Ziff Davis Inc (ZD) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the j2 Global first quarter earnings conference 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 very much.

Good afternoon and welcome to j2 Global's investor conference call for the first fiscal quarter of 2014.

As was just mentioned, I'm Scott Turicchi, the President of j2 Global and I have with me today, Hemi Zucker, our CEO and Kathy Griggs, our CFO.

As you can see from the release, this has been a very strong quarter for both our Cloud and Media businesses, as well as for the Company as whole, exceeding our expectations.

We will be discussing in greater detail the Q1 results, provide you an update on these two business segments and also give you the details of the current dividend payment, which is raised to $0.27 per share.

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

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

If you have not yet received a copy of the press release, you may access it through our corporate web site at j2global.com/press.

In addition, you can access the webcast also from the site.

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

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

However, at any time you may email questions to us investor@j2global.com.

Before we begin the prepared remarks, I'll read the Safe Harbor language.

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

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

Some of those risks and uncertainties include, but are not limited tot the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, proxy statements and 8-K filings as well as additional risk factors that have been included as part of the slide show for the webcast.

We refer you to discussions in those document regarding the Safe Harbor language, as well as the forward-looking statements.

And now, I'll turn the presentation over to Kathy to discuss the financial results.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

Our revenues for the quarter were $134.1 million, an all time first quarter high, and an increase of 18% versus a year-ago quarter.

Business Cloud Services revenues were $100.8 million, an increase of $10.1 million, 11% versus Q1 2013.

And Digital Media revenues were $33.3 million, an increase of $10.5 million, or 46% versus Q1 2013.

I'm very pleased to say the results on both the Cloud and the Media business each and together exceeded our internal budgeted targets for Q1.

Consolidated EBITDA increased 19% to a Q1 record of $57.3 million, compared to $48.2 million in Q1 last year.

Please refer to Slide 5 in our presentation for our Business Cloud Services, segment financial results.

For Q1 2014, that segment achieved the following results.

Revenue growth versus Q1 2013 of 11.1%, from $90.7 million to $100.8 million.

Non-GAAP gross margin of 81.3%.

Non-GAAP operating margin of 46.5%.

Non-GAAP operating income of $47.2 million.

EBITDA margin of 48.1%.

And EBITDA of $48.8 million.

At the end of Q1 2014, our Cloud segment is performing ahead of budget.

Our cancel rate was at 2.3% for Q1 2014, our best Q1 in the Company's history.

We added approximately 23,000 net paid DIDs this quarter, bringing our total at quarter end to a record 2.26 million DIDs.

ARPU was $12.67 per DID this quarter, versus $12.75 last quarter.

The decrease is primarily due to the growth in our larger corporate accounts and international users.

Moving to Digital Media segment on the same slide, the business achieved the following results.

Revenue growth versus Q1 of 2013 of 46%, or $22.9 million to $33.3 million.

Non-GAAP gross margin of 88.4%.

Non-GAAP operating margin of 22.2%, and operating income of $7.4 million.

EBITDA margin of 25.6% and EBITDA of $8.5 million.

Again at the end of Q1 2014, our Media segment is also performing ahead of budget.

As I've mentioned in the past, due to seasonality, Q1 Digital Media revenues generally represent approximately 1/5 of the annual total for this segment.

Given the timing of the release of the games for new gaming consoles, we achieved a bit stronger than seasonally expected first quarter for our IGN subsidiary and our Digital Media segment as a whole.

Please refer to Slide 23 of the presentation for a recap of our Q1 2014 non-GAAP consolidated operating results, and to the supplemental schedules at the end of the presentation for reconciliation of all non-GAAP financial measures to the nearest GAAP equivalent.

On a consolidated basis, adjusted net income for the quarter was $36.4 million.

Consolidated adjusted growth and operating margins were 83.1% and 40.5% respectively.

For Q1 2014, we achieve adjusted diluted EPS of $0.76 a share, compared to $0.67 in Q1 2013.

A 13% increase driven principally by strong performance in both of our segments.

For Q1 2014, amortization of intangibles on a pre-tax basis for the cloud and media segments were $6.6 million and $3.8 million respectively.

This represents 6.5% of revenues for the Business Cloud Services segment, and 11.4% of revenues for the Digital Media segment.

