Ziff Davis Inc (ZD) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to j2 Global's fourth quarter and year end 2009 earnings conference call.

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global Communications.

Thank you.

You may begin.

Thank you very much.

Good afternoon and welcome to j2 Global's investor conference call for Q4 2009, as well as the fiscal year end.

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

We will be discussing our Q4 and fiscal year 2009 financial results, provide you with an update on on operations and strategy, and discuss our fiscal 2010 guidance.

We will use the presentation today for the call, a copy of which can be obtained at our website at the investor section in the featured documents area.

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

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

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

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

However, at any time you may e-mail us questions at investor@j2Global.com.

Before we begin our prepared remarks, we will 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 we have disclosed in our SEC filings including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we've included as part of the slide show for the webcast.

We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements.

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

Thank you, Scott.

Good afternoon, ladies and gentlemen.

Please refer to slides nine and 10 in the presentation for a recap of our Q4 and full year GAAP operating results.

2009 revenue increased to $245.6 million, compared to $241.5 million in 2008.

This is a year-over-year growth of $4.1 million or approximately 2%.

This growth is largely driven by our voice products, corporate business, aided by our secondary brand fax products segment.

In fact, this year our voice business grew by approximately 28%.

Internationally,eReceptionist, which was launched in June 2008, continues to grow at an even stronger pace.

Foreign exchange had a negative impact on revenues for the year.

Without the foreign exchange impact our revenue growth would have been $2.8 million higher for the year.

Had it not been for this FX impact, the 2009 revenue growth would have been at 3%.

Our paying DIDs grew by over 39,000 for year-over-year increase of 3.2%.

As of the end of Q4, we had approximately 1.275 million paying DIDs.

Our corporate segment has grown fastest, increasing by 10%.

We the continue to see quarter-on-quarter improve innocent our overall cancel rates.

During the quarter our rate dropped by 70 basis points from a peak of 3.7% in March of '09 to 3% this quarter.

We anticipate this rate to stabilize and continue to improve in the coming quarters, as we continue to increase the value of our services, actively manage customer retention, and the economy continues to recover.

During the last earnings call, I mentioned that we expect Q4 ARPUs to be adversely impacted by seasonally lighter usage and slower business activities due to the holidays.

This quarter's ARPU decreased by $0.18 from $15.03 to $14.85.

This is the least decline in ARPU from a Q3 to Q4 quarter since late 2006, when the Company implemented its price increase to eFax domestic customers.

Overall, our Q4 results validate our assumptions that the economy had bottomed and is on the slow road to recovery.

I'm also pleased to report that we continue to experience very strong operating performance in Q4.

GAAP gross margin of 82.8% is 130 basis points higher than Q4's 2008 margin of 81.5%, and 100 basis points higher than last quarter's margin of 81.8%.

This quarter's selling expense was 15.7% of revenues.

R&D expense was 4.9% of revenues and G&A was 23.2% of revenues.

If not for the impairment of long-lived assets in Q4 our G&A margin would have been 19.2%.

Total GAAP operating profit for the quarter was $23.8 million; GAAP operating margin for Q4 2009 was 39%.

In Q4, we recognized $2.4 million in expenses relating to a loss on disposal of a long-lived asset.

Excluding this expense, Q4 operating profits would have been 43%, in line with our prior quarters.

This write-off was partially offset by gains from the sale of certain assets.

The net EPS impact of these two events was $0.01.

And our diluted GAAP EPS is $0.39 a share.

Q4 non-GAAP EPS is $0.45 per share.

For this quarter, to calculate our non-GAAP EPS you will need to adjust for 123R, and the sale and write-off of assets I mentioned previously.

Please refer to slide 22 in the supplemental section of the presentation for the GAAP to non-GAAP reconciliation schedule.

Q4's non-GAAP adjustments are $3.7 million on a pretax basis or $2.7 million after tax.

The resulting net EPS charge is approximately $0.06 per sled share.

Q4 2009 was negatively impacted by lost tax deductions of approximately $0.02 related to certain non-tax deductible share-based compensation expense.

Cash and investments at the end of the quarter was $243.7 million, an increase of $21.2 million for the quarter, and a year-on-year increase of $81.8 million or 50.5%.

Free cash flow for the quarter is $22.2 million, and $101.6 million for the year.

Year-over-year free cash flow increased $11.9 million or 13%.

This is a new j2 record.

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 a 2009 recap and a 2010 overview.

Thank you, Kathy and good afternoon everybody.

Today, I will talk about our 2009 results and mostly about our 2010 plan and budget.

To recap, we are on page seven.

To recap our 2009 budget or guidance, sorry, we have predicted only modest increase in revenue and modest increase in non-GAAP EPS.

Our actual results are that the revenue indeed grew modestly by 1.7%, but our EPS, 8.8% year-over-year; our EBITDA, 11.4% year-over-year; and, our free cash flow, 31% growth year-over-year.

