Ziff Davis Inc (ZD) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Second Quarter 2010 Earnings Conference Call.

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global Communications.

Thank you, Mr.

Turicchi, you may begin.

Thank you very much.

Good afternoon and welcome to j2 Global's Investor Conference Call for the second fiscal quarter of 2010.

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

We'll be reviewing the Q2 financial results as well as provide you with an update on our operation and strategies going forward.

We will use the presentation as a road map for today's call.

A copy, of which, is available at our website.

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

In addition, you can access the webcast from this site, as well.

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

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

However, you may e-mail questions at any time to investor at j2global.com.

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

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 our we have disclosed in our SEC filings.

Including our 10k filings, recent 10Q filings, various proxy statements, and 8k filings, as well as additional risk factors that we have included as part of the slide show for the webcast.

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

At this time I'll turn the presentation over to Kathy, who will give you the results for the quarter.

Those can be found on slide 4.

Thank you, Scott, good afternoon, ladies and gentlemen.

Please refer to slide 4 in the presentation for a recap of our Q2 GAAP operating results.

Q2 2010 revenue was $61.3 million.

Revenue grew $1 million dollars from $60.3 million in Q1 2010 despite the negative impact of approximately $300 thousand from FX.

Revenue was $62.5 million in Q2 2009.

Please remember that in 2009 we had a one-time event when we sold non-core patent assets that represented approximately $700 thousand in non-subscriber revenue.

We continue to see a shift in product mix with our DID growth coming mostly from our corporate and secondary brands.

Our desktop faxing corporate revenue is up 7.5% year-over-year and 2.2% compared to Q1 2010.

During Q2, our paying DIDs grew by an additional 20,000 sequentially, achieving a quarterly growth of 1.5% and just over $60 thousand DIDs year-over-year or 5% At the end of Q2, we had approximately $1,335,000 paying DIDS.

Our corporate segment led the growth and increased by 32,000 DIDs or just over 10% compared to the same time last year.

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

From a Q2 2009 rate of 3.3%, down to 2.8% in Q1, and additional improvement down to 2.6% for Q2 2010.

We anticipate this rate will stabilize if the coming quarters, as we continue increase the value of our services, actively manage customer retention, and the economy maintains it's current level of activity.

RPUs for Q2 were essentially flat with Q1 2010.

Year-over-year, we saw 3.9% decrease, or $0.59 from $14.96 to $14.37, due primarily to a shift in our fax product mix ,and the weakening of foreign currency exchange rates.

I'm also pleased to report that we continue to experience very strong operating performance in Q2.

We have reached a record GAAP gross margin of 83.1%, which is 170 basis points better than Q2 2009's margin of 81.4% and 10 basis points better than Q1 2010 margin of 83%.

This quarter's selling expense was 16.8% of revenues.

R&D expense was 4.7% of revenue, and G&A was 19.3%.

Total GAAP operating earnings for the quarter $25.9 million.

GAAP operating margin was 42.2%.

Non-GAAP operating margins were $29.2 million for the quarter with a non-GAAP operating margin of 47.6%.

Net earnings for the quarter were $18.7 million for GAAP and $21 million for non-GAAP.

Gross margins reached record highs on both a GAAP and non-GAAP basis.

Other income was $1.1 million for the quarter compared to a negative $8.9 million loss for Q2 of 2009.

If you recall, we recorded an impairment charge on certain auction rate securities in the second quarter of 2009.

Q2 non-GAAP EPS is $0.46 per share for this quarter to calculate our non-GAAP EPS, you will need to adjust for 123R and certain acquisition-related costs.

Please refer to slide 17 in the supplemental section of the presentation for the GAAP to non-GAAP reconciliation schedule.

Q2's non-GAAP adjustments are $3.3 million on a pre-tax basis or $2.3 million after tax.

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

Q2 continued our strong year for M&A activity.

We closed a transaction in the e-mail space during the quarter, and additionally hen we closed another of voice space with UK based company.

Free cash flow was $26.4 million exclusive of the $14.2 million IRS settlement covering fiscal years 2004 to 2008, which was within the range of our reserves.

Compared to $22.9 million for the same quarter last year.

Net of that settlement, our free cash flow was $12.2 million for Q2 2010.

Total cash and investments were $265 million at June 30, 2010.

