Ziff Davis Inc (ZD) 2009 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the j2 Global's third quarter 2009 earnings.

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.

Good afternoon and welcome to j2 Global's investor conference call for the third fiscal quarter of 2009.

As the operator just mentioned, I am Scott Turicchi, President of j2 Global.

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

We will be discussing our Q3 financial results as well as providing you an update on our operations and our strategy.

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

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

For those of you who have not received the press release, the Company earned $0.43 in GAAP EPS for Q3 and excluding $0.044 for 123-R non-cash compensation charges we earned $0.47 for the quarter.

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

After we complete our formal presentation, we will be conducting a Q&A session.

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

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

Before we begin our prepared remarks, allow me to read the Safe Harbor language.

As you know, this call and the webcast includes 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 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 we have included as part of the slide show for the webcast.

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

I'll now turn the presentation over to Kathy who will give you the specific details for the quarter.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

I'd like you to please refer to slide four in the presentation for a recap of our GAAP operating results.

I'd like to start my review of the financials by highlighting our free cash flow results.

This quarter's free cash flow was $26.1 million, a record for our third fiscal quarter.

Our nine -month free cash flow of $79.4 million is also a new record for j2.

Compared to last year year-to-date free cash flow increased by $14 million.

Compared to Q3 2008 subscription revenue increased from $60.5 million to $61 million.

Without the impact of foreign exchange, our revenue growth would have been greater by $3 million on a year-to-date basis and greater than $500,000 for Q3 alone.

Revenue for our voice business segment grew the fastest.

The domestic segment increased by approximately 14% and international by 645%.

Since we launched internationally (inaudible) in June 2008 the high percentage growth has no material impact on our overall revenues.

Our total Q3 revenues were $61.8 million.

Our paying DIDs grew year over year for an increase of 6.3%.

As at the end of Q3 we had approximately 1,274,000 paying DIDs.

Voice business has grown the fastest, increasing by over 14%.

Corporate segment is a close second at a growth rate of approximately 11% and in total our fax DIDs grew at an annual rate of approximately 5%.

During Q3 we had higher organic customer signups and fewer organic cancels than in Q2.

This favorable organic DID growth was offset by an adjustment made during our final call wave customer count.

Similar to prior quarters and as a sign of the economy, our DIDs for our low-priced fax brands continued to grow faster than our higher priced fax brands.

This quarter our overall increased ARPUs increased from $14.96 to $15.03.

We now have two consecutive quarters with higher ARPUs.

Cancel rates are also trending favorably.

Q3 cancel rates are at 3.14% a decrease of 16 basis points from the prior quarter.

Another barometer we watch closely is usage.

In Q3, we had a slight increase in overall usage led by our legal, health care and education services sectors, which are classified in the noncredit sensitive portions of the graph on slide 14.

Our Q3 metrics reaffirm our belief the economy is showing signs of improvement.

However, I would like to reiterate my comments from the last call that while overall usage, ARPUs and cancel rates are trending positively, we are still guardedly optimistic for the remainder of the year.

As a reminder Q4 has more vacation days and therefore we expect ARPUs to be lower as we enter into our seasonally lighter usage period.

We are very pleased to report another quarter with very strong operating performance.

GAAP gross margins of 81.8% is 80 basis points higher than Q3 2008 margin of 81% and 40 basis points higher than last quarter's margin of 81.4%.

This quarter selling expense was 15.1% of revenues.

R&D was 4.6% of revenues and G&A was 18.9% of revenues.

Total GAAP operating profit for the quarter was $26.7 million.

GAAP operating margin for Q3 2009 was 43.1%.

Q3 2009 operating margins are 2.2 percentage points better than an already high Q3 2008 rate of 40.9%.

Despite the increase in our cash balances, our interest income during Q3 2009 was $600,000 lower than Q3 of 2008 due to our conservative investment strategy and the current interest rates available.

Our diluted GAAP EPS of $0.43 per share is $0.01 higher than Q3 2008.

Q3 non-GAAP EPS is $0.47 per share which is $0.02 higher than Q3 2008.

To calculate our non-GAAP EPS you need to adjust for 123-R.

Q3's 123R was $2.9 million on a pretax basis or $2 million after tax.

The resulting EPS charge is approximately $0.044 per diluted share.

This quarter's beneficial change in state apportionment rates contributed $0.02 to our third quarter EPS.

