Ziff Davis Inc (ZD) 2009 Q2 法說會逐字稿

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

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global Communications.

Thank you, Mr.

Turicchi.

You may begin.

Thank you, Joe.

Good afternoon, ladies and gentlemen, and welcome to the j2 Global investor conference call for the second fiscal quarter of 2009.

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

Today we will be discussing the 2Q financial results as well as provide you an update on operations, strategy and outlook for the remainder of fiscal 2009.

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

In addition, a press release has been put out which you can access through our corporate website at j2global.com/press.

You will also be able to access the webcast from this site.

After completing the prepared remarks, we will be conducting a Q&A session.

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

However, you may e-mail us questions at any time to investor at j2 global.com.

Before beginning our remarks today, allow me to read the Safe Harbor language.

As you know, this call and the webcast will include forward-looking statements.

Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings including our 10(K) filings, recent 10(Q) filings, various proxy statements and 8(K) filings as well as additional risk factors that we have included as part of the slide show for the webcast.

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

At this time, I will now at any the presentation over to Kathy who will give you an update on the quarterly results.

Thank you, Scott, good afternoon ladies and gentlemen.

Please refer to slide four in the presentation for a recap of our non-GAAP operating results.

This quarter I'm going to be presenting and discussing non-GAAP financials.

Non-GAAP financials exclude the impact of the write down of our auction rate securities which you will note in our financials of $9.2 million our 123 R expenses.

Let me provide you with a recap of our Q2 operating performance.

Q2 revenues were $62.5 million, which is an annual increase of $1.8 million or 3%.

Q2 revenue growth includes a full quarter benefit from our Callwave acquisition and a one time benefit of approximately $700,000 in additional revenues from the sale of certain non-core intellectual property.

Voice was our strongest business segment with annual increase of 38%.

Domestic revenue is holding at an annual growth rate of 4.3%.

In the second quarter, our relatively weaker US dollar compared to the euro and British pounds had a favorable quarter-to-quarter revenue impact of approximately $240,000.

As of the end of Q2, we had approximately 1.275 million paying bids.

Over the past year, we have increased our paying bids by more than 111,000 for a growth of rate of 9.6%.

Our two fastest growing segments are voice and corporate fax.

Voice business increased by over 26% and corporate by over 16% as j2 continued to benefit from the business outsourcing trends.

Currently, we have approximate 200,000 voice bids and over 300,000 corporate bids.

Although quarter-to-quarter paid bids were essentially flat in Q2.

We saw an increase in RPU across all our brands.

Overall RPU increased from $14.85 in Q1 to $14.96 in Q2.

This is a reversal of the past six quarters' RPU trends.

We also experienced an improvement in our cancel rates.

Q2's cancel rate was 3.3%, a decrease of 20 basis points from the prior quarter.

As we stated last quarter, there was a spike in bid cancellations in March that resulted in an upward bias in a Q1 reported rate.

In Q2, we had three consecutive months with similar cancel rates.

We believe these results are a reflection of the somewhat improved economic conditions in Q2.

While the increase in RPU and lower cancel rates are both encouraging signs, our optimism remains guarded for the remainder of the year.

As I have mentioned in prior calls, we remain committed to optimizing our cost structure.

I am pleased to report continued improvements in cost management across the entire j2 organization.

Q2 2009 non-GAAP gross margins of 82% is a full percentage point higher than Q2 2008 margin of 81% and 40 basis points higher than Q1 2009's margin of 81.6%.

This quarter's selling expense was 14 percent of revenue.

R&D expense was 4.3 of revenue and G&A was 14.9 percent of revenues.

This quarter, we were able to achieve a new record profit.

Total non-GAAP operating profit for the quarter was $30.5 million.

Non-GAAP operating margin for Q2 2009 was 48.8%.

Q2 2009 operating margins are 1.2 percentage points higher than the prior quarter and 5.9 percentage points better than Q2 of 2008.

Our diluted non-GAAP EPS of $0.48 a share is an improvement of $0.03 or 7% from Q1 of 2008.

The sale of our certain non-core intellectual property contributed a penny to the Q2 EPS.

To calculate our GAAP EPS, you will have to adjust for two expenses, 123 R and the impact of the ARS impairment charge.

Q2 123 R was a $2.9 million pretax or $2 million after tax expense resulting in an EPS charge of approximately $0.044 per diluted share.

In addition, due to the further deterioration in the credit worthiness of the issuers of our auction rate securities, we decided to make our auction rate securities available for sale and recognized an impairment charge of $9.2 million.

This resulted in an after tax impact of $8.7 million or $0.19 per diluted share.

As a result of these two adjustments, our GAAP for Q2 was $0.25 per share.

We have supplied you with a GAAP to non-GAAP reconciliation schedule in the supplemental section of the presentation.

Moving to the balance sheet, our annualized return on equity is 21.3%.

Cash and investment at the end of Q2 is $194.8 million, an increase of $15.5 million for the quarter, which includes the ARS impairment charge.

Slide 12 is a summary of our quarterly free cash flow,and free cash flow for the quarter was $22.9 million.

In conclusion, let me remind you that the supplemental schedules at the end of the presentation will provide you with additional detail on our metrics and our financials.

Now I'll turn the call over to Hemi who will provide you with an operational and strategic overview.

Thank you, Kathy.

Good afternoon, everybody, and thank you for joining us for our Q2 earnings call.

Today I have three slides for you.

The first slide will cover our last quarter, the second slide is mostly our outlook for the rest of 2009, and the third slide -- in the third slide I will discuss our longer term plans and opportunities.

Let's move into the presentation my first slide, page number six.

Year-over-year, our fax business is still growing.

This exceeds our growth rate in our lower cost brand are still growing and doing well despite the bad economy.

On our searchable faxes, as you know, we have by now deployed it to all our customers and they are getting between one and two years of history.

