Ziff Davis Inc (ZD) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global first quarter conference call.

It is my pleasure to introduce your host Mr.

Scott Turicchi President of j2 Global Communications.

Thank you.

Mr .

Turicchi, you

Great.

Thank you.

Good afternoon and welcome to our conference call for the first quarter 2011 fiscal results.

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 our Q1 2011 financial results, provide you an update on the status of the acquisitions that we did in 2010 in integrations, the progress we're making on our operating strategy we outlined in last quarter's call, as well as reform out guidance for fiscal year 2011.

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

When you launch the webcast, there is a button on the viewer on the right-hand side which will allow you to expand the slides so that they're more easily readable.

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

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

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

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

In addition, 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 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 that we 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 that 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.

I would now ask you to turn to slide four.

As you will recall, we introduced the slide last quarter to describe to you j2's core strategy.

We want to continue to show you this slide as a reminder that our strategy is premised around cloud-based services for businesses, the ownership of our own brands, the recurring revenue model, and efficient operations producing high margins.

Currently, we're offering the six services of online fax, virtual phone systems, outsource hosted e-mail, e-mail marketing, online backup, and a bundled solution under the brand Onebox of unified communications.

And I'll now turn the presentation over to Kathy who will give us the financial results for the quarter.

Thank you, Scott.

Good afternoon ladies and gentlemen.

Please refer to slide six in the presentation for a recap of our Q1 GAAP operating results.

In addition, I'd like you to also refer to slide 17 and the supplemental section of the presentation for the GAAP to non-GAAP reconciliation schedule for all non-GAAP financial measures included in our remarks.

We achieved record revenues in Q1, 2011 on both a GAAP and non-GAAP basis.

Q1 2011 non-GAAP revenue was $83.7 million, up 39% from Q1 of last year.

GAAP revenue for Q1 2011 was $73.4 million, up 22% from the previous year.

The difference relates to a change in estimate implemented in Q1 2011 regarding our remaining service obligations to annual eFax subscribers.

As a result of systems upgrades, we are now basing estimate on the actual remaining service obligations to these customers.

As a result of this change, we recorded a one-time non-cash increase to our balance of deferred revenues of $10.3 million, with an equal offset to revenues.

This change is insignificant considering our prior estimation techniques had been in place for over 13 years, a period which we reported over $1.6 billion in revenues cumulatively.

Quarterly non-GAAP revenues grew to $83.7 million, up $23.4 million from $60.3 million in Q1, 2010, which was fueled by organic growth in corporate, voice, and international businesses, as well as our acquisitions.

Non-GAAP revenue in Q1 2011 was $12.7 million higher than Q4 2010 revenue of $71 million.

An 18% increase.

Our desktop fax corporate revenue is up 29% compared to the same quarter last year, our voice revenue is up approximately 13% over the same quarter last year, both areas continue to show improvement in our position for a strong 2011.

At the end of Q1, 1,929,540 paid DIDs were deployed to our customers.

Our paid DIDs grew organically by nearly 25,000 in the quarter, with the largest share coming from corporate fax and voice services.

Our cancel rate for the quarter improved to 2.6% from 2.7% in Q4 2010.

The current cancel rate remains within our historic acceptable range of 2.5% to 2.75% per month.

Our non-GAAP ARPU was $13.30 per DID for the quarter.

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

Let me remind you that these margins include acquisitions and exit related costs for Protus which totalled $2.5 million for the quarter pre tax.

We expect to complete the Protus integration before the end of 2011 and to incur up to an additional $5 million pretax in associated acquisition and exit expenses over this period.

Non-GAAP operating earnings for the quarter were $38.2 million, which is also a quarterly record.

Non-GAAP gross margin was 81.8%, and non-GAAP operating margin was 45.6%.

Non-GAAP net earnings for the quarter were $27.9 million.

Q1 non-GAAP EPS was $0.60 per share, up 36.4% from Q1 last year while GAAP EPS for the quarter was $0.66 per share.

For Q1 2011, we incurred $3.2 million in non-cash amortization expense on intangible assets of acquired companies.