Consolidated free cash flow for the quarter was $38.4 million representing 29% of revenues, despite decreasing our accounts payable by more than $16 million in the quarter, at which $7.3 million related to the payment of an accrued liability from one of our Digital Media acquisitions from Q1 of 2013.

The seasonality of our Digital Media center generated significant accrued expenses in Q4 that are paid in Q1 of the following year.

Our cash and investment balances were $315 million at March 31, 2014.

DuringQ1 we deployed $52.4 million for acquisitions, and returned $22.4 million to our shareholders and bondholders in the form of interest and dividends.

And today we announced our 12th consecutive quarterly dividend and the 11th consecutive dividend increase.

Specifically, our Board of Directors has approved a dividend payout of $0.27 per share, payable on June 3rd to shareholders as a record as of May 19th.

Since starting our dividend program in 2011, we have increased our quarterly payout by 35% on a cumulative basis.

Inclusive of our June 3rd dividend, we have now returned $130 million to our shareholders, or $2.78 per share, through cash dividend payments.

Gains and losses from fluctuations in foreign currencies were not material to either our Q1 2014, or Q1 2013 results.

Our estimated effective adjusted effective tax rate for Q1 2014 was 27.1%.

We anticipate our fiscal 2014 adjusted effective tax rate to remain between 27% and 29%.

In conclusion, let me remind you that the supplemental schedules at the end of the presentation will provide you with more specifics on our metrics as well as 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 units.

Thank you, Kathy.

And good afternoon, everybody.

Let me start with our Cloud business in Slide 7. I will talk about the growth of our run rate versus the Q's of last year and the year before.

We just added few acquisitions in the months of April and May, therefore I was thinking that the run rate is more reflective of where the business is.

Okay.

Let me start with the facts and bolts, what we call our deep business.

(inaudible) voice are both 4% up versus last year and continue to grow.

The key growth areas for us are the US, Japan, UK corporate, and also Australia.

Our online business, the pick up of business has grown 900%.

Run rate versus the first quarter of 2013.

We crossed the $50 million revenue run rate, and I will discuss about it in our dedicated slides, Slide number 9. We have both grown organically in acquisitions and we are very happy, as we said last time, we are in the fast lane, and we actually passed $60 million.

Hosted email grew 69%, a run rate versus last year quarter.

Last year, as are you remember, we placed our management and then entered the UK market in late 2013.

We enhanced our market position with the last acquisition of (inaudible) critical, our run rate there is $14 million versus $8 million last year.

And we strongly believe that both back up and fuse mail has large opportunity, growth opportunity ahead of us.

Moving to page number eight.

When I will discuss about the globalization of our Cloud and Media business.

Approximately 20% of our total revenue is international.

In the Cloud it is 25%.

Our largest market now outside the US, is the UK.

We achieve run rate exceeding $60 million in the UK, and we grew more than 3.5 X versus last year quarter one.

We employ more than 100 employee in the UK, half of them are in London and I'm planning to spend more time this year than ever before in the UK.

The services that we provide in the UK are our traditional fax, voice, online data, hosted email and media.

Another (inaudible) market internationally for us is Australian, New Zealand as we call it here, A and Z. The run rate is $24 million.

We grew 160% in the past two years.

We have 45 employees in both the Media and the Cloud business in both Australia and New Zealand.

The services that we provide them are fax, voice, online backup, media and we see a lot of opportunity in this part of the world.

Next page is my dedicated page for online backup.

On the online backup, we operate two brims.

One of them is KeepItSafe, dedicated for businesses only.

The other one which is LiveDrive.

It's individual users both business users and private users.

Our current annual revenue run rate there is over $60 million and we are continuing with rapid growth.

2014 actuals are 480% versus Q1 of last year, and 160% versus Q4 of last year.

Our recent Norwegian acquisition expands our global presence to Norway and Sweden, and we are increasing our online backup business into nine countries, when people can back up their system locally.

We believe that we are number one in five of the six countries, in the six countries of the UK, while we are not sure if we are the largest, we definitely know we are a very significant player.

The markets that we are not the largest are the US, Canada and Australia.

We operate services, but we are not the largest.

And we see huge opportunities and potential to grow in those markets.

Let me now talk a little bit about LiveDrive.

We acquired them during Q1.

We have fully integrated the Company except of the accounting system that we are going to integrate in Q2.

