fractional dollar will flow through in G&A because those are offensive litigations.

The litigation costs are capitalized and then they're amortized into expense over the remaining useful life of the portfolio.

The other piece is it frees us up to utilize those patents and put together other licensing programs around them.

And usually, expense precedes revenue or license, either settlement or license agreements.

So, those things will start to kick in now, meaning we'll have the next eight months of this year of expense that will be larger, both GAAP expense and cash expense, versus the last year and a half.

Okay.

And then, Scott, as you think about the CapEx trend in aggregate and the level that that's been running at here the past couple of quarters, is that something that we should be looking at as CapEx being in a maintenance mode of basically you're replacing dying equipment?

And if so, do you expect that to continue through the rest of the year, or is there potentially, to go along with what you're talking about in terms of spending the entire marketing budget, would that parlay through and maybe you'd get into more of an investment mode relating to the CapEx?

Yes, I think -- the answer is yes, it's effectively a maintenance mode in terms of CapEx.

It's in the $3-ish million range for the year.

As you'll see historically, it doesn't -- it's not ratably spent over the four quarters.

So, you will see variations quarter to quarter.

I'm just looking at the last four quarters, and the range was as low as $300,000 in one quarter to slightly less than $1 million in one quarter.

So, that kind of variation you will see.

But, for the four quarters of '09, $3 million to $4 million aggregate.

Okay.

And then, just one last one.

As we try to work through kind of a ballpark for how much revenue CallWave might bring to the table in Q2 on a sequential basis, is there -- I mean, is there any reason not to just take a fairly representative monthly revenue per DID rate and apply that to your comment that CallWave had contributed a majority of the DIDs?

Well, CallWave has a little lower ARPU.

The (multiple speakers).

That's correct.

That's the only thing to normalize it for.

Right.

Okay.

Do we know how much lower that is, or do you want to comment on it?

Well, I can tell you, if you go to the website, they were selling product anywhere between --.

$7.95 and $12.95.

Hemi Zucker $7.95 and $12.95.

So, I'd say that the average is towards the $12.95 side a little bit.

Like on a $9.00 to $10.00 level.

Correct.

Okay.

And that's --.

So, if you look at our almost $15.00 ARPU across all of our DIDs, and if you looked at their ARPU, you'd have to take about $4.00, $4.50 off of our ARPU to come to a $10.00 to $11.00 ARPU for them.

Also, you have to remember that during Q1, almost half of the quarterly run rate was already baked in.

A little less than half.

A little less than --.

A little less than half.

We bought them in 20 --.

Third week of February.

Third week of February, right?

And then, just remember, as Hemi pointed out, to take out -- a Pan licensing revenue would be associated.

It was roughly 10% of their revenue that flowed to us as other income -- I mean other revenue.

Other revenue.

Okay.

Thank you very much.

You're welcome.

Bye, Mark.

The next question is from Tavis McCourt from Morgan Keegan.

Thanks.

This is Justin Patterson on behalf of Tavis.

The bulk of my questions have already been asked.

But, I'll just throw out a few housekeeping ones.

First, on voice, you've typically provided a monthly revenue run rate on that.

Perhaps I missed it on the call, but could you provide that?

I don't think we did.

No.

But, I can tell you we said that we are approaching 200,000 customers.

You can figure out the ARPU.

And we said -- we mentioned in the past that the ARPU for the voice is a bit lower because they take multiple extensions.

So, 200,000 customers, little lower ARPU, not so hard to get.

Okay.

Thanks.

And that's actually a nice segue into my next question.

Just looking at the ARPU trend, we've gone from about $16.30 in Q1 '08 to about $14.85 today.

Should we continue to expect that to just decrease over time from that higher mix of voice and the --?

Yes, you have a double impact on the aggregated ARPU.

One, clearly, if you look at the metric slide over the last nine quarters, you've had, independent of the economy, an evolving shift in mix towards corporate DIDs, large corporate deals, the seven that Hemi mentioned, voice DIDs at the $10.00, $11.00 and at most $12.00 range, and then the secondary fax brands, which can be anywhere from $7.95 to $12.95 a month.

