Ziff Davis Inc (ZD) 2010 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the j2 Global's third 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 our Q3 conference call.

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

We'll be discussing the Q3 financial results as well as provide you an update on our operations and strategy for the balance of the year.

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

Also if you have not received a copy of the press release, you may access it through our corporate website at j2Global.com/press.

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

After completing the presentation, we'll be conducting a Q&A session.

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

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

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

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

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

Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy filings 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 these documents regarding Safe Harbor language as well as forward-looking statements.

I'll now turn the presentation over to Kathy who will give you the operating results for the quarter which can be found on slide four.

Thank you Scott.

Good afternoon ladies and gentlemen.

As Scott mentioned, please refer to slide four in the presentation for a recap of our Q3 GAAP operating results.

Q3 2010 revenue was $62.8 million.

Revenue grew $1.5 million from $61.3 million in Q2 2010 fueled by organic growth, improving foreign exchange rates and a partial quarter contribution for our recent acquisitions.

Revenue in Q3 2010 was $1 million higher than Q3 2009 revenues of $61.8 million.

We continue to see a shift in product mix with our (inaudible) growth coming mostly from our corporate and voice services.

Our desktop faxing corporate revenue is up 17.4% year-over-year and 9.8% over Q2 of 2010 and our voice business revenue is up 5.2% over last quarter.

At the end of Q3, we had deployed approximately 1,411,000 paid telephone numbers.

Our paying DIDs grew by an additional 76,400 sequentially, achieving a quarterly growth of 5.7% and 136,700 DIDs year-over-year or 10.6%.

Our corporate segment led the growth increasing by nearly 49,000 DIDs or just over 15% compared to the same time last year.

Our cancel rates are holding at 2.6% which is flat with the prior quarter and down from 2.8% in Q1 and 3.1% in Q3 of last year.

Our ongoing focus is to stabilize if not further improve these rates in the coming quarters as we continue to increase the value of our services, actively manage customer retention, and the economy at least maintains its current level of activity.

ARPUs for Q3 were $14.21, down slightly from $14.37 for Q2 2010.

Year-over-year, we saw 5.5% decrease or $0.82 from $15.03 to $14.21 primarily due again to a shift in our fax product mix and the weakening of foreign currency exchange rates year-over-year.

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

GAAP gross margin was 82.9%, 110 basis points better than Q3 of 2009's margin of 81.8%, down slightly by 20 basis points from Q2 2010's margin of 83.1% due to initial inherited cost of our recent acquisitions and our launch in Japan.

This quarter's selling expense was 17.3% of revenues.

R&D expense was 4.8% of revenues and G&A was 17.4% of revenues.

Total GAAP operating earnings for the quarter were $27.2 million.

GAAP operating margin was 43.4%.

Non-GAAP operating earnings were $30 million for the quarter with a non-GAAP operating margin of 47.8%.

Net earnings for the quarter were $19.8 million for GAAP and $21.7 million for non-GAAP.

Other income was again $0.5 million for the quarter compared to just $20,000 for Q3 2009.

Q3 non-GAAP EPS is $0.47 per share for this quarter.

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

Please refer to slide 16 in the supplemental section of the presentation for the GAAP to non-GAAP reconciliation schedule.

Q3's non-GAAP adjustments are $2.8 million on a pre-tax basis or $1.9 million after-tax.

The resulting net EPS charge is approximately $0.04 per diluted share.

Q3 continued our strong year for M&A activity.

We closed one small international transaction in the voice space and one mostly domestic in the fax space.

Additionally, subsequent to September 30, we closed another transaction in the online data backup space with an Ireland-based company.

This latest acquisition further expands our service offerings and extends our reach into new global markets and customers.

Free cash flow for Q3 was $26.7 million compared to $26.1 million for the same quarter last year.

Year-over-year, our free cash flow grew 10% for the first nine months.

We achieved record nine months free cash flow of $87.3 million for the period ended September 30, 2010, exclusive of the $14.2 million IRS settlement we paid in Q2 as compared to $79.4 million for the nine months ended September 30, 2009.

