Ziff Davis Inc (ZD) 2012 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the j2 Global First-Quarter 2012 Earnings Call.

It is my pleasure to introduce your host, Mr.

Scott Turicchi, President of j2 Global.

Thank you Mr.

Turicchi, you may begin.

Thank you.

Good afternoon and welcome to our Investor Conference Call for the First Quarter of Fiscal Year 2012.

As the operator mentioned, I'm Scott Turicchi, President of j2 Global.

And with me today is Hemi Zucker, our Chief Executive Officer, and Kathy Griggs, our Chief Financial Officer.

We will be discussing our Q1 2012 financial results as well as provide an update on the business and the initiatives that we outlined for you last quarter.

In addition, our Board has increased the quarterly dividend to $0.215 a share.

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

A copy of the presentation 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 to you expand the slides.

If you've 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 conduct a Q&A session.

The operator will instruct you at that time 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 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 have 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.

At this time, I'll turn the presentation over to Kathy who will review the results for the first fiscal quarter.

Thank you, Scott.

Good afternoon ladies and gentlemen.

Please refer to slide 5 in the presentation for a recap of our Q1 GAAP and non-GAAP operating results.

I'm pleased to report first-quarter revenues of $86.7 million, our best quarter ever.

Revenues increased 4% over Q1 2011 on a non-GAAP basis.

Additionally, our deferred revenues increased by $1.5 million this quarter.

Our other revenues increased by $1.3 million due to the strong performance of our intellectual property licensing efforts.

Paid DIDs grew by more than $22,000 in the quarter.

Corporate fax and Voice were the largest contributors to our growth.

Our cancel rate for the quarter improved to under 2.4%, a record for any first quarter and remaining at historic lows for any quarter.

ARPU was $12.85 per DID this quarter versus $12.91 in Q4 primarily driven by corporate fax and Voice growth.

On a non-GAAP basis, our earnings for the quarter were $30.3 million, an increase of 8% from Q1 2011.

Non-GAAP gross and operating margins were 82% and 46.3% respectively.

GAAP net earnings for the quarter were $28.5 million.

Our operating earnings were $37.6 million.

Gross and operating margins were 81.7% and 43.4% respectively.

For Q1 2012, we achieved non-GAAP EPS of $0.64 per diluted share, up 6.7% from $0.60 per diluted share in Q1 2011.

Free cash flow for the quarter was $38.1 million representing 44% of revenues.

This is consistent with free cash flow in the year-ago quarter despite our investment in several acquisitions since that time that have not been fully integrated into our cost structure.

Our cash and investment balances totaled $193 million as of March 31, 2012, up from $127 million a year ago.

We repurchased 1.3 million shares of stock this quarter, deploying nearly $39 million in cash.

As Scott mentioned, we increased our dividend payout for the third time and will pay $0.215 per share.

This is a 2.4% increase over last quarter and a 7.5% increase in the three quarters since our first payout.

For Q1 2012, we incurred $3.3 million in non cash amortization expense on intangible assets, which equates to approximately $0.05 on our EPS.

Due to fluctuations in foreign currency this quarter, we experienced unrealized losses of approximately $1.2 million, which is shown in other income and expense.

These results and the nature of our global tax structure were [very superior] to a short-term inter-company debt obligations denominating currencies other than the US dollar.

There is no cash impact however, unless and until these balances are settled.

Our GAAP estimated effective tax rate for Q1 2012 was 22.6%, although we expect our normalized effective tax rate to be between 24% and 25% for the balance of 2012.

We completed four acquisitions in the first quarter of 2012.

These include Landslide Technologies, a Boston-based provider of cloud-based CRM services to small and mid-sized businesses.

Offsite Backup Solutions, a Phoenix-based provider of online data backup services.

Zimo Communications, a UK provider of cloud-based voice services marketed under the brand name Number Store.

And Zintel, an Australian-based cloud voice provider.

While they are important strategically, the added revenues from these four acquisitions were not material in the quarter.

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

Now I'll turn the call over to Hemi, who will provide with you an overview of our business metrics for Q1.

