Ziff Davis Inc (ZD) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global second quarter 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.

Good afternoon, and welcome to j2 Global investor conference call for Q2 2011.

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

We will be discussing our second quarter financial results, provide you an update on operations, an update on the integration progress of our 2010 acquisitions and an outlook for the remainder of the year.

Based upon the strength of our six-month results, we have increased our guidance for both revenues and non-GAAP EPS, as well is initiated quarterly dividend.

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

A copy of this presentation is available on 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.

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 will be able to access the webcast from this site.

After completing our presentation, we will be conducting a Q&A session.

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

In addition, you may email 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 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 at 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 document regarding Safe Harbor language, as well as forward-looking statements.

I would now ask you to turn to the presentation on slide 4.

Before handing the presentation over to Kathy to review the current quarter's results, I would like to take a step back and just review some high-level numbers about j2 and we believe this really tells the story and these are the metrics that we focus on.

Operating income is in excess of 47% on a non-GAAP aces.

Our free cash flow is in excess of $12 million per month after taxes and after CapEx.

Our efficiency levels have now risen to over $600,000 of revenue per employee, measured by some of our historic metrics of DIDs, we have just shy of 2 million paid DIDs and 11 million free DIDs, coverage of more than 4,600 cities and 49 countries, and we offer our services in 9 languages, collect in 19 currencies and have offices in 7 countries.

We completed 2 deals just the beginning of this third quarter bringing our total since early 2000 to33, and we continue to obtain, license and prosecute our various IP.

And now I will ask Kathy to give you the results on a GAAP and non-GAAP basis for the second fiscal quarter.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

Please refer to slide 6 in the presentation for a recap of our Q2 GAP operating results.

For Q2 2011, we achieved record revenues of $85.7 million, up approximately 40% from Q2 of last year Revenue growth was fueled by a record time low churn rate of 2.4%, and a strong net DID growth in the quarter with no new acquisitions.

At the end of Q2 2011, our paid DID count exceeded 1.960 million, growing by more than 31,000 DIDs in the quarter.

Our corporate fax DIDs grew by 57% year-over-year, and our voice DIDs grew 32% year-over-year.

As mentioned earlier, our cancel rate for the quarter improved to 2.4% from 2.6% last quarter and the comparable quarter last year.

This ties our record low achieved Q4 2005 and is better than our 2011 budget expectations.

More importantly, we saw an improvement in the cancel rate across all major services.

Fueled by increased fax usage, ARPU increased to $13.49 per DID for the quarter versus $13.30 last quarter.

On a non-GAAP basis, our earnings for the quarter were $30.6 million an increase of 46% from Q2 of 2010.

Non-GAAP gross and operating margins were 82.6% and 47.7% respectively.

Let me remind you that these non-GAAP margins do not include the transition costs for 2010 our Venali and Protus acquisitions.

These costs totals $660,000 for the quarter pre-tax.

We have completed the integration of Venali and expect to complete the bulk of the Protus integration by year-end.

We anticipate incurring up to an additional $1 million to $3 million pretax in such transition costs over the last 6 month of 2011, bringing the total to between $4 million and $6 million for the year, which is lower than previously projected.

GAAP net earnings for the quarter were $28.5 million.

While our revenues grew 40% versus Q2 2010, our operating margins increased even faster by 47% from Q2 2010.

Gross and operating margins were 82.3% and 44.3% respectively, both near all-time records.

Importantly, our Q2 operating margin exceeds the level achieved prior to the Venali and Protus acquisitions, despite the fact we continue to incur transition related expenses and acquisition related depreciation and amortization.

This demonstrates that these acquisitions are already accretive.

In Q2, we achieved record non-GAAP EPS of $0.65 per diluted share, up 41% from $0.46 per diluted share in Q2 of 2010 while GAAP EPS for the quarter was $0.61 per share, up almost 49% from the year ago quarter.

We continue to maintain a disciplined approach to our marketing spend with the goal of optimizing our return on investment.

During Q2, we were able to achieve a level of net ads not seen since prior to the recession while deploying fewer marketing dollars than budgeted.

It is our goal in the second half of the year to test in a disciplined way new and creative venues to further increase our net DIDs growth.

For Q2 2011, we incurred $2.6 million in non-cash amortization expense on intangible assets of acquired companies.

For the remainder of 2011, we expect to incur an additional $5 million to $6 million in non-cash amortization expense on intangible assets.

We expect the full-year effect of this to be between $0.13 and $0.14 per diluted share.

Our estimated effective GAAP tax rate for Q2 2011 was 25.4% due primarily to the continued growth of our foreign operations.

We expect our effective tax rate to be between 25% and 27% for the balance of 2011.

Free cash flow for Q2 2011 was $42 million, also a j2 record.

