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j2 Global Communications, Inc. (NASDAQ:JCOM)

Q4 2008 Earnings Call Transcript

February 19, 2009 at 5:00 pm ET

Executives

Scott Turicchi - President

Kathleen M. Griggs - Chief Financial Officer

Nehemia Zucker - Chief Executive Officer

Analysts

David Eller - Raymond James

Corey Tobin - William Blair & Company, LLC

Analyst for Youssef Squali - Jefferies & Company

Analyst for Michael Latimore - Northland Securities

Daniel Ives - Friedman, Billings, Ramsey & Co.

Bradley Whitt - Broadpoint AmTech

Operator

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications fourth quarter and year-end result 2008 conference call. Joining is toady is Mr. Scott Turicchi, President of j2 Global Communications. Mr. Hemi Zucker, Chief Executive Officer and Ms. Kathy Griggs, Chief Financial Officer. (Operator instructions)

And now it is my pleasure to introduce your host Mr. Scott Turicchi. Mr. Turicchi you may begin.

Scott Turicchi

Thank you. Good afternoon and welcome to j2 Global investor conference call for Q4 2008. As the operator just mentioned, I'm Scott Turicchi, President of j2 Global and with me today is Hemi Zucker, Chief Executive Officer, and Kathy Griggs, our Chief Financial Officer.

On this call we will be discussing our Q4 financial results as well as providing an update on operation and an out look for fiscal 2009. The IR presentation will be use for today’s call. A copy of that is available at our web site but it is also available for download so that you can have your own copy and see it in a larger format. In addition there was also separate file with all of our metrics. If you have not received a copy of the press release you may access it through the corporate web site at www.j2global.com/press. In addition you will be able to access the full webcast on this site.

After completing this formal presentation, we will be conducting a question and answer session at that time the operator will instruct you regarding the procedures for asking a question. In addition, at any time you may e-mail questions to us at investor@j2global.com.

Before we begin our formal 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 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 slideshow for the webcast. We refer you to discussions of those documents regarding the Safe Harbor language as well as forward-looking statements.

As reported in our press release we are very pleased with the operational results for Q4, and for all of fiscal 2008 especially in light of the significant deterioration in the economy in the latter part of the year. Our focus this past year, as we stated almost a year ago was to put our energy in the areas that we knew we could influence. Those included margin enhancements, profitable organic revenue growth and the deployment of our cash balances and free cash flow in the higher yielding assets and investments. Kathy then will provide you with financial details for the quarter and our analysis in each of the business segments. I will return a little later to discuss our fiscal 2009 guidance.

At this time I will now turn the presentation over to Kathy

Kathy Griggs

Thank you, Scott. Good afternoon, ladies and gentlemen. I'd like you to please refer to Slide 9 in the presentation on the website for a recap of our Q4 and full year GAAP-based results. I am pleased to announce that annual revenue improved to $ 221 million to $242 million a 9% increase or $21 million increase. We were able to continue our double digit growth trends for subscription revenue which improved 11.5 % from $212 million to $237 million.

Total Q4 revenues increased to $60.6 million compared to $56.8 million in 2007 and this is an increase of 7% or over $ 4 million. Our subscription revenue grew 8% of $4.2 million and a continued strength and with that continued strength in U.S. dollar compared to the euro and pound within the quarter continues to have an average revenue impact for approximately $600-K. Throughout 2008, we continue to focus on efficiency and increasing our growth and operating margins. Our success is reflecting in our financial results. Our margins have suddenly improved throughout the year. In Q4 our gap gross margin reaches 81.5% which is 1.9 percentage point higher than a year ago.

We are also pleased to announce that our GAAP operating margins are also AT an all time high increasing by almost 6 percentage points for 37.3% in Q4 of 2007 to 43.2% in Q4 of 2008. This quarter’s selling expense was 15% of revenue, R&D with 4.7% of revenue and G&A with 17.6% of revenues.

For 2009 we plan to continue our effort to improved operating for efficiency and continue to provide extra product and guidance services to our customers. At the end of November we acquired 2 U.S. based companies Mijanda and MailWise. Mijanda fax and voice, MailWise email related products which brought our 2008 total acquisition to four. Our guidance is Q4 GAAP EPS up to $0.45 per share within an improvement of $0.11 or 32% for Q4 of 2007.