Thank you Kathy, and good afternoon everybody.

Let's go to page 7.

Today, I will start with some metrics on our business, metrics that we have never provided before.

Some of our analysts are asking us to provide more information on the business and the facts, and we decided to share the information with everybody at the same time.

As you can see here, on the cancel rate, we are providing the data on a quarter-by-quarter basis.

As you can see, on the first quarter, since 2009, we were up at 3.5% and now down to under 2.4%.

This is huge.

Every 0.1% of decline or reduction that we can achieve on the churn has value of over $300,000 that goes all the way to the bottom line.

Our customers are using our services more, and as you can see on the left bottom side on the chart, we are providing an index on the pages.

So total global customers of j2, which is everybody, has grown by 10% in the last 10 years -- 2 years.

10% in the last two years, and our corporate have gone 26% when you count the pages per DID.

On the right side, we have provided a number of DIDs on the fax.

In the last two years, we have grown the total j2 fax DIDs by 59%, from $1.083 million to $1.7 million, and the corporate, they grow even faster, from $333,000 to $554,000, 72% more DIDs.

One of the things that we are trying also to measure is what part of the global fax business in the world have we penetrated.

There are no metrics.

But what we have done is we have tried to run a query, the checks, how many faxes received or sent are from our customers to our customers.

And this number is very low, something like 1% to 2% which means that still 98% of the traffic that is going out there on the fax is not going through the j2 infrastructure.

So there's a lot of growth here.

And again, we are trying to replace other fax infrastructure and move them to use our cloud services.

Let's go to page 8.

Here is a chart that provides the view of our revenue breakdown and diversification.

As you can see, our subscribers, which is our fixed base revenue, the fixed revenue that counts independent of usage, independent of holiday seasonality is not an impact there, is now 83%.

So 83% of our revenue counts every month just on the basic services.

And on top of it, we have usage.

The usage is 17%.

The usage is mostly impacted by business days and it's approximately $260,000 to business days.

The fax proportion of our business has fallen to 79%.

So if you look at the j2 Company several years ago, it was virtually 100% fax.

Now fax is only 79%, and on top of eVoice, which is grown now to $50 million, which is 14% of our business.

And then we have the other businesses, e-mail being $80 million.

In Q1, we have added 22,000 DIDs, and April already is 8,000 organic only DIDs that we added this quarter.

We have done four acquisitions in the first quarter.

The first off one here is Zintel.

Zintel is an Australian company, it's Voice only.

We have opened an office in Australia.

We have now plans to move our fax service also to this office, and we installed management and we have employee body there of 21 employees.

Landslide, we talked about it on the annual earning call.

It's a CRM company, strong management.

We are combining them with the management of Campaigner, and we have big hopes for that.

The next one is Number Store.

It's a UK company.

It's Voice business, and we are now working on moving them to our platform.

And the last one here is Offsite Backup Solutions.

It's a US company, it's backup.

And it's a backup company and we are going to move them to our platform as well.

Next, page 9.

Now with the office that we have in Australia, we would like to present with you the distribution of our employee base.

We have 627 employees.

Of those, 363, 58% are in the US, and then 42% are in the rest of the world, Canada, Ireland, and then Australia are the biggest one.

We are providing services in 49 countries, in 6 continents, and we have customers virtually from every country around the world.

Go to page 10.

When I will talk and refresh you on the cross-sales in the up- sales efforts.

It's almost a year, a little bit more than a year.

We sold 18,000 seats in the first year.

By doing this, we saved $2.7 million in media costs.

If we had done it not through cross-sales and up-sales, j2 Global or j2.com website is the major website for cross sales.

We had so far 443,000 visits and 4.6 thousand sign-ups since the launch.

In the last quarter, we have added 4,800 new sign-ups from cross- and up-sells, which is 18% growth quarter-over-quarter.

We are now planning to increase our effort in this field and continue to grow it.

With that, I will now pass the call to Scott, who will give us updates on the guidance.

Thank you, Hemi.

And if you'd just turn to slide 12.

We're reaffirming the guidance that we issued for the full fiscal year on our Q4 call in mid-February.