We are quickly rebuilding our cash and investment balances, which totaled $172 million as of June 30.

Finally, I would like to briefly touch on 2 points we announced during today's press release which Scott will discuss in greater detail later in the call.

First, our performance through the first 6 months of the year has caused us to increase our financial guidance for the year.

Second, our board has authorized the initiation of a quarterly dividend of $0.20 per share payable to shareholders of record September 2, 2011.

In conclusion, let me are reminded you that the supplemental schedules at the end of the presentation will provide you with more information on our metrics, as well is the GAAP to non-GAAP reconciliation schedule for all financial measures included in our remarks.

Now, I will turn the call over to Hemi who will provide you with a recap of the quarter and additional 2011 overview.

Thank you very much, Kathy, and good afternoon, everybody.

I will start with slide 8.

We just had an amazing quarter.

I will focus and try to explain why do we believe are the major reasons that we had such splendid quarter and also how we are going to continue and keep these remarkable results going forward.

The first and foremost is our churn rate.

Our churn rate is hit lower of 2.4%.

I just looked back to the history of the Company, besides 2005, we never were lower.

2.4% now is much, much harder to achieve than in 2005.

The economy is bad, plus the Company is much bigger.

Just to demonstrate it, 01% or tenths of a percent and our size today is 2,000 customers.

If you do it over a quarter, you get 6,000 customers.

6,000 more customers, the margin of cost of acquisition would cost more than $1 million, and those customers last time value is many, many times more, so churn is very important.

How did we do it?

First of all, from the beginning of the year, we focused our search optimization efforts on better quality, more response bidding and as a result, they come in higher quality and also we get more straight to site customers.

Those customers who come straight to site historically have been showing more loyalty to the Company.

Secondly, our customer mix.

We have more corporate customers.

As you know, corporate is the fastest growing segment of our business.

Corporate customers tend to sign for annual contracts, and they stay longer and are more committed and of course, they are helping our churn rate.

The next initiative that we are increasing and will increase, are our telesales channels.

Customers that call and talk with our telesales agents before they make the decision to buy have proven historically to be staying longer because they have their major issues resulted up front, they understand totally what they are buying and how to utilize it, and more of those means lower churn.

Another thing that is significant is our shift -- the shift of our phone support into North America.

Since we bought MyFax, which is an Ottawa based Company, 60% of our customer support reps are actually speaking in the native language.

Therefore, are able to increase customer satisfaction and with the customer satisfaction usually comes a higher retention rate.

As you know, in the last few quarters, we have improved the value proposition for the customers.

While we did not increase our prices, we kept on adding features like mobile apps, lifetime storage.

I'm not aware of anybody else that gives this kind of feature, large file shares basically ability to send out any size of files out.

And also we added searchable faxes.

All those an extra features we believe are strengthening the loyalty and the value of the product.

And last and very important also, we have improved our credit card declines.

As you know, most of our customers are paying us via credit card.

Kathy and her team were able to find new ways and systems to better predict declines and to combat them and improve it, and the combination of our gaining more expertise and more work has helped also in the decline of the churn.

Now, while churn is extremely important, let me take you to slide number 9 and talk other very about important factors that helped us to get this great quarter.

As you know, our revenue is basically a multiple of how many DIDs we have and the ARPU.

We have added this quarter 31,000 achievement.

Last quarter our -- sorry, last year we added 20,000 DIDs and last quarter we added 24,000 DIDs.

So, this is a record -- new record or close to record number.

Also the same time, our ARPU revenue per user increased 1.4% over last quarter.

Or let me be a little bit more detailed on it, in Q4, when we bought -- after we acquired Protus, our ARPU went down to $13.25 in the quarter.

Then it went up, climbed up to $13.30 and now it is $30.49.

As you know, 18% of our revenue is coming from usage.

Everyday j2 is now a big Company, every day of usage is $250,000.

When we have a weekend or we have a holiday, like you would see in our Q4, everyday there is a loss of $250,000 in usage.

And for Q3, actually we are monitoring the number of business days, it's going to be very similar to Q2.

We expect to have similar usage, but lower in Q4.

Our drivers for the growth has been the corporate as I said, and the voice.

Corporate grew 57% year-over-year.

This is by far the largest growing segment of our business.

And the second is our voice business, which grew 32%.

If you remember, j2 originally was a Company that did only fax and only for consumer SMB.

We are now evolving into a Company that does more and more corporate, not only SMBs also voice, so diversifying our product as well.

All those are good news.

Another contributor for our success this quarter, or from the beginning of the year, to be more exact, are the strong and improving Protus results.

As you remember, we initiated offsets in cross sells early in the year.

Those are basically efforts that are done mainly by -- on the phone, by the telesales team.

And the first half of the year, we have generated more than 6,000 cross sales and up sales.

