Ziff Davis Inc (ZD) 2012 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the j2 Global, Q2, 2012 earnings call.

It's my pleasure to introduce your host, Mr. Scott Turicci, President of j2 Global Communications.

Thank you Mr. Turicci, you may begin.

Thank you very much.

Good afternoon and welcome to the j2 Global investor conference call for the second fiscal quarter of 2012.

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.

As you know, this has been a very exciting time for j2.

We will be discussing the second quarter financial results as well as provide you an update on our Business and business prospects.

Also, as you know, approximately one week ago we closed our $250 million bond offering.

In addition our board has increased quarterly dividend to $0.22 a share.

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

When you launch the webcast, there's a button on the viewer on the right hand side, which will allow you to expand the slides.

If you've not yet received a copy of the press release, you may access it through our corporate website at www.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 will instruct you at that time regarding the procedures for asking a question.

In addition, you may email questions to us at any time at investor@j2Global.com.

Before we begin our prepared remarks, I will 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 SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements, and 8-K filings.

As well as the additional risk factors that we've 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 financial results for the second quarter.

Thank you, Scott.

Good afternoon ladies and gentlemen.

Please refer to slide 5 of the presentation, for a recap of our Q2 GAAP and non-GAAP operating results, and to the supplemental schedules at the end of the presentation, for a reconciliation of all non-GAAP financial measures to the nearest GAAP equivalent.

I am pleased to report that for Q2 we achieved record quarterly revenues, record EPS, and record free cash flow.

Our revenues were $89.5 million, the highest quarterly revenues in the Company's history.

Revenues increased 3.2% over Q1 2012, and 4.4% over Q2, 2011.

Other revenues of $1.4 million reflect continued traction with our intellectual property licensing efforts.

Paid DIDs grew by $33,000 in the quarter, with corporate fax and voice being the largest contributors.

This is our largest quarterly DID growth since we acquired Protus in 2010.

Our cancel rate for the quarter improved to 2.3%, another all time quarterly record.

ARPU grew to $13.19 per DID this quarter, versus $12.85 last quarter.

On a non-GAAP basis, our earnings for the quarter were $32.5 million, an increase of 6.3% from Q2, 2011, and an all time quarterly record.

Non-GAAP gross and operating margins were 82.1% and 47.2% respectively.

GAAP net earnings for the quarter were $31.2 million, our operating margins were $40 million, gross and operating margins were 81.9% and 44.7% respectively.

For Q2 2012 we achieved non-GAAP EPS of $0.70 per diluted share, up 7.7% from $0.65 per diluted share at Q2 2011, and representing yet another all time quarterly record.

Our GAAP EPS for the quarter was $0.67 per share, also a quarterly record.

Free cash flow for the quarter was $45.6 million, representing 51% of revenues and also a quarterly record.

Our cash and investment balances totaled $207 million as of June 30, 2012.

Additionally, in Q2 we repurchased 826,000 shares of our common stock for nearly $20 million in cash, and paid our quarterly dividend of approximately $10 million.

After giving effect to the $250 million senior unsecured note offering we recently closed, we now have $450 million in cash and investments.

Today we announced that we are again increasing our dividend payout to $0.22 per share, the fourth consecutive quarterly increase.

This dividend was paid on August 29, to the shareholders of record as of August 13.

This is a 2.3% increase over last quarter, and a 10% increase versus our first quarterly dividend a year ago.

For Q2 2012, we incur $3.7 million in non cash amortization expense, on intangible assets, representing approximately $0.06 per share in EPS.

If you refer to our other income and expense category, you will see we have fluctuations in foreign currencies this quarter, which resulted in unrealized gains of approximately $400,000, compared to a loss of $1 million in Q1 2012.

These gains and losses result primarily from the nature of our global structure, where various subsidiaries carry short-term inter company debt obligations, denominated in currencies other than the US dollar, especially the Euro, Australian dollar and the Yen.

Continued fluctuations in these currencies can effect both the direction and the magnitude of the changes in this category.

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

Our estimated effective GAAP tax rate for Q2 2012 was 23.6%, up from 22.6% for Q1 2012.

We expect our normalized effective tax rate to move closer to 25% over the balance of the year.

As mentioned, we recently issued $250 million in senior unsecured notes, due in 2020.