Those excellent results are extremely strong due to the fact that in 2009 we had a very tough year ahead of us.

We focused and worked hard on managing and optimizing all our resources and delivered those results that we are very pleased with.

Our operational results, or our main contributor to our success, were our cancel rate and our growth drivers.

Our cancel rate as Kathy mentioned, it dropped to a low 3% by Q4, when we had 3.7% in March '09.

Our growth drivers were voice, our voice product, which we believe now is the largest in the market, have grown year-over-year by 28%.

Our corporate revenue grew by 4%, with 22 large deal wins, end the year with 79 large accounts; and our international revenue grew 5%.

This growth is mostly in local European currency, British pounds and Euro.

Now, let's talk about 2010 and beyond.

2010 is going to be an investment year.

While in 2009, our strategy was to conserve and build up our resources.

In 2010, we are planning to invest in growth, and, therefore, while we are targeting 5% revenue growth, we are planning flat profit growth.

All this money that we will be investing is going to help our 2010 growth rate and we are also optimistic about 2011 when we believe that the investment will have a payback and we are hoping to have even a stronger year than 2010.

Now, please turn to page number nine.

We have announced recently three acquisitions, Quexion, anti-spam virus protection, hosts of email and security company.

This business is already fully integrated to our electric mail company in Canada.

Reality telecom operating under the brand of Core Navigator is a UK based voice service, fully compatible with our service in the UK; we are working on integration, it should be easy.

And then TrustFax.

TrustFax is a US based fax company focusing on individuals and SMB's, one of the top five in the US market.

We have integrated many companies like this in the past and we are confident that this integration will be no different and as easy as the others, as the product is fully compatible (indiscernible).

I am very happy to say that our M&A pipeline is very solid.

If you remember, last year we announced only one build.

This year, we already have three announced, January and February, and our pipeline is strong, mostly with voice business, internationally in Europe, fax all over the world, Asia, Europe; and then on the e-mail side, we have scores of e-mail deals that are available to us in the US and internationally and we're going to be picky and choose the best of them.

Now, let's move to page number 10.

On our outlook of organic growth, on the fax side we are providing service today in 46 countries and 3,500 local area codes.

As I said before, this is very important for us to have increase our coverage and we are planning this year to focus on adding both countries and area codes and most of them will be outside the US and Europe.

We have very good coverage in Europe.

We are planning now to expand into Asia; in some places we just get countries, in some places we just get cities.

For example, in Japan we cover only two cities.

It's a huge country.

In Australia, only five cities.

There are at least 50 cities there that are of importance.

So we're going to focus on that during 2010, most of the efforts will take place if the first and second quarter.

We have changed our organizational structure internationally.

As our international business continues to grow, in Europe alone, $30 million run rate, we have decided to break the international business to Europe or what we call EMEA, Europe, Middle East and Africa, and then the rest of the world.

We have recruited the end of last year, a new VP, European based, European gentleman that is running our European business out of Dublin, and we took our existing international Vice President that developed Europe almost from zero to $30 million, and focused him on Canada, Asia-Pacific, and Latin America.

As a matter of fact, he and I are going to travel over the weekend to Japan.

We expect this year that the DID growth will surpass our total revenue growth so if the revenue's going to grow 5%, our DIDs will grow even faster.

On the corporate side, we are increasing our sales staff by 20%, one in Europe, one in the US, and finally, after so many years, we are seeing success with the US government.

We have seen few initial build with the US government, and it's an upside that is not baked in in our forecast.

On the voice side, we are trying to correct the course of free to pay model, the same way we did with eFax free.

We are providing high value free trial recently to business users.

We started with a very generous offer and so far we like what we have done, and we'll report to you in the future after we have some time to measure our initial proposal.

We are going to focus on branding on voice, especially in Europe.

Europe is broken to many countries.

We have to figure out what's the best brand to operate under and if necessary, do we need to work with more than one brand?

We're going to continue to do cross-selling with our voice.

More we will try even to do not only cross-selling from fax to voice and vice versa, we're trying to pull in the e-mail to become a one stop shopping, under the brand of one box, when a customer can go and buy from us everything that they need, e-mail, voice, fax, you name it.

As I said before, 2010 is going to be a year of investment.

Most of the investment will go to advertising.

We are going to spend dramatically more money on advertising than we ever did before.

We are going to reinvest in our fax brand.

EFax free for the last three years, we have managed down our expense and accepted only customers that came to us.

Now we're going to do a reach out and add a few million customers there.

We are adding spend to our advertising.

We focused in the US for the last few years on search only.

Now we go after media and promote our both fax and voice products, and as I said, Japan.

Japan is -- we view it as the second largest economy with the second largest potential for j2.

This weekend I'm going to travel there with our Vice President of International.

We are hiring or we're interviewing general manager, marketing, advertising agency; and we have a lot of hope for that and it's start of a multi-year plan.

With that, let me pass the conversation to Scott.