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

Finally 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 the third quarter recap and additional 2010

Thank

you very much Kathy and good afternoon everybody.

So, usually Scott limits me to three pages.

Today, he was very (inaudible) and he allowed me to do five slides.

This is because we have many good news here and in multiple fronts so let's start with page number six.

On the operations side, our total net adds are 76,000.

Of those, 50,000 came from our acquisition mostly with Venali and 26,000 are added organically.

More than 50% of our corporate -- of our adds came from the corporate side of our business and I will talk about this later more.

This quarter is our largest quarter ever since 2000 when we acquired eFax.

We have added 76,000 new DIDs this quarter and year-over-year -- sorry, 137,000 new DIDs.

Again, this is our largest add since the acquisition of eFax and is a very exciting time for us.

We had also a strong international performance this quarter.

We've added 10,000 phone numbers, almost 50% of them are organic and the rest of them are from the acquisition of the UK Company, Alban Telecom.

Japan, as you know, we failed twice in the past in launching Japan.

Now, the third time is the charm.

We talked about launching Japan last year and this year, we started launching in second quarter and in the third quarter we have doubled our customer counts and we are very excited about this.

Actually, we have a new director in our Japan office.

His name is usually [Yushi Takimorisan] and he started in the beginning of November in our Tokyo office.

We are refining our online campaigns in Japan.

We're working on pricing, product offering, and we are also launching probably the next month or so our affiliate marketing Company campaign.

And the most important piece of information in this stage is for the second quarter we have a very low cancel rate of 2.6%, which is near our historic low.

Those of you who follow the Company know this is a very important fact of our Company.

Next page, page seven.

I'll talk a little bit about our corporate business.

Our corporate is small and effective sales team have added this quarter 14,000 DIDs organically.

This has been done through the execution of six additional large contracts in Q3 to remind everybody, we count and define large contracts as having almost 1,000 DIDs or $1,500 or more per month.

So now with the acquisition of Venali, we are 150,000 DIDs like this and this is very exciting to us and I want to take a moment, many times I'm with customers and sometimes investors and they are not aware of the (inaudible) corporate business.

eFax Plus and eFax Free, we have done such a good job that everybody thinks that j2 is a web Company.

So I will take a moment to try to explain the side of our corporate business.

Our annual corporate fax revenue as it is now is $61 million a year, which is 28% of our total fax revenue.

If you add to it the fact that we just acquired Venali at $10 billion.

If you add to it our messaging business, if you add to it our Electric Mail which mostly serves customer (inaudible) corporations.

If you add to It the portion of corporate business into our voice services, those customers who pay $1,500 or more and even if you add to it our recent acquisition of keepITsafe, you are talking well over $18 million a year.

So it's not so small but we never try to focus on the size of each (inaudible) of the business but just I was asked by some investors to tell the number so here it is, more [$19] million a year.

We also in this quarter added another feature, SAP connector, there was a high demand.

And we have had launched it and already have some built in the makings.

And now let's talk about our voice business.

Our third quarter --- during our third quarter we added 5.2% more DIDs of revenue -- on the revenue, sorry, our revenue now is on the run rate of $2.8 million.

Annual run rate is almost $34 million and if you remember in the last year, in the beginning of this year, I would say almost 200, about 200 so now with the addition of October.

So in the last four months, we have grown to 220,000 DIDs, so 20,000 DIDs, 10% in third quarter.

This is extremely exciting and we added phone numbers came from all our products.

Some came from Alban acquisition, something like 5,000 or 6,000.

eVoice was doing phenomenally well, Onebox add new website and is doing extremely well and even our phone people have done very well in October.

We have launched, okay for those of you that don't know, phone people is focused on toll-free numbers and you can go there and select a number, a vanity number.

There was a new area code introduced in the US, 855, and in the last quarter we have done very nice in that as well.

So I am very happy and pleased with our voice business and we continue to expand coverage and now we have 32 countries and 235 area codes around the world.

Let's go to next page.

Next page is product highlights.

eFax Next, I mentioned it last time.

We are rolling it out.

And let me just for a moment talk about the history of the fax in our Company.