Our conversion rate, our retention rates, have improved dramatically since the acquisition.

We are very pleased with this acquisition.

We see another additional outside opportunity in those markets with LiveDrive, with more relationships, more product and better distribution opportunities.

Let me go to page 10.

My favorite slide about our churn rate.

Our churn rate in Q1 continued to improve.

It is now down to 2.34%.

This is the churn rate that is a bit higher than Q4, but always Q1 is higher because many of our corporate accounts, the contrast (inaudible), the net additives, but they also cancel some.

And this is what is reflected here.

Next, I will talk about our digital media.

Let's go to page 12.

As you heard before from Kathy, our media business did very well, and exceeded our expectations for the first quarter.

We are measuring both business and page views in our web site.

Our visits grew by 57% year-over-year to 594 million and our page views grew even more by 62%.

And we serve 2 billion pages, page views in the first quarter.

IGN launched new Android app in March.

And even though it was just launched in March, we already have 3 1/2 million downloads to date in both Android and IOS.

For the month of March, IGN apps represent 43% of the IGN mobile traffic and this is 17% of the total traffic of IGN.

We have $1 million downloads of the IGN dedicated to the Sony Play Station, which is 14% of the PS4 shipments.

We know that people download over time, so 14% at this stage is number one in the category.

We have five-star rating out of 9,300 users.

Next, page 13.

Our PCMagazine web site is redesigned to improve usability engagement and other traffic environment.

AskMen has reached a record under our management of $162 million.

It is the strongest month since we acquired them.

And last but not least, AskMen Germany has a new launch of new product, or new service in Germany, the first month for our international platform under the AskMen.

Let me pass it to Scott now.

Thank you, Hemi.

And very briefly, before we turn it over for questions, I'd just like to reaffirm the financial outlook for fiscal 2014, which can be found on Slide 15, to remind you that is for aggregate revenues of between $580 million and $600 million, and adjusted non-GAAP EPS of between $3.23 and $3.47 per share.

And then, as I mentioned at the beginning of the call, the Board approved a dividend payment for shareholders of record on May 19th , with an actual payment date on June the 3rd.

The rate is $0.27 per share.

A three quarter of a cent raise from the dividend paid a quarter ago.

From a corporate standpoint, that will be approximately $12 million in cash.

And is a dividend increase it's 12.5% from the dividend paid in the year-ago period.

And then, as Kathy has mentioned, beginning on Slide 17 and following, are a variety of schedules dealing with the metrics for the individual pieces of the business, meaning the Cloud versus the Media, as well as j2 consolidated.

And a number of reconciliation schedules that will give you the nearest GAAP alternative to the various non-GAAP presentation that has been put forth here.

And, at this time I would ask the operator to come back and to instruct you how to queue for questions.

(Operator Instructions).

Our first question comes from Shyam Patil, from Wedbush Securities.

A couple questions.

First, on the Digital Media business, at a high level can you talk about the synergies and benefits you've been able to derive from the acquisitions, particularly the ones following (inaudible) and your level of confidence on being able to hit your 20%, five-year total rate?

Sure.

Well, I think the best way to look at that, from a financial standpoint, is if you look at the performance of the business top and bottom line in Q1 of 2014, versus Q1 of 2013 and the core assets were basically in the businesses in both periods, only IGN was missing the month of January and 2013 and that's a relatively immaterial month if you look at the 12 months as whole.

So on a year-over-year basis, the revenues increased by $10.5 million, and I think the real thing to look through is the flow through of that revenue to EBITDA in the media segment, which was 50%.

So, when you look at that, if you look at what we've been saying ever since entering the Media business, you'll recall there's a few key elements to it.

Number one was being able to get into the space and build it to some degree of scale.

Because with scale comes improved margins.

And this marginal flow-through analysis that you can see in the five quarters that we've owned the business is, in fact, producing.

So I think that's one key element.

The other is to stick to content providers or content that leads to decision making.

So what we're doing in both the tech and games in particular is review oriented content that leads to a purchase decision.

So as we have amalgamated the four businesses over the last 14, 15 months, there's been a combination of cost synergies, but there's also been the ability to generate some revenue enhancements, because of the nature of the games and the tech business and the fact that these are all leading to purchase decisions.