This means that they can go and search faxes by keywords, and we providing this unique feature, which is adopted well by our customer base.

On the corporate front, we are continuing with our success.

If you remember in the last quarter, we had six deals of thousand plus DIDs.

In this quarter, we had started with six deals, four of them ended up 1,000 plus and two of them ended up an average of 500 DIDs, still six large deals.

Usage which has been a very important factor of our business, it is actually stable and if you go to slide number 19, you see that on the non-sensitive or non-finance grid sensitive business, it's inching up.

Our cancel range, our churn rate has peaked to 3.67% per month in the month of March.

Every since it has declined to 3.3%, and we believe that one of the signs for the recovery will be when we come back again to the historical levels that we have seen of 2.5% and 2.6%.

Our voice product.

Late in 2006, we went to market with our voice offering, and now we have 200,000 paying DIDs, which is our fastest growth area and we are seeing good uptick in Europe.

Our EU companies are just starting, and we expect more out of those markets.

In the US, we continue to grow.

Despite the economy customer awareness is increasing.

There is a buzz in the market created by our competition, and we are seeing the increased awareness is generating demands for our professional, private, secure and high quality services that are reasonably priced.

On the e-mail front, we continue to see opportunities in the M&A opportun -- front and also, we are about to launch a service that would compete with the outsource or outlook exchange.

We are upcoming with an alternative that is delivering the same functionality with approximately half of the cost and we have high expectations.

As you heard from Kathy, this revenue -- this quarter we recognized revenue of $700,000 related to our patent revenue.

We always have been focused on IT and have so far at the beginning of our inception collected $20 million on licensing and past settlements of patents.

We continue to focus on this area.

Let's move to our next slide when I will talk about our current outlook.

On the fax front, we will continue with our ROI approach to marketing, we will take advantage of the economic situation to promote and continue to increase our penetration in the corporate world.

We are seeing again and again more businesses are walking away from their fax servers and taking our services.

We'll continue to selectively look into M&A acquisition and opportunity focused mostly on international.

And we will explore new geographic markets in Asia, Australia and South Africa.

All those markets represent good potential and we don't have significant business in those areas.

On the voice front, we will continue to emphasize our approach to ROI based marketing.

We will continue to increase our market share in Europe.

We have in the past did good job with -- in some markets with fax partners and happy to help us again in penetrating with our fax service into those markets.

We are looking into M&A opportunities, both domestically and internationally, and we are going to roll-out additional features most probably this quarter.

I will just leave the announcement of those to our marketing team and their product releases.

On the e-mail front we continue to target 22,000 (inaudible) opportunities.

We are expanding cross-selling into our large fax and voice base, and we continue to build our revenue base throughout acquisition and organic growth.

On the operational side, as Kathy was talking about our increased profits and increased margins, it is very important to note that we continue with those efforts and we are ready for the economy to turn around.

We have kept all our talent pool.

We have not reduced like other companies, we have not reduced our headcount.

We kept our talent and upgraded it, so we are ready to rock and roll when the economy comes back.

Now, let's move to the next page when I will discuss our further opportunities -- longer term opportunities.

As you know, we have $200 million cash and one of the ways to deploy it are into new businesses.

When you are reviewing new opportunities, our strengths and weaknesses, our expertise are key to our further success.

I have listed some of our key advantages here in front of you so you can have good appreciation to what we are looking for.

We have strong message and communication and inventory.

We have strong 19.5 million DIDs all over the world, covering all the world.

They are going to deploy those.

Real expertise in business services to end business users.

Our customers usually purchase our services based on ROI and lower TCO, we continue there.

We have sending high value services with stickiness.

Our functionality delivers a service.

We have no inventory, we have high margins and we are continuing to maintain those attributes of ourselves.

Our business (inaudible) base recurring revenue.

We have successfully shown how we can start with the (inaudible) moving to the SMB, SME and corporate customers.

We are going to leverage and continue to leverage our own line in tele (inaudible).

And, of course, as mentioned before, we have strong intellectual property and opportunity.

We have deployed all those thing mostly into unified messaging and unified communication.

We are now seeing opportunities due to the regulatory changes, and we are looking into areas like healthcare, banking and finance, discovery loads, et cetera.

I will now pass the call to Scott.

Thank you, Hemi.

The nest slide is the reaffirmation of our 2009 guidance to remind everybody we are maintaining our perspective for modest increase in revenues and non-GAAP EPS for the year versus fiscal year 2008.

I think to give a little bit of color to that, as Hemi and Kathy have both mentioned, we've seen what we hope is a stabilization and a bottoming in the economy, some of that evidenced by our own data in terms of the cancel rate coming down and being relatively stable versus the March high.

However, as Hemi noted, these are still levels meaningfully elevated over the historic norms.

Usage, particularly for the credit sensitive sector, while stable, remains still anemic.

So our view is that we probably had see some improvement in the overall macro data in the latter part of the year, but it will be modest and as a result, we will continue to execute, as Hemi has just mentioned, which is to really focus on the controllable elements that j2 has and to pursue opportunities both in our immediate areas, i.e.

rolling out companies through M&A, but also beginning to explore areas that might be adjacent or complimentary to those areas.

We will begin our budgeting process in late October, early November.

And at that time, we will take a look at the economic conditions as they exist as well as what the -- to the extent there is a common expectation for unemployment rate GDP growth for 2010 and factor those into our account as we develop the 2010 budget and the operational strategy around it.

The remaining slides are, as you know before on slide -- excuse me -- we have a redacted version for this presentation.

Slide 11 is the metrics which you're familiar with.

We have got eight rolling quarters there, the reconciliation of free cash flow.

We did include the GAAP to non-GAAP reconciliation as given the putting up for sale the auction rate securities and taking the impairment charge.