Thank you, Hemi.

I would direct you to slide 12 to give you some additional assumptions underlying our guidance, and we broke it into three areas.

Our assumptions regarding the economy for 2010 is that we do believe the economy is in a recovery mode.

However, we believe the pace is tepid and could be volatile.

We think that probably the most relevant element regarding the economy as it would relate to our business is the pace at which companies begin to hire back employees, particularly in the services sector.

We expect that to be modest this year.

Minimal increase in the new hiring in the aggregate in those sectors that are relevant to us, but at least more positive than it was last year where they were actually laying off people and, at the early part of '09, in droves.

Also slightly weaker US dollar relative to the pound and the Euro, which is relevant to our international business or European business.

From an operational standpoint, continue to leverage the infrastructure and the efficiencies as Kathy mentioned, tremendous improvement over the course of the the last six quarters in the gross margin and the operating margin.

The whole goal over the last six quarters was to make permanent cost adjustments that were positive to our cost structure that we could carry going forward with one exception.

And that was the temporary modification of how we were doing some of our marketing programs, until we had a better confidence that the economy had settled and/or was improving.

Second piece is, and there will be more disclosure in our 10-K which will be filed shortly, this is going to be a year we're going to make big investment in the intellectual property portfolio.

As we told you last year, a number of the patents were in re-examination and as a result the cases surrounding them were stayed by the various courts.

Last year those patents came out of re-exam.

There was a lot of administrative things that took place for the courts to set new dates for discovery, Markman hearings, and ultimately trial.

We see these cases, for the most part coming to trial in early 2011, which means this will be a year of investment to get ready for those trials and to deal with the remaining discovery and the Markman hearings.

And finally, the increasing cash balances we have and strong free cash flow, reinvest that as Hemi mentioned into the M&A.

The pipeline is as robust as we can ever remember and unlike last year, many of them seem to be actionable as already evidenced by the three deals that we announced just a couple of weeks ago and look for those opportunistic investments in our cash even if they not be within the M&A realm.

Now, our assumptions regarding interest rates is that they'll continue to be low and as a result interest income should be roughly flat with 2009.

We're assuming a little higher tax rate of 30.5% and the reason for that is that at this moment in time, although there are bills pending in Congress, there is no approval for R&D credits in 2010.

You may remember that in 2008, a similar situation existed.

In Q4, of that year the Congress passed it and made it retroactive and as a result we had a very low tax rate in Q4 because we took the full amount within that quarter.

So, assuming there will be no R&D approved by Congress, we'll have a little higher tax rate.

If and when they approve it, we'll make the adjustment as appropriate.

Our 123(R) stock-based compensation expense will be in the range of $0.20 for the full fiscal year.

Between $0.04 and $0.05 per quarter.

And as a result, if you go to the next slide, that gives us a total revenue growth from 2009 to 2010 of between 3% and 7% with a target growth rate of 5%.

As Hemi mentioned, given the numerous initiatives, non-GAAP EPS to be similar the to 2009.

And with that, our formal comments are concluded.

I would just guide you very quickly to the supplemental information.

The slide 15, you recall, it's the metric slide, you've got eight rolling quarters, two fiscal years.

The next slide is the reconciliation of free cash flow to its nearest GAAP measure.

The slide 17 is one we put in.

We've been public now about ten years and this gives you a little ten-year overview of some key metrics for the Company that you can see how we have been successful in growing the business across a variety of these metrics as well as improving the margin structure.

The following slide is a reconciliation of the GAAP to non-GAAP results.

And then the last slide is the chart regarding the the corporate and high volume users, bifurcating it between the credit sensitive or financial institutions and non-credit sensitive.

I think this chart has served its purpose and this chart has served its purpose, and this is probably the last time that you will see it.

The trends continue to be fairly consistent which is growth coming on a usage basis out of the non-credit sensitive, the financials stabilized, but still at levels well below where they were before the financial crisis occurred in the middle of 2007.

And with that, we'd ask the operator to come back and begin to instruct you for asking questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions).

One moment please while we poll for questions.

Our first question is from Corey Tobin with William Blair.

Please go ahead with your question.

Mr.

Tobin, your line is live.

Please go ahead

Excellent question.

Mr.

Tobin, if you are on speakerphone, please pick up the handset.

Hi, guys.

Congrats on a nice quarter.

Thank you.

How are you?

It's Jeff [Gerowin] in for Corey Tobin and I just have one quick question.

Regarding the increase in discretionary spending, given that, where do you think the operating margins can go both in the near and long term, seeing that we're very close to peaks right now?

Well, I would say first of all, I don't know that we're near peaks.

As I mentioned, we spent the last several quarters, I'd say, optimizing the margins, not maximizing them.

And there is still additional work to be done, albeit less dramatic than what you've seen over the last six quarters and we intend to do that.

Having said that, I think the easiest way to get your arms around it is we intend to re-spend the 200 basis points that we shrunk the sales and marketing over the last few quarters, we intend to re-spend that this year.