So what we've been seeing internally for a while, what you're now starting to see externally as we report, is that the thesis of getting into the space and deploying our capital and making our return only goes up, our degree of confidence only goes up, as we move forward.

We saw this earlier on but it wasn't so demonstrable to the marketplace.

Because as you know, for about six months last year, we had internal work to be done, particularly at IGN, to get the cost structure in the right place.

And then, to turn our attention how to get greater productivity out of the traffic.

I wouldn't say the latter is completely done.

But certainly Q1 is very good emphasis that is moving in the right direction.

Great.

Maybe as sort of a follow-up, there are questions just around the organic growth rate after the recent 10-K filing.

Can you maybe talk philosophically how you think about organic versus inorganic growth and how you guys have been able to drive value, or create value, from inorganic from acquisitions essentially over time?

Our whole thesis is really about the return on invested capital.

Whether that capital is invested in activity that some people deem organic, or whether they're invested in M&A activity, that's the key driver of how we think about our businesses.

It doesn't matter whether it's the intellectual property business, the Cloud subscription business, or the Media business.

So, for those that have been around j2 for some period of time, you'll know that on the Cloud side of the business, the way we have done that on a organic method is to put certain limits in place on the sales and marketing.

And to not be "as aggressive in our sales and marketing" in terms of the percentages of its revenues that we spend to drive additional future growth, relative to many other Cloud-based companies, who are spending twice as much on a percentage basis of their revenues in sales and marketing.

We spend between 16.5% and 18%, depending on the quarter.

Q1 is generally a little heavier, Q4 is generally the lightest.

And then, we look for opportunities to deploy either borrowed capital.

or internally generated funds by buying books of business or by buying companies.

And that is the whole philosophical model of j2.

And that's what I tell people all the time.

We don't get into a lot of distinctions between organic growth and inorganic growth.

The question for us is, how much of our capital can we put to word in a given period, quarter or year.

What is the cost of our marginal capital to get access to more, if either we want to do it perspectively or in conjunction with a larger transaction.

And then, when we bring that asset in to j2, which of the various models does it fit for how we're going to extract value.

There's the direct synergy model, where we bring a customer base in.

And a lot of the costs that do not follow and, therefore, there tends to be very quick payback.

Because we put the customer base onto our platform.

We use our employees.

And we get synergies that way and get very high EBITDA margins.

There is an alternative model, though, that we have used in going into a new segment like Ziff Davis, where the initial transaction is designed to get us into the space with a meaningful asset, where brands are appropriate and necessary with good brands, as well as key management, and then be able to leverage that with follow-on deals to be able to make good return on the aggregate amount of invested capital.

There are other derivatives that we use for international and intellectual properties.

But there's four, five different core play books that we use when we look at how we're going to be exporting our capital and spending it.

But that's really the key for us.

It's all about the return on the capital that we are intending to deploy.

And while we're talking about the mix of organic acquisitions, we do follow up on it.

And all of our businesses are growing organically, either by just signing new customers, and also by improving the assets that we acquired.

So j2 continues to grow organically as well.

Just as Scott said, there's a cost of capital deployed in organic versus acquisition and we are happy to do both based on our metrics.

Thank you.

That was very helpful.

Just one last one.

Free cash flow.

I know you don't guide to this metric.

But how are you thinking about just free cash flow for the year?

Well, as Kathy mentioned, really the free cash flow was $38 million.

We look at it as $45 million in the quarter, because $7 million of it related to a deal of a year ago on the accounting of how that was paid for.

It was paid in cash.

But how that was paid for was not treated below the line from a free cash flow perspective.

And as you can see from last year, the flow of the cash flows over the four quarters, it will be up relative to last year.

I think even in light of the fact that Q2 was unusually strong, because of the settlement and the cash collections, that we had, with respect to the intellectual property portfolio.

Great.

Thank you.

Remember, there was a $27 million payment that flowed in to free cash flow in Q2 of last year.

And about $12.5 million of that related to prior year's damages, which flowed through in terms of revenue and EBITDA.

Great.

Thank you.

Congrats again.

Thank you.

Our next question comes from Daniel Ives, with FBR Capital Markets.

Please, proceed with your question.

Thanks.

I feel like a tape recorder saying this but, solid quarter, yet again.

Thank you.