Please refer to the GAAP to non-GAAP reconciliation schedule in the supplemental section of the presentation for additional details.

Moving to the balance sheet, our annualized return on equity is 22.4%.

Cash and investments at the end of the quarter is $222.5 million, an increase of $27.7 million for the quarter and a year on year increase of $70.7 million or 46.6%.

In conclusion, let me remind you that the supplemental schedules at the end of the presentation will provide you with more information on our metrics.

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

Thank you, Kathy.

Good afternoon, everybody.

I would like to start today with our business update.

Please turn to page six.

On the fax form, our corporate team continues winning big deals.

Three deals in Q3 and additional three deals during the month of October.

The pipeline is very healthy and we have good momentum in the corporate business.

We had a record month on the secondary fax brand.

October showed very well and we see healthy demand for our lowest cost brands.

The eFax brand will generate and continue to generate approximately 50% straight to side signups when people just key in www.efax.com and buy directly the service.

We are starting now to try again to go back to the prerecession marketing programs that we were running.

On an ROI basis we will try to see if we can increase our programs and try less search and more creative marketing plans.

Next bullet.

We have added 170 cities totaling 3,500 cities in 46 countries.

Our geographical coverage has always been an important factor for our individuals and for the one stop shopping for our corporate accounts.

We would continue to always seek opportunity to grow our coverage.

Another point here most of the cities that we added this quarter are in the US.

Let's go to the voice.

On the voice (inaudible), we have submitted both to Blackberry and iPhone mobile apps.

One of them was already approved and the other one should be approved soon.

We are excited about the opportunity and after the beta launch we will release our mobile apps to our 200,000 users.

The mobile apps and the mobile features are including message center.

Basically it's a log-in feature that you can log in from your smart phone.

Our new mobile apps include, among others, also voice mail is displayed.

Basically you can see the list of all your voice messages.

Playback.

You can listen to your voice message.

Voice-to-text display.

This is basically -- you can read your messages.

I personally love this feature because reading a message takes a third of the time that it takes to listen to it.

We have a feature of click to call.

Return a call from your mobile.

Searchable voice mail.

You can actually search your voice mails that are converted to text and search by key word.

We are committed to our mobile apps and we continue to enhance it based on the market demand.

Next, I'd like to talk about our eVoice.

I think I mentioned it in the past, but we have started with our invitation only free trial.

We are still in beta and we plan to launch it and operate to the entire customer base before year end.

Also on the voice front, I'm very excited to mention that during October eVoice which is our US brand and [Irreceptionist] which is our European brand broke their weekly record signups and in October we have seen more signups per week than anytime in the past.

I believe it has to do with two things.

A, we have improved our website and our marketing and also the Google voice box that is created is attracting customers to go and seek for professional, the real deal, the real product and they come to us and sign up.

On the e-mail front, we are planning a new website for year end.

Www.electricmail.

com is the website you should go looking for.

Some of the changes will be visual and some of them will be in the other line technology when our system will have more flexibility and more modern features that enable us to change it and measure the effectiveness of the site.

We are continuing to work on edit features on our e-mail and we will announce them as they come.

Let's talk about operations.

The impressive margins that Kathy and Scott talked about are a result of our attention to operational excellence, diligent and cost efficiencies and those things are very important to us.

I'm very pleased with the spirit of our management and employees that are always seeking to optimize our costs.

We will continue on improvement of those costs and will use the cash that we accumulate to venture into new opportunities for 2010.

Let's go to page seven.

As you know, j2 went public in '99.

Being a public Company we decided in 2003 to hire the services of [Reveil] which is a very well known IR research firm.

The method we are using with them is very simple.

We send surveys to our shareholders and to the analysts, many of them are today on the call.

We asked them to score us on many, many metrics.

The report usually is something of the magnitude of 100 pages that have both scores and comments.

It was obvious that the response was that the investors and the analysts wanted more disclosure, more (inaudible) metrics, improved guidance and more management visibility.

We took it to heart.

And if you go to page eight, you will see (inaudible) -- as you all know, Scott Turicchi, who sits with me here, and you know, we are working together since 1998 I think or even earlier.

1997.

He is our IR manager since 2000 and he is doing a superb job.

Before I share some of the results with you I wanted to thank all of our investors and all our analysts for the time you spent on filling out those reports and the scores are here.