For the remainder of 2011, we expect to incur approximately $8 million to $10 million in non-cash amortization expense on intangible assets.

We expect the full year effect of this to be between $0.24 and $0.28 per diluted share.

In Q1, we recorded non-cash benefit to income tax expense for the release of reserves for uncertain tax positions as a result of expiring Statutes of Limitations.

We released $14.1 million in the quarter and expected to release another $1.1 million in the third quarter of 2011, as additional statutes expire.

Our effective GAAP tax rate for Q1 2011 was a negative 36%, due primarily to the aforementioned release of accruals for uncertain tax positions.

Adjusting for this one-time, non-cash income tax benefit, our non-GAAP effective tax rate was 26.2%, compared to 28.7% for Q1 2010.

The Q1 2011 non-GAAP rate was reduced by increased forward income tax, income tax at rates lower than in the US, and increased foreign tax credits.

Excluding releases for uncertain tax positions, we expect our effective tax rate to be between 28% and 30% for the rest of 2011.

We achieved a new record for quarterly free cash flow in Q1 2011 of $38.2 million despite incurring $1.9 million net of tax of acquisition and exit related costs related to Protus.

We're quickly rebuilding our cash and investment balances with now stand at $126.7 million as of March 31, 2011.

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 recap of the quarter and additional 2011 overview.

Thank you, Kathy, and welcome, everybody.

We just have -- usually I say a great quarter, this time we have a fantastic quarter.

We broke many, many records and are very excited talk about it.

Let's go to page eight where I will talk about the Q1 updates.

Our organic net growth were nearly $25,000, this is a very strong quarter as supported by our nice growth in the corporate and in the voice business.

We improved our retention, and our cancel rates are now down to 2.6%.

This is especially very great achievement, as you know when we buy new companies and we have Venali and Protus, usually when you change ownership, you change systems, you have higher churn so to maintain still a 2.6% churn on this environment is a big achievement for us.

Our non-GAAP revenues were $83.7 million.

This is a record.

It is 39% year-over-year, and we are actually running higher than our guided revenue for the year.

But I have to remind you that even though our higher end $340 million, we have anticipated to lose something like $5 million because of the Venali customers, broadcast revenue, and advertising, but so far, we didn't lose them and they didn't impact us yet, so we are very, very happy and proud with our both 39% year-over-year and 80% quarter over quarter.

We have record free cash flow, actually more than $40 million, if we didn't have the one-time transition exit costs, if we continue to accumulate cash at this rate, and unless we do a large acquisition sometime in Q4, we will have more than $200 million in our bank account.

This is mostly through the dedication and cost management that is done by everybody in the Company, and thank you very much for that.

Our corporate continues to grow very nicely, we have a healthy pay.

We have now more than 410,000 bids, and actually we did not start to count the MyFax bid corporate.

We didn't sort it out yet.

Once we will, we just thought it's not a high priority because we have to count them and classify them the way we classify the j2 corporate accounts, but I will not be surprised if by next quarter this time, we will be able to count them and altogether reach something like 500,000 corporate accounts.

The corporate accounts are extremely important A, they usually signed for long-term three years or more deals, which actually is helping us with reduced churn.

Also depreciation into the corporate is aiding our web business because we become more known and more -- the brand there is very, very strong.

This said, we have added 10,000 DIDs this quarter, eight large deals.

On a daily basis, I get the daily reports actually this morning, I was happy to open it and see that we added more than 1,000 net DIDs this morning.

So, all good on our corporate side, and now let me talk a little bit about international.

We have added Onebox numbers in the 15 major Canadian cities.

When we acquired MyFax, MyFax brought to us more Canadian numbers, a higher ratio than Canadian numbers or customers than we used to do by j2, but as usual the big Canadian company, so we're now trying to get into more Canadian cities and be ready for the upsell into those markets.

Also in Europe, we added 115 new cities in Germany.

Now we are totaling 303 cities.

And in Romania, we added another 10 cities, and as you know, j2 always focused -- it always was important and is important to add more cities, more countries.

And I had a meeting with our telco team just in the beginning of the week and they are working with more and more cities and countries to be added.