To remind you that is revenues of between $345 million and $365 million, and non-GAAP EPS equal approximately to that which we had in 2011, which was $2.53 a share.

A couple of facts on the dividend.

As I mentioned at the beginning of the call the dividend payout will be $0.215 a share for those who are shareholders of record on May 16.

The payment date will be May 30.

It will represent approximately $10 million of cash payments and 30% of our quarterly non-GAAP earnings.

As we've stated in the past, this dividend program is designed to neither impact operational or M&A activities.

As Kathy mentioned, there are a number of supplemental schedules on slides 14 and following.

And I'd ask the operator now to come back and instruct you for the question-and-answer session.

(Operator Instructions) Shyam Patil of Raymond James.

Hello guys.

Congrats on the quarter.

First question is, Scott, can you talk a little bit about how you're thinking about large M&A at this point and what areas seem attractive to you?

Sure.

Well, as Hemi talked about, obviously we've done a fair amount of M&A already this year, all in Q1.

We continue to maintain a very active pipeline of deals.

We are clearly desirous of doing a deal that would be of the size of Protus.

As you know, that has been very successful in terms of both the initial acquisition, the subsequent integration and the financial results that have occurred following that.

I would say that there are opportunities, albeit somewhat limited in most of the spaces that we currently operate in, although we would not limit our focus only to those five spaces.

And I think because it's a limited pool, I remain very cautious in terms of the ability or the timing to actually complete such a large transaction.

Great.

And then switching to ARPU, I'm sorry, not ARPU, churn.

There's been a lot of discussion around churn in the investment community.

You guys obviously put up a great number this quarter.

Can you talk about how you're thinking about it for the balance of the year and if there's any seasonality in that metric that we should take into account?

Sure.

I would answer it.

As you see, it's very hard to predict, but we have done presentation here quarter-over-quarter.

In the last three years, or actually four years if you include Q1, it was going down every quarter against the quarter before it.

As far as I can see, the first quarter, the numbers are good.

There is no reason for us to have a spike there.

We are doing good.

The usage is increasing.

Our customer loyalty is increasing.

I know that you are looking for some concrete number for your modeling, but I think that at least here the expectations are this would stay on those levels.

Under 2.5% for the next quarter or two, and I cannot think about Q4 yet.

But the coming quarter, Q2, I think will be a strong one, both on added DIDs and on low churn.

Great.

And my final question is, in general, when you look at the small to mid-sized business environment here in North America, any take-aways in terms of if it's stabilized to getting better or if it's still very uncertain?

Just curious to hear your thoughts on that.

It's very hard.

I know that our cost per acquisitions are strong and low.

I know that we're not worried about anything.

We're seeing good numbers.

The team is finding ways to improve it.

So yes, the economy is unpredictable, but we continue to be a cost saving high value proposition and product.

So I think that even with the bad times, we will do better than what the economy does.

Great, thank you, and congrats on the quarter.

Mark Murphy of Piper Jaffray.

Yes, thank you.

I was wondering, did the cancel rate decline for both the corporate and the individual/SMB fax users in Q1?

We do not measure it separately, but it has to be because we have such a large base that is non-corporate that you cannot just move the needle with the corporate only.

So while I'm not measuring it, if I had to predict it based on my knowledge of the situation, yes.

I know that we have done several improvements.

We have improved the cash unit.

Tim did a very good job on getting better success rates on credit cards and safe programs and everything else.

So, yes, I think it is done mostly on the low smaller customers level.

Okay.

And also, the other revenue looked like it was higher than it's been in awhile.

Can you remind us what that is?

Did it relate to patent licensing or advertising or something else?

And maybe any --

No.

It's not advertising.

Advertising is very, very small.

I mean so small that I don't even remember the number.

It is mostly our IT, and we have some programs when our product is embedded with other products.

That's also been increasing.

So, a company that sells a hardware solution or other solutions and embed eFax in it.

So they are the largest contributor -- the largest contribution is coming from there.

And, Hemi, what about how that should flow forward into Q2?

Is this run rate sustainable?