The non-GAAP, we think gives you a better trend over time of the operational aspects of the company and then slide 14 is the continuation of the slide we've seen before, which breaks down the usage patterns for our corporate and high volume web users into the credit sensitive sector and the non-credit sensitive sector.

At this time, I'd ask the operator to come back and to instruct you how to queue for questions.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions) Our first question is from Shyam Patil with Raymond James & Associates.

Please go ahead with your question.

Good afternoon, guys, congratulations on the quarter.

Thank you.

This is Varun actually filling in for Shyam.

That's what I thought.

(laughter) Go ahead.

Obviously, operating margins were very strong in the quarter.

Just wondering if you could provide color on how we should think about expenses and margins as we progress through the year.

Well, I think for the balance of the year, given that we are not anticipating any significant material bounce in the economy and as a result, the operations will be as you have seen them over the last several quarters, these margins should be in the range of being repeatable.

Now, the one cautionary note that I have would be in the sales and marketing area.

Relative to, say, a year ago, that is pulled in buy a couple hundred basis points.

Part of that has been that advertising has just become cheaper in a weak economy, and part of it is we have proactively cut back some of the weaker producing spend that we think would be not economically viable in a weak economy.

It is our goal, hope and intention that as the economy improves, we will spend more marketing dollars.

So you've got over time, probably a 200 basis point potential for increase in sales and marketing, all of that being with third party vendors.

So our sales and marketing line item has two pieces.

There's the internal piece of our employees and there's the external piece with our vendors.

What has come in over the last four quarters is the external piece, and we would hope to be able to expand that again over time.

Although under our view and sense of what's going on in the economy, that would be unlikely to the occur in the short time frame of a quarter or two.

Let me also add to Scott on our operational side, on our engineering and our network and other areas of operation, we have started initiatives that will end up saving money, and those will roll as we continue into the quarter.

So I think that maintaining our margins, besides the comment that Scott made on advertising and promotion, would be -- I would still expect improvement due to the other actions we've taken other field.

Got it.

And could you just talk a little more about the credit sensitive revenue component in terms of the figured versus the variable stream?

How is the usage relative to the last quarter?

Relatively flat.

The last three quarters have been relatively flat in terms of the usage of the credit sensitive piece.

As Hemi mentioned, the non-credit sensitive piece has been inching up in their usage, although you could say it's still relatively modest growth in the usage.

But the non-credit -- or the credit sensitive has been basically flat.

Got it.

Thank you.

The next question is from Tavis McCourt with Morgan Keegan.

Please go ahead with your question.

Hi guys, this is Tavis.

A couple of them.

First, as you describe the sales and marketing spend, Scott, some of it internal, some of it variable and external.

Could you give us a rough split of that so we can get a sense of how much is truly fixed on a quarterly basis and how much you really have discretion on?

Yes.

And then also, you seem to be focusing a little bit more on e-mail in this call and talking about the hosted exchange offering.

I was wondering if you could go through if you have a distribution for that would be different, if at all versus your historic offerings.

Great.

As to the sales and marketing, it's about 8, 7.5 to 6 points on a non-GAAP basis of internal people cost.

There's salaries, taxes, benefits, et cetera.

And so anything above and beyond that, so in the past quarter it would be in the range of, call it 6, 6.5 points is the third party spend with vendors.

It's that piece that over time, we'd like to see it if it can be spent effectively, go back to 7.5%, 8% of REVs.

When you look at the total sales and marketing expense of j2, year in and year out, not in any given quarter, it's generally going to be in the low 16% rage of revenues.

That, in most environments, will be about 8 points of employee cost and about 8 points -- or a little bit more than 8 points of external costs that we are actually put to go work with vendors.

Let me --

But the people basically stayed the same.

What's come in is the third party piece.

Right, as Scott said, people is piece on the search, on the display advertising where we spend most of our money there.

On the search arena, we continue to compete with other companies.

As the economy gets weaker, they spend less, the competition -- as you look into the search engine revenues, they are basically reduced growth, meaning we can get those keywords if we want for less money.

This part of our experience would go up expense would go up only when the economy recovers and everybody, including us and our competition, decide that we want to place more money on a certain keywords.

On the display, display advertising we are doing mostly in Europe and we are able due to our size and our unique niche and lower competition there to actually do a blend of display when you buy promotions and also when we have some fixed component on it.

If you go to big advertising agencies, the inventory -- you say this is how I am going to pay, not per click but per sale, you can find them cooperating with you.

So basically in a nutshell, I do not anticipate our marketing costs to go up while the revenue doesn't.

On the question that you have on the e-mail, as you know e-mail -- outsourced e-mail is gaining popularity.

Many of our customers are using our web-based and our lower level services if you compare them to Exchange, Microsoft Exchange.

Microsoft Exchange is offered by us and many of our competitors, some of them are even pure plays.

It's very hard to be competitive when you offer Microsoft exchange because you have to pay Microsoft, depends on your size and other elements.

You have to pay them something like 40% of your revenue, sometimes even more for smaller customers.

We have found technologies that basically allow to you use your Outlook or your Office Outlook or whatever client you are running on your machine but instead of tying it back to Microsoft Exchange, if you buy and pay license and everything, you tie it into our non-Microsoft e-mail server and the technology that ties the outlook exchange to a non-Microsoft is something that we have now deployed into beta and by doing that, we can give the customer exactly all the functionality that they have with Microsoft, but we do not have to pay the licenses and therefore, roll the savings into those customers.

We are trying (inaudible) excited about it, we believe that if it will work well and the market will show high acceptance, we can basically steal a lot of business from competitors.

Did I answer your question?

That was great, Hemi.

And I did have a follow up on a comment that Kathy made.

I want two make sure I understood correctly.

She mentioned voice up was 26%, corporate was up 16%.

Was that a revenue basis year-over-year or --

Yes, this is based on the DID.

That's a DID basis year-over-year?

Right.