If you compare it to the fact that we grew only 51,000 DIDs from the first half of the year, over 6,000 coming from cross and up sales is very nice start.

Why we had 6,000 plus cross sells, 5,000 of them are DIDs, but the other 1,000 plus are other services.

We have many cloud services today, container wars, good beneficial (inaudible) and USENET.

All those have benefited from the cross sell, and had we not do it via cross sell.

It went out and paid our average CPAs, or marginal CPAs in this case, for this type of services, we would spent north of $1 million on advertising costs and most probably would get lower quality customers because those customers, as I said before, that I saw through the cross and up sells, have proven themselves to be better sticking customers.

Last but not least, very important factor on the cross sell, at the beginning 6 months of the year, all our cross sells, the vast majority of them were done here in Hollywood with our telesales team.

We just started last week to also move this effort into our auto call center, which is actually larger than the one we have here in Hollywood.

Another thing that we are going to start soon is not only we will do telesales, we also are moving to customer support.

So, when you talk with a customer, based on the fact if the call is positive, we will try and do an up sell there.

We started it already in some places in our offices in Canada, and so far the results are good.

Let's go to the next page, page 10.

Try to cover our second year and our success drivers.

So, we are going to continue and make sure that we can keep on those that are doing other good things going on, and try to make them better.

On the marketing side, on the retention we are going to continue to employ our cross sells.

As I said, not only the telesales team will participate on it starting last week, also the customer support are motivated and incentivised to start to do that.

We have good hopes, and the initial results are showing good signs.

We are going to continue with our customer retention programs.

We have some more ideas besides only native language speakers, we have some other ideas that can increase our customer satisfaction.

Usually customer satisfaction translates to better results.

We are going to continue to do our traditional advertising and CPAs program, so again, focus on the search engine optimization.

But we are going to try with the extra fans that we have now -- we will try to do new initiatives on marketing.

We will try to do new things like radio.

We tried radio several years in the US, it wasn't a good thing, so we stopped it.

Now with the new tools that are available, we are going to do a small test in Europe and the United Kingdom.

We are able to secure a test that is not expensive, focused, much more measurable, much more manageable that we did in the US.

We are going to try, and of course, if it's good, we do more of those.

We are also going to try for the first time to do a direct-mail campaign.

In partnership with 1 of the largest credit card companies, we are going to do a -- maybe a certain, try to focus on our voice services as well.

And also, we have been recently increased our PR efforts, and we continue to do it as long as we can measure the success on that.

On the international front, as both Scott and Kathy have detailed, we added a 300 cities, 7% more cities.

It was always extremely important for us that in most cities, we continue to look for more cities in Asia and Europe.

To the best of my knowledge, no company in the world has so many numbers in so many countries, and we are going to spend efforts to order to keep this leading edge.

Japan, as you know, Japan was unlike all the other markets, the company that did not start with an M&A.

It's a company that we started with -- from ground 0 when we just built an office and started from scratch.

Last quarter, Japan grew 45% on a quarterly basis on revenue and 27% of DIDs.

We are extremely encouraged, we are going to put more resources, we are very optimistic about it.

And if we can start in a country like Japan from zero and become profitable, we will then try to replicate it again.

Last slide is 11, I will discuss our M&A opportunities and the progress that we have done.

As you know, last year we did 8 acquisitions, the most important ones were MyFax and Venali.

Venali, we work very hard.

We ended up all the migration we finished everything, we actually worked harder than we planned, but it was more profitable than we planned, because we are able to keep more than 90% of the customers.

And we are very, very pleased with the fact that this is over and we can now focus more attention on the MyFax integration.

MyFax, we believe that by the end of the year, a substantial portion of the customer will be migrated to our j2 platform.

We already, as you can see in our financials, are showing cost reductions due to this effort, and we believe that we can do it in a very effective way.

And talking also about My1Voice, which is another product that came from the acquisition of Protus.

We believe that we will complete this deal in Q4.

There is a high likelihood that we will do it before the next earnings call and of course, I will be very happy to inform you about that.

We are focusing here and on MyFax on the quality of the migration.

Speed is important, but quality is more important because we are trying to do everything we can to make it seamless for other customer so they will stay longer and love us.

The recent acquisitions that we have done, Data Haven, it's an Irish provider that we bought, online backup.

It's a smaller Irish competitor to keepITsafe, but very important, we wanted to get the confidence level that our keepITsafe team can integrate a competitor.

As you know, it is very important for our acquisitions strategy to make sure that we can buy companies and integrate them.

Move them to 1 platform, 1 management, 1 everything, all those efficiency sides.

They have done in a remarkable speed, and it went very smoothly and we are very encouraged by that.

So, probably we will try to do more of those.

Another acquisition that we did is Buzz Network asset in the UK.

We bought their voice business.

It's -- our European team are very experienced and are preparing to do the integration.