We are making progress in our communication.

The first metric that we chose to show you -- by the way all the metrics are showing improvement.

On our IR effectiveness score, the metric when we started was 3.9 out of 6.

Now in 2009 we moved up to 4.7 out of 6 while the S&P 500, which had a huge, IR teams, versus our single scores, they are scoring 4.6 while we are scoring 4.7.

The next metric here is the overall impression of j2.

This is basically a blended metric.

In 2003, the score was 4.2 out of 6.

In 2009 we improved to five.

While the S&P 500 is only dragging behind on 4.5 out of 6.

Next is the strategy efficiency of j2, the rating we get on it.

We started with a score of 4.2.

We moved up in 2009 to 4.8.

And the S&P 500 is 4.4.

I am very pleased with the results and we will continue to listen to our shareholders and meet -- and obviously try to exceed your expectations.

I'm turning the presentation to Scott.

Thank you, Hemi.

The last formal slide to address before we open it up to questions is slide nine.

We are re-affirming the guidance we have had throughout this year which is for a modest increase in both revenue and non-GAAP EPS compared to 2008.

I also will remind investors and analysts and particularly those that are newer to the Company that the fourth fiscal quarter usually has at least four, sometimes as many as five fewer business days than the immediately preceding quarter of Q3 and that has an impact on our variable revenue as each business day is worth approximately $175,000 in revenue.

So as we enter Q4 we would expect the variable revenue with no other changes in the business positive or negative to show a decline on a quarter to quarter sequential basis in the neighborhood of between $650,000 and $900,000.

So keep that in mind.

There is nothing unusual about this year.

This occurs every fourth fiscal quarter.

But my own experience is sometimes people don't remember that by the time we get to the end of the year.

Finally as Kathy has pointed out we have the metrics that follow behind slide 10.

So we will refer to those during the Q&A.

We also have the reconciliation for the quarter and for the nine-month period between the GAAP and non-GAAP results.

Then on slide 14 we have the continuation of the usage slide where we have shown you the volume of usage broken out between the financial services firms that we call the credit sensitive and the noncredit sensitive; a quick overview of that would show that the credit sensitive remains basically stable over the last several quarters albeit at depressed historic levels of usage while the noncredit sensitive, as Kathy mentioned in her presentation, continues to grow, specifically in certain areas like legal, education services and health care.

With that, I would ask the operator to come back now and give you the procedures for asking a question.

Thank you.

(Operator Instructions).

Our first question is from Youssef Squali with Jefferies & Company.

Two quick questions.

First, Hemi, in the press release I think you talked about, as you turn your attention to 2010 you're going to be focusing more on additional marketing program, new product development, M&A, et cetera.

Ex M&A.

Can you just be a little more deep or can you provide some more detail as to what it is that you're planning on doing to try to move the needle?

Will these programs be enough to allow you to actually start showing year on year growth in 2010, again ex M&A?

Second, Kathy, just a clarification.

On the 95,000 net adds can you maybe just break that down for us between voice and fax?

Thank you.

As you know, when the economy started to retract we moved from various marketing plans to search only.

Now that we are looking into improvement of the economy we will go back into display affiliates and all those others reseller programs that we used to use in the good years and try to do them again.

We are continuing to do it in Europe and it is working well.

So we will try now to launch and relaunch them in the US and focus on our leading products.

Another thing that was always helpful for j2 was the free product.

We have a eFax or fax free product that still generates many of our signups.

We are working at launching a free product for the voice.

I mentioned during the call it is a trial now but it gives you full feature product for six months free and then during the six months we will try to convert you to a paying customer (inaudible) usability of it and go on.

I think that the other question you had was about --

There's two other follow-up points.

Obviously in the area of e-mail as Hemi alluded to there are additional features that we would expect to have available at some point in 2010 that is independent of any M&A, but I would not exclude the M&A from the discussion because I think one of the things we have seen in the last I'd say three to four months is -- and we actually referenced this in part in the last earnings call there was a slide in Hemi's section about areas of interest and what makes a specific space more interesting to j2 than not.

And we have seen a fair amount of activity in what I call related or complimentary spaces to the way we articulate the business today.

And it is in part our desire that some of those new products and features may very well come through M&A.

A further commentary on that I believe the M&A will become easier to do now that the economy has clearly stabilized and arguably has some upswing to it.