We intend to use those proceeds from this offering for general corporate purposes, which may include acquisitions.

We anticipate the interest expense and amortization of deal related costs to decrease our EPS between $0.11 and $0.13 for the balance of the year, assuming no material reinvestment of the proceeds.

Despite this additional expense, we are re-affirming our previously issued non-GAAP earnings per diluted share estimates for fiscal 2012 as being approximately the same as for 2011.

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

Now I'll turn the call over to Hemi who will provide you with an overview of our business metrics for Q2.

Thank you Kathy, and great afternoon everybody.

Today my presentation will be short, only 3 slides as Scott said let the numbers speak for themselves.

So let's go to slide 7. This quarter we were able to demonstrate our lowest cancel rate ever.

At 2.3%, it is not only quarterly, but also all time record.

We are very happy with the record.

So much work went into it.

Virtually every department in j2 is involved in this record.

Now we will try to continue and hold to this amazing record.

As you can see, in the chart below, we have improvement of churn year-over-year starting from 2009 I believe.

Yes.

And to demonstrate the importance of the -- of the reduction of the churn, 0.1% saves us almost $1.7 million in annual customer acquisition costs.

To slide 8. One of the things that we are focused here in management is the diversity of our Business.

As you can see, our fixed revenue has increased from 81% to 82%.

Another $3.5 million is more guarantee, they're not dependent on usage and variable impact.

Number two, our non-fax business is now on a run rate of $78 million.

A year ago it was $56 million, growing at a rate of 39%.

The third item that is not demonstrated on the chart is also, if we take our 50 largest customers, and as a map all together they're representing less than 3%.

Our top customer, which we all love, is still less than -- 0.3, less than a third percent of the revenue.

All those things are very important to us, and lso the strengths of our revenue in our Business.

Now to slide 9. As you all know, we had a bond offering and we were very excited when the opportunity showed up and we were -- and raised $250 million.

Why did we do it and how did we get there?

Why?

Because the size of j2 became to a level that those markets opened themselves to us.

We were also able to demonstrate successful M&A of a scale.

As you know, we bought Protus for $230 million integrated, and demonstrated ability to do deals of this size.

And what did we got, we got capital for eight years tenure.

We got a very attractive rates, as you can see, the rate that we got is 8%, if you calculate the effective cost of it, it's less than 5% because A, we'll get some income from investing it, even in a conservative way until we use it, of course.

And secondly tax effective is going to be less than 5%.

I will now pass the call back to Scott.

Thank you, Hemi.

And welcome to those of you who are on the call who are our new bond holders.

What I'd like to do for all of you is just quickly review the terms of the senior unsecured notes on slide 11.

And then some of the financial ratios that are relevant to our bond holder community.

As Hemi mentioned, it was $250 million at 8%.

They are unsecured notes issued by the parent corporation, j2 Global.

The maturity is in eight years and for the first four years the notes are non-callable.

After that they are callable pursuant to an existing schedule.

There are three primary types of covenants, which are if we wish to incur additional debt, if we wish to put any liens on debts, have it be secured, and make restricted payments.

There are no maintenance covenants within this offering.

Now slide 12 will give you a sense of the financial picture from the bond holder's perspective.

So, at 63012 pro forma for the offering of receiving $243.5 million of net proceeds, it brings our total cash and investments to $450.3 million.

The only debt obligations that we have at this time pro forma would be the $250 million bond offering.

I would note that our total market capitalization as measured in the stock market, is approximately $1.36 billion, meaning that we've got about 15% of our mark to market capitalization in debt, and 85% in equity.

Now, a lot our covenants key off of EBITDA, and in the back of this presentation, there's a slide now that includes not only the free cash flow that we've reported, but also EBITDA and how it is calculated.

For the latest 12 months ended June 30, 2012, we have slightly in excess of $183 million of EBITDA.

As I mentioned, there are three core covenants.

So we are allowed to incur additional indebtedness provided that our EBITDA to interest ratio is 2 times or greater.

Currently with just the existing bond offering outstanding, the coverage ratio is approaching 9 times.

So if needed, we have ample ability to incur additional indebtedness under that covenant.