It's very hard -- I'll tell you what, it's very hard to predict because there are settlements on patentings that are increasing.

And there are sales of hardware that are done by third parties, and it's hard to predict.

But what I can tell you is, it all flows all the way to the bottom line.

Okay.

How about the -- in terms of the DID adds in Q1, should we be assuming the 22,000?

Is that the organic number, or was there some -- was there any kind of contribution from the four acquisitions?

Yes, there was contribution for the other acquisitions.

But I told, and I indicated that in April, which we closed, that we have 8,000, all organic.

Because we didn't do any acquisition in the last month.

So I believe that this will continue, and therefore I anticipate better results in Q2 from the standpoint of added DIDs, but it's too early.

We have another two months to go.

Okay.

So for the -- so you're not providing an organic number for Q1?

I don't even know, even if I wanted.

But I can tell you that it's probably -- if I have to estimate, it's third/two-thirds.

Like a third from acquisitions, and two-thirds organic.

But this is just -- Scott do you think it's kind of close?

Okay.

And Scott, I wanted to ask you as well, on the idea of the suite of services that you're clearly expanding, I'm wondering how many spaces do you think you could be in a few years down the road?

And what is the strategy for selecting or maybe rejecting any new adjacency's that you might be looking at?

Well I think -- we keep them on an active list, and we did not include it in this investor presentation for the earnings call.

But when I go out on the road there's a slide that we introduced last quarter that has the seven independent services around j2 in the middle and behind it there's a lot of text.

And it doesn't print out very well, but if you look at it on screen, there are basically the cloud service spaces as we currently see them targeting businesses.

I think there's about 40 of them.

And you'll see some are a lot closer to the j2 ball and are a lot larger in type.

And that was by design, because those are in our judgment better fits than those that would be out on the periphery.

So in the normal course, we are refreshing that list of spaces or subspaces that would be business-oriented SMB focus subscription based.

And then we are looking for ways -- I would say there is no set number, but probably realistically to absorb two or maybe three a year.

And part of the absorption will be how we actually get into those additional spaces.

Is it through an M&A transaction, like in the CRM space where we actually acquire an asset, a platform, a team, and a customer base?

Or is it through organic development, which would generally have a longer tail to it in terms of being able to enter the market?

Or is it through a licensing relationship where we are licensing some third party's technology, either in whole or in part?

But the general idea, and I think it's representative of KeepItSafe back in '10, Landslide now in early '12, is that we'll get access to a technology in one of those forms.

It will more than likely be small, and that will give us some time to effectively incubate how those technologies play out.

If you go back into our history, what we did with Paul Sciences that led to the creation of the Voice services, the eVoice and the Onebox I think is very representative.

Much like some of these acquisitions, we bought an entity in late 2004.

It had some voice technology that we did not have access to at that time.

We let it stand alone for about 14, 15 months, observed how the business was growing with very limited resources.

At that point said, okay, if we come in with our marketing, with our product skills, and our branding, how would we take this technology, which is growing on its own with very little additional support and give it what it needs to then become a more prevalent piece of j2's business?

And as Hemi mentioned, through a combination of our efforts, the organic marketing, and select M&A, that's now about a $50 million run rate business.

So I think that is a representative example in terms of how it can play out over time.

Okay, great.

Thank you.

And that, by the way, one comment on that.

It does it not -- obviously in the days that we launched eVoice back in late '06, there was really no concept of cross-selling.

So one of the other elements that Hemi touched on, which I think is important, not in the near term, but over two to three years out prospectively, is that as we add these additional services then it becomes additional opportunities to go back to the existing base and cross-sell in a second or a third service.

Okay, got it, thank you.

Joanna Makris of Mizuho Securities.

Hello, good afternoon.

You mentioned in your facts or review that about 17% of the revenue was usage based.

And I'm just wondering how you expect that to trend over the next 12 months, and what factors could potentially drive an increase in usage base portion of the pricing?

Okay.

The usage is basically mostly pages that are not included in the package.

So eFax, you have so many pages inbound, 160, and 100 outbound.

If you go about it you generate usage.