Our M&A pipe is as healthy as ever.

We have lots of pending -- or negotiation, different negotiation stages deals that we are talking about.

And I want to make sure that you all understand that our raised guidance does not include those additional M&As.

Our new guidance does not include M&A.

If we let M&A, it will help, but we are planning to do it without it.

With that, I will give it to Scott.

Thank you, Hemi.

If you go to slide 13, we would like to give you the updated guidance for the full fiscal year of 2011.

As you will recall, at the beginning of this year, we announced revenue guidance of between $320 million and $340 million versus 2010 for an increase of 25% to 33%.

Based upon what you have heard today, we have increased that guidance range to between $335 million of revenues and $345 million of revenues.

And 2 comments on the revenues.

1, which Hemi just mentioned, it does not include any of the pending M&A which may or not come to fruition as is the case in M&A, that we are continuing to work on.

And secondly, for those that are newer to the stock, I would remind people that in the fourth fiscal quarter, we are usually 5 or 6 business days lighter than Q2 and Q3, and each business day today is worth about $250,000 in usage-based revenue.

So, based on the calendar this year and based on the current run rate of usage-based revenue, I would anticipate that going into Q4 we will be down about 6 business days, or $1.5 million relative to Q3.

And then of course, based upon how the quarter performs, that will dictate how Q4 looks compared to Q3.

On a non-GAAP EPS basis where we are excluding the non-cash share-based compensation of expense of between $9 million and $11 million this year, $4 million to $6 million of cash, transition costs that Kathy mentioned and an effective tax rate now of between 25% and 27% that allows us to raise the guidance from the range of $2.21 $2.41 to the new current range of $2.46 to $2.56 per share.

Finally, before we go to the Q&A session, I would like you to turn to slide 14 and talk a little about the initiation of a quarterly dividend.

And light of the outstanding performance for both the quarter and the first half of this year, the record free cash flow and the rapid nature in which we are rebuilding our cash balances, the board decided it would be appropriate, and we are in agreement, to initiate a quarterly dividend.

The reason for doing this is 1, to return some cash to our shareholders, 2, to give us an opportunity to broaden the appeal of the stock and the shareholder base.

The specifics of the dividend are as follows.

The record day will be set for September 2.

So, those who hold shares at the close of business on September 2 will be entitled to receive a dividend payment which will be paid on September 19.

The initial payment will be $0.20 per share.

That equates to roughly 30% of our non-GAAP earnings or ion aggregate dollars, is about $10 million of cash out of what we will earn in the current quarter.

I think a key element to this program is that it is designed to in no way impact our operational or M&A activities.

Both the cash balances we have currently of almost $172 million, the prospective free cash flow, and we are still in transition, particularly with Protus, and the availability of financing both under our current line of credit as well as other facilities will be available give us the flexibility we need for both operational and M&A purposes.

And at this point, I would ask the operator now to come back on the line and to give you the instructions for queueing for questions.

Thank you.

(Operator Instructions).

Shyam Patil, Raymond James.

Congrats on a great quarter.

Thank you.

It seems like corporate and voice services drove the strength relative to the internal estimates and external estimates.

Can you just talk about how big each of those is as a percent of revenue or percent of DIDs and just what's driving each one of those areas?

This is Hemi, how are you?

Great, thanks.

I need Scott to help me, but I think our corporate revenue is like north of $50 million a year?

It's more.

In terms of the DIDs, I prefer to speak in terms of the roughly 2 million paid DIDs.

Corporate is in excess of 20%, and voice is in excess of 15%.

Okay.

Actually, they will highly correlate to revenues, but the DIDs ones I know off the top of my head.

The voice DIDs are like 280,000, 270,000, and the corporate are, how many?

Over 400.

And I know it's become more difficult to break out acquired revenue from organic revenue, but if you'd just take the acquisitions, the acquired revenue from 12 months ago and you maybe grow that at whatever that business is growing at and you back that out, is it fair to say that the organic year-over-year growth is probably in the 5% to 7% range, would that be a fair characterization?

I come at it a little bit differently but may end up with an answer that's similar to yours.

You can look at 2 things.

First of all, Q1 to Q2, we owned everything that's the same in both periods.

So, there's a 2.5% growth rate from Q1 to Q2 sequential.

Not all sequential quarters of equal value, but if you were to just run that out, you would be closer to 10%, and if you compound it, even a little bit more.

I also -- when we looked at the numbers last year, going into this year, coming up with a pro forma for Protus and Venali, the deals we did at the end of the year, backing out the $5 million of revenue that we said we were prepared to give up in advertising and broadcast fax, I came up with a pro forma revenue number of $315 million, 3-1-5.

So, the previous range of guidance had slightly less than 2% to slightly less than 8% growth anticipated for this year.