In Japan, we had very strong growth quarter over quarter, 45% year-over-year -- sorry our revenue grew up over 45% and our DIDs count over 68%, even though Japan is doing well ahead of the plan, I have to remind you that Japan revenue still on a run rate of something like $1 million or a little bit more, so why we are very excited, it still does not move the needle for j2.

Actually, I'm going to visit Japan this month with our head of international.

We see opportunities there.

We have the special offer during the earthquake there, and we have exceeded our expectations so far.

Regarding the acquisitions, we have several deals in Europe.

We have one that is in LOI stage, one is in the negotiating LOI.

Hopefully we still start with the due diligence next week.

We are -- those are relatively small deals, but important.

And also they are easy to integrate as far as we know.

So far, so those deals once we consume, and if we consume, they will be held and managed by the local European team.

In other exciting service that we have just launched, I tried it over the weekend, it was working fantastically, is something we call large pipe sending.

Basically the ability to download from your computer very large files.

We are offering now 1 gigabyte for our paying eFax customers and 100 megabyte for our free customers and you basically can send it with a link.

It works very nicely.

We had, as you know, more than 10 million free faxes and another were more than 1 million or something like this paid eFax customers -- the service is available, but has not announced yet.

We are going to announce it sometime soon.

Let's go to next page, page nine.

Our acquisitions.

As you know, we did very large acquisitions last year.

Very important to make sure that we are doing good job there in the transition.

And we bought Venali in September of '10.

We hope to finish the integration in the second quarter.

So far, we have moved all of the easy customers, the inbound customers, the customers that have less customization, we have not lost any significant customer yet, which is a excellent achievement.

We will finish during this quarter to move the more complex customers in hope to keep them all and move them o a better system, more reliable system, and a better platform and hopefully, this will pay us in higher retention.

MyFax.

As you know MyFax while, they have both corporate and web customers.

All their sales people were telesales.

We have combined the telesales of MyFax together with the telesales of eFax under single management.

Our telesales group last month broke a all-time record.

They sold 10,000 DIDs on the phone, and this is also a very good thing for the churn because historically the customers that bought the service over the phone had better retention rate.

They were able to get all the questions answered, and usually they stay with us longer, so we're very happily with the integration of the sales people.

Also, we are continuing to support the MyFax brand.

We achieved a double digit growth rate.

We were able to keep the growth rate, despite the management change, and we love MyFax and everything there is doing very well for us.

And now let's talk about the integration of the platforms and the services.

Both MyFax and MyBox, we are planning to finish the integration during the fourth quarter.

Everything is going according to plan, and we found some ways to save money .

I think I mentioned it before, but MyFax has a superior send system, and we are going to keep in Ottawa and move into Ottawa more of our same capabilities and build more redundancy, better product with lower cost for us.

And last year, we also acquired KeepItSafe, which basically was a new service we introduced at j2 to remind you, we had the two services last year, one is online backup and one is container, the email marketing.

The KeepITSafe Company is small, they're entrepreneurial.

We fully integrated into our (inaudible) offices.

We kept the entrepreneurial spirit of the company, very important when you buy companies to try to keep the good things going.

I think we did a very good job there.

They started to expand into the United Kingdom, and have some major resellers sign up.

We invested in the system in Ireland, both in KeepITSafe and in our own storage.

We have seen year-over-year growth of 35% for KeepITSafe.

We like the business.

We gain our trust in it and we are now considering to do some acquisitions that will enable us to grow not only organically but also through requisitions.

And now let's go to page ten.

The Campaigner .

As I said, the new service that we added last year was Campaigner.

We actually had something similar, but it was very small in focus and very total business difference.

Last week, we went my sales and big group from the management and spend two days in Ottawa.

We spent time with the entire management team there, and we were trying to get to the bottom of it and see if Campaigner is also ready for requisitions, so we can buy competitors and bring them to the Campaigner system.

The engineers and the product guides believe that we can do it.

We are going to start by practicing with some of the smaller brands.

This comes with the acquisition of FuseMail and if we can do it we'll get the courage to do more.

Campaigner is very good position for our sweet spot.

It is built towards the small businesses.