Can you tell us if those also grew sequentially?

Yes.

I will take it.

When you say sequentially --

Relative to Q1.

As I said, voice and corporate grew quarter-over-quarter.

Quarter-to-quarter.

Quarter-to-quarter.

Q1 to Q2 of '09, they both had positive growth.

Then the fact, the consumer small business was negative, the?.

Yes, correct.

All right, thanks .

The next question is from Corey Tobin with William Blair.

Please go ahead with your question.

Hi, good afternoon and congrats on a nice quarter.

A couple of things, please.

You didn't mention an international DID number.

Any color on what's going on on the international segment?

Yes, on the international segment ,both consumer and corporate, we have been growing it.

As you know, it's a much smaller base.

The largest growth that we have seen is on the voice side.

If you remember, last time I mentioned this, we have launched a specific, fully supported language in France, in Netherlands.

And in Netherlands, we have also experienced success in the past with our fax service.

And I believe that we have a unique service there where we have a block of numbers that are calling party based, and we can provide free service with all the functionality of the voice services that is being paid by the callers.

So will you not see increased or paid DIDs because they are actually not paying us.

But you will see increase of revenue coming out of it.

We just started with one of the partners.

We used to have like 20 partners that help us with the fax.

We started with a few of them (inaudible), and it's working well.

Okay, great.

Then just to circle back to the voice DID, I think last quarter that you mentioned that you were approaching 200,000 DIDs this quarter, you're saying you had 200,000 DIDs or so.

When you say currently, do you mean at the end of the quarter or today?

It doesn't matter all a lot.

We do grow our voice DID during June and July.

It is still the a number that is rounded to 200,000.

And then the question on that front is it seems like the absolute number of new DIDs added has clearly slowed down a little bit in the last couple of quarters and while we are pleased to see the growth, the question is do you expect that the absolute number of DIDs that you are adding each quarter is going to pick up here in the near term based upon the pipelines that you are seeing?

It's very trickly, because we analyzing, of course, our focus on this metric, what happens to the net growth.

Many of those customers have been customers that have very light usage and with the economy is bad, you are looking to what you are paying and you are saying, do I really need it?

And this is mostly what you are seeing on the consumer side.

On the corporate side I think I talked about it last quarter, I will say it again.

We do not lose, mostly we don't lose corporate customers.

What we do see, they go through their DIDs and they reduce them because they are letting people go like here, there is if somebody there that is going through the expense line by line and saying, hey, I want to eliminate waste.

So to answer your question, I don't really know what will be the net of those things.

We are still seeing good healthy demand for growth sales.

On the churn side, we don't know, what is the final clean up or not.

But again, we are seeing that most of those that do cancel are, A., have low usage and some of them are those that have problems with the credit cards.

Got you.

Okay, great.

Shifting topics for a second, on the e-mail product, exciting to hear.

When do you expect a release date for this?

We already started to sell some accounts.

So some accounts bought into it pending the trial.

I want just everybody to know why it can be successful, and we believe that we will launch it sometimes at the end of the quarter, no later than at the beginning of next quarter.

Our e-mail business is relatively small so even if you will have a big uptick, it's not going to be something that unfortunately in the short time is going to move the needle.

And again, to be more specific,to answer your question, we are in beta.

We have some orders.

Those orders are usually, let me try and if it works, I will buy it.

I just had a meeting with our e-mail business yesterday, and we are talking about a release towards the ends of the quarter or next quarter.

Because besides the technologies already noted, we have also to build around it all the complaints.

Got you, great.

And then wrapping up on this topic, where do you see e-mail in terms of contribution over the next one to five years?

You mentioned it's a relatively small piece of the business.

I think we assume less than 5%.

Can that be a 10% revenue line as we look out over the next three or four years?

Yes, absolutely.

There are many, many companies that can make it a 10%-er.

A., e-mail is, in my mind, the glue for unified messaging.

You get your voice mail through your e-mail.

You launch start with your faxes, you launch, you get there.

We get even our voicemail to e-mail with all the text -- speech to text.

So definitely we see -- the issue was with unified messaging is, what is the angle to sell the customer that here in j2, you have one stop shopping?

E-mail was the hardest because e-mail is something that if it's working, it doesn't make a lot of sense to just drop your vendor and move on.

As we continuing to go and penetrate, and we have some customers it takes two, their voice and fax from us, I believe that e-mail will become more and more something that we can sell and easier.

Also, e-mail, unlike fax, represents much larger opportunity on the M&A because there are many small companies that are $1 million, $2 million, $3 million that are going nowhere.

So I see opportunity on that side and definitely can go to 10% or more.

You have to remember there are very strong players there, but they are all coming from a different angle.

I believe that with the unified messaging angle plus, ours ability to do small acquisitions in a very efficient way will help us get to that level of 10%.

Great, thank you.

You're welcome.

Your next question is from Mark Murphy with Piper Jaffray.

Please go ahead with your question.

Yes, this is Brian Schwartz sitting in for Mark Murphy.

Either Scott or Kathy, I was wondering if you guys can comment if the reversal in RPU this quarter.

Looks like it's the first time here in eight quarters where RPU actually increased, and just trying to reconcile that with the positive trends we are hearing on selling the lower priced brands as well as the voice services which tends to be lower RPU too.

So, trying to understand what really drove the lift there in the quarter and then what your expectations would be for RPU trends here in the second half of the year.

The biggest -- this is Scott.

The biggest movement quarter-to-quarter sequentially is increase in usage based revenue.

So the relative mix of the DIDs in terms of ads and cancels I would say is fairly consistent with Q1, Q4, going back a couple of quarters.

The difference is, we got probably something on the orders of magnitude like $0.10, $0.12 increase quarter-to-quarter sequential in usage base revenue.

It's very helpful.

Then, Scott, could you also give us an update here on the M&A pipeline?