None of our debt is currently liened, but if we wish to lien it, there could be no more than 2 times our EBITDA in senior secured debt, which would give us under the current EBITDA about $360 million of capacity.

And finally, the ability to make restricted payments, which would be inclusive of dividends and stock re-purchases, are unlimited provided that our total debt to EBITDA is less than 1.75 times, its currently at 1.36 times.

If for whatever reason that test is not maintained, and we were to go north of 1.75, then we would be limited to $50 million, plus 50% of prospective GAAP net income.

Going to slide 13, as Kathy already mentioned, we are re-affirming the guidance today on both the top and bottom line.

I will remind you for revenues that's between 345 and 365, and a non-GAAP EPS roughly equal to that of 2011.

This is inclusive of the bond costs for the balance of the year, which is 5 months and 1 week.

Under the assumption that there is no material investment of those proceeds through the balance of the year, and is a very nominal amount earned, as that money is put away in some safe and readily accessible investments.

Finally, on slide 14, the dividend which was also mentioned, the record date is August 13, the payment date will be August 29, is $0.22 per outstanding share.

But given the re-purchases that still is approximately $10 million of cash payments for the dividend.

And then as usual, there are a variety of slides beginning on 15 and following, that are supplemental information.

The only one that I noted earlier is on slide 17, you now have in addition to the free cash flow reconciliation, you also have the calculation of EBITDA, which is important in terms of understanding how the covenants work in our bond indenture.

At this time I would ask the operator to come back on-line and instruct you for queueing for questions.

Thank you ladies and gentlemen at this time we will be conducting a question and answer session.

(Operator Instructions)

Shyam Patil, Raymond James.

Congrats on the successful debt raises in the quarter.

I guess, Scott, the question on everyone's mind now is, the use of the proceeds.

If there's something you're seeing in terms of the M&A pipeline that, prompted, prompted you guys to do the raise just given the amount of cash you had before, and the amount of free cash flow you generated on your own?

The answer is, is no in the sense that as Hemi mentioned, the bond offering came at a time really when conditions presented themselves that we could access this market, which in our judgment was previously not open to us on a historic basis, and certainly not on any rates near the rate that we accomplished this offering.

So having said that, though, we have and we do maintain a list of targets that would be of the Protus size, meaning $200 million to $300 million in transaction value, although we have no intentions of breaking our discipline that you're well aware of in terms of acting on those.

But as you know, it just takes some right conditions for valuations and for certain situations to become actionable that might not be at the current moment.

So we're now very well positioned.

¶ Also as you know, the existing $207 million of cash, about $115 million or $120 million of that sits overseas, so we now have north of $300 million of cash that is US domiciled.

In addition to, we have about $335 million that's US domiciled, and now $115 million overseas so we're well positioned if one of these situations presents itself to already be fully financed, to go in without any contingencies or any conditions obviously other than diligence.

Got it.

I know there's not much you can say in terms of the targets and so forth, but when you look at the number of Protus type deals in your pipeline, can you talk about, you know, is that less than a handful, is it more than 10?

And maybe what areas you're potentially looking at?

I think if I answer all those questions, it will end up narrowing the field too much, which is a good question to ask.

You should ask it.

We won't answer it.

I would say that we are tracking between one and two handfuls of situations right now, and I think if we kind of maybe take some of the criteria down a little south of $200 million of transaction value, we'd probably get up to close to two handfuls.

They are, you know, certainly all cloud-based services, consistent with what we've talked about in the past, and consistent with what you have seen over the last few quarters of both spaces we are in, but also in some situations, spaces that might be related to what we do, but not exactly what we do today.

And to add, we have less than a handful, smaller deals, that we call -- we used to do in the past that are in various stages from LOI to all those, but there are small deals that do not require these finances.

But we are continuing on the other ones, yes.

Got it.

Okay.

You know, one of the questions I get asked a lot from investors is, in terms of adjacent areas that you could look to get into, kind of what those areas might be.

Can you maybe talk about, some of the more interesting areas that you're not in today, that you are considering or have considered entering?

It's easier for me to tell you those that we are already in, you know?

We are in internet faxing business, where we don't have any large target in mind.

We are in the voice.

There are several targets there up from different sizes.

We are in the backup there are many targets there, different sizes, and on the hosted email, a bit less of this, from the size standpoint, in the email marketing there are many companies of all size.