Our Q4 2008 tax rate was lower than our normal due primarily to the reinstatement of the Federal R&D tax credits for the full fiscal year which occurred during the year. So we are EPS as the $0.58 per share and in 2008 we are able to successfully meet our guidance about revenue and exceed the top end of the range for EPS.

We are now focusing on our non-GAAP EPS, we will need to adjust the [1.3 hours] of $2 million, pre tax of $1.4 million after tax. The after tax impact of 1.2 is approximately $0.03 to $0.04 per diluted share excluding 123 hours sales our non-GAAP EPS was $0.49 a share. Our 10-K in our press release were able to provide additional details in expense category.

Moving on to the balance sheet in 2008, we provided our investment equity of 29%. If you move to slide 19 the presentation you will see a summary of our quarterly free cash flow. Free cash flow for the quarter was $25.4 million and $88.2 million for the year. This is a new annual record for j2. During the year, we reported over $151 million in cash to re-purchase our top and for our applications.

There are several slides at the end of the presentation that includes j2 metrics for 8 rolling quarters at 2 fiscal years as well as our free cash flow calculation and other schedules.

Now I will turn the call over to Hemi who will provide you on operational view of 2008 and a 2009 outlook.

Hemi Zucker

Thank you very much Kathy.

Thank you everybody for joining us for our 2008 annual earnings call. Today, I will discuss both our 2008 results and also provide outlook for 2009. During our fourth quarter we have ended with 37,000 new user. As we speak now, we are approaching close to a million paying customers which is a big achievement for j2. Lets go into 2008 and review it at page 11.Our tax rate have increased to approximately 1, 050, 000 customers and we have ended the year with also 190, 000 voice bits together approaching 1.4 million customers or DAD since we refer to them in the othe presentation.

During 2008 we have been successful in launching multiple pricing programs and as you know we serve multiple brands, in multiple countries, multiple currencies and all these four our called coordinated well and we are able to served customers in each market in an optimized way. We have headed and extended our network to include 46 countries, to the business of our believe that there is no other company that served such a large that provide coverage of the site.

We have added this years Croatia, South Africa, Slovenia, Cyprus, and Czech Republic. During the fourth quarter as mentioned before we have acquired Mijanda, Mijanda have multiple brands and as well as small customer base. As we talk now we are working and integrating Mijanda and the brands that we select to keep and the most well-known brand of Mijanda is Smart Fax. During 2008, we have seen strong corporate sales. We actually had 23 wins in 2008 and alright 24 even better and if you look into our supplemental information we have done four of them in the first quarter then five, six, and eight in the last quarter.

During 2008, we have perfected and continue to work on our approach. Our RI base approach to our advertising contains most of them have been done so that excellent management and discipline of our marketing team together with our financial input. Our growth during this year was 172,000 customers. This was done despite to the headwinds that we have in usage, in retention, and if the economy deteriorate as we are seeing again our supplemental churn rate have been in the first quarter to 2.8%, second quarter 2.93%, and 3.1% during the first quarter despite all of that it is 172,000 in new net customers.

As you know, we have a nice portion of our revenue coming from our foreign currency. The strength of the US dollar held our international revenues mostly in Q3 and Q4 and we believe that in ’09 it will continue.

Let me move now to our 2009 outlook. We believe that we will continue to leverage j2 advantage when it comes to corporate customers. Those customers today more than ever are seeking established, profitable, trusted and well capitalized providers. They no longer can tolerate a weak player. We at j2 provide all of the above and then we also provide redundancies, disaster recovery center, multiple flavor of security, and the list goes on and on and we are very proud with our achievement there.

For 2009, we are going to increase our focus on top European countries and especially in Canada through our multiple currency, multiple pricing. We are able to serve those markets in very attractive and competitive pricing. We have made significant investment over the years especially in 2008 that we have completed a large investment in our data warehouse. We are analyzing a lot of pieces of information both with our tool system and mostly with our people; and for 2009 our marketing teams are going to implement [core corp] secretive way to even better target and find and get there, I would say, multidimensional ROI approach to get more customers for less money and drive into the bottom line.