Are any deals getting closer to fruition?

How are the bid/ask spreads out there and if there are any large M&A deals in the pipeline?

Sure.

I would say that there are a number of situations that are in a variety of stages of discussion.

I think as we talked about one or two calls ago, basically, companies are falling into one or two camps.

There are those that are under some either economic stress, financial stress, or they are seeing an evolution in their own business model which is encouraging them to shed certain assets.

And that would be very representative of like the (inaudible) deal we did last year, the call waiting deal we did earlier this year.

I would say that's clearly the minority of the companies.

Then there's a much larger group that are at some level certainly willing to be sold, but it is a price issue.

And I think the theory amongst those companies is that they like to "wait out the recession" to see if there can be higher prices and a better future.

So we are, as you know, we are very disappointed with the pricing.

This is a game of patience.

We think that while the economy may have stabilized, it is far, far from healed.

And as a result, we are very prudent in the way we are bidding these.

And so there are several to many where there's a bid/ask spread at this moment is not bridgeable.

And we will continue to pursue to see whether those can be bridged over time.

That's real helpful.

And --

And I do want to -- I want to say something else leveraging what Hemi said.

If you look at our spaces, I think that clearly, leveraging off the other question, e-mail is probably our most interesting space to do M&A in, because there are numerous small companies.

And by the way, some larger than us.

Not giant companies, but companies doing $10 million, $15 million of REVS.

So larger than what we do in the e-mail space, but still relatively small as far as companies go.

And I think that from a purely strategic standpoint, those transactions bring a lot more to the table than doing another fax based.

DID based deal.

So one of the reasons why you don't see us doing as many fax and voice based US DID based deals is because we are really, really sharpened the pencil in terms what have we are willing to pay for them.

Because effectively, they have got to make not just good, they have got to make great financial sense.

They've got to have a meaningfully superior rate of return on our invested capital than what we can get if we bought back our own stock.

And depending on how you look at -- depending on, A., where the stock price is at any moment in time and B, whether you want to exclude the cash or include the cash, you are going to see that the free cash flow yield of the company is around 10%.

So we have got to have a meaningful premium over that to justify putting it into particularly a US DID based business.

E-mail much more strategic, because it's a much smaller base.

We have got additional service sets that we can acquire within the e-mail umbrella that we either don't have or that are very, very small for us.

Also, international deals are very high priority for us, because there's many regions in the world where our presence is much less than it would be in North America.

And then the third piece of it , as Hemi touched on, is we call the adjacent space or the complementary space of M&A.

We are seeing a lot of companies in this environment that are not pure e-mail, faxed e-mail or receptionist type companies who are approaching us that have some applications, some service set that to some degree or to a very large degree, is complementary to the services we already provide and they address the same end customer.

We talked about some of these in the past, things like, just to use some very broad terms, very broad generic areas, document management services for the SMB customer.

So we are evaluating those kinds of spaces against the criteria Hemi laid out a few slides ago and a few minutes ago to see of the, probably four or five different space areas that are applicable, which ones have the highest value add to us to leverage our core strengths, to cross-sell into our existing base and to really take what in many instances is a very small business today and have it become a meaningful contributor under

Thank you for that update, and thank you for taking my questions today.

No problem.

Next question, James Cakmak with Sidoti.

Please go ahead with your question.

Hey, guys, good afternoon.

Hi, James.

I just wanted to touch on the international front again.

Do you have the growth there on a constant currency basis?

No.

I think it was like 3% year-over-year, but that would include -- that's not a dollar denominated basis.

So you have to adjust -- I actually don't think though, there was much on a year-over-year basis currency impact.

There was quarter-to-quarter sequentially, 240,000, but not year-over-year.

I think that's a pretty pure growth rate on the year-over-year basis.

Got it.

And then any more color that you can provide on the international front as far as the traction that you are getting there?

Is it meeting your expectations at this point?

Is it exceeding it?

Or ---and are the customers adopting it, especially on the fax front?

Are you guys where you want to be?

My expectations are high.

The budget is more realistic.

So we are bidding our budget.

We will never beat out my expectations, but to be serious for a moment, we have fax, we have voice and we have international Europe and international rest of world.

Our strongest market, by far in Europe is UK.

We are doing well there, we have the blend of services.

We are covering all the varieties what have we offer in the US, even a little bit with the e-mail.

In the UK, we are far behind the penetration rate that we have demonstrated in the US.

In the other countries, we are seeing strong success in countries with stable strong economies.

We are not in the level of penetration that we would like to be.

We are still not fully local, even though we have the language and the support.

To remind you, we support six, seven languages.

So definitely in those markets, opportunity is high.

Some of those markets like Spain are suffering mainly from the economy.

The unemployment rate last I looked was 16%.

But again, we are in all those markets.

We definitely see demand and we definitely see advertising opportunities.

As I talked to you in the previous question, in those markets we are doing also display so basically, not only looking for those that are seeking our services, we are also going out there with a targeted advertising.

It is growing, but I think that the economy in certain of the European countries is hit even harder than the US.

Okay, great.

Thank you.

You're welcome.

The next question is from Mike Latimore with Northland Securities.

Please state your question.

Yes, good afternoon.

Bad debt expense, was that -- do you have that number for the second quarter?

It is relatively flat over the first quarter, for the period.

So there wasn't much of a change in that, at least nothing that was of a material nature.

So what we did see was that basically, declines have flattened out, declines as we indicated previously are the credit cards that failed to pay due to reaching your ceiling or your limit.

We saw that kind of flatten out in the quarter.

We give it another quarter, so we'll see how that goes.

That's one of the indicators that we look to as well.

Got it, okay.

Then your marketing expense, say per ad, or per eyeball have been coming down.

Is that trend starting to flatten out here where the marketing spend, say per ad, is stabilizing now, or is that still improving in your favor?