Finally, deferred revenues grew $1.4 million from the end of year December 2009.

We anticipate our effective tax rate to be approximately 30.5% in the coming quarters, due to increases in domestic income.

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 call over to Hemi who will provide you with a second quarter recap and an additional 2010 overview.

Thank you, Kathy, and good afternoon everybody.

So, usually Scott gives me only three slides.

Today, he was very generous.

They gave me six.

Maybe a salary raise afterwards.

I'll be fast and talk to the point because we have six slides.

First slide, page six.

I want to draw your attention to our product road map (inaudible) on the right hand side.

As you know, this is our unified communication product, it has everything in it.

It has a beautiful PBX, all the features--e-mail, fax, conference calling, voice to text, and recently we have added web conferencing, collaboration, and also call recording.

This by far is our largest voice product by number of users, revenue, and has the largest RPU.

Let's go to the next page, page seven.

Our customers.

This quarter, we have grown our customer base by approximately 20,000 users.

This is while we do not have any deep base acquisition during the second quarter.

Year-over-year, our gross rate is almost 5%, or 4.7%, to be exact, and the most exciting thing on my presentation today is that we are seeing steady improvement in our cancel rates.

Since Q2, 2009, when it was at the height of 3.5%, it is constantly declining to 2.6% in our recent quarter.

This is the most important thing.

It demonstrates the efforts of all of our departments.

It had a big impact on our record margins, lower marketing spend of immunization of the company.

And something that if you will look into our balance sheet, you will see also that we have grown our deferred revenue from the beginning of the year by $1.4 million.

Those are the an annual programs that helped us to keep these low rate of cancel rate.

So, to date we have almost $30 million in our deferred revenues.

It's all cash based, prepaid by credit card.

Let's go to page number eight when I talk about our marketing.

We have recently won again two Tele Awards for eVoice.

The silver award and the bronze.

I just want to tell you all, there is no gold award, so silver is the best, and brought in the second one.

We won--our wonderful creative team won the Tele Awards for internet service advertising and the bronze awards for marketing.

Those are very important awards, because j2 continues to be a company that drives all of our customers via website, and everything we do on the creative team has a big impact on our results.

This quarter also we have lower marketing spend.

If you remember in Q1 we were trying some initiatives in Q2 we were optimizing them and measuring them.

And, encouraged by their results, we predict that in the Q3 and Q4 we will have increased spending with our optimized programs.

Also, we started this quarter with our marketing efforts in Japan, and in Asia Pacific market, and so far we are pleased with the initial results.

Moving to page 9, where I will talk about our corporate sales.

Our corporate sales continue to lead the pack.

Revenue grew 8% year-over-year, and did grew 10.4%.

We have added 25 new contracts this quarter.

Of those, four are large deals.

We have more than 70 deals of a thousand DIDs each.

We have seen success in segments like healthcare, government.

We are very encouraged by the results there as well.

We have decided, based on the success on our size to allocate the dedicated director of market that we manage the Airforce for the marketing focus on corporate only.

And we also added another sales executive in the UK.

Next Japan.

As I said, we launched a local Japanese operations, dedicated a team that is focused on Japan.

only.

We have dedicated marketing team and dedicated customer support.

A local language--everything is localized.

We started in June with Tokyo and [Isachar], which are services in areas that we had all of the time, and then we added in July an additional 50 cities.

We cover all of the major cities in Japan today.

We have live Japan news customer support, seven days a week.

We continue to optimize in increasing our on-line campaign and so far we are happy with the results.

The next page, page number 10.

Something that we always exercise, it's very important for us.

We are continuing to increase our geographic coverage.

Our geographic coverage now is on the level of almost 4200 area codes.

To summarize, we have 27 area codes in towns and cities around the US and then an additional 1,500 cities internationally.

Most of the ads this quarter were smaller cities and places in the US.

Hundred cities and towns in Germany.

We added a new country like Gibraltar, and we added the cities I mentioned in Japan, and we are working now with adding also South Korea.

On the coming soon section.

Next, we are planning to launch in Q3 eFax Next that will have many exciting features.

I don't want to steal the thunder from our product guy.

So, I will not get into the details, but I can tell you it will include an APP, and it will include many things I've never seen before from our competitors, And, I think they will be definitely exciting announcement during the quarter.