Then we have our other products that are the developer type and all those against usage again.

Those things have been pretty consistent, 260,000 per business day.

So if you want to see how many business days are in Q2 versus Q1, this would be the strongest indication.

Also, as Kathy mentioned, our deferred revenue grew in this quarter $1.5 million.

The deferred is actually subscription based.

So this usually has -- not every quarter, we are depositing money on the deferred.

Sometimes it's coming back.

So I think this was a high contribution towards our future revenue.

It might reverse itself and come back in Q2, and so-and-so.

And to follow-up Joanna, to Hemi's commentary, there -- I'd have to take a look, but I believe there's one additional business day in Q2 versus Q1.

Q2 is generally the seasonally best quarter from a calendar basis in terms of business days because the only full legal holiday in the quarter is Memorial Day, and it's a Monday.

I would say too, to add on to his comment, that more than minor deviations positive or negative would most likely be caused by some significant change in the economy.

And also because the acquisitions that we did in Q1 were partial contribution and now in Q2 will have the full benefit of those acquisitions, they are $1 million or $2 million additional revenue that are sitting there to be recognized on a full quarter basis.

Thank you.

James Breen of William Blair.

Thanks.

Just a couple of questions.

One, can you give us some color in terms of the sales profile and basically how the revenue is being generated from the sales front in terms of inbound or outbound, and does that differ greatly across the products?

And then, as you do look at some M&A across different product groups, is there going to be a significant change in the free cash flow profile or the capital efficiency of the Company over that time frame?

Thanks.

So on the M&A front, we have -- we are very conservative in talking about it, but we have several of them.

I think four in LOI.

They are mostly in our current businesses, so, no, nothing major that is new business.

When we buy business in our current business, the efficiency is fast.

They are mostly international, so we can utilize our cash that sits abroad.

Cash flow and integration takes time, but I cannot predict in accuracy.

But most of them, those that I see that are significant are going to be contributing cash at the same rate that we have done before from day one.

Those are companies that are in our basic services, so they should be doing well from the beginning.

Okay.

So basically as you're looking at some of these deals, the parameters you're using for cash flow generation and capital efficiency, you want to stick around where your business is today?

Yes, they should either be the same or better.

Okay.

And then in terms of the sales channel, as your -- as the business makes changes a little bit, do you see any real changes there?

Not really.

Inbound is still a larger part of our business than the outbound, which is also more profitable.

And as we have more customers that take built-in packages they add to the subscription revenue more than the usage, which is a positive.

And as you up-sell some of these existing customers with more products, is the margin -- the incremental margins there are north of 80%?

Because there's not a lot of support that goes behind that.

Yes, most of our sales are fax and voice, and both of those are the largest contributor to the mix that you are seeing today.

So I would not anticipate any change of any significance.

Okay.

Great.

Thank you very much.

Okay.

We have one question that's come by e-mail, and then if there's anybody else in the queue we can go back to the operator for those questions.

One question that's come in by e-mail is, as some of you may be aware, within the last couple of days it was announced that Open Text is in a definitive agreement to purchase Easy Link.

And so the question is what is the likely impact or take on that situation?

So we had two competitors out there.

One was selling hardware and software solutions for in-house solutions, that we were competing all the time with.

And the other one was selling on-line fax services.

Both of those companies are competing with us with the high, high edge of the enterprise customers.

Those customers come with many DIDs but a relatively low ARPU.

We are very happy that now instead of two competitors we'll have one.

And the way I see it, the purchaser of this company is financially stronger and therefore I believe that they will be less competitive when it comes to dropping the prices and lowering the ARPUs.

So I think all in all, it's positive for us.

But time will tell.

Okay.

Any other questions for the operator?

Is anybody else in the queue?

There are no further questions at this time.

All right.

Well we thank you all for joining us for the Q1 call.

As is usual and typical, there will be two or three conferences between now and the next earnings call that we'll be participating in.

There will be press releases put out to alert you as to the time and place, and how to access those calls through a webcast.

And we will look forward if we don't talk to you before then, to talking to you in early August to report the Q2 results.

Thank you.