The new range would be probably a couple of points higher.

A couple of different ways I think you can get to a number that is within the range you just mentioned.

Got it.

And it seems like the cross-sell, up-sell strategy is paying off nicely.

Maybe better than you guys thought entering the year.

Do you have any metrics or -- around the services per account or anything that shows how that strategy has tracked throughout the year and maybe what you guys think you could get it to over time?

Internally, first of all, we are measuring all those in a very simple metric.

How many fax customers bought voice?

How many voice customers bought fax?

How many brand X to brand Y?

These resulted, as I said, more than 6,000, most of them are of course selling to the eFax customer because it's the largest base.

From the eFax to the largest brand, which is eVoice, et cetera, et cetera.

What we also are doing, we are trying to create more opportunities.

More opportunities mean that every call, every connection, every interaction with the customer can be turned into an up-sell.

To do that, we have changed so that all our customer support and all over the world are talking on the same phone system, so extension in Dublin can be forwarded to an extension in Japan, and vice versa.

Or Canada to the US.

Also, we are [eddying] basically back end power.

This is on planning.

So now, the customer support agents are basically offering a product based on something that they know and we told them.

But as we move forward and we do more work on our back end, we will capture -- okay, customer X, last time I offered him to do backup, he didn't like it.

So this time, I'm not going to repeat, I'm going to try to sell him a voice service.

And all those other things have to be computerized and added to the back end.

This is something we are just starting, we have not done it yet.

First thing was to do the manual work, see if there is an upside.

Now that we are in touch with the upside, we've continued to do more and more, and it's an initiative that we are embarking on.

Great, and my last question, we are starting to see some layoffs around financial services.

Just wondering if you guys could talk about your exposure to large financial services institutions, whether its through individual customers or corporate relationships and if you've seen any impact thus far in 3Q?

Thank you.

The answer to the latter part is no, we haven't seen it.

We have not calculated a metric in a while, but the last time we did, which was several quarters ago, it was less.

The financial community as a whole, as best we could analyze it, and it is difficult with the individual customers to know exactly what each of them does or the business they're in, it was under to around 20%.

I used to talk with our customer support management -- sorry, with our sales team, corporate sales team, and when we had problems, we lost -- most of the customers that we lost were involved in the mortgage business, and they never came back.

So, it's not like we grew out of it by them coming back.

They didn't come back, the mortgage companies usually had user for access.

So, they all have in-house capacity, and when they ran out of it, they came to us.

After the beginning of the recession, they basically went back to what they have in house and didn't use us.

So, I think that the financial impact on us is not going to be as big as it used to be.

James Breen with William Blair & Company.

Thanks for taking the question.

Just a couple questions.

1, Scott, if you could just clarify with the guidance, the new guidance range.

In the third quarter, the existing quarter, we have about the same number selling days as in the second quarter, so there shouldn't be necessarily a day's variance there.

That's correct.

Q2, Q3 usually are pretty close, and the drop off is from Q3 to Q4.

Okay, that makes sense.

And then also, with the churn, obviously churn coming down was great, especially in this environment for small- and medium-sized businesses.

Can you give us a little more color into the churn, is it customers that you are shutting off because they are not paying, is it customers that are just going away because the business themselves are going away?

Is there any more color or granularity you can give there?

When you go to a certain lower level of churn, it becomes -- I don't know what the number is, but I think that sometimes around 1.5% or 2% is unavoidable.

People retire, people lose their job, God forbid people die, there is a churn that is -- I have not seen anybody able to go under it.

I cannot tell you that the customers are leaving for a certain reason or another.

I can tell you that most of the time people that decide to quit is those that don't use the service.

And we are not seeing any changes.

The usage of the service is not going down, on the other way it goes up.

So, I cannot just point to another, to any specific --

And you guys generally can see, for eFax number and so forth, you can see the traffic coming across that number, and that traffic really hasn't changed much over time?

On average.

On average, okay.

And lastly, you talked about the cross-sells, and certainly that's having a positive impact on the monthly revenue.

From an M&A perspective, you guys have done M&A in the past, like Protus where it was more of a consolidation of an existing group, maybe to help out with pricing pressure and so forth.

But now it seems like we're moving more toward M&A that gives you more things to cross-sell.

Is that sort of a fair assessment?

What else is out there that you'd like to be able to sell to your existing customer base?

You are correct

You are correct, and I want to modify what you said about the rollup acquisitions.

All of the acquisitions that we do are first and foremost benched to mark against a return on invested cash.

Whether they are being rolled up within existing set of service and platform we have, or whether they are the creation of a new set of services, there is a financial criteria which has to be met and it has to be superior to the return on the invested capital if we were just buying our own stock in.

There is a free cash flow yield of the stock, even independent of the dividend.

So, that's the first threshold criteria.