Also, we are working on our voice website, and foreign people, and will get additional functionality that will help the customer be able to navigate easier.

We hope to also increase our conversion rate and the satisfaction of our customers.

Let's move to slide 11.

M&A.

As you know, we have been very aggressive on the M&A front.

The markets are right now.

We have done five acquisitions from the beginning of the year.

As of July, we have bought three international companies, two in the UK.

Voice companies.

One is Reality Telecom, one is Alban Telecom.

Also, we acquired a company out of Australia, MBOX, and we also acquired two local companies, One is a company fax to e-mail earlier in the year, TrustFax, and another one is hosted email company FuseMail.

On the integration, as you know, buying the companies is easy, integrating them is what makes the profit.

We have integrated and completed integration of TrustFax in Q1.

Reality Telecom integration was completed in Q2.

MBOX migration was completed in July last month.

Fuse One migration is ongoing, and Alban Telecom we just acquired, and we started the integration.

Our M&A pipeline, I know that I say it again and again, but it is really the largest we have ever had it.

Not only in quantity but also in size of the companies, and we are very excited about it and now I'll let Scott continue.

Thank you.

On slide 13 is a reaffirmation of the annual guidance that we provided several times throughout the year to remind everyone it's revenue growth of between 3% and 7% versus 2009, and similar non-GAAP EPS 2009.

And as Kathy mentioned, following slide 14, you have got some additional information including the metrics for the last eight quarters.

Computation and reconciliation of free cash flow, and then the reconciliation of the GAAP and non-GAAP statements on the P&L side.

And with that I would ask the operator to come back and begin the polling for questions.

Thank you.

(Operator Instructions) Our first question comes from the line of Shyam Patil with Raymond James and Associates.

Please proceed with your question.

Hi guys, good afternoon.

I guess, Scott, when you look at the quarterly results, how do they compare to what you guys were tracking internally?

I mean, seems like from a metric standpoint, you guys did better for RPU, better for churn, for net ads, but the revenue was a little light.

Just wondering how that tracked with expectation?

I think it was fairly close to the internal, take both the budgeted numbers we had that it beginning of the year.

Maybe somewhat lighter than the budget, but I think the street had numbers that were too high on revenue, at least relative to our own budgets.

I think you're correct on all the other factors, that the underlying metric trends are almost across the board, moving in the right direction, and moving in a meaningful way in the right direction.

This is Hemi.

I think we didn't do a good job last time trying to guide you to a hockey stick kind of revenue, and we did meet our numbers, but, yes, you guys were a little bit higher than we are.

We have in our plan more M&A towards the second half of the year.

Okay.

And that kind of feeds into my second question.

When you look at the first half of this year, it's more or less flat compared to the first half of last year, yet you guys are reiterating the previous guidance.

Just wondering what kind of gives you visibility into the ramp, and the growth rate in the second half of the year?

I think you have three things going on.

One, you have the underlying tone of the core business that as I just mentioned and you see in the metrics is improving.

Two, we have--as Hemi mentioned, then marketing programs we spent the first six months trialing and testing, I would say that in some instances it will take us longer to be definitive.

I think we know that there will be more productivity out of those programs in the second half of the year, which was anticipated when we built the budget, and the third is, we know what our M&A pipeline is, and that is, as Hemi mentioned, we're very up optimistic with that.

And then just my last question, and it's more of a general question.

Wonder if you guys could talk a little bit about how you view the health of SMBs.

How big that is as a percentage of your--of your subscriber base.

How you compare that to what you're seeing with enterprise spending, and any distinction between US/International that would help.

Thank you.

Well, that depends.

On the internal analysis, where do you want to draw the line on SMB?

You could argue 90% of our business on one hand is SMB and 10% is enterprise.

You might argue that there's 50% of the base are SOHOs if you it want to use that as a separate subcategory.

So, it depend on how you wanted to define SMB, but I think, clearly, irrespective of your definition, a large portion of our base is qualified as SMBs in anybody's parlance.

And, as I think we've talked about throughout the year, our view has been that the SMBs have probably participated in the least in the economic recovery to date.

I think there's a lot of ancillary data out there, whether its inability to secure adequate financing, or whether it's the lack of hiring going on by those SMBs, but clearly, they have not participated to the degree of some of the top line GDP numbers, which I think has been to the benefit of the larger enterprises.