Fax machines were the way people would use it up to 1995 when we started with the introduction of fax to e-mail.

Fax to e-mail basically was at the time, get your faxes in your e-mail.

So if you are mobile with your laptop or with your desktop, you were able to get your faxes to go.

With a new introduction of eFax Next or now it is basically an app that you can see on the right side, our new app that is on beta and will be launched next week.

But now that eFax became an app, we have it in smartphones, on tablets, desktops and multi-functional printers.

It's extremely exciting because if you can think about it, we have shrunk the size of the fax machine into an app that can reside on any screen, any machine.

And it is very exciting and let me talk a little bit about the new features and why I am so excited about this.

So first of all, the iPhone app that I'm already using is a scanner.

You take a picture of documents or multiple documents, business cards, receipts, a four-page document, you take it with the camera and then you arrange it and you click it and send it or you save it.

We also added another exciting feature which is the enhanced security for HIPAA Compliance.

The fax comes to you as a https, it's a secured link and then it's encrypted.

So when you pull it in, it's encrypted so it's fully secure to comply with severe security request.

We have finally brought the digitized signature in a more user-friendly way.

We used to have a digital signature all those years on the messenger.

The problem was that the messenger was an installation and when you bought a new machine or you were using a machine that is not yours , you have to find it or reload it.

Now the new signature is also in our message center.

It is always there you can pull it including with the new iPhone app.

We improved our interfaces, you can see on the slide, hope it's big enough.

You can view faxes.

You can search faxes that are old, that are harder to find in your email.

Just go to the storage, we give you -- provide you lifetime storage and you can send faxes.

Also, you can search faxes by any keyword because we are also digitizing and we are also converting them to text.

And we also added a new small feature.

We used to save only the faxes that came in.

Now we are also storing for life the faxes that going out, very exciting there.

Now as we mentioned before, we would also added another product on the corporate side the SAP connector.

We introduced it last month in Las Vegas at the SAP User Conference and there was a lot of excitement around it.

And the most exciting integration that we did is an OEM one.

We never did those.

HP -- we have a new partnership with HP Image and Printer Group.

eFax is now part of the solution when you buy an HP Photosmart eStation Printer.

It is there on the MSP, multi-functional printer.

If you go to the next page, you can see on the right bottom corner, the new HP Photosmart eStation.

And if you go and you take the main screen, it gives you the basic functionalities of this MSP, which is copy, scan and fax.

And fax, eFax, the first time you launch the screen, you are required to either get an eFax number for free or sign up for a paid eFax, whichever one you want.

Just sign in and then from that point on you can use it and it is part of the major feature of the machine.

We are also talking with many other hardware manufacturers of printers and HP is talking with us to make the next deal for 2011.

All is very exciting and as I said before, the fax is transforming into an app, including an app that resides on multi-functional printers.

For the next page, page ten, our M&A team is working very hard and we are very pleased with the results.

We just acquired Venali.

Venali was acquired in September, the integration is underway .

Venali was a Miami-based company.

The customer base is mostly corporate, mostly Fortune 500 business with very big names.

The annual revenue is approximately $10 million coming mostly from the US, Europe and Asia.

In October, we acquired an Irish company, keepITsafe.

Or to be more exact, they launched the company as keepITsafe but over time, they followed the customers, and called it keepITsafe.

The company is a provider in the online backup -- that as you see on the consumer side.

They're focused on the corporate side.

They usually backup the entire organization and they charge premium prices because unlike their consumer one, they provide very fast recoveries.

Both basically in a way you can call this a disaster recovery solution.

The Company has six to seven employees and they are moving to our Dublin offices by this Friday.

Our M&A team is executed through this year seven deals.

They were very busy.

Let me just repeat those deals.

For international deals, in the UK, Reality Telecom & Alban Telecom, small voice companies, a few thousand phone numbers each but strategic.

Australia, we bought the fax business called mBox.

In the EU, we have the company that we just talked a moment ago, keepITsafe.

And then we did also three domestic fax to e-mail deals -- or two, TrustFax and Venali, and also FuseMail which we acquired for our e-mail subsidiary in Canada.

Integration of all those businesses in previous quarters are underway and nearing completion.