It has been challenged to do for most of this year because of the lack of confidence as to first where the bottom was in the economy and then secondly whether a stable floor had been attained and as a result that meant very, very modest bids for assets.

I might have mentioned on the last call we have had a very unusual year in M&A with 12 or 13 active letters of intent that we've been involved in, and yet, as you know, today only one closed deal.

Some of those are still currently pending so those percentages may change by the end of the fiscal year but it really is I think a totality.

In terms of your last point no we are not deep enough into the budgeting process to know exactly the impact of the things that Hemi had mentioned as it relates to organic and/or total growth rate in 2010 versus 2009.

Those things we will get into greater detail on on the Q4 call which will probably be in mid-february.

I think you said you had a second question which we will get back to you on before this call is over and I think you're referencing the 75,000 growth in DIDs from Q3 2008 to Q3 '09?

Is that correct?

Yes, correct.

You wanted to know the split in numbers between fax and voice, correct?

Yes.

If I look at that sheet, the metric sheet and I just look at the paid DIDs at the end of Q2 it was 1.274, 145 and at the end end of Q3, it 1.274240.

The delta was 95.

I don't know whether that's me doing the math wrong or whether that was --.

(multiple speakers) the 75,000 is.

I understand.

Sorry about that.

The 95,000 sequential increase trying to figure out the mix there.

Got it.

Thanks.

Before the end of this call we will have some commentary on that.

Thank you.

Misunderstood your question.

Sorry.

Our next question comes from the line of Corey Tobin with William Blair & Co.

Please proceed with your question.

Congrats on the nice quarter.

Thank you.

Quick two if I could.

first, following up on the last question.

While I understand you don't have specific numbers as to what the initiatives or reintroduction of some of the discretionary marketing spend that it sounds like it might impact the SG&A line, do you have a thought whether it will impact margins either to keep them from trending higher or remaining at the levels we have seen.

I guess the other way of asking is we have enjoyed the nice benefits of some of the absence of these discretionary marketing programs this year.

Should we expect to see margins trend slightly lower as those come back into the equation in 2010?

We don't have the budget for next year but we do have planning and we do have ideas.

The idea is our margins are so fat and high that what we can do is we can, instead of taking the improvements and keep on increasing our margins we will keep the margins with lower improvement and take the money and spend it on an ROI basis, meaning that we get paid for each dollar that we pay on the marketing.

So I think the answer is -- again, we are preplanning, prebudgetting, but the general idea is that we can, instead of just keeping the money and turning it into cash and it goes to the investors we can now more effectively use it towards advertising.

But because as you see we keep on improving on the efficiency, maybe for next year the improvement on the margin will be lower but the improvement on the customer acquisition will be higher.

Understood.

Switching gears just for a second.

Hemi, you mentioned the beta program for a free trial on eVoice.

Can you get into a little bit more detail what's around that?

Yes.

And then also, thoughts on what sort of revenue impact that may have as we look out at 2010?

The product is basically (inaudible) -- we are offering it by invitation only.

It gives you six months of basically the eVoice product on a smaller scale meaning not for a big company but for one or two users and the number of minutes while many are limited.

I think the number of minutes are on the thousands level but it is just meant to protect us from somebody who is coming and is using it in an abnormal way.

The main event is to give them the full features with the voice-to-text, with Find-Me-Follow-Me, with the IVR, with everything, everything free.

All they have to do is say that they want it and allow us to charge us up to six months.

We are starting with our existing base because we have the credit cards and it is much easier and the cost to us is, besides the programming and everything, is not significant.

We have already a few hundred users that are very excited about it.

We have profiled them and we know who they are.

It is a competitive space so I'm not going to say what the profile is but we do have the profile and we have many of these profiles in our user base.

So if I answer what you want or what you are asking, great.

If not, maybe you can specify more.

Just to be clear when you say you are starting with your existing base you mean your existing fax base, right?

Yes.

Yes.

Okay.

Those are the voice --

Right.

And as I said we started a few hundred.

Okay.

And after the six-month trial then they have the option to sign up and become full fledged voice.

No, if they don't cancel they are in.

It converts (inaudible) automatically.

Right.

But there could be triggering events that cause it to occur earlier than the six-month period.

I understand.