Now, I don't think we have a deep enough insight or portfolio of enterprise solutions to really pit one against the other, but I would say that I think we see it certainly in our own numbers, and we've seen it for a while, and I think certainly on a more macro basis, that the enterprise element of the economy is participating to a greater degree in whatever this recovery is that's been going on.

I think, in our case though, they say you can't perfectly extrapolate it because I think we have an industry shift and trend that is going on that is the movement away from the in-house hardware based solution to an outsource solution that has whole set of additional dynamics beyond just are you in a mode of buying or not buying vis-a-vis the economy.

And I think that's why our corporate sales continue to do very well, why they're one of the growth leaders for the company.

Whether you look at it by DIDs, by revenue, almost every metric and we continue to win a lot of the large deals.

Great, thanks and congrats.

One last thing, you asked about international versus domestic.

You will see this quarter some growth in international, not-withstanding the FX currency issues that Kathy mentioned earlier, which Nick just for about another $300 thousand.

So, as we said last quarter, the underlying real growth international is being masked to some degree by the currency, since most of our revenue still comes in pounds and euros when we talk about international revenue.

But the underlying local currency is doing better than that, and we're starting to see even a little bit of pickup, even though it's very early, in Japan.

So, I think we're rather optimistic about the rest of the world opportunities, but they're not flowing through in US dollars quite as dramatically as we're seeing it locally.

Okay.

Thank you, guys, and congrats.

You're welcome.

Thank you.

Thank you.

Our next question comes from the line of Youssef Squali with Jefferies and Company.

Please proceed with your question.

Thanks, this is actually Navit Cohn for Youssef.

First, on the 20 thousand net adds, how many of those were corporate versus individual and SMBs.

I don't think we have an exact number, but I want to guess 10 and 10.

I think it's about half.

It's about half.

And organic, or did you acquire anything?

The acquisition in the quarter was FuseMail, which had no DIDs or no phone numbers associated with it.

Okay.

And the churn rate of 2.6% for the improvement over the 22.8% in the first quarter, is that primarily because of the shift to annual plans and how much of a discount are you offering now in moving customers to annual plans?

Okay.

It is definitely not only the annuals, but annuals help.

We give different discounts.

But the most common discount is two months instead of $16.95 a month, you pay $169 [in out-dollar] up front, so you basically get a discount of 16% to 17%, and you pay annual up front, but that's not the only contributor to our lower churn rate.

It has to do, and you know I'll take the--I'll take a moment to compliment our employees that work, it has to do with the network.

It has to do with the customer support.

It has to do with our credit card, the way we--the way we manage decline.

It has to do with many, many factors we are working, and they say the devil is in the details.

So, it's a result of that.

Plus, we have other offers, so we have all lower cost DIDs, and those are basically -- when you sell on the lower price, customers don't decline or move to the lower price competitor because you also offer a competitive product for those that are focused only on the cost.

There are many reasons.

I see.

So, does it mean you are pushing more of the lower price brand versus--

No, we're not pushing more, but in this economy, customers sometimes instead of just going for the lead brand, will be like bargain shoppings, but we are not pushing.

Most of our promotions deal is focus on th fact which we believe is the best product is the best solution.

And most of our sign-ups are eFax.

And most of our sign-ups are eFax, also.

Okay, and then, so, currently, or at the end of the second quarter, how much of the base was on annual contracts versus non-annual.

I don't know the answer, but I think you can calculate it.

Look, we have $30 million of deferred revenue.

If you see the deferred average is six months and our RPU is what?

[$1440]

You can divide it to 14 and then to 6, and you probably will get a number that's close enough.

Okay.

Got it.

Okay, great.

Thanks.

Thank you.

Our next question will come from the line of Daniel Ives with FBR Capital Markets.

Thanks.

Thanks you guys.

When you mentioned the revenue range [3 to 7], seems like we're tracking toward the lower end, but I guess when I think about acquisitions that could happen with second half as well as marketing spend that would translate, that kind of makes up for maybe going to the middle to the high end of the range?

Is that the best way to think about it?

