Ziff Davis Inc (ZD) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to the J2 Global's first quarter 2010 earnings call.

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of J2 Global Communications.

Thank you, Mr.

Turicchi you may begin.

Thank you and good afternoon, ladies and gentlemen and welcome to the J2 Global investor conference call for the first fiscal quarter of 2010.

As the operator just mentioned, I'm Scott Turicchi, the Company's President, and with me today is Hemi Zucker, our Chief Executive Officer and Kathy Griggs, our Chief FInancial Officer.

We will be discussing today the results for the first fiscal quarter of 2010, provide you an update on our operations and strategy, and reaffirm our guidance for fiscal 2010.

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

In addition, if you have not received a copy of our press release, you may do by also accessing our corporate website at www.j2global.com.

Also at that web address, you can find the webcast which will be available today as well as archived for the next 30 days.

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

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

In addition we remind you at any time you may e-mail questions to investor@j2global.com.

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

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

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

Some of those risks and uncertainties include but are not limited to the risk factors we've 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 those documents regarding Safe Harbor language as well as forward-looking statements.

At this time, I'll turn the presentation over to Kathy, who will give you the financial results for the quarter which are on slide four.

Thank you, Scott.

Good afternoon, everyone.

As Scott indicated, please refer to slide four in the presentation for a recap of our Q1 GAAP and non-GAAP operating results.

Q1 2010 revenues were essentially flat at $60.3 million compared to $60.4 million in Q1 2009.

This minor decrease is driven by the strength in US dollar in Q1 2010 versus Q4 2009, which negatively impacted Q1 revenue by approximately $400K.

Another contributor was a continuing shift in product mix as we see faster growth in our corporate and low price brands.

Additionally we saw strong demand for our prepaid annual payment programs in the first quarter of this year, which yield a smaller ARPU than the cost of a monthly plan for the same service.

And finally our enterprise corporate revenue is up 2% over Q4 2009 and up 8.1% over Q1 2009.

Deferred revenue grew by $1.2 million this quarter primarily due to increases in prepaid usage, strong demand for our prepaid annual payment programs and deferred revenue acquired through acquisitions this quarter.

This is the first quarterly increase in more than eight quarters.

Our paying DIDs during Q1 grew by over 39,000 for a year over year increase of 3.1%.

As of the end of Q1, we had approximately 1,315,000 paying DIDs.

Our corporate segment has grown significantly, increasing by 27,000 DIDs or 9.2%.

Our organic DIDs grew by 10,800 in Q1 2010, the largest organic growth since Q3 of 2008.

Free cash flows for Q1 2010 hit a record of $34.2 million or 57% of revenue, an increase of 12% over Q1 2009.

Additionally the Company reported total deferred revenue of $12.6 million for Q1 2010, an increase of $1.2 million over the prior quarter and the first increase since Q4 2007.

We continue to see quarter on quarter improvement in our overall cancel rates.

We've reduced our churn rate from the Q1 2009 rate of 3.5% down to 2.8% for Q1 2010.

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

ARPUs for Q1 decreased 3% or $0.45 from $14.85 to $14.40, this decrease is primarily due to a shift in fax product mix, the weakening of foreign currency rates and growth in our corporate customer base.

In addition, our Q1 acquisitions have lower ARPUs than our existing base.

I'm also pleased to report we continue to experience very strong operating performance in Q1.

GAAP gross margin of 83% is 190 basis points higher than Q1 2009's margin of 81.1% and 20 basis points higher than Q4's margin of 82.8%.

This quarter selling expenses were 18.5% of revenues, R&D expense was 4.8% of revenues and G&A was 19.1% of revenues.

Selling expense includes investments of several initiatives that should yield long term benefits and Hemi will provide you with additional details in his operational review.

Total GAAP operating earnings for the quarter were $24.5 million, GAAP operating margin was 40.6%, non-GAAP operating earnings were $27.5 million for the quarter with a non-GAAP operating margin of 45.7%.

Net earnings for the quarter were $17.6 million for GAAP and $19.8 million for non-GAAP.

Other income was $192,000 for the quarter compared to $142,000 for Q1 2009.

Improving returns from interest income were offset by foreign exchange losses due to the weaker sterling and euro.

Q1 non-GAAP EPS was $0.44 per share, for this quarter to calculate our non-GAAP EPS you will need to adjust for 124 R and certain acquisition related costs.

Please refer to slide 14 in the supplemental section of the presentation for the GAAP to non-GAAP reconciliation schedule.

Q1's non-GAAP adjustments are $3.1 million on a pretax basis or $2.1 million after tax.

The resulting net EPS charge is approximately $0.05 per diluted share.

Q1 was a robust quarter for M&A activity, we closed three transactions, two of which were in the fax space and one in voice.

Two of the acquisitions are internationally based and support our expansion both in Australia and the United Kingdom.

These new revenue sources combined with our strong margins position us well for the coming quarters.

Cash and investments at the end of the quarter are $264 million and increase of $20 million for the quarter after spending $10 million on acquisitions.

Free cash flow for the quarter is $34.2 million compared to $30.4 million for the same quarter last year.

This is a record for free cash flow in any one quarter for J2.

We anticipate our effective tax rate to be approximately 30% in the coming quarters.

Our tax rate did benefit from an increase in foreign earnings this quarter which are taxed at a lower rate.

Finally, we are pleased to announce our Board of Directors has approved a share buy back program of up to 10 million shares over the next two years.