What we are doing here is, once we are into space over a period of time we get comfortable that we understand the business well enough to acquire another chunk of it.

So those are the things that guide us.

Of course, we are not limited to go and enter the other cloud-based services.

The further they are from us, the more we have to be careful, the longer the process, the harder the -- the due diligence.

But we are confident that we can get into anything that has recurring revenue, subscription, all those types of things and we have gained a lot of expertise in processing credit card, customer support, international, local, all those kind of things are playing to our strengths.

I cannot be more precise.

Definitely as Scott said, we have many -- many companies that we are following, both private and public.

Both in the US and outside the US, and we hope that the opportunity will show itself in the near future.

Great.

Thanks.

And congrats again.

James Breen, William Blair and Associates.

Can you just talk about -- you had particular strength this quarter in DIDs as well as churn improving, how much of the increase in the DIDs was a result of lower churn, just versus higher gross adds?

And then ARPU also went up, can you talk about sort of what's driving that?

And then lastly on the competitive front with Easylink getting bought, does it change the competitive dynamic at all within the industry?

Thanks.

Okay, so is the churn you know each tenth of a percent is a little bit more than 2,000 customers.

Three quarters, 6,000 so you can attribute 6,000 for the lowering of the churn.

The source of the customers are from all the areas, the fax, it was mostly corporate, and on the voice it's voice, our voice customers now have, are north of 300,000 customers.

On the churn question, as you know we have now three months of the Australian acquisition of Zintel.

Zintel is typical of higher -- higher ARPUs in the $100s, or sometimes in the $1,000s per customer, having them now for a full quarter, the impact on it, and is there anything else -- no?

And the last question was, the Easylink and we like it because OpenText seems to be more or less desperate as Easylink was when it came to pricing.

We are feeling that they are more disciplined like we are.

And I think it's going to be only positive in the market.

We needed a Company that doesn't scramble but wants to give good customer service and wants to keep financial logic and common sense is better for us.

We are not -- so far we don't feel anything and like we're not losing deals or nothing changed.

Great.

Thank you very much.

Mark Murphy, Piper Jaffray.

This is Benjamin for Mark.

I just wanted to ask about the other revenue line item.

It's been a complicated quarter, I think it's been pretty strong around 2% of revenue.

Should we, should we think that this level will continue going forward and is it -- is it mainly a contribution from OEMs?

There are several items there, and Scott will compliment me if I forget something.

There is income that comes from licensing.

It's choppy because once we sign the deal, there is a big payment and then there's ongoing payments, so this is a little bit hard to predict.

There is the licensing that is still going on, but again unpredictable.

We are basically dependent on the speed of shipment of equipment of a third party so we don't control that.

And the other small, smaller things that are really on the rounding error level.

Those are the two primary components.

Right.

And they're, in one case, the shipping of product OEM that's not in our control at all in terms of the timing of that, in the other case, it's a function of how many deals are signed up in a quarter, and the exact nature of the deals.

So I'm always on the cautious side in terms of establishing a run rate for this line item.

We talked about in Q1 it was a bit higher, $1.9 million.

We said in commentary we didn't know exactly what level it would be in Q2.

I actually thought it would be not of the same magnitude and I think we did better in Q2 than our own internal expectations.

But I don't think it's necessarily appropriate to take that and straight line it through the balance of the year.

Okay.

Got it.

I'd have a more conservative approach to it, and if things keep at the level and heartbeat that they are, then, you know, maybe this level is sustainable for the balance of the year.

I see.

Okay.

Thank you.

And can you comment anything on, on the corporate business and I remember I think you said it's around low 20% -- 20% of the total revenue of -- can you comment on that?

As well as any break through into the government sector, if any?

You're correct on the -- on the size of the business.

A little bit north of that.

I think it's 70 --.

It's almost $80 million.

21%, 22%.

Right.

Okay.

Close to $80 million, 22%.

Government is still not significant.

We have, with the government an arrangement that they can under a certain arrangement, pick up small offices of government, and you know nothing big.

So they're still, buying here and there, but nothing of significance.

We don't have any large government customer.

They're slow to move.

You know, they talk the talk, but they don't walk the walk.

They want us all to be green but they're not so much, but hopefully it will pick up.