Because if they want to use much more and they want more extensions or they want features that -- we give them 100 conference calling minutes and they want more then they will have to trigger it and sign up earlier.

And, of course, they will be notified.

All the life-cycle management programs we have been using for years will be there to make sure we have good conversions and we learn about how to do it better.

I think in answer to the second part of your question, Corey, first of all, it is starting out very small today, and given there is a six-month trigger which although the average may be shorter than that you should assume that any revenue impact really would be in the latter half of 2010.

Understood.

Last one on this.

I'll jump off.

But you mentioned that you will probably ratchet this up, if my interpretation of your comments is correct, when do you anticipate that might happen?

Ratchet up means introduction of these offer to all our base.

We are talking about doing it towards the end of this year.

And we will repeat it.

We will go for -- again, our base is large.

We have like 1 million paying customers that are not voice.

Something like this.

So we have to go -- we have to go group after group learn, improve.

And then usually we offer it more than once but you have to give them a rest period.

Understood.

But everything is automated so it is not going to be a big undertaking.

All we are trying to do is you have many times you have only one chance and we want to utilize the chance in the most sophisticated, clever way.

Great.

Thank you very much.

You're welcome.

Our next question comes from the line of James Cakmak with Sidoti & Company.

Turning to the ARPU, it is up again consequentially.

Can you just provide some more color on what is driving that and all else equal for the next quarter with variable revenue and given that the new customers are of lower ARPU should we expect that to tick sequentially down?

Secondly on the acquisition pipeline just trying to get more color on that, that is an important part of the story to consolidate the industry.

Would you say that you have more or less confidence than you did in the last quarter?

I think the ARPU question -- and I will let the Scott answer on the M&A.

On the ARPU, most of the growth is based on usage.

More business there is more usage.

More activity.

This is the driver.

Plus some of it is the recovery of the economy as you know.

Faxes are directly related to activity financial activity or business activity.

So as the economy is improving and I don't know -- I hate to say that the economy is improving because I'm not a politician, I'm a businessman.

But what we see is more usage.

And to answer the second part of your question, yes, it is likely that the Q4 ARPU would be sequentially lower than Q3 because if our estimates are correct, the decline in variable usage once again not uncommon expected this time of the year would probably put anywhere from $0.20 to $0.30 pressure negative on the ARPU.

It depends whether we come in the lower end of the range or the higher range of my earlier comments but that $600,000 and some, $900,000 revenue invariable that is left in Q4 would be in that range in terms of ARPU, monthly ARPU.

In answer to the question on M&A, just to follow up on what I already said, I think, yes, because there are now a discernible number of months of at least stability, if not some degree of improvement in the economy, I think it actually facilitates accomplishing M&A and I think you have seen that outside of j2.

There has been actually a decent amount of M&A activity probably over the last 60 days as well as that which is pending versus the prior nine months.

And using an analogy I think earlier in the year it was like catching a falling knife, so I think it was prudent to be very, very cautious in terms of the multiples and the valuations [accorded] to companies because you did not have any degree of confidence if, A, their metrics would turn, and B, at what rate they would turn.

But now that you can see in targets stability and/or improvement in their metrics I think that facilitates the ability to offer bids that are somewhat more aggressive.

Okay.

So we have transactions pending in most of our existing spaces but also outside of our spaces.

We are not looking to only do deals that are pure e-mail, pure voice or pure fax.

As I stated before my own preference is because I think of what we do today the most valuable to j2 and it was one of Hemi's bullet points is to do a deal in the e-mail space and to continue to build that business through the M&A and bulk it up to a size that it is more important to j2 internally which unlocks a number of internal opportunities and also is a stronger competitor externally.

So if I'm only limited to buying companies in our existing space my own preference is e-mail.

However we are not limited to buying things in our own spaces.

There are many related spaces or related areas that are complimentary, leverage our customer base, have a subscription based model, are in the cloud or software as a service if you prefer.

As I say last quarter we had a slide in the presentation that outlined a number of the criteria that influences our view towards a given space and those drivers still remain true and are still important to us.

Okay.

Great.

And turning to the costs.

The G&A line has been ramping up for the past couple of quarters.

I guess what should we expect going forward?

It is usually a little heavier in Q4 and Q1 than it is in Q2 and Q3 because of the year end activities following the K, all that stuff.

I think, though, because it was somewhat higher in Q3 than we expected that may not necessarily follow the normal course.