Under this share repurchase program, the Company may make purchases in the public market or in off market transactions of up to 10 million shares at any time or times through April 30, 2012.

The timing and amounts of any purchases will be determined by the Company from time to time depending on market conditions and other factors it deems relevant.

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 first quarter recap and additional 2010 overview.

Thank you, Kathy, and good afternoon everybody.

Today, I broke up my presentation to three parts.

Our operational results, our marketing spend initiatives and our M&A activity.

Our net ads.

With our increased spend on our various market initiatives, we have added in Q1 over 39,000 net DIDs, with 11,000 of them coming from our organic growth.

This organic growth is the highest we have seen since the beginning of 2009.

Just to do the math, in Q1 we have added average of 3,600 new sign ups every month.

In April we did even better and we already have 6,000 new DIDs for the April months.

Our retention.

Our retention is improving.

Q1 cancel rate is down to 2.8%.

This is our lowest rate in the last two years.

I want to remind you that in Q1 of 2009, our rate was 3.5% and it even peaked to 3.7% in March 2009.

I hope that we can during this year beat our 2007 -- Q4 2007 when the churn rate was 2.7%.

We have done a lot of efforts in driving annual sign ups.

Part of our drive -- part of this initiatives was to lower our churn rate.

From our customers, we were asking to show their loyalty and in return we gave them a discount of usually up to 17% on the annual basis.

This effort has resulted lower churn and also lower ARPUs and, as Kathy mentioned before, our deferred revenue spiked up to $12.6 million, $1.2 million over last year.

Our corporate sales.

Our corporate team performed very well this quarter.

We have added 26 new contract customers in Q1.

Of those, seven are large deals, and already in February they have signed additional two large contracts.

So if you add it all together we have now 85 large scale corporate deals.

Our geographical coverage.

As you know, our geographical coverage is very important for us.

We have added two countries, Brazil and Peru to our global footprint.

If you are counting we now have 48 countries and 3,700 cities, added approximately 130 cities during Q1.

We will be getting more cities in Q2 both in Europe and in Asia.

Also wanted to mention that we have increased our coverage on the voice product and we have added major Canadian cities to our e-voice service.

Now, let's go to the next page, page number seven, where I will be discussing the marketing investment and initiatives.

Its adjusted, we have added in April, 6,000 DIDs, largest month organic growth since November 2008.

We are continuing to increase our marketing spend and keep our high marketing budget and we will continue it and hope to achieve even further growth during May and June.

In the last two years, as you know, we've virtually stopped spending on display advertising specifically in the US.

Now we have decided to renew our investment in display advertising both for our fax and voice brands.

This will result strengthening of our brand, boost our straight to site sign ups and enhance our market share.

Now, let's talk about our free base.

As you know, J2 is unique with the fact that we have 10 million free customers, most of them are eFax customers.

In the last few years, we stopped investing in this base and the base has been becoming weaker and weaker over the time.

In the beginning of the year we decided to reinvest in our free base.

Our eFax free base already grew by 500,000 or more customers, we now have 10.3 million customers.

The free, the investment in free fax is designed to increase our free to pay signed ups, customer come sign up for a free number, they want a local number, they want more features, they sign up for a new paid numbers.

Also it increases our up sales, our cross sales and our straight to site traffic is increasing as a result of more free customers.

We never had good invoice free offering.

So in January, after thinking about it and designing it we have launched a new offering, eVoice Free.

The eVoice Free trial is unlike eFax, the sign up is with credit card, the customer gives us the credit card, they get six months of free usage and then during this period, if they go higher with the usage that we allot, we give them this allotment, they start paying and at the end which will probably be late Q2 or mid Q3, we will be able to also analyze the results of the end of the six months of free period.

Let's move on to our initiatives in Japan.

As you know for many years we tried to go into the Japanese market.

Now, we have established a Tokyo office as we speak.

Our network ops guys are working in building up our offices, telephony and all the other things we need to establish an office.

We have a formal launch plan during this quarter, we'll announce it.

We have strong advertising still working for us on marketing campaigns.

We will start with phone numbers or fax numbers in Tokyo and Osaka and we have contracted with one of the leading carriers in Japan to add up to 50 major cities in Japan.

Our website in Japanese are in final testing and our marketing campaigns are almost ready.

I hope to give you some updates in the next earning call.

Hong Kong.

We have established Hong Kong as our Asia Pacific hub.

We will be supporting from there our existing customers in the newly acquired customers of mBox.

We will support our customers that reside in Hong Kong, Australia, New Zealand, Singapore, Malaysia and Taiwan.

Next slide is M&A.

If you remember, we talked a lot about our M&A activity when we closed year I'm very happy to announce that we have year to date close four M&A acquisitions.

Last but not least today FuseMail, but let me go through the beginning of the year.

In January, we bought the assets of a US based fax business that required in January.

We are now in the finishing line of integrating and moving all those customers to our network and infrastructure.

MBox is an Australian fax business company that we acquired in the end of March.

Their revenue impact of this quarter was dismal.

The integration is underway.

Customers are mostly Asia Pacific, Australia, Singapore and New Zealand.

They will be serviced, as I said, from our Hong Kong office.

The next one was Reality Telecom, it's a British voice service company, small company we acquired in January with service in the UK, primarily SMB accounts and the integration is underway.

I think we will be finishing sometimes late May, beginning of June.

FuseMail is the new company that we just actually signed today.

The deal closed, this company is primarily e-mail hosting and also small portion of e-mail marketing that we'll integrate into our electronic mail and into our N4, the customer base is SOHO and SMB, similar base to eFax.