Yes, and I'll tell you, if we will not do any acquisition, then we'll have to announce new guidance, but we are--based on the pipeline, and based on what we are seeing, so many of them, that we are basing our ability to make it on some of them happening.

But with the acquisitions, it's still a similar size, or there are any, like slightly larger deals in there.

There's a range of them.

The ones we've done to date, the five we've done this year, I would put all in the small category, and there are a handful that have emerged that are--I would call them mid-sized deals.

So, they are going to be more expensive even holding the multiple constant just because there's more revenue, and there should be throughout the world.

They're actually in many multiple non-US jurisdictions.

So, we look at that pot of deals, and in some cases we're at very advanced stages of negotiations.

We say, okay, we think that definitely there will probably be a few of those that will fall into this probably be a few of those that will fall into this year.

We have more MDAs, more NOIs, and larger deals.

Not that they won't do some of the smaller garden variety stuff that falls into our lap, but we have clearly seen a step up in the sizes of the transactions.

Both A, that we are focusing on, but B, also that appear to be available and what are available at least unreasonable multiples.

Also, Daniel and the rest, we definitely have high confidence that we can make our bottom line with or without acquisitions.

With acquisition, we not only will do the bottom line, we'll also do the top line.

So, that's just to be as open as we can with everything that's going on here.

Okay, and Scott, ,you might not answer this, but based on the performance on the call, does Hemi get more OS slides on the 3Q call?

I'll have to take a poll.

It doesn't affect the salary rate.

I don't understand.

The less I talk the better it is.

Thank you.

Our next question comes from the line of Travis McCourt with Morgan Keegan.

Please proceed with your question.

Thanks for taking my question.

I don't know if you addressed this before, but there wasn't a lot of share buybacks in the quarter.

Is that related to the pipeline of acquisition activity?

And if I remember correctly, you were -- I guess you down played acquisition on the last call.

What kind of happened mid-quarter here to kind of--has the private market all of a sudden gotten more on valuation, or you guys more aggressive, or both?

Two things.

First, we actually bought no shares during the quarter.

And the reason for that was the day after the last earnings call, as we have done in the past, we put a 10B5-1 plan in place, which have certain criteria that will dictate in both open windows and closed windows when the company buys.

Unfortunately, those triggers were not hit during the roughly two-month period of May and June that the plan covered as it related to this fiscal quarter.

In terms of the M&A, I think we were actually as bullish on M&A last quarter as this quarter.

In fact, I think Hemi had the same comment, that the priceline of M&A remained full.

I think he said that a quarter ago.

I've been very bullish on M&A throughout really the course of the last probably nine months, going back to late last year.

I think it's a combination of things.

I think one is that although people did not -- we're not willing sellers at distress prices in the recession in late '08 or early '09, and at in those instances we bid effectively bankruptcy distressed.

As the economoy stabilized, yes we moved our evaluations up because we could pout some value on the future of the target.

So, that probably helped.

But also become the economy did not come back in a real V-shape for these companies, I think they realize that it will be a very long road with very limited exit strategies.

So, the vast majority of them recognize they will not go public, whether they are family owned and operated, or whether they do have VC backing.

So, I think it made them realize that what occurred in '09 was not some temporary dip in valuation and dip in the economy that it would come roaring back and they would have many different ways to exit, but realize that, look, it's clearly better economically, but some people were now talking about a double-dip, the economy is different than it used to be.

So, particularly if you're a small business and you're family run and someone is putting on the table several multiples of your current standalone EBITDA, that has to be taken seriously.

So, I think those elements have helped to wake people up that these kind of transactions make sense for them, as well as making sense for us.

And, as I say, because the economy is not rocketing back, I think those trends will only continue, and I think for us, the goal, as it has always been, is to be patient and to be disciplined.

So, I never like to promise about what M&A will occur over the next one, two, three quarters because pipelines come and pipelines go, but I think the fundamental underlying trends for doing M&A, particularly the kind we do, remain very strong, and I think as long as we remain disciplined and focus, there's no reason we shouldn't accomplish some number of M&A, and if you notice from what Hemi said, we've already cleared the migration path on three of the five deals.

So, it means we are actually ready to take on more from a migration standpoint.

And just for--for the record, we will walk away from M&A that is too expensive-- The number one goal to here is to keep our profits.