It is simple and easy to use.

The setup is very quick, and it's positioned as best in class by the face that it provides 24X7 customer support, many of the competitors don't.

We have free onboarding, many of the competitors don't.

We have very competitive pricing, and we believe it's an ideal position for SMB's and Soho.

The technology is scalable and the annual seed growth was 74%.

Now, they are shifting from historically having larger customers to smaller customers so more, 74% more customers does not mean 74% more in revenue, but we are very happy with the direction because it fits well into our upsales and our customer space.

We are reporting, as you know, as the press release said 1.930 million DIDs, but in the future, we'll add new metrics when we start to include the non-DIDs base customers, and Campaigner 10,000 of them KeepITSafe some of them.

We will start to report those when we are ready.

Again, I'm liking Scott allow me to do another slide quarter, so I have a fourth slide.

Let's go to the fourth slide, which is page number 11.

And it is a very important slide, one of the most important ones.

It's about our process initiatives.

j2 historically was very good in doing upsells.

We upsold the free mostly fax and voice to paid and then we upsold the paid customers into corporate accounts.

But now moving into cross sale, it's a whole new game.

In cross sales, you need to have more skill, you have more discipline, you have to build more systems, and you have to orchestrate and also have a much larger upside.

We are towards the -- we focus the Company on our premium services.

eFax is the leading fax service and eFax we approve something to close to 10 other brands, maybe 8.

eVoice is our primary virtual voice business.

We have another two or three, at least maybe four including Europe.

Campaigner is our new service for email marketing.

As I said before, we have some few very small brands that we don't even offer a new customers to.

FuseMail, FuseMail is our all electric mail repositioned to be FuseMail with additional and more exciting services.

One of the services that I mentioned previously, the large pipe sales that is offered now for eFax customers and later will be offered to more.

Is basically coming from the FuseMail systems.

And then KeepITSafe, want to mention something again -- and that nobody knows, or most people don't know, we also owned the ebackup.com domain, so maybe KeepITSafe has another play there.

We come to eVoice, the eFax, and then the eBackup.

Anyways, move on to the Onebox.

Onebox had -- as Scott said, is the unified messaging service.

When basically all or most of our services are available there.

We started with the cross sell initiative, initiative by increasing the awareness.

As you can see on our bottom of each page now, you will see our brands.

We are adding a new business card, new signatures.

We launched a new website that is called j2.com.

Which is basically one-stop shopping.

We already have thousands of visits and hundreds of sales.

Each of those services are offered as cloud services for businesses, and all of them have either free or try before you buy services.

And we are very excited with the beginning of [Byte]-- it's only the beginning.

As you can see last quarter, we added nearly 25,000 net DIDs, and more than 10% of them were cross sales that came mostly from eFax customer that bought another service.

Most of them are eVoice services.

So it's very exciting.

We are just at the beginning of the cross sell opportunity, and I will tell you more about that next time, and I'll pass

Thank you.

Slide 13 is the guidance that we discussed from the last quarterly call, to remind you revenues for the fiscal year 2011 are estimated to be between $320 million and $340 million.

Non-GAAP EPS between $2.21 a share and $2.41 a share(Sic-see press release).

The various underlying assumptions inclusive of the guidance are as follows.

In the EPS, exclusive of between $9 million and $11 million of share-based compensation expense, $5 million to $8 million of acquisition related transition costs, the exclusion of the impact of the one-time non-cash change in estimate that Kathy mentioned earlier, and assumed tax rate of between 28% and 30%.

As you know, the following slides are the supplemental information of our metrics, and various reconciliation statements between non-GAAP numbers provided in this presentation and the nearest GAAP equivalent.

This time, I would ask the operator to come back and to poll for questions.

Thank you.

(Operator Instructions)

Shyam Patil, Raymond James.

My first question is on the Protus integration.

I think last quarter, you guys talked about getting $14 million in comp synergies from the acquisition, five months through the year, how do you guys think about that $14 million?

Do you think it tends to be more -- is that the right number?

How do you think about that?

Well, I think at this point, as Hemi mentioned, a lot of the transition of the customer -- so things like improvement in telco costs will not occur until that is complete, which will be in the latter half of the year and specifically between Q3 and Q4.