We hope that with this company we will be able to sign smaller customers, those are the eFax customers that are typically one to five employees that want also to get our support in moving their domain and give them alternatives, local alternatives to Microsoft exchange, et cetera.

This assets that we just acquired had it all.

To summarize, our M&A pipeline is big.

We have large number of candidates in multiple countries, several LOI's, cannot talk more about it, we are conservative when we talk about M&A, we'll announce it after it happens.

Scott and his team are doing an excellent job on this front and most of the businesses we have are international opportunities.

With that, I'll pass it to Scott.

Thank you Hemi on slide 10, you have a reaffirmation of our annual guidance, which is for revenue growth between 3% and 7% over fiscal year 2009.

A non-GAAP EPS similar to 2009 levels.

And as Kathy mentioned, the slides following the guidance are the supplemental information, which are an update of our metrics, free cash flow, reconciliation of GAAP to non-GAAP statements.

And at this time, I would ask the Operator to come back to begin polling for questions.

Thank you.

(Operator Instructions).

One moment while we poll for questions.

Our first question comes from Shyam Patil with Raymond James.

Please go ahead.

Hi, good evening.

I had a few questions.

I was hoping, I know you only provide annual guidance I'm just curious how you tracked relative to your projections for the quarter and what you think of seasonality throughout the rest of the year?

Yes Shyam, this is Scott.

We were close, a little bit light on our Q1 revenues relative to our own expectations.

Most of that coming from misreading of the currencies are you unfortunately as continuing as the Euro and Pounds weaken against the US dollar and then some of it as Kathy mentioned coming from shift in mix, some of it coming from the acquisitions.

As we said last quarter, we looked for sequential improvement from Q1 to Q4 in revenue.

And that would still hold true.

And that's a little bit different than in prior years, where usually there's a softness in Q4 relative to Q3.

But some of that has to do with the way the timing of the acquisitions and their revenue comes into play.

Okay.

To our spend, very very close across the board on the spend, as you can see the gross margin was up both sequentially and year over year.

The G&A and R&D very very consistent with prior periods, the big delta was in sales and marketing.

That was intended.

And its intend to continue at those or even somewhat increased rates in Q2.

I'd say the basic theory there is we've got a number of these programs that Hemi mentioned that are still relatively early in their stages of execution.

It will take us until probably the middle to end of this quarter to be able to have enough data to fully evaluate those programs.

Then like we do in any given year, we will debate those programs, which one will get more money for the back half of the year, which will get less, which will get cut, et cetera.

But things like the free program, rolling out eVoice free, those are programs that are going to need multiple months of spend before you can do a serious analysis in terms of the effectiveness.

This is Hemi.

I also believe it's not wise for us to be penny wise and pounds foolish here.

There's no value in an incremental penny of EPS.

We decided to move into annual guidance and it's very hard when you do annual to interview guys what will be the quarter.

Our difference between our budget and our actual is very small but we could not have implied to you the exact magnitude of each quarter.

So internally versus the budget, the miss is tiny, mostly as I said as Kathy said $400,000 was surprise of foreign exchange.

The rest was it was planned not to be linear and indeed it's not.

Okay.

And as you mentioned on the call you've done four M&A deals year to date.

Typically we've thought of a deal adding about a point of growth.

I know you are bigger than you were in the past.

As we kind of think about M&A you've done so far, we kind of assume that the economy doesn't double dip, is it safe to assume you're kind of tracking to at least the midpoint of the top line guidance at this point.

Two different questions.

I think in terms of your M&A question these deals on average are somewhat smaller.

So the four deals, and if you include the small deal on e-mail space we did right at the end of last year, so it's really almost five deals in the first four months of the year, in the aggregate, they're worth about two points in revenue growth, all five of them.

The e-mail, one of the e-mail deals of very small, one of the European voice deals were very small, the other three were a little bigger but somewhat smaller than the comment you made.

So in terms of tracking all, in terms of now your second question, because I think they're two different questions, we continue to track within the range of the over all guidance of 3% to 7%.

Okay.

And the free cash flow was very strong in the quarter.

And any guidance on how we should think about that coming in for the year or how to model that for the year?

Well, remember Q1 is always a seasonally strong quarter in free cash flow, it's always appropriate to look at the Q1 free cash flows on a year over year basis as opposed to sequential trending.

The primary reason for that there's very little if any income taxes paid in Q1.

Those catch up in Q2 and Q3 and hit you dollar for dollar in your free cash flow.

So it's appropriate to look at the Q1 free cash flows but not to take that and multiple it by four, that would give you I think an erroneous outcome.

We've got $105.5 million, last year we did 101, I think there's a little bit of the free cash flow this year will depend on how much we spend in marketing in the back half of the year, and how much we have in litigation expenses over the balance of the year.

They were not dramatically up in Q1 of 2010 versus Q1 of 2009 or Q4 of 2009.

But as we talked about, there is a push as these cases move forward, albeit in some instances more slowly than anticipated towards the actual trials and the spend that will be needed to be well positioned to prevail in those cases.

Also there is some impact on how hard we're going to continue to drive our annual programs.

I'll not sure to what extent we will continue, it's a balancing act.

Okay.

Thank you, guys.

Thank you, our next question from Mike Latimore with Northland Securities.

Please go ahead.

Yes, good evening.

On the, you talked about getting more customers under a prepaid annual plan.

Is that going to continue and can you give us some sense of the magnitude in the quarter relative to normal patterns?