Revenue as M&A, we believe is a matter of patience, and as we keep improving our margins, we prove our position to be the ultimate acquirer, but it's not like we will do any stupid deals outside of our range to meet a number.

The most important thing is our cash flow, our profitability, and the M&A is, if we do the--as Scott said, very disciplined approach to it.

And a follow-up.

I don't know if you gave this number or intend to give this number goings forward, but to get a sense of the revenue or subscriber diversity, how much of the DIDs or revenue is voice currently, and if you can give us some kind of generalization on the posted e-mail revenues.

Is it sub-5%, sub-10%?

Anything would be helpful.

Thanks.

The e-mail is going to be a little under 5% of revenues.

Yes.

The voice is going to be around 15%, maybe 16% of revenues, and that will leave us about 80% in the fax, if you look at it that way.

Now, you'll notice in the redesigned slide, we put a Hemi section that is normally at the front of the presentation.

We did reintroduce the unified communications category.

So, when we say 16%, we're taking those UC solutions and putting them under the voice, from a revenue allocation standpoint.

Got you.

And Hemi you mentioned Onebox has been your post popular voice brand or eVoice?

No, Onebox.

Great, thanks a lot.

Bye.

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

Please proceed with your question.

Hi, guys, good afternoon.

Do you have any preliminary comments with respect to the free voice trial program?

I was waiting for this one, and I'm not going to give you a straightforward answer.

I would like that, too.

(inaudible-multiple speakers) to be correct, but here, A, we are still measuring it, only the first few customers have--the six months free period was over July when?

July 17..

You can see one thing for sure, we didn't pull it off, and I said that we are going to spend more money on marketing.

The reason here is, this is a very competitive area of ours, and I don't want to help the competitors, and so I cannot talk too much about it, but they're not stupid, they will see as we continue and they will get to their conclusions.

So, you didn't pull it off, and you didn't shut it down.

No.

And a second ask final one if I could, any color on where the pipeline stands on the corporate sales perspective--from the corporate sales perspective?

Yes.

I get the weekly report from our head of corporate sales.

The deal size are larger, significantly larger than they've been before.

Decisions are really slow, but I say less slow than they used to.

We are seeing orders from the US government.

This is something that we are trying to do since I was 12, and we are finally seeing deals.

So--some deals from healthcare.

Healthcare was not strong for us.

We were always strong in legal, but now we are very encouraged and we see larger deals, and larger in size, and I think that outsourcing became something that is more common in corporate America, and also we are seeing very good success in Europe.

As you know, we added another person, so the pipeline in corporate is very good.

Great.

Thank you.

You're welcome.

Thank you.

Our next question comes from Brad Whitt with Gleacher and Company.

Please proceed with your question.

Hi, guys, thanks for taking my questions.

Hey.

Hey.

On the sales and marketing spend this quarter, we had forecast actually to go up sequentially from Q1.

Did it come in as planned, or did you scale back a little bit mid-quarter?

We scaled back in Q2.

We took several actions.

First of all, a--we did some trial in the voice product, and we slowed it down 'til we got metrics to measure, and, as I said, we didn't put it off, which means we are continuing, and we will continue to spend at an increased accelerated pace.

Also, in Q3, we'll have Japan for the full quarter.

We had it partially.

Also, as Japan team is figuring out, and this is hard, as we figure out what to do, we'll spend more.

I'll drop a piece of information.

We are now in Japan on a level of a hundred or so customers a week, and we are planning to accelerate it and actually next week, I'm going with our headed of international to visit there and to start some new ideas.

So, I'm planning, or we are planning to spend in Q3 back to the budget whatever we didn't spend in Q2 probably will go to the bottom line.

Okay.

That's helpful.

And then I believe you said on the last earnings call, you kind of gave an update of subscriber growth kind of quarter to date.

I think you said around 6,000 subs.

I'm just curious as to what trends you're seeing so far this quarter.

Scott told me not to say, but I'll say.

No, we have to have some fun here.

It's very similar to last quarter, but the reason Scott said not to respond is because we don't want you to fall into this trending.

We are not.

But, again, the number is very similar to what I said last time, yes.

Okay.

And then finally, just a clarification, I wasn't sure if heard you correctly, but did you say if you don't do acquisitions, that the revenue will be just at the low end or below the low end of the guidance.