We have also launched some new fax and other features in ’08. We started with fax indexing. We did a test. The test was successful delivering now to launch it across our entire eFax base, other features and potential additions will be announced if we launch them. We believe that in 2009, the economy will yield additional lighter than average usage, while I cannot predict exactly. We thought it is prudent to assume that the economy will continue to be weak resulting in less fax in voice activity. We are continuing to focus on our M&A. We are currently working on a very actively late stage deals.

Let us turn to Page 12. We talked about our voice services. Our voice services were the major success during 2009. We have more than doubled our base from 80,000 to 190,000 users. As you can see, today, approximately 1/12 of our customers are voice users and they provide approximately 1/10 of our revenue and growing.

During 2008, we launched a receptionist, which is our voice service for international markets. We deployed it in some European countries. We have added speech to text in the US, a highly recommended service. Those who use it will find it addictive and especially in the current environment and people who use PDAs. It is a great service and a highly recommended. We will continue to do it in 2009.

We have increased our telesales staff and extended our customer support both in Dubois and on the fax services. We have continued to do cross selling to our fax customers in 2008 and we have acquired our largest voice acquisition as well as our largest acquisition during 2008 for people.

For 2009, we are planning to extend our marketing leadership both organically and with our M&A growth. The market faces competitive and there are many opportunities for us. We will continue to refine the user experience and the value proposition. Those voice services as we are selling have been around for many, many years. It is an art to sale them and to take expand and I am very pleased with the success that we and other competitors in the industry are provided validated this product.

For 2009, we are planning to do one click funding between our fax and voice customers. Today, those customers are being approached by us but we have to have them and if not fully automated, we will work on that. We have 50 additional on services, cannot talk too much about them but our voice team has some very creative ideas. It went to refine our strategy for 2009. We are going to do better positioning. As you know, we are operating in the US with three brands; Phone People, eVoice and Onebox. Each of them is served in different market. It went to continue better position them.

Internationally, as we said, we are offering service in 16 to 20 countries around the world, but all of the services are offered in English. So, US, Canada, Ireland and UK, for 2009, we are going to localize our website, localize the user interface, launch foreign currency and better leverage our assets in Europe to introducing services. Potentially, we will also introduce a new exciting service that fits the era. Free service when the customer gets it for free and we make money. It is about regarding voice.

Let us go to the next page, Page 13, in our other businesses. I am very pleased to say that our email company, Electric Mail, which is in Vancouver have acquired last year a company called Mail Wise. Mail Wise is a highly provider or in a layman term, it is a company that provides the virus and [spam tutoring].

It is the first time that our Electric Mail Company is doing any integration, as you know, we have experienced in fax integration, voice integration, as far as email, it is the first time that they are doing it. I am very pleased to say that the integration is moving very well ahead of program and also because those customers come from Mail Wise and with us only virus and [spam tutoring]. We are offering them all of the other services of Electric Mail that accrued them on other email as well as archiving etc, etc.

We are hoping and we have seen already a beginning of success before selling to those customers. We are currently evaluating some additional many opportunities on the email sector and when they will happen we will be very happy to share the information with you.

Another segment of our other businesses is our patents. Some of our most strong patents are out of re-exam. As you know, we have 57 patents and we are actively looking to acquire more. Some of our strongest patents are out of re-exam and I am sure that you will hear more about if we will launch new licensing program 2009.

Last but not the least our advertising in broadcaster. As you know, we have a small segment of our business approximately 2% of our revenue that is derived from fax broadcast and service and advertising to our free and paid customers mostly email and banners. The market is very soft. The weakening economy creates a situation when advertiser wants to pay much less and get much more. The bad news for us is that we have less advertising revenue. The good news is it is a very small segment of our business and because we are large buyer of advertising, we are able to leverage it to acquire and we will do even stronger effort in 2009 to acquire more customers for less money and continue to improve our margins related to this significant cost of ours.

Next page, Page 14, the j2 operation success. The j2 team performed very well in 2008 and we will do even better in 2009. We are lucky that we have started to adjust our organization to the weak, bad economy already in the second quarter 2007, and the results are showing and let me take you through that.