In terms of acquisitions, obviously the Media acquisition is really starting to pan out.

But in terms of Cloud, and maybe Hemi can start, and then Scott.

Are you sort of broadening out the thought process in terms of cloud acquisitions, just given where the platform is going, in terms of scale and scope?

Absolutely.

(inaudible) to mentioned that also we have launched our mobile service.

And we start selling it.

We had several sales with one customer buying 2,000 units.

And we are expanding into the Cloud by further acquisition.

We have a healthy pipeline.

You know, last quarter I said $40 million planning to reach (inaudible) this quarter we actually passed $60 million.

But conservatively I saw it's passed.

And I believe that next quarter I will be able to say approaching $60 million.

So we are growing it in many ways.

A, by acquisitions and B, adding product and, C, by selling more services.

The back up in the Cloud sounds kind of simplistic.

But there are many features there.

The more customers are getting used to it, they want to buy what I would call the better insurance.

And we have all.

Everything that they need to get into the product.

I'm not sure, Danny, if I answered you.

Do you want to follow up with more specific questions?

No.

It's good.

Good.

Scott, are you starting to see a different dialogue in terms of targets?

I mean, the usual guys that (inaudible) when they think they're going to take over the world and then a year later they're calling you guys.

Yes.

Sometimes it takes a little longer than a year.

Yes.

That's true.

Also, you know, there's a lot in the psychology behind of what's going on in the market itself.

So, quite frankly, the volatility that we're seeing in the stock market right now.

And the way certain firms have been treated on the downside, is a good thing.

When everything is going north and the Dow is hitting and the S&P and the NASDAQ are either at, or near, all-time highs, that comment that you just made, whether the Company is already publicly traded or whether they are not yet publicly traded but hoping to go public.

Or they are nice people that canceled.

Right.

All of those dynamics for the way our model works, will put a lot more pressure to do medium to larger sized transactions.

And that's why you'll recall over the last eight or nine months, beginning in the middle of last year, we talked about a lot of our attention, M&A wise, became focused outside the United States.

And it's not a coincidence that we are doing deals now in Norway, the UK, Australia.

That's by design.

Because what we have found is that things were just too expensive domestically in the United States.

And we could not justify it.

We couldn't justify where either things were trading or where people thought they should be trading, if they were not public.

So, we go to other parts of the world.

Obviously the volatility has been in the very recent past.

So I think it's a little bit too early to extrapolate and say three of four weeks of volatility means that the pipeline in the United States will come gushing in.

But this kind of tone from an M&A standpoint for us, is a very bullish sign.

If you take the top brand names in storage, in syncing, like drop box and the list of the four, five other of them, some of them are already contacting us.

Most everybody is running up to the top and we are sitting here finalizing and refining the business model that makes money and waiting for the right opportunities.

Meanwhile, we are growing in our mobile product as a leader.

From Beta we moved to serve thousands of them in the last week.

It's really big.

It's a good place to be.

Thanks, guys.

Congrats.

Thank you.

Our next question comes from James Breen with William Blair & Company.

Please proceed with your question.

Thanks.

Just a couple questions.

Just on the pay view side.

Seems like you're seeing robust growth there.

I'm wondering if you think this is sustainable.

And then, just provide any upside to any advertising rates that you charge for the page views.

And then, secondly, can you give us an idea of what organic growth was around the Cloud segment?

Thanks.

Yes.

So regarding the page views.

The page views are not born or equal.

Some of them we are selling directly our inventory.

And sometimes we sell other inventories.

And in the last quarter, we saw more of our inventory that usually the mix is.

So the page view, the per-page view net contributions, the bottom line improved.

And what was the other question?

The organic on the Cloud.

I just mentioned organic growth on the backup.

We have seen also organic growth everywhere.

All of our product are growing organically.

So there's no one that I can specify out.

And needless to say, the facts is more mature.

The voices are more mature.

Bigger base.

Percentage is lower.

And (inaudible) we are seeing very good numbers.

Very good numbers on our refuse mail, and amazing numbers on our backup.

I think orders of magnitude are about half-and-half.

Okay.

How about the Media side?

What's it look like in terms of organic growth in Media?

Higher.

Higher.

And as we said --

It's a double digit.

Yeah.

It's solid double digit.

Kathy just mentioned.