So, at this point based on what we've actually realizing what we see, we would still affirm the range of about $14 million of synergies once everything is complete.

And large piece of the cost is the number of employees that we keep in myFax.

At this level, I think that we already are where we originally planned, and as I said, we have discovered some additional efficiencies that originally we didn't think about when we acquired the companies, has to do mostly with the ability to send.

They have developed a system that is superior to ours both in cost and delivery rate, we are not using it yet, so it's not in the numbers.

As you see, our cash flow was very strong this quarter, stronger than we were planning, so it has to do mostly with the ability to manage costs on the j2 and on the Protus side.

Okay.

Organic net adds were very strong this quarter.

Is that the right run rate to use by quarter for the year, or do you think it trends higher, and I guess within that, what drove the increase in voice services?

I know that it seems like the net the total number of subs for voice services has been relatively flat kind of quarter to quarter for the past several, just kind of curious what drove the net adds there?

First of all, as I mentioned the cross sales, the best cross sell we had was when somebody calls to buy eFax, we offer them to take the eVoice, the second one, eVoice has six months of free trial.

We have spent a lot of energy and systems and many other things to make sure that we had a large percentage of the customer that takes the six-month free space, and of course as you know the numbers that we reported are only those that passed the six-month and paid us, or those that converted to paid customers before the six-months, so this also aided, and I believe also that in the beginning, there was a little bit noise level at Google.

Everybody thought that Google was going to provide them what they need, ended up that Google didn't, but they did -- one thing they did well was increase of awareness.

Also the voice service works very well with smartphones.

Much better than with usual phones.

You can control it, you can read your message, so I think all those things are a tailwind for this service.

Okay.

My last question.

This year the pre-cash flow's going to be impacted somewhat by the acquisition costs.

Scott, what's the maybe the right pro forma baseline for free cash flow for the year to maybe start projecting off for next year?

You're correct.

There's two adjustments you have to make.

The easier one is to take the actual cash transition exit cost between $5 million and $8 million tax effected and add that back.

So, in Q1, there were $2.5 million of that $8 million that was incurred pretax, and about $2 million after-tax.

So, the free cash flow pro forma that would be a little over $40 million for the quarter.

Now, you cannot take the $40 million, though, and annualize it, as you can see in the history, Q1 is usually seasonally heavy or disproportionate of free cash flow for the full year, in large part because estimated taxes in the first fiscal quarter tend to be the lightest of the four.

In some instances, they're actually zero.

So, I think if you look over the last three years and it's provided as a supplemental schedule as part of the press release, you can see that Q1 generally represents 30% to 33% of the full-year free cash flow.

Now, there's also some issues about timing of CapEx spend and things like that, but in general, that's kind of a rule of thumb.

So you'll take the number, you'll gross it up, by whatever formula you're comfortable at, based on the growth rate of the Company for the balance of the year, our CapEx will be on -- for the full fiscal year, heavier this year than last year.

Okay?

We're thinking it's going to be around $5 million.

We had less than $1 million in Q1, meaning there's still $4 million to go over the remaining three quarters.

Now, that's the easy part.

Then what's harder, as you look forward into '12, is capturing the full benefit by the end of this fiscal year of all of the synergies of both Venali and Protus.

Now, in the case of Protus, we've given you or you've taken a number of $14 million, you can bank that in on a run rate basis, and then extrapolate that forward.

I think you can kind of begin to concoct or create a number.

Obviously at this point, we don't have any guidance for 2012.

We don't intend to, it's not our focus at this point.

But I think if you take those elements, you will see that you'll have a progression, if things go as according to plan, where you've got a building of free cash flow from '10 to '11, and then into '12.

Also you asked about the net customer growth rate, and of course, I cannot predict, you know, but based on everything I see, I do expect us to have similar net add DIDs in the next -- second and third quarter.

Usually our fourth-quarter will be a little bit weaker, but definitely we are planning to celebrate 2 million customers this year.

As a joke, I told everybody I hope that we will do shirts for the employees to celebrate it and they will be with short sleeves.