In 2008, we have achieved revenue within our range and our EPS is above the range. I am very happy to also talk about our cost structure. We have done an amazing job and I want to thank here for all our employees in reducing costs across the Board. Our revenue grew 9.4% while our employee base kept flat at around 400 employees. As a matter of fact, since we were using and we are still using outsource services and we were able to reduce those, the effort is paying even more. We have increased our operational efficiencies, not only during the fourth quarter but for the year. We have new program for 2009. We have improved our gross margins from 79.6% last year to 81.5%. We improved our operating margins from 37.3% to 43.2%. This is an improvement of 5.9% and if you have a calculator here, we have freed up through this activity more than $40 million through those efforts.

Year 2008, we have done a very good job with our cash. We deployed into acquisition and stock buyback. As I said before, we bought four companies across multi services. For 2009, we will continue to enhance and extend our operational excellence. We have an active pipeline of M&A opportunities and we will leverage our acquisition and integration expertise. So that you know, j2 has acquired so far 21 companies and we have developed the skill that can meet the expectations of the seller of hundreds of companies with hundreds of entrepreneurs in multiple countries, multiple spaces that we keep in touch with and when decided they are looking for an exit opportunity and they want somebody to come with hard cash. They can meet us, we are sure footed. We know how to minimize the questions, how to quickly dive into efficient due diligence and we have provided for those smart people out of the entrepreneurs, quick and nice exit. We will hope to continue do more of it this year, leverage our talent pool across the Company.

For 2009, I said before, we are working even more than 50 advertising programs and we continue to prudently manage our capital expenditures. Let me now pass the call to Scott.

R. Scott Turicchi

Thank you, Hemi and Kathy. Now, I would like to address the outlook or guidance of 2009.

Turning your attention to Page 16, in the past, we have normally not commented or dealt in great deal to the assumption underlying our plan, specifically as it relates to the economy but my feeling was this year given that things have changed and are changing very rapidly. It was important to understand our thinking behind some of these macro variables as well as how they might influence or impact both are thinking of the business as well as some of our own metrics.

So, if we start with the economy as a broad concept, we are believers that 2009 as a whole will be worse than 2008. Specifically, there will be four quarters of GDP contraction that this is not limited to the US but is in fact to global that there will be increasing unemployment and that most importantly the bottom has not been reached, and so this is the mindset with which we developed our plan for 2009.

I would highlight that j2 because we are subscription based business and because of how we think of the business, we are flexible to the extent that hopefully we were wrong on some of these assumptions. We could take actions that we might do in better times like 2006 and 2007 that we are not currently contemplating as being realistic for 2009.

As Hemi and Kathy noted, we believe US dollar will continue also to remain strong against the British pound and euro which is where the bulk of our foreign revenues come from, so that will prevent some headwind, as Kathy mentioned, it was 600 grand in the recently completed quarter. What does this mean operationally? Well as you have heard, continue to focus on the things that we can influence and control, which is our cost structure, optimizing our margins and operating cash flow. Most likely because of the economic assumption, there will be continued decrease in usage revenue and some modest increase in the cancel rate or if you will a decrease in the retention rates.

As we have seen over the last year or two, we believe there will be a continuing shift in mix of the DID sold primarily into the areas of corporate, voice and secondary fax brands which I would remind you all have a lower monthly revenue RPU than does the Company as a whole.

Next is, as Hemi mentioned, as the patterns have come out of re-exam, this will allow us to put more time, effort and money behind intellectual property programs. Some of that you will probably see a little later in the year come through as an amortization expense through our G&A, and then as we demonstrated really over the last several years, continue to focus to deploy our cash and higher yielding investments, last year we did it through a combination of M&A and stock buybacks. We will look at each of those as well as other opportunities to have at least the portion of our cash in yielding more than it does now which is very de minimis given the falling interest rate environment.

Clearly, our preference in this area is for M&A, as we believe those are not only be at the highest end of the range in financial return but they also allow us to build the business in terms of customer, employee talent, and in some instances additional technology and services.