Just a clarification on that.

Let's say, if we want to acquisition, best case, it would be at the low-end.

But as I said, we are bullish about the bottom line.

Okay.

Very good.

And this is all just to--like our investors, also the companies that are negotiating with us on their companies are listening, and we are very disciplined we are not going to pay more than the value that we believe.

It's not about like we want to play them less.

We are paying them what I believe generously and effectively, that we are mostly the only buyer, so we are paying the right prices.

The only trick is, we have to be disciplined and to continue to what we pay and what we pay is what we believe is the real value.

Okay.

very good.

Thanks for taking my question.

Thank you.

Thank you.

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

Brian Schwartz here for Mark Murphy, thank you for taking my questions.

Hi, Bryan.

Two quick ones here.

I just want to take you pack any the guidance question again.

It looks like we are going to be a back-end loaded this year--

Yes.

To reach the targets.

I'm just wondering is there any scenario here where you think that the Q4 revenue would grow sequentially?

I know historically, that's not the typical trend.

Yes, as you know, we always have negative trends on a sequential basis because of generally three or four fewer business days with relative to Q3, so if you're standing still and don't do anything, whatever your book of business is that is the same in Q3 and Q4, it will probable through produce less revenue in Q4, particularly if there's a usage based component.

But, obviously, the M&A can offset that depending on the timing and the magnitude of MA that comes in.

And yes, I do believe there will probably be some M&A that closes very late Q3 or even in Q4.

Okay.

That's helpful.

And just wanted to ask you a question on a trend for the voice business.

How that is going?

Is there any metric you could share with us possibly how many voice DIDs you had in the quarter or what the gross was year-over-year?

It was better in Q2 than it was in Q1.

And, you remember I used to say.

We are almost 200 DIDs.

I hope the next time I say we are 210.

I hope next time we are 210 DIDs.

If you round it up, it's 210 DIDs, but it's not there yet.

Okay.

That's helpful, Hemi.

And last question I asked actually wanted to ask you Hemi, is it possible to talk or share with us the shares cycle you have in these corporate sales?

Just kind of curious, are you mostly replacing the hardware type vendors?

Yes, yes.

So, the cycles are long, and the decision--most of the time we replace fax servers, there are several manufacturers out there--three, four big names.

And usually when we are negotiating again, against the server.

It's time to replace the server that those companies are thinking about should we buy a new machine and keep this guy that runs this to just get into the--solution outsource solution.

Those usually take a lot of time, and there is not--the customer has something that is working, so there's no time pressure.

Those are most of the deals.

Now in, in other cases, there are companies that just want to support the non-core office.

So, let's say companies that have big concentration in San Francisco and then they have many multiple offices around the world, at that time, they would replace fax machines in the--in the small offices, and want to move them to a solution like the big office.

In that case, it is faster and--I mean, there are so many--sometimes we get customers that are, like, in the [Morlidge] time period, we had customer that had capacity, but it wasn't enough, so they would buy the extra capacity from us.

And this is why, if you remember, like when the mortgage--when the catastrophe started, we lost--we didn't lose the customers, but they just reduced the size, because they were using us for the extra capacity.

Recently, we are seeing, also, more customers that are buying from us more than the simple fax to e-mail, and e-mail to fax, things that are integrated into the systems.

We have done some improvement, including now that we have in beta, those companies need our system to work with their databases.

So, we were always doing [ORCA]--now we are starting to do SAP.

All of those deals, they cook slow, it takes a lot of time, but then when the they come in, they're stable and large, and they also--multi-year contracts, and they're looking for redundancy to provide them.

So, I'm very, very optimistic about that market.

That's real helpful, thank you.

And last question is for Kathy.

Just wondering if FX helped you on the margins at all in Q2.

I'm sorry, say the question again

I'm wondering if FX helped you on the margins at all?

No, it eroded the margin because we had a $300 thousand impact on their revenue.

Okay, so it didn't help your compensations at all?

Very, very slight.

Remember we have a very high margin product, so you have get very little benefit on the expense side when compared to the impact on the revenue side from FX.

Great.

Thank you, and congratulations turn on the real strong margin performance.

Thank you.

Our next question comes from Matt Headburg with RBC Capital Markets.

Please proceed with your question.

I guess as a follow-up to Brian's question on the gross margin.