You know, we have done our-- you know, we do budget and then we do a mid and up range of our outlook.

And then we watch every quarter.

Our Q1 was significantly higher than it was with our outlook.

For j2, as you know, we don't update the year-end number unless it's --

Clearly north.

Yes.

But we are very comfortable and very confident towards where we'll end out the year.

Q1 was a very positive surprise for us.

Great.

Thank you.

You're welcome.

(Operator Instructions).

Our next question comes from Ryan MacDonald, with Northland Securities.

Please, proceed with your question.

Hi, everybody.

Great quarter.

Thanks for taking my questions.

In the Digital Media segment, obviously you were sort of expecting Q1 to be stronger.

Based off the strong quarter you've had, how does that affect what your thoughts are for the remainder of the year?

Do you think this is something that continues into second and third quarter, in terms of being better than expected?

I mean, is this a full year we're gaining, where IGN will benefit from these new gaming consoles coming out and everything around that?

Ryan, I think you said we expected it to be strong.

We expect actually to be lower, just surprised us.

Because the way our Media is, not all of the quarters have equal.

Like the first quarter in Media is significantly stronger (inaudible) seasonality.

So the seasonality that we originally planned for Q1 was lower and it kept up stronger.

We knew that the gains would be launched in Q1.

But still, it so past our expectations.

So there was big demand, and we were able to sell more of our own inventory, which basically gives us higher margins.

I'd like to add two things.

So, yes, I think in terms of IGN benefiting from the console and the game phenomenon, it will have a full-year impact, although it will probably wane the farther you go out from where we sit in real time.

And the other comment I want to make, is that Q4 will still be the most important of the four fiscal quarters for Media this year.

So even though relative to what we said a quarter ago, it might be at the mid-point or even a little bit higher than the mid-point of the band that we gave, Q4 is still going to be a very material quarter and still drive a lot of the total EBITDA for the year.

And, you know, the --

I want to say that because I think it's important for particularly the analysts and anybody who is building a model to remember that.

Because last year there was some confusion as to how to spread the revenues and the EBITDA over the fourth quarter.

Just remember last year half the EBITDA for the whole business in Media occurred in Q4.

There's that much leverage in were primarily-- The cost structure is primarily the people and the business.

When you get that lift of revenue from Q3 to Q4, you get it even better marginal flow through to EBITDA that we just experience from Q1 of 2013 to Q1 of 2014.

Which was 50%.

And, Ryan, you know the driver on IGN is first the new consoles.

But then the real money is not from the consoles, from the new games, and many of the popular games are just working on the new versions.

So once the new versions of all of the games will come, we expect even more growth in the IGN part of the business.

So we are very optimistic about it.

Okay.

Thanks for the clarification there.

And then, you know, you talked about in your prepared remarks about the backup business and how there is huge opportunities for growth I believe in the US, Canada and Australia.

Is that something that you feel that you already have the infrastructure in place and that will be just done with the existing brands that you already have, or is this something that you are looking for additional M&A in those specific regions?

Our M&As are not geared toward a systems software know-how.

They're mostly geared-- So we have systems that we are very pleased with.

We have the system that is for the LiveDrive, which, by the way, some of our larger customers are US customers.

And we have the (inaudible) for KeepItSafe, which actually within it is built of several platforms but they are all from the customers standpoint, they are merged into one.

We have the platform, but we are trying to buy.

Most of the time we are buying our businesses that are using similar platforms, but didn't come to the growth and the ability and they're fading behind in their ability to provide all of the area services.

So we buy what they have.

And we add it to our business.

So basically, we are less looking for technology and we are more looking for customer base.

And again, when we buy the customer base, most of them don't have all the features.

We say, hey customer, we can add to you whatever you have already.

This and that feature.

Mobile feature.

And as I said, you just saw last week one customer took 2,000 tablets and smartphones and added it.

They were a customer before.

Nobody could offer them the service.

And, you know, we offer those at $10 each.

So it's a lot of money.

Okay.

(inaudible) unit.

And then just finally, my last question.

I don't want to start to sound like a broken record.

I think you touched on it a little bit before.

Is there any update in your thoughts of the position you're holding with Carbonite, and just that area of the business?

It's an investment we hold.

We've held it for 18 months.

We have a 13d on file that the language hasn't changed.