I think it's relatively stable quarter- to-quarter, Q2 to Q1.

I want also to say we are not driving, there is nobody here in j2 that tells the marketing guys, spend less money.

It's usually what we tell them is this is how much you can spend to bring a customer and as the demand declines, unless they are willing to spend more for each customer, which we are not doing, demand declines advertising expense declines.

We have a model here that is very disciplined.

Then in terms of free cash flow, in the -- in 2008, the first and the fourth quarter were the strongest free cash flow quarters.

Is that generally how we should think about this year as well?

The biggest differential for the middle part of the year has to do with estimated tax payments.

I believe between Q1 and Q2 of '09, the difference between the two quarters was $12 million plus of estimated tax payments.

There were effectively none in Q1 and more than $12 million in Q2.

And they tend to be -- remain high in Q3, which is when the tax returns are actually filed and then they tends to go down in Q4, very modest in Q1.

So, yes, there is that seasonal flow to the free cash flow, assuming there's not disparate spending of CapEx or anything else going on.

That's usually due to taxes.

Usually due to taxes.

You can do (inaudible) payables too, but your working capital, but for the most part --

We do that anyway, yes.

Then I think you guys are doing some test marketing of display adds and you were going to see how that went and determine whether to continue that sometime around August here.

Can you give a little update on that, whether that's --

It's something that we mostly do in Europe, and we are beyond testing.

We just got some strong advertising agency to basically agree that we pay them based on success.

So the test was for them to give confidence that they are willing to work with our model.

Now that they are convinced that they can make money that way, we are buying -- actually we don't buy being how many (inaudible) we order, so we by how many sign ups you got you get that.

The upside on this model is that you know how much you are going to pay and what you will get.

The downside is it's limited because when they play with your money, they run faster than when they play with their money.

Got it, good.

Then last question.

Roughly, how much incremental revenue did Callwave contribute this quarter versus last quarter?

Incremental would be about 800, 900 --

Little bit -- 750-ish.

Thank you.

Nice quarter.

Thank you.

The next question is from use Youssef Squali from Jefferies & Company.

Please state your question.

Hi, good afternoon.

This is Sandeep Swatia for Youssef.

How are you guys doing?

We're good.

Good, good.

Thanks for taking my question.

Just two quick ones.

So you did you talk about the second half of the yea,r but just trying to hone in a little bit so obviously, churn rate and RPU trends are showing some stabilization.

So how should we think about these metrics for the rest of the year?

What's embedded in your guidance in terms of sub growth and RPU and churn, et cetera?

We would assume -- remember, our guidance when we started the year, we came into the year, we assumed actually there would be a linear increase in cancel rate throughout the course of the year, roughly in the range three to four basis points per month.

We report only on a quarterly basis the average for the three months, but if you broke it down into the monthly cancel rate, we actually have not seen that.

What we've seen is January, February, April, May and June all in the 3.3 range and March around the 3.7 range.

So at this point, we are back on track with our budget as to where the cancel rate would be.

Our back half of the year would show it continuing to increase.

If do you a 3 to 4 basis points per month, you get kind of a 10 basis points on average increase for the quarterly number, meaning you would be at 3.4 and 3.5 by the ends of the year.

Now, if it is in fact the case that the economy has stabilized and to say we've seen three running months at 3.3, then I think that that probably is a conservative assumption.

We are not anticipating though, at this point, is any material decrease in the cancel rate.

Because we don't think -- our model, our assumption for the balance of the year is there's no snap back in the economy.

That it is what it is now, it may have some upward bias, but it is not, as some people call it, a V shaped recovery.

Hopefully we are wrong on that and if we are wrong, one of those indicators internally would be a falling of the cancel rate.

So under that economic assumption and under that assumption for cancel rate, that sort of dictates a continuation of the operational strategy that the company had when it entered this year which is to, some people would say be defensive, but to be very focused on the controllable cost elements that j2 can influence.

So it is how we spend the marketing dollars, it is how we deal with our teleco vendors.

It is watching the G&A expense, all of those things that we can influence.

Obviously, if we see influxion points that make our economic scenario wrong, then we will take action against it.

So to the extent there is a stronger rebound in the economy, then we have a very flexible business model and a relatively small management team, we sit down and say, you know what, we were wrong.

Lives is better.

Let's spend some more money in the marking area.

Let's do some of these things that maybe have been put on the shelf for a few quarters.

A lot of this, I believe will really get addressed in the context of 2010 budget.

So unless there's a major surprise in the economy over the next few months, I think that we are going to operate as we are right now in this mode which means the margins, as Hemi pointed out, I think are very good and they are comfortable to maintain and then we'll have to take a look about a changing economic environment and what the appropriate response is to that as we look to 2010.

And simply to add to Scott, we have always been a company focused on profit and margins, and this we do well, including in the worst economy and while we can not focus what's going on, there is more and higher level of control as we are continuing to deliver high margins.

On the revenue, they are more like riding the wave of the economy.

So if the economy goes bad, revenue is a problem, but not the profit.

If the economy goes well, revenue will go and the profit.

So basically, continue in this environment, definitely it's a good thing to do, to be defensive and manage our cash and manage our profit.

That's very helpful.

In terms of RPU, are you -- obviously, there was an increase in use of space revenue, but are you thinking about this in terms of a sustainable level or, again, sort of just trying to get some color.

You see, usage is an issue that we don't control.

Also this quarter is the summer, July, August, September.

Historically usage, Scott knows it better than me.

Softens a little bit in Q3 relative to -- softens a lot in Q4.

So the good news is that usage as percent of revenue significantly less than it used to be in the good days.

But it's still there.

So as long as we don't play, say100% figured free company, usage that impact our revenue, and there is not a lot we can do on usage besides price increase, which we are not planning.

Last year, usage based revenue Q2 to Q3 was basically flat.

That actually was pretty good.