And there will be a little bit -- it may be offset by other savings.

There will be some upward bias in the G&A because of the enhanced litigation cost.

So long-term do you think we can maintain where we're at now or go to higher levels?

Well, we don't make long-term projections.

I would say that philosophically, once we make these investments -- as Hemi said, this is an investment year -- the goal is obviously not to make an investment with no return, so the presumption and our view is that these will have payback in 2011 and assuming everything else stays relatively status quo, that should give enhanced margins to 2011, relative to 2010.

And those margins may very well be larger than what you see in 2009.

Thanks.

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

Please go ahead.

Yes, good afternoon.

I'm just wondering, should we assume or do you assume that the free cash flow for 2010 would be similar to what it was in 2009, given it's kind of what you're seeing for earnings as well?

It should be the same, not including our M&A activity, which is --

I think it will be similar.

Okay.

I think it will be similar to those levels, under the presumption that the assumption is correct that the non-GAAP EPS is similar because as you know, the two are very highly correlated.

There's not a material change in the CapEx budget this year.

It is somewhat higher than last year.

As you see the last couple years were really bare bones.

But just a few $100,000 more, $1 million more, not a big difference.

Because the interest rates are low, we cannot talk a lot about increased cash flow from this angle.

Then your 5% or so revenue guidance, does that include some of the acquisitions in there, I assume?

Yes.

And I made a comment on that.

I think that given the timing of the investments, both in the M&A and in the operational elements, what you will see is an acceleration over the course of the year.

So we will expect to have more revenue, middle to later in the year, than, say, right now earlier in the year.

And then of course the timing of any future M&A is unknown, although to say we remain optimistic given the pipeline and the activity we're involved in, there would be obviously analysis made as those deals close.

Okay.

Just last, on gross margins, should we assume those are relatively stable from this point forward, given the efficiencies you've attained there this year?

Yes, although as I mentioned to Corey there are still efficiencies to be obtained and one of the things we've talked about is within our own network operations, a longer range plan, some of which is now behind us, but some of it is still forward-looking, that as we do certain things to the network makes it more efficient on a cost basis and has the opportunity to enhance the margins there somewhat.

Now, as I say, we've done a lot of of it over the last couple of years so you should not be expecting anywhere near the same magnitude, but I think there's still some more benefits to be achieved.

Even though you might be adding more capacity internationally?

Yes, even with that taken into account.

Our international capacities, both leveraging the relationship we have with the big Telcos and they just bring the numbers to where we need them to be, rather than us installing heavy equipment in those countries.

It comes with the territory, as we have so many relationships with big Telcos, I don't anticipate the margins to have -- I mean any significant change.

Okay.

Thank you.

Next question is from Mark Murphy with Piper Jaffray.

Please go ahead with your question.

Yes, thank you.

This is actually Brian Schwartz for Mark Murphy.

Just wanted to dig in a little bit into the investments here in 2010, and it's real good to see you guys incrementally more confident or slightly more confident in the macro picture.

Just trying to get a timing or an understanding on when you started to feel a little bit better, seeing some improvement there in the macro.

If it's possible to talk about what you saw linearly in the quarter and then what you've seen also since the start of the year?

Has it been a linear improvement here since October?

Thanks.

From the M&A standpoint, everything started now, January, February.

All those companies that we are acquiring or in various stages of letter of intent and all those other companies that we have been sticking for long time, I think what happened to them, their confidence came up.

The offer that we give them is good and it's not going to be better, faster.

So they think that the price that we are giving them or offering is fair and the change is mostly on the server side, not on our side.

So we were active all the time.

It's not like we woke up this morning and started to acquire companies.

That's on that standpoint.

From the organic growth or the customer, we have seen less cancellations, and we have seen that the customers are more poised to buy what they want.

They shop around less.

They are less hesitant, so it's good.

And in terms of timing of the spend, as you know, we don't do a lot of new initiatives from Thanksgiving through the first full week of January, encompassing new year's day.

There was no difference or change in behavior in '09 than in prior periods.

So we come out of the box with a new initiative in the first full Monday and programs like the Free and things Hemi talked about, the spend has already begun.

Great.

Not all of it at the same levels.

Things like Japan will occur over the course of the year and actually there will probably be more expenses later in the year than earlier, but things like direct marketing began right out of the gate.

That's helpful.

And then just on the Q4, the net new DIDs, looks like maybe it was about 1,200 in the quarter.

Just wondering if that is correct or if you had any old cleanup that you did and you had acquired more DIDs and such, or is that the right number?

1,200 is the right number.

Just the last question, Scott, on the legal front, just wondering what -- or Kathy -- what is the expectation for the legal expense for quarterly run rate for 2010?

That one is hard to predict.

Remember, you've got two things going on and it depends on where the cash dollars are spent and which cases will dictate the accounting treatment.