The M&A pipe has never been so robust.

We have a lot of activity in multiple countries and we have handful open bids still going on as we speak.

Let me pass

Thank you Hemi.

In the last slide before we turn to questions is slide 12, a reaffirmation of our annual guidance, which to remind you is for revenue growth between 3% and 7% versus 2009 and non-GAAP EPS to be similar to 2009.

As a further reminder given the timing of some of the acquisitions, we will record a full three months of Venali revenue in fiscal Q4 versus slightly less than one month in fiscal Q3 and about 2.5 months of revenue from keepITsafe in Q4 versus none in Q3.

At this time I'd like to invite operator to come back on to instruct you how to queue for questions.

(Operator Instructions) Our first question is coming from the line of Mr.

Brad Whitt with Gleacher & Company.

Your line is now open.

You may proceed with your question.

Hey guys, thanks for taking my questions.

I got a question for Hemi.

I signed up for this eVoice for a six-month free trial and two months into it, you guys charge my credit card.

What happened to my free trial?

Free trial is limited to so many minutes.

If you go above them, we charge you.

You expect me to read the fine print?

I'm very happy that you are a heavy user.

No, I am a happy user.

I really appreciate the product.

Heavy and happy user.

I'm curious as to whether or not how we should expect sales and marketing trending Q4.

I know Scott, normally you put the brakes on a little bit during the holiday season but it sounds like you've been investing lately.

So I'm just curious should we think about it going up sequentially or more traditional flattish to down?

Well, it's a little bit of a hybrid answer.

It will probably be between Q2 and Q3 spend because of what you just noted which is that we'll rely on a more limited marketing from Thanksgiving through the first full week of January.

So it will probably be -- you should assume it to be flattish, maybe even down a little bit on a sequential basis but up relative to Q2 and up relative to other Q4s.

Okay great.

That's helpful.

Impressive on the corporate side this quarter.

Is there anything in particular -- any secular trends or any dynamics you're seeing out there that seems to be driving that?

Just old technology out there?

Now that you are customer I have to be careful how I answer you.

But seriously, the corporate deals tend to take deals years and I think what we see here is corporations are now starting to look back into investment in their old infrastructure.

And when they have the choice of buying another server versus going to j2, they are making the decision to outsource in the cloud -- all those modern world and even (inaudible) themselves are trying to offer in the cloud solutions.

So we are there and we have benefit from the years of investment in this space and many of our customers, we have a very big list that is growing, they're adding phone numbers.

We don't have to do a lot and as you know, corporate also has a lower churn rate.

So it all helps.

Okay great.

Thanks for taking my questions.

I'm going to look for a vanity number too, by the way.

All right.

Good.

Thank you.

Our next question is coming from the line of Shyam Patil with Raymond James Financial.

Your line is now open.

You may proceed with your question.

Hi there this is [BJ Corey] calling in for Shyam.

My first question is can you give us your thoughts on how the EasyLink/PGi transactional impact j2's enterprise business and opportunity.

Do you view it as a positive, negative, neutral event?

And why?

We are looking at it as extremely positive we used to have two low bidders on our business, now we have one.

It's extremely well if you know, in the past we have done several attempts to acquire EasyLink and now we congratulate them for acquiring the business of PGi.

So it's great.

Okay great -- no, going ahead.

I would just also emphasize, too, as it has been the case in the past although I think it's a little clearer now, one of the advantages that we believe is important is the financial wherewithal of the entity providing the service.

And I think we like the fact going up against the company that's taking on some leverage.

Yes thanks and just a follow-up question.

I know you talked a little about spending in Q4 but I guess it's from a high-level just so we can understand what your thoughts on this but in 2011, just in terms of focus overall how do you view sales and marketing spend, real costs and G&A?

I think that what you will see is similar behavior with more spending on voice because voice, as you know, is a less mature product.

It needs more support.

You will see us spending more internationally.

We are getting very good return on our investment search and everything internationally.

There's not enough inventory but we are doing very well and as we continue to grow and expand, I think that we will spend more towards international.

Here in the local markets, eFax brand is doing well.