Given the interest rates have fallen, we have invested very conservatively to keep the money. We will probably have lower other income even the if the cash balances do rise over the course of the year, modestly higher share count and probably an increase in the 123R expense for those that are tracking the GAAP number. The reason for that is they will be probably hopefully be a grant at some point during this year, as the five-year block grant that was done in 2005 is becoming substantially vested this year, and we should have the CapEx rate in the 30% to 31% range. All of that rolls up to a modest increase in the revenues to remind you that is 241.5 from 2008 and a non-GAAP EPS was about 70.

As Kathy mentioned earlier, behind his slide there are the metric slides which you are familiar with on Slide 18, giving you the eight quarters then the two fiscal years of rolling metric. The reconciliation of free cash flow and then finally our Slide 20, the usage of credit sensitive customers versus all other for now eight rolling quarters, and with that, we ask the operator to come back as we will begin our Q&A session.

Question-and-Answer Session

Operator

(Operators Instructions) Your first question comes from the line of David Eller - Raymond James.

David Eller - Raymond James

As margins were quite strong this quarter, how should we think about 2009 and potential for expansion and how should expect an uptick as in 2008?

R. Scott Turicchi

In terms of the margin, I would look first of all I am always looking at four rolling quarters opposed to ticking out one quarter. We had somewhat lower than usual marketing expansion in Q4, which is somewhat traditional. We tend not to be as aggressive in marketing from Thanksgiving through the end of the year. So, some of that you will see reverse in Q1, it will be end sequentially but I think that we believe in this scenario that certainly the annual margin should increase year-over-year. Although the 46.5 may not be sustainable through Q1 because of incremental marketing and as I say later in the year and the timing is hard to predict, depending upon the timing and the amount that is spent with regard to our intellectual property activities so that will flow through as amortization as the G&A. It will not be something that will in Q1 but it certainly could serve the bill from Q2 and bill drop over the course of the year.

David Eller - Raymond James

Okay and then what kind of foreign exchange rates are you assuming? You talked a little bit about your assumptions. Do you reckon up assumptions point to the revenue growth growing frequently throughout the year?

Scott Turicchi

Well in terms of the exchange rate, I guess the pound the and euro, they are roughly where they are now but we relative to all of fiscal 2008, that is a strong dollar and probably has about $2 million to $2.5 million of making it headwinds in terms of revenue.

Hemi Zucker

I think it was like 140 almost during last year and we are thinking about mid 20, yes.

David Eller - Raymond James

And then one with potential email company that you are looking right now for acquisition, should we think of these in the 1% to 2% of revenue range or how should we think about those?

Scott Turicchi

It is similar to the fact that many of them are small or any one of them is 1% to 3% of our current revenue. There are few that, in fact many very similar to a lot of our spaces. There is a handful at best. They are probably doing $10 million or north of revenue and that majority of doing are $1.5 million to $3.5 million or $4 million. So probabilistically we really across all three of the spaces as percentage churns, most of the deal tend to be like a MailWise or a Mijanda which are small under the range and there is a minority of them like so many people will be at the large end of the range.

Hemi Zucker

And we do not have any reactive discussions with one of the larger ones now.

David Eller - Raymond James

Okay and the looking at the 2009, how should we think about net ads, churn and ARPU?

Scott Turicchi

Well as you know we do not guide to the net ads. I think the cancel rate and rise of economic functions probably continues to ease up so as Hemi pointed out when almost like stair function from 27 a month in Q4 of 2007…

Hemi Zucker

To certain year.

Scott Turicchi

Turn 31 at Q4 of 2008, I think that may have some continued upward bias assuming that we are correct at the bottom of this economy has not been reached and there is continuing weakness that will be felt. It terms of the net ad, a lot of feel in that has been we are not going to change the gross ads so if we arrive on cancels and it is going to increase somewhat, there will be more cancels whether there will be an up gross ads to off that and to make a specific number is something that will happen in real time as we actually spend the marketing dollars but if the customers do not appear to be profitable to a certain degree, we will not go after them. Let me be clear, there is no magic to any net bid ad for the quarter or for the fiscal year.

Operator

Your next question comes from the line of Corey Tobin - William Blair & Company, LLC.