So it says that we're interested in acquiring the Company at a price of $10.50 a share.

They're trading slightly below that right now.

So not much of a premium in terms of our stated purchase price of interest, relative to where they're trading.

And our view, like we've said, or has been intimated on other conversations, is really to be very patient.

What we may do with the position in the future will obviously in part be a function of their performance, their stock price, and we'll let you know when we make those decisions.

And as I said last time, we're not sitting and waiting.

We grew in one quarter like $12 million, $15 million of revenue.

We're growing faster than they do in absolute dollar size and in percentages for sure, because we have a smaller base.

And we're focused on business.

So we are not waiting.

We are running our own business independent of that.

Okay.

Great.

Thank you very much.

Our next question comes from Greg Burns, with Sidoti & Company.

Please, proceed with your question.

Good afternoon.

Looks like you're reporting Cloud business customers in the average revenue for those customers now.

I think that's something new.

What are the puts and takes of the average revenue for a Cloud customer, and how does that evolve going forward, given the different growing components of the business?

Should we expect any material changes in that metric?

Well, let me address that.

On Slide 21, which is what you're referring to, and you heard us talk about for some period of time, that the historic metrics, which are on page 19 for the Cloud and our DID base, in our judgment have been sufficient to the describe the overall Cloud business.

But we also stated there probably would come a time when those metrics would not be sufficient to describe the total business, because the non-DID based services, so, the email businesses, email marketing and core hosted email, as well as the Online Backup, were totally excluded from the metrics.

So, what Slide 21 doing, is introducing for the non-DID based business, the addition of those accounts, the customers in those accounts for the non-DID based business, and adding them to the DID based metrics that you see on Slide 19, to create the Cloud customer base metrics.

We actually believe these are the right metrics on a going forward basis to look at the business because it will encompass the Cloud business as a whole.

And the way that these metrics are constructed, it not only can accommodate all of the Cloud services we offer today, but other Cloud services that we may have perspectively in the future, either that we acquire or internally develop.

Now, I would draw your attention, that if you look on Slide 21 towards the bottom, the ARPU has been actually relatively stable over these 13 quarters presented, of $13.75, sometimes $14.

You will see movement in that ARPU, based upon the same things that drives the movement in the DID based ARPU.

Which is, larger customers, depending upon how they buy, they get discounts, may bias that down a little bit.

The smaller customers tend to bias it up.

The mix of the small relative to the large will be influential to the average ARPU.

You'll also notice the cancel rate tracks very closely as well to the DID based metrics.

Because, remember, the DID base business is still eighty some percent of the total Cloud business.

So, I think in the near term--

In units.

In units.

I think in the near term, we would expect continued growth albeit maybe a little bit more lumpy than in just purely the DID business, in terms of total customers, because in the online Backup, they can come in big chunks and so that can cause some spikes in the numbers from quarter-to-quarter.

LiveDrive certainly influenced that in Q1 of 2014.

But I think the other dynamics in terms of the ARPU, if the relative mix of what's been going on, obviously we've had a dramatic increase in the Online Backup component.

It's been the most important growth component in the non-DID-based piece of the business for the period these metrics are presented.

But you'll notice the ARPU has been stable.

So if you go back to Q1 of 2011, basically online backup was nonexistent.

It didn't exist.

And on the Online Backup, we count actually accounts versus units.

Even though in many times we do know the units.

It is very complex because there can be one employee that has three, and one employee that has none.

And we have the one customer that has almost 1 million units and we count them as one.

So, it's kind of tricky.

So we decided there to go and count accounts versus units, because the units in the backup are usually judged by how much data they have.

Not so much by how many units.

So, you know, one server can be bigger than the rest of the Company.

If you understand what I'm saying.

Okay.

All right.

Thank you.

You're welcome.

There are no further questions in queue at this time.

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

Okay.

Thank you very much.

We appreciate your attention today to listen to the results for the Q1 fiscal 2014.

And we would remind you that over the next several weeks we'll be on the road participating in various conferences around the country, as well as involved in non-deal (inaudible) activity to answer further questions.

If you have other questions, please free to either email or call.

And then we would look to have our next scheduled earnings call sometime in early August.

Thank you.

Thank you.

Bye-bye.

This concludes today's tele- conference.

You may disconnect your lines at this time, and thank you for your participation.