So I think we will spend probably $3 million or $4 million more dollars this year than we did last year in the aggregate series of litigations.

However, I think probably only a couple million or less will flow through incrementally to the P&L.

That has to do with the fact that most of those costs get capitalized an amortized.

Now, I think if the courts maintain the trial dates as currently contemplated, and of course we've had trial dates in the past and they did not occur on those time frames, you would see the expense build over the course of the year and would probably be most heaviest in the back part of the year, particularly Q4, because one or two of the trials is due to start in Q4 of '10 and then the rest of them in early '11.

So short of any settlement or resolution, those costs will build as you really get ready to go to trial.

Right now, for almost all of the cases, it's still in a discovery mode with, in the not too distant future, some Markman hearings coming up but those are still a couple months out.

Okay.

And then just two other quick follow-ups here.

One is on these acquisitions that you did in February, just wondering if there's a meaningful number of DIDs that you're going to pick up in Q1 from these three?

Q1 should be strong when it comes to DIDs, yes.

And then last question, just Kathy, just wondering if you had bought back any stock in the quarter with stock here trading at a very attractive -- ?

No, we did not.

Unfortunately on that point, Brian, we did not have an authorization when the stock hit into the 18s and as a result because we were in the quiet period it was not an appropriate time to do so.

So we had no pending authorization during Q4.

We have no current one pending as we speak.

Is there -- are there any discussions right now with the Board about possibly reauthorizing.

There's always discussions about how to deploy our cash back to get the best rate of return and we are building the cash levels not seen in a long time, if ever in this Company, now that we're probably in real-time over $250 million.

So it's a balancing act that has three elements to it.

How much liquid resources do we have and do we need for the M&A?

We have a lot.

Secondly, are there reasons to be somewhat hopeful that larger M&A than what you're used to seeing is do can occur?

The third piece is depending on answer to number two, what is the state of the financing market?

How readily available is capital and at what prices and on what terms?

I'd say right now, clearly we have a lot of cash that's obvious to people.

If you go to the third bucket, although it has ebbed and flowed, I would say certainly over the last 10 to 12 weeks the financing markets have opened up dramatically, almost across the board, whether you're talking debt, bank revolvers, equity, equity linked securities, so we don't know if those will stay open very long, or will stay open on good terms, but clearly at least at a moment in time they are opened.

And then as relates to the middle question, we're not going to get too detailed on that because I don't think that's appropriate but I think we have some reason to believe that although the set of larger deals is rather small, there is something bigger than a zero probability that something could happen there.

So it tends to guide us to being more liquid and keeping more cash around than what someone who is just analyzing the balance sheet might assume.

But it's a constant question that gets revisited and I think to the extent the market windows stay open, to the extent we become more pessimistic about a larger deal, then I can tell you, I would be a big advocate of buying in shares.

I think it's a very attractive rate of return for our cash, which unfortunately is still yielding at best about 1% on average.

That's real helpful.

Thank you for taking all my questions and congratulations on a good quarter.

Thank you.

Thanks.

Thank you.

The next question is from Tavis McCourt with Morgan Keegan.

Thanks for taking my question.

I apologize for the background noise.

Could you give a number for the total number of voice DIDs at this point?

No.

Do you intend to break that out in the future or still just an aggregate?

As you remember, last time we talked about we said it was around 200,000 customers and this quarter growth was 1,200 DIDs.

How big can it be?

And then if I heard you right I think you said the corporate fax revenues were up 4% year-over-year.

Yes.

Is that something you would expect to accelerate next year?

It seems like you had a pretty good year adding new --

Yes.

-- new customers, but didn't grow into revenues.

Was that because it was back end loaded this year in terms of getting the services deployed?

No.

On the corporate side, the buying decisions and the process are totally different.

Those builds take sometimes two years from the date that they start and show intention to the time that they really get the numbers.

So we have very healthy pipeline, our pipeline is even healthier than ever, so we have a lot of build that's are pending, just that they are moving very slow due to the nature of those customers.

They take thousands of numbers, they have to get rid of an existing system, and as I said also, we are seeing now also starting of business flow that comes from the government.

So I expect 2010 to be better.

But you're correct about it, that from a DID perspective, as long as they're provisioned by 12/31/09 that's what refers to the 10% increase in DIDs allocated to corporate relative to '08, but obviously because you don't get the full year benefit, revenue wise you'll have a lower percentage of revenues.

So yes we are carrying in 2010 some incremental revenue from those contracts for which we don't have the full year benefit in '09.

Great.

And then can you talk about how churn has trended throughout the quarter?

I mean, seems like it's come down to 3% here.

Can you start to see the light at the end of the tunnel in terms of getting down the churn rate where it was historically before the recession?

We are hoping -- as I said before, I hate to make forecasts especially about the future, but joking aside, we believe that the trend will continue.

How fast and when will it stop we don't know, but we already have our January, February results and at least they are not worse than before.