We have a lot of (inaudible).

So I'd say and again we didn't start in this economy budgeting early like crazy.

So I believe that it will keep some similar percentages to revenue but it's too early.

We'll probably give you much better answer in the next earning call.

Thanks.

You're welcome.

Thank you.

Our next question is coming from the line of Youssef Squali with Jefferies & Company.

Your line is now open.

You may proceed with your question.

Hi, this is actually (inaudible) for Youssef.

I have a few questions.

I think Kathy talked about how there is opportunity for improvement in some of the metrics.

I think she was referring to churn and maybe subscriber growth.

Can you talk about how you can improve these metrics?

Well basically we've actively pursued customer retention programs on an ongoing basis over the course of the last several quarters.

Based on those results, as you can see, we have been able to retain a number of customers that might have otherwise canceled for any number of reasons.

The economy as well has probably played at least some portion -- some measure in this in terms of the fact that we had less cancels.

We are working very hard to provide services and customer service to a lot of our customers on an ongoing basis and I think that this helped as well because there needs to be some stabilization there.

To the extent that any of that changes changes, of course, could have an opposite impact but for now we are very pleased with performance on the churn rates and we continue to focus in on retaining our customers on an ongoing basis.

And there are three things that can impact our churn.

First of all, the economy, which is not one of the third, that we have no control but what we do control is -- are three things.

Credit card processing and I'm doing it here from 1996.

It's a very evolving and you always think that you know everything but there is another trick and another trick, so everybody always doing credit card processing should know that there is always the next road to turn and find another source of retention.

Because again, most of our customers don't really cancel.

They just -- something happens to the credit card and then when we come and ask for information, we either don't get them or they say, okay, now that you came.

I'm not renewing it.

So with the credit card, we still have to do, and we are doing well and we will do more.

Secondly is the corporate.

The more corporate you have and as you're seeing, the less you should expect the churn.

Corporate are going up to three-year deals and they are less sensitive to -- they're not credit card sensitive.

They just need the number to work and to be on the business card and move on and move on.

At the next one is our customer support.

Our customer support has done very good things and I don't want to detail so much because we have the competition listening but they found ways to save customers with multiple offers and other things and by getting better there, we also see improvement on the churn.

So those three things, I believe we can continue to improve.

How much, I don't know but every time you see a world record has been broken, you say, I thought that nobody could improve it but then somebody comes and does.

So I believe we can still improve it a little bit, yes.

Okay great and then on this Venali acquisition, do you simply see it as a bolt-on or do you also see some opportunities to upsell or expand accounts there?

No, it's a bolt-on.

There's actually going to be no further promotion of the Venali brand name, et cetera, so those customers will get migrated into j2, into the eFax Corporate environment.

There will be some employees that will be retained but effectively it's a bolt-on.

There are some customers there that find out we have some additional area codes or some additional services and those are always welcome in the business and the revenue in the first few months is doing well.

But nothing (inaudible) beyond that.

Okay and then on M&A, you talked about opportunities that are out there.

Can you talk about the size of these related to Venali or --

Yes, I think on the last call I had mentioned that if you look at the 30 deals that we've done, now that would include keepITsafe, probably 25 or 26 are what I would call "small category deals".

That's the company has less than $5 million of annualized or trailing revenues at the date of acquisition.

Then you have a basket that would be between $5 million and change up to about $15 million.

Venali clearly falls into that category as do the couple of our historic deals.

And then you have a category there are few the very few transaction possibilities in within our core space.

That would be $15 million and above.

So what we have seen over the course of this year, both by our own internal design as well as by what is available in places we are looking is a lot more of a category two deals.

The deals that have between $5 million and $15 million of revenue.

They happen to have a very international flavor so almost all of them are non-US-based.

And as a result, most of their customer base is also non-US-based.

So that tends to be the flavor.

Now there's always exceptions to that.

keepITsafe is an exception and that is in category one as a smaller deal but there, that's really looking from our perspective as a not a bolt-on transaction but one that is actually in a high growth mode in a related area.

Entering into new space.

Right, entering into new space or related space.