So, go figure out when we will have 2 million customers.

But definitely, I think that we should be able to have another quarter and then another quarter, another quarter of 25,000 net and above.

Great.

Thanks , guys.

Thank you very much.

Matt McKee, Morgan Keegan.

Hi, guys.

I have a view questions on behalf of Tavis.

First, are there any metrics that you can provide us at this point for some of the newer services such as storage or e-mail?

Yes.

I said Campaigner is more than 10,000 paying customers.

I did not count the free.

They give some free service.

Also give to nonprofit free service so 10,000 are the paid customers.

They're growing according to plan of 700 net a month.

KeepITSafe, is a small business, more than EUR1 million a year run rate.

I do not know the number of customers, but I can tell you that a relative to the customers are larger, there will not be one guy with one laptop.

They will cover a small company of 10 laptops, and the prices are not like what you see with Carbonite or those kind of deals.

Usually, they will be paying more and getting significantly more, not only they will get it done backups, they will get monitoring if your machine did not back up they will let you know, they will manage it to you.

And the most important thing here, when you have a business and it close down you want to retrieve it, retrieval has to be very fast.

Retrieval over the web is very slow, so they have services that once and if God forbid you lose your data, they can rush to you a copy of your data on a physical device very fast.

But I don't know how many customers, as I said, revenue is more than EUR1 million growing very nicely.

And the typical customer there is probably -- I know that for Campaigner, the typical customer is like $70 plus, so the revenue there is approaching because $10 million.

And on - $10 million, and as I said on KeepITSafe is more than EUR1 million.

I mean, I told you everything that I know.

Thanks.

All right.

And is that part of what's driving the higher ARPU or what is--?

No.

The ARPU that we are so far, its a good question, I was thinking about it.

We tried not to confuse it.

The ARPU is only on the DID base customers and services.

So, if we were blend in the new customers, with the new services, the ARPU will go up.

That's one of the reasons that we are not rushing into it, because we have to think how not to confuse our investors and you guys.

But definitely once we throw it in the ARPU will go up.

And if we decide to throw in the e-mail customers, which have some thousands or hundreds of thousands customers that buy from us, only virus protection, then this will be a negative on the ARPU, so we're trying to figure out how to define the customer and as you know, we're expanding now into services in the cloud.

Who knows, maybe tomorrow we get into new service.

Up to now, we kept it on DID basis only, but definitely we are aware of the need to move into something that will include the other services.

So far, they are not significant yet.

But Scott is definitely and Kathy and everybody here thinking about it, and we want to do it in a way that will serve well our investors and everybody else.

Okay.

Thanks a lot.

Daniel Ives with FBR Capital Markets.

Hey, guys.

This is Mike for Dan.

Good quarter.

A question on the corporate side.

The eight large contracts in 1Q can you speak to the pipeline around there, like what are you seeing over the course of the rest of the year, and how should we expect the run rate on that?

Mike, hi.

Send my best regards to Daniel.

The pipeline, I do get a weekly report on the pipeline on the corporate.

The pipeline is very big, very large, lots of low films.

In other banking services are back in the business, and we're trying to penetrate the government, and I see they are also large -- I mean, our corporate customers are slow.

Sometimes it takes one or two years, talking about the government, talking decades.

But definitely, the pipeline is healthy.

We have started to sell or to upsell to our to Venali customers, many of the Venali customers bought from Venali limited services and now with us, more.

We did not start yet with the MyFax corporate accounts.

MyFax, as you know, has much less countries than we did.

They were basically US and very light in Europe.

So I see an upside there, too.

And our corporate sales started to sell also part of the cross sell program, FuseMail services, we already outdid several deployed deals when we went after corporate and offered them services for FuseMail, mostly virus, spam protection, and so we're very excited about it, and I think we will have at least as many deals in the near future that we have in the last few quarters.

But I always add the caveat that, given the lifecycle to obtain these customers, the actual win can be lumpy, meaning that you can have eight or nine in one quarter followed by two to four next quarter.

So, they are, to your point, or the implication of your question is even for us, somewhat hard to predict the timing, even though we get the weekly reports, even though we've got the expectation of what is more live than others or more ripe for going to contract.