So I would expect if there are no shocks or unforeseen situations that it is probably at a fully loaded level right now.

Got it.

And lastly, I believe Kathy was mentioning this.

The growth that you mentioned on the voice side, domestically and internationally --

What is the question?

What was it?

Voice was --

14% domestically and 600% and some odd, almost 700% internationally but don't forget on an international basis it is still a small number relatively speaking so it doesn't have a material impact on your revenue.

But it does continue to improve and grow at a very quick pace.

Our voice business is still a leader in the pace of growth.

Thank you very much.

Before we go to the next live question I want to answer a couple of questions that have come in via e-mail.

So in no particular order although we will follow up on a question that James just asked.

There was a question that came in regarding our foreign exchange impact.

Just to reiterate on a Q3 2009 versus a Q3 '08 basis international revenue was negatively impacted by in excess of $0.5 million and for the nine months in excess of $3 million.

So those were negative head winds in those relative periods.

On a sequential basis Q2 to Q3 was pretty much nil.

It was nil, yes.

Also, just as a matter of note, our 10-Q has been filed and I think someone has already been reading it.

There was a question that came in which is true.

We've begun to put a small portion of our cash into CDs and the reason for that is to try to generate some kind of yield.

We are still left, though, with an ample amount of cash for all other activities specifically the M&A or if we were to contemplate any other kinds of transactions like buy backs or dividends; this is in no way impinging our ability to do any of those activities but it is a way to try to get 20 more basis points in yield.

And I think that's what we have got for the questions by email, so we will go back to the live question.

Our next live question comes from the line of Brad Whitt with Broadpoint Capital.

Thank you for taking my questions.

Go ahead.

Hemi, you mentioned that you thought that you had record signups for eVoice and [eReceptions] in the month of October and you thought it may have been driven by the Google offering.

I thought maybe you could highlight some of the differences as you see it in that offering versus what you have?

First of all, our offering is not free.

Our offering is more professional.

We are not trying to find out what your interests are and send you advertising.

They had severe glitches in privacy.

But I don't want you to say anything bad about Google.

But on the positive side, we offer an IVR receptionist or -- we have an auto attendant.

So when you call our number it sets up for an office environment where you can say push 1 to talk with Kathy, push 2 to talk with Hemi or to search our employees by last names.

All these features is something we do and they don't.

We have also, in addition, additional on the one books, we have full suite of unified messaging.

You can get e-mail, you can get fax.

You can get voice.

You can get conference calling.

Collaboration is something we are adding.

So it is much more a full-feature product and of course we give the local numbers and the international numbers and many numbers and it is a whole different thing.

Our's costs more but the value is higher.

Have I answered your question?

Yes, that's very helpful.

Then Kathy, just a couple questions on how should we think about tax rate for next quarter?

Maybe going forward.

And also, since that was a little lower than we anticipated.

And also the other income.

I know that's impacted --

Quite a list there you got.

Brad.

Okay, I think the best way to think about tax rate on a normalized basis is probably on a 30 to 30.5 percentage basis.

We have a lot of ins and outs because there have been a significant amount of tax changes.

One of which we talked about in this quarter, which is the California state apportionment.

We petitioned some time ago to the state of California to reassess our apportionment of income to California.

Obviously, the redistribution allows more income in other states where we actually do some business and has less of an impact in California because of the re-apportionment.

We ended up with a much nicer number in terms of that, in terms of the tax rate.

So that was a one-off that [actually] (inaudible) will be normalized and built in going forward but we had a catchup in Q3 because of that.

When you think of the cash and foreign exchange, foreign exchange is hard to predict.

Obviously, we have balances in other locations around the world.

In [other] companies and other currencies around the world so there are going to be impacts associated with that.

Right now, we seem to be fairly stable.

So it's not necessarily I'm not seeing big numbers in terms of that.

The interest is going to continue to be depressed.

Yes, actually, Kathy, I'm sorry.

I meant to say other revenue, not other income.

Oh, other revenue?

One of the things that I probably should mention is when you look at other revenue, last quarter in Q2 we had the sale of a patent, a noncore patent that impacted Q2 by about $700,000 that we discussed on the call.

We didn't have that recurring this quarter.

So what you are seeing this quarter is probably something that's a little more normalized compared to the prior quarter.