There's some interesting opportunities within both Ireland where the company is based but also going over the ponds to the UK and then maybe on a longer-term basis, other parts of the European Union and even North America.

So there will always be exceptions to the rule but of a handful of deals that Hemi talked about most of them fall into that category two.

And as they mature and grow, larger deals more interesting and smaller deals are less interesting.

So you can assume that the average deal in the pipeline is much bigger than the average deals that we did in the past.

That's correct.

Okay great and then lastly, with keepITsafe, I think you moved into cloud-based storage.

What's the roll-out strategy there?

keepITsafe, or keep IT safe, is focused on the whole enterprise so basically you will backup all the machines of the organizations in most cases.

And you would expect it to be fast recovery, now faster recovery over the Internet is not as simple as one might think.

So what they are doing is doing a few things that are different from what you see -- first of all, they make sure that the backup or the nightly wake-up -- backup is really done so you know when you have a machine, if it fails, it fails, they will alert you that something is not going to make sure that you are update is up and current.

And then, if their system goes down, they will offer you fast recovery including putting on your company on a hard drive and send it to you.

This strategy there is because companies understand that just simple backup is not enough.

They need system-wide backup.

They are willing to pay more and this is where we are, j2 was always focused on high margins.

We take pride in our average revenue per employees of over $0.5 million and we saw that these guys can deliver that criteria over time.

That's why we were attracted to them.

They have the potential of growth with very few employees.

So do you think that this can be easily cross-marketed to e-mail customers that you have?

Absolutely.

I hope so and absolutely.

This is why we bough it but time will tell.

So far, they were a stand-alone company.

They never had a chance to grow and upsell.

We have located them inside in the heart of our Irish office so that they can basically, across the hall that's sitting with our customer support and our teleservices team.

So basically those are young entrepreneurs and they will understand that they will work with them across the hall to try to upsell.

They also have the opportunity to upsell an image solution from our Electric Mail.

As you remember, our vision is to sell everybody all the solutions for small businesses fax, voice, backup, email.

It's hard, most people buy a piece here, a piece there.

Very few are ready to buy everything for a one-stop shopping.

We are ready and we are trying but we cannot make the trend we can just ride it.

Great thanks.

Thank you.

Our next question is coming from the line of Mr.

Mike Latimore with Northland Securities Your line is now open.

You may proceed with your question.

Hi everybody.

Thanks for taking call.

This is actually Ian sitting in for Mike today.

Just to get back to M&A real quick here -- wondering how what the environment is like in terms of actually getting deals closed here.

Obviously you've got seven done this year so it's going pretty well.

But just wondering if you can talk about that a little bit and maybe should we expect one or two deals getting done here in Q4?

Let me start with your first question.

I think the environment is, has been, and remains good and I think some of the reasons for that is there was not a real snap back in the economy.

So you did not have that V-shape recovery.

We actually thought that what we are doing this year M&A-wise would have occurred at 2009, particularly in the first half of the year when the economy was still falling.

But I think it was, to use the expression, "trying to catch a falling knife".

It was very difficult in that environment to know what to bid so you tended to bid overly conservative which, because the economy did find its bottom, resulted in relatively few deals occurring.

Then with the economy, I would view it as generally improving albeit not at a consistent rate and certainly not consistently across all categories.

That allowed for us to increased someone the multiple that we are willing to pay but at the same time I think on the other side, recognizing that you are not in a robust mode.

So therefore, there was a more realistic expectation in terms of what a fair evaluation was.

So you've got a confluence of events.

It took a few months to play out.

We've seen it play out throughout the course of this year.

I am hopeful our M&A has not concluded for the year.

We've got obviously another seven, eight weeks to go.

There are deals in the pipeline and I think from our standpoint, though, what's more important than -- certainly we're not going to force the deal to get done.

That's insane.

But the real goal in the next eight weeks is to be able to take this pipeline and prioritize and order it.

And a lot of it, if we can get it done this year, great.

But a lot of it is how are we ordering it going into 2011.

And there are some interesting scenarios based on the domicile of where some of these targets are located since they are not US-based and how integration and things like that would flow and the j2 resources that would be needed and where in the world they would be needed.