Yes, I think our assumption is -- and we don't have the same granularity of detail for, say, January yet because of the consumption with the year-end activities and the K and getting a proxy, et cetera.

But our belief is that, A, it will probably trend in lock step with what the economy does or does not do, and given our assumption on the economy we would expect a continued gradual easing or improvement in the cancel rate, although if the economy takes a jerk here or there we would expect that to be reflected within the cancel rate as well.

Final one for you, hemi.

Can you talk a little about the dynamics in the Japanese market?

It's obviously a big fax market.

Are there fax/email server competitors there or is it just service solutions?

Okay.

We have -- naturally we visit all our competitors in Japan; they are all small.

One might be puzzled why in a market like this there's no solution of fax to e-mail of any size.

We believe that nobody has marketed it in the right way.

We believe that the Japanese market is ready for secured product and encrypted products

Our products are more secured and more encrypted than obviously a fax to a machine.

I'll be honest and candid to say I do not know why nobody has succeeded.

What we have done, we have spent many, many times there.

None of those that did try were serious marketing companies with any approach that we would consider a good one.

So we believe that our approach will be better.

We believe that the potential is big.

The faxing per capita in Japan is larger than the US.

They do get faxes in paper.

They have faxes in almost every house.

They use faxing also to do food orders.

They read most of their e-mails that are not work related on their mobile phones that have screens that are similar to our SmartPhones.

We have not seen any reason not to be successful and we've decided in our size it will take us $4 million or $5 million over the next two years to see if it's successful and we believe that in our position we should take the risk and try to spend $4 million or $5 million to know because there's nothing there that proves that it should not be a big success.

Also another thing that's encouraging, the iPhone there is successful beyond everybody's expectations, and if the unemployment there rate changes and they are becoming less traditional, every Japanese office used to have a woman that used to bring the fax from the fax machine to the man.

It's changing.

So we think all those are good indicators.

But we don't know.

There is a risk there that we will not succeed.

Okay.

Thanks for putting up with the background noise.

No problem.

Next question is from Brad Whitt with Broadpoint.

Please go ahead with your question.

Hey, guys.

Most of my questions have been answered but I will -- just curious, Hemi, you mentioned about going after the government vertical.

I'm curious, are you using resellers or using the enterprise sales team going direct?

Just curious how you're approaching that.

We have -- in our enterprise team, we have one of them that is an ex-politician that is specializing in the government opportunities and he reports directly to our head of sales and he opens the doors and he's worked on it for many years and also you have to understand, you have to comply with the government.

You have to be -- they like you to be American company.

They like you to have all the GSA and all the other approvals.

We've got all of them.

And we have as I said a consolidated effort.

More than one person is selling -- are selling, but one person is living it.

Okay.

And then how is the pipeline for the enterprise in general.

I'm sorry?

How is the pipeline for the enterprise business?

Did you disclose how many enterprise deals you had this quarter.

Five this quarter.

We had five this quarter, totaling 79.

76.

76, sorry, and 22 the entire year.

Okay.

That's helpful.

Thanks.

That's all I have.

Thanks for taking my questions.

I plan to answer your question.

The deals remain strong both in number as well as in number of potential users per account.

And also more and more international opportunities.

We are increasing our -- we have now two people in Europe, we are going to grow to three.

Great.

Thank you very much.

All right.

All the best.

The next question is from Shyam Patil with Raymond James and Associates.

Please go ahead with your question.

Hi, good evening, guys.

Hemi, you made a comment in the script about seeing a greater return on the investment you're making this year in 2011.

And I was just curious, if the investment plays off as you foresee and the macro's steady to improving, is it unreasonable to expect accelerating organic topline growth in 2011?

And will that drive expanding operating margins?

I will be very disappointed if 2011 will not be stronger than 2010, because some of the investment that we are doing like the investment in the Free customers, it takes a year to get the return.

Japan, and some other -- and the M&A, you know you have part year versus full year.

So I will be very disappointed if 2011 will not be stronger than 2010.

It's too early for you to say if it's going to be doubled or not, but it should be stronger because the investments are not in infrastructure.

They're investments in marketing, in customer basis, in business.

So make an M&A mid-year, next year full year.

You do you Japan, year number two is going to be stronger than year number one.

The Free customers takes years to get the full benefit of them.

So, yes.

That's helpful.

And on the fax side, you mentioned that you expect DID growth of 5% this year.

Just wondering, how should we think about the fax ARPU growth or fax ARPU for the year and then could you help us maybe understand relatively international, corporate and individual, you know fastest versus slowest there.

The comment that I made is if the revenue would grow 5%, we expect the DIDs to grow more than 5%.

The reason is, we are growing faster in the corporate where the ARPU is lower.

We are growing faster in the voice where the ARPU is lower, and we are growing faster in the secondary brands where the ARPU is lower.

If revenue grows by 5%, DID should mathematically grow more.

By answering that I'm answering your question about the ARPU.