Now, in the case of the rollups where we have an existing platform, Protus is a good example, Venali's a good example.

The synergies generally come faster and in greater magnitude than say a KeepItSafe which is taking us in a new direction or a Campaigner which is taking us in additional direction, and we have to bear the cost of that initial platform, because we don't have 1 that already exists.

When we look at it, financial criteria is important.

Getting the synergies is really the next criteria, particularly in the rollup category which then helps us make the numbers.

If we are going down the path of a new set of services, there is a couple different ways that can play out.

There can be the dynamics or the margin structure of the service and its growth rate that is so strong and so dynamic that you can meet your margin and you can meet your return on invested capital fairly quickly.

And it then gives you an opportunity to say, if the dynamics are that good, then I've got a new platform to do future rollups.

I've got another space in which I can do rollups.

That's really how we look at the M&A landscape.

I would say that given the landscape, particularly in the United States, for the fax and voice services, they are not many, if any, entities out there that are of interest to us.

So, it is leading us either to international deals, you'll notice that both the 2 recent acquisitions are over in Europe, as well is into other products sets and other service sets.

But we are constantly combing to landscape across all 6 service sets we offer today as well as looking, what I'll say, to our right and to our left for those that would be complementary.

Okay, great, and then just one last 1 on the dividends.

So it's about $40 million, it seems to be about a quarter of your annual free cash flow generation is going to pay the dividend, does that sound about correct?

That sounds about right.

For this year -- well, if you annualize the first 6 months cash flow this year, you would be exactly correct.

Now, there re some pluses and minuses in looking at the free cash flow this year, I am looking at closer to 150 of free cash flow, although there are a couple of events that might be one-off in nature that could take it even north of that.

And then we have rolling into next year, although we have not done any budgeting yet, the core base that should be, if not fully substantially synergized for the acquisition we did in 2010, and then you run your model in terms of future growth and what the free cash flow looks like on a prospective basis.

And so as you talk about some of those synergies, your EBITDA margins -- or adjusted EBITDA margins are pretty consistent in the last 3 quarters.

Do you expect that to continue to improve from here as the synergies roll through?

I think if you hold everything constant, the answer is yes.

As Hemi pointed out, we're in a very opportunistic time of the year and financially, so we are going to make additional investments in the marketing, certainly in Q3 and probably in Q4.

And the reason why that's important is it will give us a very good leg up as we start to do our 2012 budget.

How much of the core spend we will be able to spend in 2012 subject to economic conditions, and then how much of the stuff we're testing looks like it can become part of the permanent program.

So, I anticipate that certainly in Q3, marketing -- absolute marketing dollars will go up, and some of those marginal dollars will not have an immediate benefit in terms of revenue and customer acquisition.

Because they are designed for test purposes to see whether things like radio in the UK are an effective way of marketing.

Thank you very much.

Tavis McCourt with Morgan Keegan.

Please go ahead.

Thanks a lot, guys, good quarter.

You may have touched on this before, I got on late.

Can you talk about what the international exposure is right now, and where you are seeing strength?

Either if it's geographically or product-wise internationally?

This is Hemi, how are you, Tavis?

I'm great, thanks.

International, I think the largest exposure is the FX exposure.

Business is growing similar to the US business.

Japan is growing faster, but it's small, so it doesn't move the needle.

Our KeepItSafe, again, small moves faster than anything else.

So I think the major issue would be the FX impact, and the rest of the business I think is similar to what we are seeing here in the US.

Great, and great job on the dividend.

I wish more companies would do it.

(Laughter) I wish (inaudible) would do it (multiple speakers).

The 1 thing I'm wondering is obviously, 1 of the things you need to balance is the US cash flow versus international cash flow.

I'm wondering if you could give us an update on in terms of the existing cash balance, how much of it is international and somewhat encumbered by tax liabilities and how much of the ongoing free cash flow is actually generated through the US and payable in dividends without a massive tax liability?

2 things.

First of all, of the $172 million, about $100 million is here in the US.

However, based on the structuring of certain of our M&A transactions, there's actually loans owed to the US from the international entities that would allow us, if desired, to bring back almost all of that $70 million that's sitting overseas.

So, we could have $170 million-ish sitting in the United States.

On a prospective basis, based on the previous conversation at say $150 million to $160 million run rate of free cash flow we would be generating -- two-thirds of it would sit in the United States and one-third would sit overseas.

Great.

Thanks a lot.

Thank you, Tavis.

Daniel Ives with FBR Capital Markets.

Yes, hello, everyone.

Look, on the corporate, are you seeing any particular vertical that's really upticking on the corporate side financials in particular?

We do see several of them.

The only place that we are seeing continued support is on our legal side, we are seeing now more coming on the [health] side, it's all over.

I just cannot say that there is something in particular.