Yes.

You see when you give a customer annual, you try to reward them for loyalty.

But on the other hand sometimes you just give a point blank discount to a customer that will be very happy to pay you full price.

In the eFax case, $16.95 a year 17% more than $16.95 up front.

So we have to decide and we have to see how we can balance it, maybe instead of giving two months discount we can give one.

We decided just to start with a strong offering and then temper it down later, because we were focused mostly on getting the churn down and indeed we achieved that.

So the reason I cannot give you a straightforward reply is we will try to balance it between those customers that the annual program saves them, those customers that the annual program makes them choose the more expensive brand versus those that would gladly pay the full price and move month to month.

So I think that we will continue, because it's been successful.

In what rate, it's hard to predict but I don't think it's going to be stronger.

So I think it will be the same or a little bit less.

To give you a sense, you might recall that in the past we talked about the individual base having about an 80/20 split in favor of month to month over annual.

For eFax that's now almost approaching 30%.

Closer to 70 / 30 and a lot of that has occurred over the last four or five months.

So late last year through the present.

Okay great, that's helpful.

And you mentioned corporate fax, I think growing about 8% year over year I believe.

Do you have similar growth rates for our alternative fax, international.

The alternative fax brands are growing even faster than the 8%, we can probably get you what that number is, it's double digit.

The international is murky because of the currency exchange.

I believe on a year over year basis it grew a little under 4%.

Q1 10 to Q1 of 09, but we had and will continue to have I think currency fluctuates that will either accordion that number bigger or smaller independent of what's going on at the actual customer acquisition level.

So we're right now more focused on the customer acquisition level because we do see the currencies moving quite frankly a lot in the last year.

So those are the orders of magnitude.

To enhance on your question, the eFax base which is as you know is a $70 product is the one that is not growing and this is where we put a lot of effort to lock those customers with annuals.

Now, of course, if you are growing the lower end brands and the eFax is slowly declining, you see it in the ARPU.

But the other brands are rather than eFax are all growing faster and nicer.

But, again, eFax was $70 product is doing very well, especially we were able to lock now almost 30% on an annual program.

Last question, just on the eVoice itself I know you've done a lot of work on a free program.

I thought you were going to start trying right about now to convert some of those to paid.

Can you provide a little more color on when and if you have, what -- why the change?

Yes.

It's tricky, because we have lots of competitors in this space, they are listening and they are trying to learn what we have learned by investing but just listening to what I'm going to say.

So, I'll be very careful.

The offer as everybody can see six months give your credit card up front, limited usage, and when you use more you trigger it.

We will know the results at the end of six months.

We will be able to analyze it then and decide if we want to stop or go forward.

We are very analytical here.

We decided not to stop it which gives you a hint it's doing well so far.

I cannot tell you more because I just want my competitors to sweat and spend the money to figure it out but one thing you can know we are not stopping it.

Remember that the practical implication of putting that program in place in Q1 was spending money which is fully expensed, but actually taking paid DIDs and revenue out of the situation, because the way that offer has been positioned that is where we want people to sign up hence no revenue for the first six months in exchange for the credit card and the ability to test this program.

So we will know hard data sometime late this quarter, and make as I say judgment calls on the ability at which we carry that program forward.

But I think it's one of our big competitive advantages is having been through the free model historically we know how it works, what to look for and that was of course a component, not the component, but an important component in billing up the eFax brand.

And you see, too launch a free program it's not only about that you have to do a lot of monitoring, life cycle management, call the customers, monitor every step.

We are doing it so it's not only just coming with the offer.

I think also despite the fact that the program will end in six months there will always be those customers that are building up to six and seven months, suddenly they look at the credit card and say, hey, I forgot that this is no longer free and then you will have canceled.

So to really go and know the full in fullness the results of this program you have to what I call the moment of truth so it's probably after hit the credit card you still need another two cycles of the credit card to know that the customers are aware that they are paying, they like it and they're staying.

But so far, as I said, we analyzing it almost on a weekly basis.

I am meeting with my teams.

So far we decided to continue to invest in it.

Great.

Thanks for the info.

Our next question is from Corey Tobin with William Blair.

Two quick ones if I could.

First with the 11,000 organic DID add number, this might be very difficult to discern, but can you get a feeling for how much of that comes from just improving in market versus how much comes from the renewed spending on the marketing side that you discussed last quarter.

It -- there's no perfect answer to that because I think these are somewhat correlative variables.

If you take as a proxy the improvement in cancel rate for the economy, and that's not 100% correlative because there's things we did that positively impacted the cancel rate.

If you want to just give full credit to that then look at the differential as being additional core market expense I'd say it's roughly half and half.

Also remember on the marketing spend, you have to bifurcate the spend as we talked about last quarter.

So not all of the spend that you see as an increase either sequentially or year over year went for direct paid customer acquisition.

A chunk of it went to build the eFax free base, a chunk of it went to promote the eVoice free offering, a chunk of it went to promote rest of the world operations.

So there's actually only about $700,000 on a year over year basis of real incremental marketing dollars to get additional gross adds.

Got it.

I also want to, Corey, when you invest in marketing, especially when you go outside of the search, there is -- it definedly takes time.

When you start to spend on eFax three or eVoice three or display, the impact is not.

I am encouraged April 6,000 net add DIDs is very high relative to what we've seen the previous quarter.

The marketing guys would say Hemi, yes it's all has to do with marketing give us more dollars, others say no no no, it's the economy.

And I have to decide what to do.