I think the general takeaway is the business continues to be very healthy and the pipeline remains for healthy, but it's tough to predict the exact timing of closing.

Yes.

And, Mike, there is another thing that we're seeing more and more, as more and more companies are talking about services in the cloud, more and more old fax servers companies that used to buy servers and maintain them in the data centers are much more open to take it out into the cloud into j2.

So, you see more and more there.

In the old days we are replacing fax machines only.

Now we're replacing many times fax machines and more than that, fax servers.

So, the pipeline and the health of the corporate sales is very strong.

Okay.

And I guess just, I mean, I guess in relation to the question I just asked and also to one that was earlier, strong organic DID growth, how should we think about how that should flow over the course of 2011?

And that's all I have.

Thanks.

Yes.

I think, as I said before, that we feel comfortable that next quarter and next several quarters will be similar to it -- we have nearly 25,000 net DIDs, we feel strong about the capability to lever same or better quarters in the next few quarters, and I think that I said also, we are planning to do some kind of recognition here in the Company for the 2 million customers.

We are now in at 1.930 million.

And I do hope that we will do it before the winter comes.

Great.

Thanks, guys.

All that's premise that we have a stable economy.

Which was presumed or assumed as a fundamental assumption within the context of our overall annual guidance.

So, we're running ahead of our own internal forecast at this point, so far in the first four months, the economy, I think has behaved and held up according to our rough estimation.

There was, I think, a little concern maybe six, eight weeks ago when oil was at $105 to $110 a barrel, every week there's a new concern.

More people unemployed, there's always going to be a headline story out there, but I think our takeaway and our view of the data that we're getting of our own customers is they continue to be in the healing mode, they continue to be improving.

Still, the SMBs are probably the slower of the group of customers to heal versus the mid-to large sized customers, which I think most of them, depending on the industry they are in, are already in full recovery.

Youssef Squali, Jefferies.

Hi, this is Kip Paulson for Youssef.

Just a couple questions for you.

How should we be thinking about sales and marketing expense trending throughout the remainder of the year as a percentage of revenue?

It seemed it was somewhat elevated in the first quarter.

And secondly, how much revenue came from HP partnership, and is this something that will be moving across more models?

Thanks.

First question on the sales and marketing, actually it was very similar to Q4.

The Company has had a historic range on the non-GAAP basis in a very constrained mode, 14.5%, 15% on the low end of sales and marketing to as high as 18%.

Usually, and clearly years like '08 and '09, were towards the lower end out of proactive moves that we made because of the state of the economy.

We began to reverse that in '10, and as I mentioned toward the end of '10, you saw sales and marketing right around the 17.25% that it was in Q1 of '11.

So I think that we're probably within a range, and it does move quarter to quarter based on as programs are launched and how those programs, once they go through trial, whether they become part of the core budget or whether they get sunseted, but I'd say we're probably going to run between 16.5% and 17.5% of revs on a non-GAAP basis in terms of sales and marketing.

And by the way, we want to run at those levels.

And in fact, we'd be happy to run at higher levels under the caveat that the incremental dollars, either in absolute or percentage is still being spent within the criteria that we have articulated for subscriber acquisition costs.

And to answer your question about HP, the deal is going very well, and I think the best way to say it's going well is that we're working on signing a new deal, larger.

The proof is in the pudding, they are working with us to sign a new deal and also competitors, so it's all well.

Great.

Thank you.

All right.

You have no further questions in queue.

I' d like to turn the call back to Scott Turicchi for closing remarks.

All right.

We thank you all for joining us on this call.

I will be next week at the Jefferies Conference in New York, although we already have a full one on one schedule, but if others are interested, please contact us.

We'll find a way to accommodate you.

If not in New York at the conference, then at some other the time, telephonically or otherwise.

I would anticipate that we would report Q2 fiscal results sometime the first week of August, and undoubtedly, there will be other presentations made between now and then, either in a formal environment with the webcast or non-deal road shows.

Thank you.

This concludes the teleconference.

You may disconnect your lines.

Thank you for your participation.