Does that help?

That's helpful.

Thanks for taking my questions.

I want to add a point too.

First of all, some of the taxes that (inaudible) states we had a situation with Texas last year when they are taxing us for certain items and we are able to basically optimize those things by the way we manage our network.

And the other thing I wanted to tell you is you were talking about year over year and I think some you or some of your colleagues were mentioning the interest income.

The interest income is different year over year in the levels of millions.

So if you take the fact that we had $1 million or close to $2 million interest last year, now we have close to none and then we had the FX exchange.

Together you're talking about year over year $3 million to $5 million.

And yes, we are improving our margins.

Our next question comes from the line of Shyam Patil with Raymond James & Associates.

This is BJ [Correy] filling in for Shyam.

I just had a couple of quick questions.

Do you think you could expand a little bit more on the opportunities you see on the hosted e-mail front.

What type of growth rates we can expect to see from this?

Also I know you talked a little bit about this earlier but do you think you can quantify gross and operating margins going forward?

On the e-mail, we are very small on e-mail and therefore our growth opportunities are -- when you start small and you are alone against a huge market when you don't have dominance the opportunities are large, they come in many flavors; they come in the flavor of security, in the flavor of better services that we actually never try to market even e-mail services to our base.

We don't know if it is great or not, but the opportunities there is big because we are starting from a low point.

Also the M&A opportunity is big.

The other question you were heading is our margins I guess.

As I said we believe for next year we would be able to maintain the margins.

We are not promising to improve them dramatically because we might consume the money for marketing.

Thanks a lot.

I think there was another question about the e-mail growth rates.

There have been some third party studies.

I don't remember if it was Gartner who did the most recent one, but the ilk of Gartner and IDC on outsourcing of corporate e-mail to third parties which is what electric mail does.

They have been pretty consistent although it is not clear to what extent they have taken into account the recession that those growth rates are somewhere in the mid-teens and that is something that our own e-mail business has pretty much roughly experienced.

So they are looking at that as a forward-looking growth rate number over the next I think three to four years.

But as I say it is not exactly clear how they are taking into account the economy and/or its recovery.

But they are clearly seeing as are we much like in the fax business the desire for corporate America particularly the SMB and SME level to outsource those services to a third party because there are scale advantages that a third party has that a small to mid-sized business does not.

So whether you want your hosted exchange or whether you want something in lieu of it there are going to be arbitrages in cost by outsourcing that to a third party.

Obviously, we take or our competitors take some of that as profit.

Some of that is given back to the corporation who is doing the outsourcing.

But it is a very similar profile and it is a very similar fundamental economic analysis as occurs in the fax space.

Great.

Thanks for your help.

Our next question comes from the line of Mark Murphy with Piper Jaffray.

Please proceed with your question.

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

Thank you for taking my questions.

Hemi, I wanted to ask you about the international fax DID business.

I think you gave us a metric on the international voice business but just wondering how the fax business performed possibly sequentially in the quarter and curious to see if Kathy's dug up the breakdown of the DIDs between fax and voice for Q3?

Thanks.

All right.

Our international fax is growing better than our local fax, our International fax is also a flavor that our local (inaudible) what we call calling (inaudible) which in countries like Netherlands, UK, France, I think Belgium and some other countries.

I don't remember them all.

We offer a free product that actually every fax that comes in is the calling party or the faxing party pays us a fee for each minute.

So those are the good news.

The bad news are that the dollar versus other currencies had a swing of over $3 million.

But it is a business when you count it on number of DIDs, number of pages, and all those other things, is going better than the US.

Then the other question was I think we don't have the answer or we do?

We are still looking.

We are still looking.

We will try to answer it before the end of the call.

Okay.

And then, just one follow-up just on the eVoice opportunity here within the base.

Is it correct that this is pretty much just a complete greenfield opportunity for you that -- I'll ask it another way.

What percentage of your fax space is also currently using the eVoice?

The current percentage is low.

We have not done any serious work to try to lure them in with a free offer or with more educated way.

You have to remember the only thing we did is we sent them an e-mail and told them about it, but we have much more points of conducts with the (inaudible) customers before when they fill up our surveys and we have started and we will invest more next year into basically using the information of customer that fits and less on the e-mail front to try to sell them voice and vice versa.

Our businesses so far have been working mostly in the fax silo, voice silo and e-mail silo.