But I can tell you work together here, and we're encouraged by the results, and I will be just, I mean it's impossible to attribute what goes to what but we are encouraged and we see more straight to site, we are encouraged when we see more sign up, also encouraging when we see lower churn rate.

I can tell you the lower churn rate has nothing to do with advertising, it has more to do with improving and working on all the little details, not only the annuals, it's much more than that.

We are improving on everything in credit card processing, messaging to the customer in our size, every little change that we do has direct impact on the cancel rates.

Got it.

Great.

Let me just hit on that one if I could for a second on the cancel rate.

Great to see that the move continues to tick downward.

We are getting within striking distance of some of the lowest numbers we have seen in a while.

Do you explain a flat line in 2.8 here or do you expect we'll get back to the 2.5 level we saw two, three years ago.

I wish I knew, because my managers would like to know it, too.

But really, I think, I will be very disappointed and I see no reason for us to fall below the 2.8% that we have achieved.

Our goal, our budget was to improve it a little bit, and 2.5 was not the number that I was planning, I mean I would love to have it, but I think that 2.7% we'll celebrate at the time.

But definitely we are seeing the signs and we believe that unless something really unpredictable will come, we can maintain this level and continue to improve it.

How much, time will tell.

Got it.

Last one, if I could.

I know you don't publish the slide anymore, but for those of us who are fans of it and like to track it, can you give us the income metrics if you could for the credit sensitive versus noncredit?

Its a very busy slide at the back that is no longer there.

For Q1 of 2010 both the credit sensitive and noncredit sensitive were up slightly on a sequential basis.

Great.

Thank you.

Thank you.

And by the way, you see it come through on the fact that variable revenue usage based revenue increased by about $100,000 on a sequential basis as opposed to what existed a year ago which was about a $700,000 to $800,000 decline from Q4 2008 to Q1 of 2009.

Thank you our next question is from the line of Mark Murphy with Piper Jaffray.

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

Thank you for taking my question.

I want to just dive into the ARPU a little bit that came in a little bit lower than what I had previously modeled and you guys have gone into it a little bit here before.

But is it possible to possibly break out percentages of how impactful the foreign currency was versus the growth in corporate sales versus the shift in the product mix, just wondering if one was more meaningful than the other in the lower ARPU.

Yes the currencies on a sequential basis if you are looking at Q4 of 2009 to Q1 of 2008, currencies are about $0.10 in ARPU and the remaining $0.35, the variable flat, so there's not much change positive or negative in the variable component.

So the remainder of $0.35 is shift in mix which has to do with the types of new sign ups and acquired customers, so mBox and Trust Fax and the corporate that we referred to earlier, all coming in at lower ARPUs bringing down the fixed component and the the total ARPU component.

And the Euro now down to 130.

So the currencies are continuing to move in a negative direction.

If I could just follow-up, maybe some help here as we trend this out forward.

It looks like historical or at least last year, Q2 the ARPU actually increased I think we have a couple extra business days so we did get a little help in the variable usage part.

I'm just wondering what you guys are modeling internally and how you think that should probably trend out.

You are correct.

Generally Q2 and I think it's true again this year it varies year to year whether it's one or two business days.

I have to check it's one and small change this year over Q1 so that is a positive of another $160,000 to $180,000 for having that extra business day in change, $200,000 if you want to round it.

Remember that in Q2 of last year, this does not affect the ARPU, but we had the sale of some intellectual property that was classified as revenue to the tune of about $700,000.

So the more recurring revenue stream in Q2 of 2009 was like 61.7 or 61.8 as opposed to the 62.5 that was reported, which is a correct GAAP number, but unless some sort of similar sale were to repeat itself you wouldn't have that.

So if the variable usage comes in as it historically has, that will give some support to the ARPU on both the variable and the total side.

Now, we will I think continue to see, though, as we've said before, pressure on the aggregate ARPU over time because I think this shift in mix is systemic, it's on going, it's been occur being and it will continue to occur.

Yes, just to remind you, Brian, the lower brands usually have more included pages and therefore they generate less usage or less billable usage which is what really impacting the ARPU.

Thank you, that's very helpful.

Just last question, kind of following up on Corey's question earlier, you do look at metrics, you do look at your DID sign up through April as well as the churn rate which shows improvements over the last year, year and a half in addition to your increased spend.

Is it fair to step back here to say that we're getting closer to more normalized environment in terms of purchasing habits for those S&Bs, and if that was the case, is there any potential, if things continue to trend the way they are, that you might actually even increase your sales and marketing spend in the back half of the year ahead of maybe what you had currently planned?

Thank you.

Interesting question.

I think in terms of looking at the economy and looking at subsectors of it, there's probably a whole range of opinions.

I think, it's my belief I think it's been the collective belief of the Company that probably one of the lagging elements in the economic recovery have been the small businesses.

And to some extent also, and there's a correlation here, non-large financial institutions.

Both of which of are an important element of our over all customer base.

So while I think on any relative basis over the last year, year and a half, it's clearly better today than it has been, I think they're not fully participating in what are the top line metrics of the economy, and they're still heavily weighted down by difficult employment numbers.

Or lack of increase in employment.

So to the extent that we see continued improvement, to the extent that improvement would exceed our expectations embedded in our budget, then, yes, we would spend more money if such conditions occurred.

I don't believe they are occurring right now.

All we're doing right now is spending according to our budget to reinvigorate a variety of marketing programs and test certain new ones, and we'll continue to do so pretty much irrespective of marginal changes in the economy until we get through at least this quarter.