We are mostly focused on getting more customers rather than catching the customer in the full price.

The reason is we understand the economy.

We understand the customers.

We understand where they are, and now getting people to give us credit card and get service, as you see, we are still very profitable.

The focus will be on getting more customers and less on the ARPU.

The ARPU will become a focus when we have strong economy, years, and I'm not smart enough to say when.

But that's basically -- did I answer everything or you had other -- I think you also asked about corporate and international, right?

Yes.

Internationally, our corporate prices are very similar to our local prices.

We do have, as Kathy mentioned, when the Euro and the British pound are fluctuating against our currency, there's an impact, but those low cost DIDs that we are selling, why, the ARPU is very low.

Those deals tend to pay for each page starting from page number one.

So there never can be not profitable.

Even though the initial price for the DID is low, every page they receive they pay per page so, therefore, it's always very profitable.

Got it.

Great.

Scott, in the past you mentioned that an acquisition can contribute or typically contributes about a point to revenue growth for that year.

I know you're working off a much higher revenue base, now, but is that number still relevant as we think about what these three acquisitions could add this year?

Well, first of all, the historic range for a given fiscal year is anywhere from 0 to 3 percentage points historically.

Probably you're right that on average it's in between one and one and change.

Last year in '09 it would have been higher than that.

And these three deals themselves would not get to the higher end of the range.

Might get you to the low end of the range.

But, given as I say the pipeline remains full with a lot of workable situations, I think that there's a chance it could be at the high end of this range this year, maybe even a little bit above the high end.

But I don't imagine it to be materially different than the historic range and of course we're not going to speculate on anything that could be larger.

So, all the things that we look at that we're talking about now are what I would call basically garden variety deals, very much like the three that Hemi discussed earlier, and very similar to the ones we've done over the last three or four years.

You see, when we forecast our growth on the organic side, it's mathematically done, scientifically done, you play with all the variables.

When we do an M&A all you have is a list, and you don't know what's more probable, what's less.

Of course, the list is bigger and the required prices versus what we want to offer, the get is small, and the seller is motivated and is moving into serious steps, gives us the comfort level to predict them.

But I'm always very careful to say, M&A, until you do the deal, you don't have it.

It's unlike our existing base, keeps on -- has its own life.

Got it.

And just a couple more.

Scott, talk a little bit about what some of the, if you will, the areas outside of your core businesses today might be for M&A?

Sure.

There are a lot of areas that depending on how one looks at it would be complementary, related, adjacent.

If you go back a couple of quarters to the August call for Q2, there was a slide in there that listed a series of criteria that we look at or we put any space or any target through that prism.

That's how we analyze it.

So to refresh subscription based model in the cloud or as a service, targeting business end users for business people or businesses, ability to leverage our existing internal infrastructure of both network and marketing skills, online as well as offline, ideally, entering entering at the SMB level, but with opportunities to feature enhance and to go through the corporate sales force for larger deployments, intellectual property opportunities, branding opportunities, all those things are elements that we look at.

Now, not every space can meet all that criteria.

By the way, we also want something that is growing, has a large opportunity and of course if all those other criteria are met it will by definition be highly profitable but for some initial marketing spend to make customers aware of it.

As you know, we talked about things in the past such as, and these are only by example and it's not limited to these areas, document management services, the collaboration space, the digital or e-signature space, online storage and backup, more sophisticated --

accounting, SAS for accounting.

For small businesses.

Small businesses.

There's a whole series of them.

When we've done our own internal work, if you take subcategories and aggregate them, there's probably eight or nine spaces that would be complementary to the spaces that we're in today and consistent with them, that we think would be at least philosophically reasonable areas that we might go to organically, or through M&A, or in some cases possibly even licensing the technology from that third party and branding it a j2 brand.

All of those remain options of how we could enter some of those spaces.

And understand, the big -- what we spend a lot of time on from a strategic standpoint is recognizing there's a lot of different directions we could go, prioritizing which are the best two or three directions we should go.

Because remember, we're giving you big margins, giving you a lot of free cash flow.

We like that.

But part of that is we're a pretty lean organization, so we've got to pick our spots very carefully, irrespective of how we enter.

It's not limited to the M&A question.

So to go into a related area, we've got to have fairly high degree of confidence that it meets a number of the criteria outlined a couple quarters ago, meets a meaningful and growing space in terms of the opportunity and is not diverting too many internal resources away from already other productive activities.

Those are the constraints within which we operate.

So we don't lunge and new space opportunities just because they present themselves.

I can tell you they present themselves all the time, particularly in the M&A world.

In the last few quarters, certainly in the recessionary period, every type of Company has come out, and we probably had some level of discussion with them, in areas that do not necessarily fit perfectly or squarely within the way we articulate the three spaces today.

Great.

Thanks, guys and congrats and great to see accelerating growth coming back.

Thank you very much.

We have time for one more question.

And the last question comes from James Cakmak with Sidoti & Company.