At all of these things go into influencing the desirability and the order of priority of a given transaction and to me, that's the most important thing.

I would like to ultimately do them all but we've got to do them in a proper order.

And Ian, I would like to add, in order to do a deal, you have to have a willing seller, willing buyer and cash.

We are a willing buyer.

We have lots of cash and most importantly, we are very experienced in integrating.

One of the things and I've seen in the past, deals that we had other companies bidding against us, we ended up buying not so much because we paid the highest price.

Because the seller felt we know what we are doing, we know what we want, we asked the right questions.

We give the employees the view of what will happen the day before and after.

Buying companies is not just having money.

And we have it and we developed 30 deals.

You don't have 30 good deals.

And I can tell you we are in a situation now where we actually rejecting deals and we have not been in a situation like this for many, many years.

We are rejecting good deals that in the usual time, we would take them.

And we are rejecting them just because we have others that look better.

So it's very good.

Okay, all right.

And as it relates to ARPU here, I think it's, what is it, the fifth quarter in a row here that we've had downtrend?

Any reason to believe that would slow that decline down or maybe bottom out here?

It depends on our corporate business.

Corporate business comes with lower ARPU, voice comes with lower ARPU, and it's not bad news.

The real thing is what is our revenue per employee or our profitability, in case you know, we grew the revenue a few percent but the (inaudible) 10%.

And the ARPU does what it does.

What's was more exciting is that the churn is low.

The ARPU has to do also with the economy on one hand and on the other hand, we are trying to provide more pages or minutes included in the package.

This is to basically lower the uncertainty of the potential buyers so they like to know that, I'm paying you this and that and there are no more charges.

Those -- and this trend causes lower usage but we don't see it as something that is negative.

I think it might fall a little bit more but I think it will stabilize sometime next year.

We are not -- our focus more is not based on that.

It's based on how many customers, churn, cost of running the business and profitability.

Okay, all right and one more here.

I apologize if I missed it.

You were moving quick on the comments.

But did you guys buy any shares back in the quarter?

I think it was 6300 shares.

And one for you.

The formula triggered but not -- it was just there for a moment in time.

Thanks, everybody.

You're welcome.

Our next question is coming from the line of Mr.

Matt Hedberg with RBC Capital Markets.

Your line is now open.

You may proceed with your question.

Hey guys.

Thanks.

Scott, I'm wondering, earlier, there was a couple questions on Venali more or less as a bolt-on acquisition I'm wondering now that you've had a chance to look at the functionality there is there the opportunity to migrate any of that functionality either over to the eFax brand?

Yes, absolutely.

The answer is yes.

All the functionality that we have -- the functionality that j2 had in the past.

There's some new little things that they have in what we call our developer program.

They have customized it for the customers.

We are therefore going to add those features to our system and remove those customers with the added features.

Nothing special beyond the fact that there weren't many years to get us customers.

We are servicing them well, we are moving them into our platform, we have a platform.

And that's about it.

You can see in the price that we pay, this is not extremely strategic.

This is just take the revenue, move it to our platform and let -- the efficiency of our size can make it a much better business than in the hands of the previous owners.

That's great and then as far as that revenue is it -- just for modeling purposes, is it safe to assume about a $2.5 million quarterly run rate for that business?

Pretty close.

Pretty close, yes.

And we'll vary, remember, their revenue and even our revenue does have a usage-base component which varies by -- actually by month but certainly by quarter.

And remember this is particularly as we get to the year-end, a seasonally light quarter in terms of business days.

Usually on a sequential basis, you lose about three sometimes four effective business days from Q3 to Q4.

So while it is true that their book of business is basically linear over the 12 months, there are some pluses and minuses based on the actual business days in each month.

Yes.

The customers are mostly large banks, retailers, so they are all over the map.

Got you.

That's helpful and maybe I missed it but could you give a little bit more color on the SMB market and how that's functioning relative to your internal plan?

SMB Fax or SMB Voice?

SMB Voice I just covered in the call.

Doing very well, grew 10% in the last four months.

SMB Fax, we are growing more in the secondary brands on eFax.

eFax is the premier brand.