Then we'll step back and reevaluate both those marketing plans and their effectiveness as well as the pace of the economy for the sectors that are relevant on a going forward basis to make judgment calls as to how much to spend and to where in the back half of the year.

Thank you.

That's very helpful.

That's all the questions I have today.

Thanks again.

Thank you Brian.

Thank you.

Thank you our next question is from James Cakmak with Sidoti.

Please go ahead.

Hi, thanks for taking my questions.

No problem.

Just looking at the revenue for the first quarter, obviously there were a few things working against you guys with the currency and so forth.

Can you just remind us kind of the derivation of the full year revenue guidance how much is baking in functions of traction within your marketing initiatives versus the acquisition pipeline.

Well, it's a combination of three things.

The base that existed at 12/31/09 and its behavior pattern for the succeeding 12 months, the spend on the core marketing which we did in 2009 and perpetuated in 2010 to a somewhat larger degree, in the back half of the year, the success of new programs, which at this point are not producing any material contribution to revenue and then acquisitions both the size and timing.

Those are really the four elements as it would relate to the revenue component of the budget.

And then the last piece would be the currencies which to date we're wrong on.

Okay.

So if you look at Q1, currencies are a head win.

New programs on a marketing were not anticipated and are not contributing at this point because we have a longer tail before they contribute.

Core marketing spend is up somewhat and is producing.

And the acquisitions I would say are probably just a little modestly behind expectation, not so much in number or size or specific deals, but in timing.

Fuse Mail we closed today we thought it would be closed a few weeks ago, stuff like that.

Is it terribly material in the over all context, no, but it's a couple grand here, couple hundred grand there.

Got it, where would you say you're trending in Japan relative to your expectations?

James, this is Hemi.

We have tried in Japan twice.

One of them was even before we were a public company.

And we usually are more comfortable acquiring a competitor and then take what they have and make it better.

I've been to Japan in the last two years several times and there wasn't any competitor that was worthwhile buying in size.

We just analyzed the market and decided there is no reason that the market like this will not have fax to e-mail service.

So we decided to go into it and we decided to spend $3 million, $4 million or even maybe $5 million to know.

And so far, the only thing I know when we want to spend money they take it.

But it's very easy to you know to hire marketing company, to hire office, to hire people.

How will we be successful?

I don't know.

It just, it is if you take the experience that we have here, we're doing it since 1995.

There is no logical explanations to us to why Japan should not be a blooming market for our fax product.

We don't know.

We decided and reconvinced ourselves and then the Board and everybody that it's worth while trying.

And we are doing it unlike the other two times when we are we were relying on local partner, now we are doing it on our own.

I would be very happy to report progress as it comes.

I think that usually when you do programs like this, they take a while to optimize.

So even if we are going to be successful, J2 revenue, with our run rate, Japan will not move the needle this year.

Nor was it intended to.

Even if they are successful.

The way we look at this year from a budgeting standpoint, and the way I think it will play out is this is a year of investment.

We get all the spend, but we'll get very little if any revenue in large part because there's a set up time frame.

Then there's a launch time frame but at launch you're going to be testing a lot of things and learning what not to do and how to do things better.

Then you enter into a stable marketing program that actually has predictable ins and outs in terms of marketing dollars in and customers out.

Not dissimilar by the way to what occurred in Europe, except that was not four and a half five years ago.

Okay.

That's helpful and lastly, any update you can provide on the litigation front?

I just, I hinted at it.

There will be some formal update in the (Q) which should be filed tomorrow.

But short answer is, some what I call relatively minor delays in some of the cases.

We had in the (K) various expectations for when certain cases would actually make it to trial.

As you'll recall, the earliest of which would be late this year.

The latest of which would be sort of Q1 next year.

I'd say there's been a shifting on average out a couple of months.

But it's not clear how much, if at all, that will influence our spend this year because we're still marching forward with discovery, markman hearings, trial preparation, as we get closer, obviously as time marches on we'll have a better sense as to when the trial dates actually will occur.

And can give better update.

At this point I would say relative to what we talked about in mid February, things are running a little bit behind schedule both in timing and in cost meaning we're spending less but things are pushed out a little bit.

Got it.

Thanks a lot.

Thank you.

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

Hi Daniel.

Can you talk about the buy back, talk about the timing and thought process?

Yes.

A few things on it.

One actually, there was an e-mail question which I'm implicitly is going to assume is answered by this.

Someone wanted to know about uses of cash and paying a dividend.

We've opted obviously for a buy back, not dissimilar from what we did a couple years ago in 2008.

Rationale behind it is really as follows.

To be clear, preference is still to deploy the cash in the M&A world.

Obviously we're having a good run on the M&A right now.

Unfortunately the deals continue to be on the smaller size as a result we are building up cash faster than we can put it to work in the M&A.

So we feel that at the free cash flow yields, and we look at $105 million of trailing free cash flow and the net market value of the Company, that their yields that are far superior than what we can get for almost any other investment but for our M&A program.

So the idea is to have a program in place.

It will function over the next almost 24 months, it expires April 30th, 2012.

We'll have both discretion as well as a plan, a 10B-51 plan so we can buy during close windows and it will be a balancing act between the opportunities in front of us in the M&A world, some of which are not small, not necessarily huge, but not small, bigger than what we've seen before, versus the other alternatives which are very nominal returns by keeping the cash short and safe.

So we feel it's a good program to have in place.