You remember in the corporate, we have competitors that are trying to also make effort.

Most of what I think we are seeing is business that we are taking away from fax servers.

So, many of the customers that are signing up in our pipeline are those that are leaving fax servers.

So, it's not so much based on segment of market, it's more based on there are certain industries that decide that they are comfortable outsourcing and certain that are not.

So, many, many of the large deals are those that decided that they don't want to be any longer with fax servers, those that are decidedly distributed.

Also, if I look into the numbers, I see many, many smaller corporate deals.

Actually, we used to make a definition of 10 DIDs and up are getting the corporate tools, which actually management tools.

Now we are seeing increasing demand of 5 and up companies that while they are small, they want the tools of a big company.

I think what happened in the recent 5 years, with all these SaaS and cloud services, small companies today can get the nice features that big corporations have.

So, we are seeing more of those as well.

I hope I answered you, Daniel.

Yes, of course.

Good quarter.

Thanks.

Mark Murphy with Piper Jaffray.

Please go ahead.

Hi, this is Benjamin sitting in for Mark.

Thanks a lot for taking my question and a good quarter.

Just wanted to ask if you're seeing any successes in the government space or the public sector?

I think I remember you said you're trying to penetrate that, so any color on that?

Yes, we are seeing more and more open deals with the government.

The government, they are not to move not so fast, but I'm getting a weekly list of all these pending deals.

So, the list is getting bigger, we're seeing tests, we are -- yes, so we're seeing more business from the government, but most of it is still big organization checking and testing.

So, you can have a government agency that have thousands of potential, they will start small and move up very slowly.

But yes, we are seeing the government increasing their activity, yes.

Okay, great, that's good to hear.

And is it possible, I don't know if I missed it.

But did you share the organic net bids for the quarter?

Yes, we said that this quarter we have not done any acquisition.

So, the 31,000 DIDs that we brought up did not come from an acquisition.

Okay, perfect.

And is it possible at all to quantify the Protus contribution for this quarter?

That's all for me, thanks.

The Protus contribution, it's very tricky.

First of all, as we do more cross-sells than up-sells, the customers from Protus that are calling us are not subjected to cross-sells.

Definitely their contribution there in the magnitude of 400,000 DIDs give or take is important.

The other thing that we are seeing is some customers don't like eFax, they like MyFax, so now they are all ours.

We see the contribution there.

Protus or MyFax is growing -- continue to grow a bit faster than eFax.

They have a better price and better offer.

So yes, it's all positive.

Thank you.

You're welcome.

Thank you.

Matt Hedberg with RBC Capital Markets.

Thanks, guys, and congratulation the quarter, and love to see the quarterly dividend.

Hemi, I think you talked about earlier, and there was a question earlier about the ramped-up spending in Q3 on additional sales techniques.

I guess outside of UK advertising, sounds like you're going to be doing some radio advertising in the UK.

Can you give us a sense for some other things you're going to be looking at.

Yes, some of it I will not say.

We have a lot of competitors, but in the UK, I think our competitors are less, and I'm not sure that they're listening.

But yes, we are going to do, as I said, radio there.

We are also going to do direct mailing, you get your monthly statement with your credit card provider.

Some of them are stronger than the others when it comes to businesses.

We're looking for segments of cards that are focusing on businesses and doing a joint activity with them.

This is something that we are working on.

We have never done it before.

We're going to look into more incentive -- higher incentive to our -- some of our affiliate programs and things like this.

We are branching out of pure search to those kinds of things.

We are increasing our PR effort.

PR is very hard to measure, but when you have good PR, you know that you have good PR, so we're trying to do that as well.

All of those things are basically things that you can try and increase [k-lop] and if you failed, it's not that painful.

Great.

And then on Campaigner, can you give us a little bit more color on how that's progressing?

I think last quarter you may have mentioned that you had about 10,000 -- or more than 10,000 paying customers.

I'm wondering if you can give us a little bit deeper dive there.

Yes, it has continued to grow.

Of course, it didn't move from 10,000 to 11,000, but it's moved up.

I don't know the exact number.

We are focusing there on integration.

But we are focusing there also in learning how and what is needed to grow it, not only through organic, but also through acquisition.

There is big space out there.

There are many, many companies out there that we believe are spending way too much money for their margin of customers.

We are not like that.

We are always focused on profitability, the size of our My Campaigner team versus the sizes of those companies are different.

Therefore we are profitable, very profitable, My Campaigner.

I don't want to drop names of companies, but there are some obvious companies out there that I think are going to -- they will have to start to become profitable.

And at each stage, our focus now is can we integrate systems on those marketing platforms the same way we do on the fax and the voice.

This is our -- 1 of our major focuses.

So, to come to the beginning of your question, it is growing, it's growing satisfactorily, but the main event is not only to grow it, also to position it.