Corey Tobin - William Blair & Company, LLC

Let me have a couple of things here, two housekeeping items. What was the impact to earnings per share from the foreign exchange or just the net income I guess from the foreign exchange?

Kathy Griggs

The foreign exchange impact after tax probably about $0.01 a share impact there then let me just look down the other major impact in the quarter which was the cash that probably $1 per $1 or $0.01 a share. So a total about a $0.25…

Scott Turicchi

Although…

Kathy Griggs

We have asset marketing.

Scott Turicchi

Yes, although in the case of the taxes, it biases the tax rate unusually in the quarter but because the R&D tax rate has been extended yet again for 2009 in theory that should have been spread over the course of the year. Had it been an effect, you will see it is probably over the course of 2009. So, it by the quarterly result but not for certainly the annual result in July, that will you the $1.70 EPS in terms of the non-GAAP EPS off of which we intend to grow.

Corey Tobin - William Blair & Company, LLC

Understood and just for clarification, the new corporate account that you talked about adding, those were all organic or do you think the stimulus are all organic or..?

Scott Turicchi

Yes they are all organic, the true up sales force efforts.

Corey Tobin - William Blair & Company, LLC

Yes, okay and then I just have other items. If we look like from supplemental side as the credit segment took a rather healthy discount or sequentially this quarter? So I was just curious if there was any driver for that other than just general economic and as you read about things and what not. Anything else to be said that there will be obvious to the headlines and how do you see that turning thus far this quarter through about half or through the quarter?

Scott Turicchi

Well I will make one comment, both about Q4 if you take it monthly and what we have seen today and the month and a half. They are probably a little back into Q3. There is a lot more volatility in the month to month and even week to week usage patterns. That is not limited to the credit sensitive customers. I would say that is true across the board. So we dissect the three months of Q4. There were some, quite frankly, that would not necessarily occur in the order which you would assume. You would think December would have been the worst month of the three months within the quarter because of all the holidays.

It was in fact not the worst of the three months. So there has been a lot of noise going through the system as these companies booked financial but otherwise they have done their downsizing. There has been some increased degree of volatility in their usage patterns and I would say that is continuing to what we are seeing so far in the first half of the first quarter of 2009.

I think that the part of what you are seeing but certainly it is not the whole answer from Q3 to Q4. These are the traditional yearend seasonality of business days and you might recall in the Q3 call, we emphasized that we thought it would be million to drop off in usage revenue because of both the likeness and the business days of this calendar set up but also because of the economic malaise that was beginning. That turned out the usage revenue was actually on a $1.5 million instead of the $1.2. million.

The business days played out somewhat better than we thought but the economic impact played out somewhat worse than we thought and that is why going to the 2009 guidance, we are saying we think this is going to continue. This is the trend that will continue and you probably will not have a little ground until the economy had sum up.

If your question was implicitly that we lose the customer or have a significant downsizing of the customer because they went out of business, Lehman Brothers or Citigroup that downsized, the answer is no.

Corey Tobin - William Blair & Company, LLC

Scott, based on what you see quarter to date, would you expect that that current sensitive piece would stabilize at this level, potentially tick up or tick down when we come to the end of Q1?

Scott Turicchi

First of all understand that excluding that data off, it is only we generally look at month end so there is no midmonth that were a clash that has slipped to date. But what I would say is it probably if you look at last year, it was at 75 and it ticked up a little bit to 80 then 77 then 72 then 62. Now, I think this year, you would normally expect on whatever the basis some degree of tick up just because of the business days. My hunch is that will probably be erased by the weakness of the economy.

So if I have to bet on what this number is for Q1 of 2009, I would say it is somewhere between 60 and 65.

Hemi Zucker

Also that can be that both of the customers that we have specially this financial institutions that, they have within their house core base capability of their fact servers and other infrastructure is they reduced the number for which they can go back and forth into what they have so we benefit mostly when they add people and activity beyond a certain threshold and that is something should be taken into consideration. The very few of them rely on us frequently on the financial institutions.

Corey Tobin - William Blair & Company, LLC

Understood. At this point, Scott, I think you talked last quarter about current sensitivity in about 23% of their [44.43] as total debt?

Scott Turicchi

Yes, well pointed, yes.