I'm personally a believer it's one the Company should always have in place, not that you always execute against it every month every quarter but I think it should be there.

Because there could be things we can do the Company should be able to take advantage of it.

That's kind of thesis behind it.

Obviously we'll report at the end of each fiscal quarter how much if any stock has been repurchased and the average purchase price, et cetera.

To make a comment, if we bought everything that we want on a linear basis, at the end of April 30th we should have similar cash to what we have today because we are kind of buying outside of M&A on the rate we are producing cash.

Okay.

Just on the annual guidance, I mean, given the mix shift in the quarter and the currency, how should we think about what's factored into the year guidance, like have you factored in a similar mix shift, I mean you've obviously bracketed in terms on the corporate side,and then currency I guess we'll play it by ear, right?

Yes.

The answer to your question is currency is the hardest one to forward forecast.

Any time in the last year if someone had said give me the currency rate 60 or 90 days in advance it probably would have been wrong.

So, as Hemi mentioned Euro hanging around 130 which is worse relative to the US dollar than it was in Q1.

So we don't attempt to continually update the currency exchange rates.

It's impractical to do that and to forward forecast it that way so we kind of leave that assumption in place.

If we happen to be wrong in the Euro and the Pounds continues to deteriorate that will be a head wind against both our historical numbers and budgeted numbers.

In terms of the mix shift though, we do roll that through.

This is how things are trending.

If they keep trending at this rate yes that mix shift has some ARPU pressure and if we ripple that through the balance of the year, we add in all the other stuff we're doing, can we still get to within the range of revenue growth and then what are the EPS implications.

Okay.

Thanks.

You're welcome.

Thank you our next question is from Youssef Squali with Jefferies and Company.

Yes, thank you very much.

Two quick questions.

I guess going back to the consumer retail subscriber business, is it fair for us to basically assume that that base now is in harvest mode, what kind of growth or lack of there of did it see during the first quarter?

I know historical you don't break it out but you certainly talked about the business -- the enterprise business and the voice but I'm curious what's happening in the consumer.

If you mean in the individual business, it was flat.

It was flat in terms of revenues or in subs.

Revenue.

In DID is up.

ARPU basically down.

Net revenue, stem sale and more customers.

Okay.

That's good.

That's interesting.

I don't think we would say, I mean some people may state it for us, or put those words in our mouth.

I don't think we'd say in the harvest mode.

You see that in the margin structure, it's not the only contributor to it but it's obviously a driver of it.

We think there's still are opportunities to grow it.

Although for the last couple of years it's been lower ARPUs.

We're seeing double digit growth in the lower price brands.

Is any of the market initiatives that you've mentioned kind of aimed at that, at trying to accelerate growth in the consumer?

Yes.

Yes.

The eFax 3 drives mostly consumer.

We have, as we said before, we have healthy growth in the lower cost brands of the consumer.

And while we continue to market them.

So in the version for this presentation, you don't see that slide with all the brands.

But, the one that has the fax voice and e-mail.

Well, we are promoting the Trust Fax brand, mBox brand so those are brands that are not only be acquired by J2 and their customer bases but those brands are continuing to be perpetuated from a marketing standpoint.

Also use of you know in the 39,000 plus customer that we brought in in Q1, most of them are consumer, in the 6,000 that we brought in April, at least half is consumer.

So consumer still very strong, very profitable and we love it and we are very happy it's renewing its growth so all good.

Just to be clear we're talking organic growth when you talk about DIDs were up organically?

Yes.

Okay.

We said that last quarter organic was 11,000, this quarter 6,000 was organic.

For the month of April.

For the month of April.

Right, right.

Staying on that point for April, you think that's kind of, well let me ask it this way.

Is there any reason that would change your thinking about maybe using that as a good run rate?

No.

No.

I think no.

Because I think as you herdic, there's no belief at this point to alter any of the marketing spend.

So whether the spend is good or bad, whether there's programs that are good or bad we'll spend it through the end of this quarter.

That will give us a good number of months of data to really analyze which programs are keepers, which should be expanded which should be deleted but you're going to get the full spend this quarter.

Right.

So if I look at your acquisition cost, looks like it jumped 95 bucks quite a bit from the same period last year.

Anyway for us to extract these kind of initiatives that you have going on versus your plain vanilla historical kind every marketing spend?

As mentioned earlier the plain vanilla marketing spend is up a few hundred grand Q1 2010 to Q1 2009.

The difference between, I don't know I think you do your sacks GAAP to non-GAAP (inaudible) imputed growth number, we look at when we report a number, because they're not privy to the details of how we allocate our people internally.

So we have different numbers but if you look at the third party spend on a what I'd call core spend it's up a few hundred grand year over year.

All of the difference relates to new initiatives.

EVoice free initiatives, EFax free initiatives and some of the display that Hemi talked about.

So we actually don't see, when you look, when we look at the gross adds and look at our marketing person we don't see much movement in the sack cost.

Okay.

That's good to know.

As I say we may conclude after this quarter those programs aren't working on the new initiatives or need to be paired back or expanded if we don't say the right kind of pay back.

Those are decisions that will be made at the end of this quarter going into Q3.

Is there anyway to know that those 6,000 adds you got in April are coming from the new initiatives or old ones.

Arguably if you say they're coming from the new initiatives and you say oh their too expensive --

Old one.

Oh, they are coming from the old ones?

So, all this is incremental potentially.

We spend a few hundred grand more, that brought us 10,000 more gross adds year over year, that's marketing the traditional way, then there's a whole another bucket of additional spend.