Please go ahead with your question.

Thanks for taking my question.

You're welcome.

Could you provide some detail on the efforts to expand your sales force?

How many people are we talking about and are they going to be focused on corporate or what initiatives are there?

And secondly, what is really driving the confidence that DIDs can grow at a much faster rate than the top line?

And how much does advertising, increased advertising spend is really going to gain traction here.

Your first question about our corporate sales.

Our corporate sales is done in three ways.

We have those that are smaller that come directly to our website.

Those will be usually 10, 20, 30, they're fully automated.

The second level will be -- and of course we have no people there.

We have customer support people, but no salespeople.

Then we have a telesales group, that is relatively big, 30, 40 people.

They do telesales; they take calls on corporate.

Some of them take on voice, some of them take on fax.

And then on top of that, we have 12 executive sales that deal with new deals and then we have another supporting group of six, seven people, they deal with renewal of contracts, system engineering, management, and then on top of that we have another group that does the billing for those corporations.

So that's basically all that we're talking about in the organization that really support and 40, 50 people, but in the field, those that do the large deals that we are talking about, we take pride that we have only 10 and now we're going to go to 12 people, because we are covering very well and they are very successful and profitable.

We don't need to have a person in every city.

The nature of our brand is that our customers, two or three alternatives.

First of all they have to decide if they want to do a service that is outsourced, which is another few players or if they want to go to hardware solution.

Once they decide hardware solution is not the way, then we have a very good chances to win with all our IP coverage, brand, financial strength, we are poised to take most of the deals.

Now, the second question that you have --

What's driving the confidence for the DID growth.

Okay.

A, the reduction of the churn.

Our sales are even if they stay the same with lower churn you have more net DIDs, because you know our guidance is about net DIDs.

We are seeing that we have done very good results without advertising, with advertising.

Our advertising is still CPA based.

So worst case scenario we will not spend it.

But if we will, it will come with growth.

The M&A deals that we did already covered a nice chunk of our planned DID growth.

So add the advertising, the fact that we know how to do advertising, the fact that our churn is lower, the fact that we see the sign-ups are strong, all those together are increasing our confidence and on top of it also the international market, some of them are in virginity stage and just offer the service and they take it.

Got it.

And then on the ARPU side, yes, it's being weighed down by the mix shift into lower priced product, but it was also being slightly depressed by the drop in variable revenue.

What type of assumption are you making for 2009 on the variable revenue front?

You see, the variable revenue continued to shrink, it becomes at a certain point irrelevant, because most of our customers and most of our income are coming from the included packages.

Yes, it might drop a little bit more but the impact marginally becomes smaller and smaller.

Plus, you don't actually see it dropping because when you have a massive year like we did last year, most of the people that churn are people that have no usage.

So they drop and now the people you are left with have higher usage.

So a lot of the cleanup was the nature of people just looking into why am I paying if I'm not receiving faxes.

Not all of them left, because many people still would like to keep the service even for the security and for the insurance aspect; if they have the fax number advertised out there, but we have less of those now than we had before.

Therefore, we believe we will have less of an issue there.

Okay.

And lastly, with all these investment initiatives in 2010, can you provide any insight into what type of growth you think this could potentially yield on the top line next year?

As we said, it's a range of 3% to 7% and we believe it's going to end up in the center, 5% revenue growth and more than that in DID growth.

I actually meant for 2011.

Oh, for 2011, sorry.

Revenue-wise, all those acquisitions that we do mid-year gives you full benefit the the rest year.

We have also as I said high hopes to be successful in those markets that are -- we have not touched yet and we have also some partnerships that are coming from many directions, but I cannot enhance more than I see, much more interest in partnering with us with companies from all -- at least three or four different type of companies, online companies that are coming from different sectors.

And all of them have high interest in working with us.

They're serious.

They're sending senior people.

I have not baked anything into the forecast for 2010.

But if you're talking with three or four serious companies, if one of them will happen, we'll have a strong year.

Great.

Thanks a lot.

Okay.

Bye-bye.

Take care everybody.

Want to conclude?

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

Before we leave you, we did receive one question via email, has to do with what the churn rate assumptions are for 2010.

As we mentioned, we ended the year at 3.0%.

We talked about some continued modest improvement in rate over the year.

I think the average assumption for the year is about the 2.9% range, going from 3%, about 2.8%, 2.7% by the end of the year, but averaging approximate 2.9% for the year.

And with that we will conclude the Q4 earnings call.

By way of note, we will be presenting at a couple of conferences coming up in the month of March.

There will be a press release announcing those in terms of date, time and place.

And then we will also have a few non-deal road show presentations in various cities between now and our next quarterly result.

We would expect to announce the Q1 earnings sometime the first week of May, but once again, as it gets closer, we'll have a press release out with the exact time, date, and place and we thank you for your participation.

That concludes the teleconference.

You may disconnect your lines.

Thank you for your participation.