Okay.

Okay.

And with respect to FX exposure, can you remind us, do you have any exposure to Europe and how much is it?

There's two different levels of exposure.

The answer is yes.

Can I give you the specific?

We have obviously a European business that is both euro and pound denominated, so if I recall correctly --.

It's more pound.

It's more pound, about 7.5%.

7.5%.

7.5%, 8% of total revenues denominated in euros.

Although there are also expenses that are euro denominated so the actual profit would be at a margin not at a -- the revenue level we do not hedge that.

So it does flow with whatever the pound -- euro/dollar exchange rate ratio is.

And then as Kathy mentioned in her script, there are balances kept around the world in a variety of currencies, including the Aussie dollar, the euro, and the yen primarily.

Which based on the functional currencies and the translation back into US dollars we take a non-cash either benefit or hit, based on how much is outstanding, and the exchange rates.

And that you see in other income.

And as Kathy mentioned, it was not -- minus $1 million in Q1.

It swung to positive $400,000 in Q2.

So it was a $1.4 million swing within the context of the two quarters.

Got it.

All right thanks a lot.

I would just comment on that, that as to the latter piece, when we look at budgets and we look at forecasting, unless there's some obvious trend, we generally hold the basket of currencies constant to where they are, at say, the end of a given fiscal quarter.

Although in reality, there will undoubtedly be fluctuations.

Usually though over the course of any 12-month period, they tend to net themselves out.

And Kathy, I don't know if you had any other comments on the FX.

No, in fact, it seems, it seems like the swings were fairly similar last year, about the same period.

We experienced a lot of the same swings Q1 to Q2.

Both unfavorable and then moving to favorability, so it's not uncommon.

Tends to smooth out over a period of time.

Joanna Makris, Mizuho Securities.

So I'm just looking at, you know, the revenue composition of the non-fax business and it looks like on a percentage basis, voice has shown the most acceleration.

So just curious about on the CRM and backup, I know those acquisitions are fairly new.

But maybe you can talk a little bit about what plans you have in place to sort of accelerate, traction and any metrics you can give us on kind of early adoption of those services?

Yes, Joanna.

I would be glad to answer.

So, first of all, on the backup, it is growing in a nice bit rate but small as you can imagine, so while we are happy with the growth, it doesn't move the needle for $350 million plus Company.

On the CRM, I'm not sure if I talked about, I think I talked about this last call, but what we are doing is we are taking the CRM product and we are repositioning it.

First of all, from branding we are calling it a Campaigner Pro and we are now building a product that is basically going to be tying the Campaigner and the Campaigner Pro, so when you basically try to sell a even marketing platform, we're trying to provide A, the voice side which we did not integrate yet but we are planning to integrate, so we will be able to give to any campaign and customer phone numbers that will be dedicated for product or whatever they want.

So when the call comes in, there will be the way to identify what product, what promotion is there.

If we go into the CRMs record for Campaigner, Campaigner Pro, so it will be a one stop shopping that does the email marketing, the lead generation, the contact leads and follow-up to close the deal and the voice side of it.

The size of the CRM is very small.

We are now have launched also simplified versions and other, I cannot tell too much because it is a competitive product, but we are definitely in this investment period.

The revenue there is holding and increasing a little bit, but again the increasing there are tens of thousands of dollars doesn't mean a lot for us, but the main focus is to march through the milestones and we are doing it very well.

Thank you.

There are no further questions.

I'd like to hand the call back over to Mr. Turicchi for closing comments.

Okay.

Thank you very much.

We did have one question that came in by email, it was a question about the DIDs just to remind people.

There was no M&A done during the quarter, both in terms of cash expended or generation of any DIDs or any revenue during the quarter.

As you've heard from the tone of the call, we are building a nice pipeline of both.

Some of the larger situations that we discussed in the context of the offering, but also some mid size, smaller and mid sized deals.

So hopefully you'll be hearing from us over the course of the next two quarters as some of those transactions come to fruition.

We thank you for joining us on this call, we'll be available if you have any additional follow-up questions.

You can continue to email us at the address that we gave you earlier.

And there will be several conferences we'll be participating in after Labor Day for which there will be press releases announcing them.

Thank you.

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

Thank you for your participation.

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