You recall though, the economy had not started to unwind until very late in Q3.

So Q3 to Q2, at best you are going to look at flat usage based revenue.

There is an argument for probably some modest decline.

And then clearly Q2 to Q4, we remind everybody every year that almost always declines own a sequential basis, because Q4 always suffers from a lack or a lightness in business days due to all the holidays.

And because people are more vacationing than working, usually they also are buying or clicking less and therefore, we ends up buying this advertising.

That's correct.

That's Q4, not Q3.

It's all managed well, and I used to have a teacher that used to say that the -- I used to do forecasts, especially about the future.

(laughter) So similarly here, one thing we are confident about is how we manage our total business from the margin standpoint.

Okay, wise teacher.

(laughter) Just one quick think, I may have missed this on the call, but did you guys talk about how many subscribers did you guys add in the second quarter?

Yes we did, and we said that quarter-over-quarter growth was this month.

Over the past year, we increased our paying DIDs by more than 111,000.

Year-over-year.

Year-over-year.

Quarter sequential was a few hundred.

A few hundred.

It was very flat.

You will see that on the metrics slide if you haven't gotten that.

Any reason why they were flat?

Mainly because we have -- we have lots of small reasons.

We had a situation with a creative company called Advanta.

Advanta basically retired or basically closed the credit card.

We had impact of I think 12,000 customers.

We recovered most of them.

Some we didn't.

We had many issues, we have customers that, I do listen to calls, I do try to (inaudible) customers by volunteering the reasons.

There is pressure on those that are playing the credit card games to reduce credit cards and they go with a thin comb through their credit card and they eliminate whatever they can.

And many times if business is weak and you don't have money and you are looking to your usage and as I said during the call, those that have low usage are falling apart, we have seen it.

Okay, very helpful.

Thank you.

No incremental spend, in fact, maybe in even fact even a little bit less on the marketing side.

I think it was relatively flat.

And Sandeep, I tell you something here that I said, maybe I didn't he say it clear enough, on the corporate side, we have lots of large corporations and they basically have somebody like we have in j2 that goes through each line and say, hey, I see here a line that we give to this director or he actually does not receive faxes,I am going to cancel the service.

They don't cancel the account but they reduce it from 1,200 to 1,100.

Things like that.

You see that also on new sign ups.

As Hemi pointed out, going into the quarter, there were actually more than the six that closed that look like they would close during the quarter at 1,000 or more DIDs.

Four in fact did.

Even some of them got reduced down to the 1,000 level, but a couple of them that were hovering around 1,000 went down to 500.

And even to add another, the business is big, so all those examples that I'm giving you can be less than 1 million, but still we have products like the (inaudible) EFax Developer which is a service that is geared towards more stores customize, receive and send, so it's not the casual one customer, one phone number, get fax, it's more towards a special needs and special use, when many faxes coming into one number and then there is some kind of OCR behind it.

Or system generates an order and faxes it out.

There you will see the revenue, but you will not see the fact of the DID, and we are seeing the corporate increased demand for those kind of services.

That's why they bring dollars.

They do not bring DIDs.

Okay.

And last question, I promise.

(laughter) In terms of guidance, in terms of the sub growth, what are you guys thinking about for the second half?

We don't guide to specific sub growth.

As I said, I think you should be thinking about a cancel rate that is in the neighborhood, or if you want, to take our budget even slightly above where it is for Q2.

And you are going to have very similar spend characteristics, I think on the sales and marketing side.

So if -- I think one can infer from that that if Q2 is representative, we are going to be showing relative to historical trends light net DID growth.

What would change that would be we spend more money, cancel rate function is too conservative, the economy ends up being better than we think.

All those things would be influencers around whatever the reality is.

Okay.

Thanks.

You're welcome.

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

Please state your question.

Hi you guys.

A lot of my questions have been answered, but I am going to get the question before it's asked over e-mail.

Is there any update on US (inaudible)?

I don't think there is, but just give us the typical quarterly update, what you guys are seeing, do you see things like that?

Thanks.

There really isn't, but there are a few things that I think are worth talking about.

For the first time in seven months, there is a full permanent FCC commission.

So, that was a significant amount of turnover.

Four of the commissioners that were sitting at the end of 2008 for one reason or another are no longer with the commission.

The term was either out or because of obviously the change in the political party of the White House, that allowed there to be, on a going forward basis, three democrats and two republicans.

So Julius Genachowski is the new Chairman of the FCC.

He was bundled in with the reappointment of McDowell, a republican, Copps, who was the interim Chairman, who is a democrat, stays on.

And then there were two very recently additions, one republican and one democrat, so there is full complement on the commission side.

The legislative side, really, nothing has happened.

There have been -- the Senate and House have been consumed with all of the high level matters that we've been hearing about, whether it's healthcare, budgets, cap and trade, that kind of stuff, TARP.

So there has been very little, if any movement from the previous Congress.

And there also is a lot of seats that have changed.

A lot of chairmanships have changed between the two congresses.

So I don't think that there's anything likely to happen legislatively this year.

There is a sense that USF may get some renewed life as a discussion topic, either at the FCC and/or in the legislative body in 2010 as it relates to the funding or expansion of the broadband efforts.

That's speculation at this point but clearly, if we want to have better aggregate statistics of where the US places in terms of broadband deployment, one of the questions is, who is going to pay for it.

A, what's it going to cost, B, who is going to pay for it and then C, what mechanism is going to pay for it?

Is it going to be a new fund?.

Is it going to be paid through the current USF structure.

And if so, what are the implications for USF, both how much money do you need, who contributes and then under what methodology.

I personally believe the more to move to coupling USF with broadband, the less likely it is that numbers or strict numbers becomes the method of collection because you are really dealing with a connections issue.

And the connections tend to be dealing with pipes, not unique identifiers like numbers.