Now we are making an effort -- we are starting to make an effort to bring them all to unified platform when every time you have a contact with a customer of course it is a positive one to try to move them to the next product.

As you remember, those of you that have seen us when we went public, the idea was unified messaging.

Basically everything in one place.

this dream is happening but maybe 15 years later.

So the idea here is slowly but surely to become the one-stop shopping for all those customers.

And to answer your question in a short way, we have some customers that buy both but it is totally small which shows there is a huge potential going forward.

That's helpful.

Thank you for taking my questions.

Let me answer now the other question that I think Youssef originally asked and now you've asked as a follow up.

So on a sequential basis, from Q2 to Q3, the voice business grew by about 4,000 DIDs.

The fax business grew by about 1000 DIDs.

This is all total.

Obviously that is 5000 net but you only see 95 reported and that difference is the call way of cleanup that we mentioned.

When we acquire companies as a point of notice sometimes it takes awhile to discern whether certain accounts or DIDs are fully paying or on some kind of free trial or something like that.

So during the course of the quarter as we were going through the final stages of the call wave integration, it became clear there were about 4000 DIDs that did not meet the profile of being paid and as a result they were turned off and they are taken out of the counts.

Our next question comes from the line of Naved Khan of Jefferies & Company.

Thank you for taking my question.

I just had a follow-up on churn.

Can you talk about how churn trended in the quarter and could you talk about the trends you are seeing -- you have seen in October and then I had a question on M&A.

The churn as you can all see in Slide 11 was 3.5, Q2 3.3, Q3 3.1.

So we like the trend.

I think you're asking also about what do we see based on October and in Q4?

While it is too early to predict we definitely do not see any signs of -- any negative signs.

Yes, actually so I was looking for more of intra quarter trend.

Or, sorry, monthly trend.

So how did August trend versus July and then September versus August?

Well, the metric includes already July, August, September.

So all we have that we did not disclose is in our (inaudible) in November the 3rd or 4th it is kind of early.

But based on what I have seen the nonfinal numbers October is not looking worse than Q3.

Okay, thanks.

And just on the M&A, Scott, would you still say that your priority is still for e-mail followed by voice and then followed by fax?

If you're looking for an acquisition?

Well, as I say I would include the fourth category of something that is complementary.

I take you back to last quarter and that slide was put in there for a reason in terms of looking at related spaces and related services that could be applicable to and useful to our customer base.

So I would actually prioritize it as e-mail Number 1, new services, Number 2.

I would say voice Number 3 but I am bearish on voice transactions just because given the growth rates in that space and the valuation expectations I think it makes it hard to close a deal and then I would put fax fourth although it is not really fair to the fax space because certain international fax would rank higher than, say, domestic fax.

International, as we talked about before, whether it is in fax or voice, can often times be an entre into an area or region of the world that we currently either do not exist at all or we have very light presence.

We have talked a lot in the past about certain countries in Asia.

It is generally my preference, although it may not be the way it occurs, that we would enter some of those jurisdictions through an M&A transaction because I think it is useful for us to have some amount of people on the ground in the region.

And it is much easier to accomplish that if we can buy an operating business with five or 10 people as well as a book of revenue.

Now, if that becomes unlikely or undoable then we will have to look at alternative methods for entering those regions.

So, it is not quite as simple as saying one, two, three four but I think in general that would be the ordinal priorities.

However, we are active in all of these spaces and sometimes we don't -- it doesn't occur the way we would like.

But I would think that in order of strategic priority, the way we ordered them and the way we just talked about would be what is relevant to j2.

Thank you.

Any deal can make financial sense.

If they do we will be all over it.

Got it.

There are no further questions in the queue.

I would like to hand the call back over to management for closing comments.

We thank you all for joining us today on the Q3 call.

I think during the upcoming couple of months there is one conference we will be participating in.

It is a NASDAQ conference taking place in London on I believe December 2nd.

There will be a press release out confirming the exact date and time of presentation.

Also, management will be available throughout the course of the quarter on several nondeal road shows visiting a number of US cities.

And anybody who makes their way to L.A.

is obviously welcome to come and see us and meet with us.

We would look to have the Q4 call probably sometime in mid-February in conjunction or about the time we would file the 10-K.

At that time we would also talk in much more detail about 2010 and relevant guidance.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.