Building the free base of customers by 400,000 Q4 to Q1 doesn't bring any revenue.

I tried to, and you have to be careful because I don't, I have just the beginning of information, but the customers that come without direct spending those that we love more are the straight to site.

Straight to site means a customer heard about eFax, is clicking it, is signing, no money changes as far as advertising.

But if you attribute the increase in straight to site to the fact that you spend money on eFax three, then you have to calculate it.

We are not disclosing our straight to sign sign ups, but they are good and if they were not we could stop the frees.

So some of it is what we cannot tell and some of it is what we shouldn't tell.

But basically, to answer your basic questions, we are seeing increased sign ups on the consumer.

And because the churn rates are lower you get more nets.

Yes.

That's great.

Okay.

Last question.

Google voice relaunched about six months ago.

Can you kind of compare contrast what they're offering versus what you're offering and any impact you're seeing so far on your business?

I will take a risk of making the comparison and reason I'm saying a risk is they are changing, and I'm not so much into exactly what is going on.

But several major major differences.

A, we offer local numbers.

They don't.

As far as I know.

Scott says maybe I'm wrong.

Okay.

So the next thing is, the next thing is we are providing IDRs or menus that you can say click one for Joseph, 2 for the secretary, all those kind of offers, our voice to text is a different level.

There's is automatic which basically doesn't cost them money.

Ours cost us good money because we have quality checks so basically somebody with my accent would leave you a message, Youssef, a lot of work has to be done somewhere in India to figure out my accent so you can really understand what I am saying.

Our service includes that.

The number of extensions that you can get.

The languages we support and websites, so there are significant differences, plus on top of it is Google is going to harvest your data which we of course don't.

So I'll tell you, I'm watching the sign ups that we have since Google launched their service.

No impact of our gross sign ups.

Okay.

If I had to make a statement, it probably helped because it takes us, we are a web company, the more people understand what we are doing, the less words we need to describe our offering, our value proposition and it's good.

Which I think is still the single biggest challenge.

Yes two challenges.

One is, what exactly does it do, I mean you're an analyst you are into an market but when you go to the people on the street they don't understand it.

And secondly is, are people willing to get rid of their existing infrastructure to jump into this, because with the fax it's a pure replacement of your fax machine.

Here, it's not really replacing your phone number, you just put an instrument ahead of it, in front of it, it's usually something that is done to eliminate your PBX, and those decisions are a little bit more complex than just on the fax side.

I believe that like we were pioneer on the fax then came the wave that fax grew, the same here with voice.

Great.

Thank you.

You're welcome.

Thank you.

Our final question from Brad Whitt with Broadpoint Capital.

Thanks for sneaking me in there.

You owe me.

Thanks, Hemi.

I may have missed this but Kathy or Scott, did you or the gross margins very impressive this quarter, 83.5% on non-GAAP basis.

Should we be comfortable in modeling that going forward?

I mean, based on everything that we know today and what we're seeing, it's probably a reasonable number.

We do have a number of initiatives that over a period of time including some of these infrastructure changes in Japan, that as we indicated would not have revenue related to it would several have an impact on those margins, you probably need to take a look at that and keep that in mind.

As we indicated you do have an impact when bringing up new locations particularly in Japan for instance where you're going to have some costs before you get some revenues associated with it.

Okay.

That's a good point.

All right.

And then I'm curious, Hemi, how many brands are you actively marketing?

I don't know.

Can't fit them on a business card anymore.

No, no, no, I do know.

Do you know?

I do know.

We have four voice brands, and we have three e-mail brands, and we have on the fax side, we are consolidating, so for instance when we got Callaway, we didn't have a brand and some of our brands, I mean I know but I don't want to disclose, there are some brands doing less good than the others and those over time will disappear so we are not going to continue to have ten brands going into 20.

We, when we buy company, some companies have big follow-up, so basically by spending some money on search you get very good return on CPA basis, that the brand is strong, the company that we bought did good work and the word is catchy and they have customers that are telling their friends so those brands we keep.

But as we move forward and we see brands that are not doing as good job from the standpoint of visitors from the standpoint of conversion rate, then the dollars that we spend on keeping them on the competition of key words are not giving as good return on investment we are lowering it.

So you will see once in a while and we don't announce them because it's not I think valuable piece of information to our investors.

But we have retired more brands plus some of the brands are really just a website, when you go and you click and you say welcome to eFax.

So, if we have a website like mBox and you click on it, you're maintaining a website cost zero so why kill the brand.

If you talk about brand that we actively, an active brand will also have the system messages geared towards the brand appearing all over when you get your fax you see that it's coming from brand x, y, z.

Those we have less that appears to have.

Okay, guys.

I'm going to call it a day and we appreciate you taking my questions and great job on the free cash flow this quarter.

Thank you very much.

Bye-bye.

Thank you.

We have no further questions.

I'd like to turn the floor over to management for any closing comments.

We appreciate you joining us for our Q1 call today.

I would remind you waive our annual shareholders meeting this coming Thursday.

Those are generally very brief with the only real matter of business the re-election of the Board of Directors.

And then next Tuesday, in New York, I'll be presenting at the Jefferies Conference and also be available for a couple of days for one on one's and then obviously call us, e-mail us, come on out to L.A., be happy to see you and we will also be out on the road over the next several weeks at some additional conferences as well as couple of cities on a non-deal road show.

Look for us to have our Q2 earnings call sometime the first week of August.

Thank you.

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

Thank you for your participation.