It sells for $60.95.

Our secondary brands are mostly around $10.

They are growing faster than eFax -- a sign of the economy, a sign of the competition but always growing.

Great and then one last one for Kathy.

Again, I may have missed this earlier and I apologize, but did you indicate the FX impact on the quarter to revenue?

No, I did not but I will do that now.

I believe that, that number was approximately in the quarter was $73,000, I think was the impact in the revenue?

On a sequential basis.

On a sequential basis, it was $254,000 year-over-year -- excuse me, $534,000 year-over-year.

$534,000 year-over-year?

On a year-over-year, 2010 versus 2009.

Okay great.

Thanks guys.

Thank you.

Our next question is coming from a line of Mr.

Brian Schwartz with Piper Jaffray.

Your line is now open.

You may proceed with your question.

Yes thank you.

Just have two questions here.

Thank you for taking my questions.

Scott, Hemi, you have a really unique viewpoint with your business into the overall small business market and just looking at the metrics here with j2.

Everything seems to be improving from your topline growth to the organic (inaudible) churn rate and such.

Is it possible to take a step back and extrapolate on that spending environment is improving down in the small business market?

Or would you say that this is just simply real strong execution on the part of the Company?

Well, we obviously believe it strong execution on the part of the Company and I think that is true.

But I think what you're seeing in the SMB community.

They were at the end of the train in terms of participation in the recovery.

I think the good news has been, they clearly have hit a point of stabilization and depending on the specific industry they are in as well as how well they execute their business, they may be seeing some upward trend.

However, I think they still are not as strong or as participatory as say the larger enterprises and larger businesses.

So they been moving in a positive direction at a slower pace on average.

And what we'll see -- again, to maybe give you something more tangible.

A larger company would be in a growth mode, whether they're buying things, or adding employees and we will see that flow through by the taking of incremental bids under the existing contract.

I would say on average, that's happening at a much slower pace within the SMB environment.

They are standing pat.

And also Brian, this whole business or the SMB business also is international -- and on the international front, the penetration of fax to email service is a notion, it's an awareness, it's just an early stage.

And when I talked about Japan, I didn't mention it but we tried in Japan and followed the market for years.

And there was nobody there.

There was nobody to acquire, there was nobody successful.

Suddenly after we entered both NTT and KDDI, the largest telephone companies in Japan started in launching a serious way a competing product.

And we are all -- the three of us are doing well.

So I think in some countries like Japan, for example, the SMB didn't even start and also, there are lots of potential due to the fact that j2 is really a global Company

Thank you for that excellent color into the market.

The second question that I had was in the recent quarters here you have given us an early read into the quarter at least the first month of organic [date] sign-up trends.

I'm ready for you, Brian.

I'm wondering if you can help us out again here, Hemi?

So, I just looked.

Okay.

We closed October with 10,000 organic DIDS but I have to caution you, this is the craziest quarter -- this is the last quarter of the year.

December is usually bad.

And on the corporate side, I don't know how to make the decisions.

Law firms tend to delay everything until next year so I cannot tell you that effectively we have 10,000 in new organic DIDS in October or something that you can just as simple as (inaudible) and guess the quarter.

But it is 10,000 in the first quarter corporate and voice are doing well and very similar to -- all the products are doing well.

Fantastic.

That's a very impressive start here to Q4.

And congratulations on all the positive traction here in the business.

Thank you.

Thank you very much.

Thank you ladies and gentlemen.

This does bring our Q&A session to a close.

I would like to turn the floor back to management for any closing comments.

Okay.

Thank you very much.

We appreciate your participation in the Q3 call.

A couple of upcoming presentations will be next week in New York City, I'll be on a panel at the Piper Jaffray Conference that's going to be discussing SAS applications.

The following week in Las Vegas at the Citigroup Conference and then other ones look for posted either on our website or through our press release.

And we will look forward to hosting you on the Q4 call which we would anticipate to be sometime in the mid-to-latter portion of February.

Thank you.

Thank you very much.

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

You may disconnect your lines at this time.

Thank you very much for you participation and have a wonderful afternoon.