Kathy, you guys have shown really nice improvement over the last, call it six quarters.

Now, essentially at an all-time high here.

I guess--should we consider that the new run rate, and I guess both organically and then with back trip of the M&A opportunities you guys have alluded to?

I like to qualify it, because floor two things that are going to continue to go on here.

MA and the integration of M&A as time goes on, so that puts pressure on the margins until they're fully integrated.

And then the other component of it is really making sure that--I can't forecast what the FX is going to be on an ongoing basis, but obviously it could have impact as well.

S,o while the run rate on the margins is very good.

I think we've got a number of initiatives and M&A and other activities particularly in Japan that did put some pressure on them.

We like our margins.

But again, it's not a goal.

I think that anything north of [$80 thousand] is amazing and we don't run the company to get another point there.

We have a more holistic picture of let's take actions and beyond that, we are focusing on more strategic things.

Again, we like the margins, but to bake in that we continue--I told the board, it's going to be better than a hundred percent.

So, we like them and we do have and things we could do on in the long run to improve them, but I'll be very honest, it's not the main focus.

It's not the main focus, but I think anything higher than [$80 thousand] is great, and we have to look at the entire company as a whole.

So, I think those numbers are great.

I don't think that you will here next quarter it's better.

Great.

And then one last question on the churn.

Congratulations again on getting that down to some pretty historic levels here.

I guess with the promotions or discounting that you guys at least have been doing more specifically in Q1.

I guess in theory, how low can that go.

Are we at a very good level here that you would kind of like to maintain here, again, ex-the economy here?

Actually, we had -- in Q2, we took our lowest cost product and brought the price up.

We had a product that was on the $5 level and we said enough of that.

It's a company to be acquired.

Of course, we continue with the customers that had it, but when we took over, we brought it up to $7, which I think is still an amazing bargain.

So, we are not running the prices down.

We focus on value.

And another comment on the question is for a long time we've said, and I don't think we're backing away from it, that a normalized range of cancel rate is between 2.5%, and 2.6%, and the reason it's a range and the reason it may move around that range is the function of the type of marketing programs we're doing.

And the type of testing we're doing a,nd to some extent also the mix of business.

That will influence where your aggregate average cancel rate settles out.

I actually think, though, for the first time, there might be some reason to be optimistic, not necessarily in the immediate near-term, but over the next two to three years, to move that cancel rate range down.

And the reason why I think there's some optimism is it's gone to 2.6% in what is still a mediocre economy.

So, we're not here to predict when the economy will be on a more stabilized robust basis, but I think when the that occurs, if we keep the cancel rate in this 2.5%, 2.6%, 2.7% range, and then ride whatever that next leg up is in the economy is, whenever it occurs, I think there may be a chance to move the range of acceptable cancel rates down, and that would be the first time in many years, if not the company's history, that that would be the case.

I also want to add something.

We measure our churn rate after 120 days, which we consider as the time of the customers to get the first three months, and then they get--it takes a while for them to see the credit card, and they say, "oh, I didn't really want it." But I also look on customers less than 120 days.

I think that this economy and our approach to advertise produce more responsible, if you want to say, customer.

So, in the old days, people I would just say three, let's try it, and then say, oops, I really want it.

I think the customers now are more also more responsible.

This economy trained them to if they really wanted to go for it, and therefore, we have lower cancel rate, even before the 120 days.

I think it's really--there's the expression say "we lost the weekends," and this is where we are now.

We shaked off the weekends, and now we have customers that want it and know that they want it, and they are comfortable with the cost and the value, and they're staying.

Excellent color.

Thanks, guys.

You're welcomE.

Thank you.

There is no time further time for questions.

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

Alright, we thank you all for joining us on the Q2 call.

There will a press release out in the next couple of days, but to pre-announce it, we will be at two conferences next week.

There's an Oppenheimer conference in Boston, followed by the Morgan Keegan conference on Wednesday, August the 11 in New York.

And, so I'll be at both of those available for one-on-ones, as well as making public presentations at each of those.

We've got a couple of conferences coming up in the September time frame as well, and then we look forward to talking to you again to review Q3 results most likely the first week of November.

Thank you.

Thank you.

Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference, you may disconnect your lines at this time.

Thank you for your participation.