So, all of those things obviously are lower than $14.85.

They make up a -- they constitute a larger piece of the overall gross and net ads over these eight or nine quarters we're looking at.

So, that's put downward pressure.

Then secondly, it's a more recent phenomenon in the last probably four quarters, has been the usage revenue, which is really more tied to the economy and things that we've seen going on, both firstly in the credit sensitive sector and then probably more recently in the last six, seven months in almost all the sectors as the economy has contracted.

Yes.

Also, Justin, the base price is the base price.

The impact is (inaudible) by the mix.

The usage is driven by the economy.

And I'd say that if the economy gets better, the question is what will we sell more, more of the expensive or more of the less expensive products?

And then, also I'd say that the usage, will it improve to the level that we had before or not?

It's all very complex.

But, I think that the levels of the ARPU that we had in the past, let's say, two years, the only way to get there is through a price increase.

And we don't even think of price increases in this environment.

So, I think -- yes, I think that's a good qualification.

I think under our assumption that the economy remains weak through the end of this year, and to say it may not get sequentially weaker, it might get sequentially better.

But, as long as it remains in a contraction mode, then our view would be you'll see some continued upward pressure on cancel rate and you will continue to see shift mix and variable revenue pressure that will push the average ARPU downward.

And then, once a bottom has been found and there's an uptick, then the questions come in how fast does the cancel rate normalize, because we're, on a spot basis, 90 basis points a month higher than the normalized cancel rate.

That's a lot of potential pick up in DIDs that wouldn't cancel in the future if it were to return to that rate.

And then, the next question is does the variable revenue or the raw usage return to normal levels, and then how much of that converts into actual revenue?

Okay, thanks.

That's very helpful.

And then, on just bad debts, the allowance for doubtful accounts.

Obviously, it jumped dramatically from some of that credit sensitive base.

Are you considering just kind of tightening the credit standards at all, or anything like that to prevent such an uptick going forward?

A, we did.

We did -- we had some customers that took longer than we liked to pay.

And we did.

But, I can tell you it's a very essential service and we are not as aggressive as your mobile phone company, but we can.

And we can tweak the level of aggression on an individual customer basis.

So, I don't expect a big surprise.

But, definitely in the past, we were less nervous about somebody being late.

Now, Kathy drives all the controllers of the different departments and the message is very clear, a lower tolerance for being late.

And as we don't like to do it, it's very easy for us to suspend accounts or whatever needs to be done.

And usually, it's very effective.

Okay.

Good to know.

Thank you very much.

All the best.

Okay.

And let me just address the bad debt.

As we indicated last year, we had actually taken a more aggressive stance on the bad debt in terms of our declines, what we call the declines, which are the credit card declines.

And so, during the middle half of last year, we actually set in new policies and control features so that we could monitor this much more tightly.

What you will notice is that on an ongoing basis, and particularly in this economy, what we find is that the rate of decline can increase based on people's credit floors being changed or limited by their own banks.

So, the obvious situation that we have here is that banks are encouraging, shall we say, their cardholders to reduce their credit limits.

That obviously has an impact.

So, we're very much driven by the credit card environment.

And with that said, you will see fluctuations on bad debt based on that.

While we believe we've stabilized somewhat, you can't really tell whether the economy's going to take a switch or you're going to have other issues that arise from your credit card companies that could impact that.

There are no further questions in queue.

I'd like to turn the call back over to management for closing remarks.

Good.

We thank you for joining us for the Q1 call.

I'll remind everybody we have our annual shareholders' meeting this Thursday at 10:00 Pacific time.

The only matters before the shareholders are the election or the reelection of our seven directors as well as the appointment of SingerLewak as our auditors.

We will then participate in some upcoming conferences over the course of this quarter, which we'll put out press release to alert you to.

And then, look forward to talking to you in about three months to discuss the Q2 results.

Thank you.

Thank you.

Thank you.

This concludes the teleconference.

You may disconnect your lines.

Thank you for your participation.