AT&T still is abdicating numbers, but as I say, there doesn't seem to be at this point any movement on it.

We will continue to track it legislatively and otherwise through the balance of the year.

I will probably go back to DC sometime in -- after the summer in September or October once the Congress is back from their recess and check in and have an update for you next quarter.

Thanks, good job all around.

Daniel, I want to tell you that we are thinking about this topic, the USF for so long that we have prepared so well for it that I think if they would do the change, we convert it into higher revenue.

I think one thing to remember too, there is no more clarity we can give you on it because there's no clarity, that what occurred in 2008 made it very clear that first of all, USF reform, whether it's bundled with other issues or not, is a very difficult process because there are so many constituents that have a vested interest positive or negative in the outcome.

Number two, any change in the methodology of collection is a non-trivial process not only for the government, but for those who would be required to pay.

AT&T and Verizon in their own public filings last year said that to go to numbers, and they were an advocate of numbers, would take them 18 months.

So, even if to Hemi's point you start to see discussion and movement towards some reform of USF, it could be between 18 and 24 months from the time that is enacted and presumptively survives any challenges because I guarantee you, whatever they do, if they do it there will be legal challenges, both administrative and legal.

You can talk about 18 and 24 months after that before you'd actually have to implement it.

So from our perspective, if something were to occur that was not to our liking, that is we believe ample time to put into place our plan to deal with USF.

Thanks.

Can't do it today because there's nothing to do.

Thank you, Daniel.

The next question is from Travis McCourt with Morgan Keegan.

Please go ahead with your question.

Hey, guys, just a couple of follow-ups.

Scott, you mentioned before stock buybacks being part of the cash deployment plan in the future.

Doesn't look like you've bought anything in the first half of the year.

What would be the kind of catalyst behind reinstating that?

Two things.

One is first of all, what I think you are hinting at, we do not actually have a current authorization.

So it's not that we haven't bought any back, we have no authorization to buy any back.

I think that we want to fully vet the M&A landscape before we would commit to buying back the stock.

As I mentioned in the earlier commentary, particularly when we are doing roll ups of assets in one of our three existing spaces, when we are able to buy them we are getting some meaningful premium to the free cash flow yield of buying our stock back, which is how we look at it.

How we look at the M&A is also how we look at the stock buy back.

Somebody had asked earlier, and I think I failed really to answer it, while I don't think there's anything that in absolute scale would be viewed as big, there certainly are situations we are looking at that would be or could be tens of millions of dollars in transactional value.

So because I think that the financing market is still iffy, although better than it has been, and given that we like to do these deals out of cash and not have to go to a bank or to a brokerage firm to raise the money or issue our own stock, we want to be, one, fairly certain that there's not going to be a couple of these larger situations that could utilize a meaningful portion of our cash.

Now there's a small pool of them, so I'm never optimistic.

But in the event one or two, particularly if it's two were to hit, that would be a big drain on that nearly $200 million of cash you see today.

Second thing is, the last time that we authorized the buy back which was a year and quarter ago, the cash had gotten to about $230 million.

And at that time we made a judgment call that both that cash, prospective cash flow and the lack of any larger M&A meant that we could part with upwards of $100 million of that cash.

It was really based on a cash flow yield.

And we bought it kind of in the neighborhood of where it's trading now.

We bought it for 21.50.

I think we would be looking for those dynamics.

Is 230 a magic number?

No.

But something into twos of total cash on the balance sheet, conviction that certainly more than one large M&A deal is unlikely over the next six to nine months, therefore we could part with the cash.

And then the third would be to looked at the yield on a free cash flow basis the stock is yielding at that moment in time.

Clearly it will be superior to what we are earning by keeping it safe and secure and getting less than 0.5% in the form of interest.

Got you.

It looked like stock based comp was up modestly this quarter.

Was there something unique in this quarter, or should that be the run rate we are looking at going forward?

That's the run rate.

There are variables and there are assumption that change quarter-to-quarter like the volatility of the stock, the risk free treasury rates, but the biggest change from a quarter ago are really two grants.

One that was made in the, I believe, March time frame of Q1 which applied to -- I don't know, 15-ish members of management.

So there was only a partial month of expense in Q1.

There was obviously a full quarter in Q2, and then every year our directors have an annual automatic grant that occurs around the time of the shareholders meeting,which was, I think April 30 this year.

So we had two months of their restrictive stock and option grant in the expense.

Yes, this quarter will have three months, but it's not going to be a big deal.

Last one I promise, tax rates, 30% still reasonable going forward?

I'd say give the mix of US to international income and the fact we have got no muni bonds, we are probably looking more like 31.5% on a GAAP or non-GAAP basis.

You clear out any -- the reason our tax rate looks odd on a GAAP basis for Q2 is there's almost no tax benefit with the writeoff of the securities.

By the way, just to be clear, that is a writeoff for accounting purposes.

We still hold the securities, they are still paying us interest.

We are no realized loss, although we are looking to cell them.

So if you take that out, because there's almost no tax benefit, we would be a lot closer to 30%, 31.5%.

Understood.

Thanks a lot.

Okay.

There there are no further questions in queue.

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

Turicchi for closing remarks.

Great.

We appreciate everybody joining us today for the Q2 call.

We will be at a couple of conferences over the next five weeks.

Next week on August 11, there will be a press release out either tomorrow or Monday announcing our participation in the Morgan Keegan conference in New York at the Waldorf hotel.

That will be followed by a presentation on September 10, also in New York, for the Kaufman Brothers conference.

If you have any questions or inquiries between now and our next earnings call, obviously feel free to call us or to e-mail us.

Then I also want to let you know that our 10(Q) for the second quarter has been filed and should be available online as well, and we look forward to seeing you either at conferences or on our next quarterly call.

Thank you.

Thank you.

Thank you.

This concludes the teleconference.

You may disconnect your lines.

Thank you for your participation.