Is this business scalable via organic only when you compete with companies that are basically suicidal?

Or can it grow through acquisition?

We believe it can grow both.

We can grow it -- it can grow organically, it can grow through our cross-sells that we already are doing and are happy with.

And we also believe that we can over time develop the platform so that we can acquire other companies and observe them.

I hope this answers your question.

Yes, no, very helpful.

Thanks a lot, and congratulations again on a great quarter.

Thank you very much.

Brad Whitt with Gleacher & Company.

Thank you, this is Brian Wallins for Brad.

Congratulations on the quarter.

Wondering, given the recent economic conditions we're seeing, particularly with respect to jobs, recent surveys out there suggesting most SMBs are not planning to hire in the second half.

Does this have any impact on your confidence in achieving your estimate of roughly 25,000 to 30,000 net new DIDs per quarter for the remainder of the year?

Thanks.

It's very hard to talk about the entire -- the last quarter, but I can tell you we already have 1 month into the third quarter.

And it was a healthy month, I don't know if people are -- you read the news, but you also see your own metrics.

On the fax side, I believe that small business is shrinking from 5 to 4 or from 5 to 3.

Nothing will happen there, because they have only 2 fax lines and 5 employees, so reducing doesn't -- They either need the fax or not.

On the voice side, I think again, if you want to get rid of your secretary, we are a perfect replacement.

We are the lowest of the lowest end services.

We provide services for $13 to $14 a month.

I think that most of the small businesses will see us as efficiency tools rather than something they need to cut.

I cannot make a focus on the economy as a whole.

But I think that the past experience showed that we were mostly impacted on the larger financial customers and less on these small ones.

We have more of the small ones now and less of the financial ones, so we have good hopes.

Okay, thank you.

You're welcome.

Youssef Squali with Jefferies.

Hi, this is Kip Paulson for Youssef.

Just a couple of questions.

First, how do you view the long-term growth profile of the business as you reposition the Company to a cloud-based service provider?

And second, where is KeepItSafe with regard to international expansion?

Is online backup significant outside the UK?

Thanks.

2 things.

First of all, we don't, as you know, give long-term growth rates for the Company.

We do annual budgets and annual guidance.

Also, I would say too, I think it's a misrepresentation to say the Company is being repositioned.

The additional services, the SaaS or cloud-based services are natural extensions out of the original DID based services the Company launched some number of years ago.

You'll have to stay tuned on a quarter-by-quarter basis as those pieces of the business get bigger and as the growth rate of either those pieces or the Company becomes more apparent.

Now, regarding KeepItSafe, KeepItSafe is a smaller player, focused on Ireland and the UK.

When we acquire businesses, we have 2 -- under our financial capabilities, we have 2 options.

Another 1 is to buy a big Company that does well and make it better.

Another 1 is to start small and grow.

On the backup, we saw lots of companies of different sizes.

We believe that many of them have bad business model, and we picked KeepItSafe because we believe that they're focusing on the higher quality, picky businesslike service that will generate business like payment.

And this Company that we picked up was a test.

They came, we brought the entire team on board, and they set an aggressive goal.

We saw that they are meeting their goal, and we said okay, we trust you, now let's do some acquisitions.

The first acquisition that we did was, again, relatively small.

But we were testing, can they do billing, can they do -- move the service, can they message the customer without losing them?

Can they up-sell the customer, can they deal with prices, sometimes you have to raise the prices.

And even though we just did the deal a month ago, I already got very encouraging reports that everything is moving faster and better than we are.

We will do more, and the reason that we focus only in the UK and Ireland to start with was because we wanted to do it small.

We didn't want those people to start to travel all over the world.

But now we are encouraged, and we are going soon to announce that we are bringing the services to the US.

We are building or buying it or both, so we are getting encouraged.

And the pickup service that we are doing is more, if you want to put it in simple words, it's more like a disaster recovery plan for the Company because we back up the entire company.

All the machines, all the employees, and their recovery is significantly faster than what you will find in the small companies that go online and advertise themselves on TV.

Because in our case, our customer needs fast recovery, and we are building everything that we can to put all the company quickly on a disc and give it to them.

We believe the business is significant for businesses and we'll continue to grow outside the UK in this year.

Internal plans are to do it sometime in this quarter when we will start to announce the service availability in the US.

Great, thank you.

You're welcome.

Thank you.

We have no further questions at this time.

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

Thank you.

We appreciate you joining us for the Q2 earnings call.

If you have any further questions, please feel free to call or e-mail us.

Next week, I will be in New York at the Morgan Keegan conference.

So if you're interested in a 1-on-1 and have not signed up I would encourage you to contact them to do so.

And then we will also be between now and the next earnings call in several cities, both in conjunction with conferences as well is on non-deal road shows, so we can give you a personal update and answer any questions.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.