Corey Tobin - William Blair & Company, LLC

But is it consistent there now or has it shifted down to close at 20 at this point?

Scott Turicchi

We did not find through the map. I would say it is still on that same range. I mean it would slip there, it is 20 to 22.

Corey Tobin - William Blair & Company, LLC

Got you. Last one if I may, email as the percentage of total revenue at this point or at least run rate basis, just where would you expect at the end of 2009 email will shake out as a percentage of total revenue?

Scott Turicchi

Well, I would say, two different questions. Where it is today is probably roughly 4% of reps but there is a different element in terms of the answer to your question because if you look at j2's business, historically it was substantially all faxes and then with the introduction of voice over the last couple of years, you hear now it is on historic basis 10% of it was 2008 actually more of a run rate basis of 12% of the bid.

Email obviously is not bid base so accounts for those bids, but it is 40% of reps. The real goal is through a combination of organic but I will tell you it will be definitely much more driven by M&A is that how that piece of the business be more meaningful and equally weighted with some of the other things we do i.e. giving it to some of this, giving it to 10% of j2's reps.

Now, how we will get there particularly supplemented by M&A is a function of the sort of the ordering of the deal that can be done. There are not many but they are probably a few candidates that in and at themselves if they were acquired could give us to that level but as Hemi noted and it is truly an old basis, there is such a limited number of the larger deals and if something if there are additional complications that we are not going to assume that a larger deal would break.

So if it is a combination of the smaller deals, I would certainly hope that this is the year where an addition to the mail life deals, we are going to acquire at least two additional email companies, maybe three. We do need to be careful that time such that they can be properly integrated but I can tell you that it is the goal of j2 to have the email piece be a bigger piece and a more meaningful piece of j2's business and I think M&A will be a meaningful contributor achieving that objective whether that occurs by the end of this fiscal year, I do not know.

Hemi Zucker

I just want to add if you know, if you grow our services together, you will be fragmented in fact in communications. One books a day that offer email part of the service, we just do not count it as email revenue because it is mostly blended into our voice services but we are pleased with all the complements and one day we will put together into one big super messaging.

Operator

Your next question comes from the line of Youssef Squali - Jefferies & Company.

Analyst for Youssef Squali - Jefferies & Company

Just two quick questions in terms of the guidance. We know that it is hard to gain any visibility in this environment but would you be able to quantify what your definition is in terms of moderate growth and revenue earnings? Is it mid single digit, low single digit, any color there would be useful.

Scott Turicchi

No, it is moderate as it is possibly is. I do not see any reason to get in that game. I mean let us be very clear, there are many companies not providing any kind of guidance in this environment and I am sympathetic to those companies. I understand why they are doing it. We have the advantage of being in a subscription base business where I think it is appropriate for us to get some commentary and outlook which is what we have done, in fact I think we have actually given you more elements that are relevant to how you conclude on guidance for revenues in EPS than we have done in the past yet there is not a formal range of revenue x to y or EPS a to z but we have given you, I think, all the necessary components. What you need to do is you need to figure out your own view of where you think this economy is going, where the bottom is, how deep it is, how long it will be there because I think then you can influence yourself on terms of cancel rates, usage trends and bid activity to come up with the specific number.

Analyst for Youssef Squali - Jefferies & Company

Yes, I think the slide 16 is going to be very helpful and thanks for doing that. Another facet of this you are including acquisition in your guidance so any assumptions that you bake right now in terms of..?

Scott Turicchi

Very nominal, I mean it is sort of what we did the last year which is the, we can begin to that. We are very deep in negotiations on some situations. Obviously there is not guarantee that any of them will close. In fact, last year we had disappointment where something that was very deep in negotiations at the time of the call and we have a very high degree of confidence it would close, it never did. So we have to be a little bit careful but it is not the case, you should not draw the inference that this is a heavily weighted M&A driven budget that we do now have M&A, you have some catastrophic result.

The M&A, I mean it is supplemental and it is assumed to be small in nature. It is not like there is a big deal we are targeting that we got to do it to make them upwards.

Hemi Zucker

Yes and basically what we have in the pipeline are small which only help us to be confident about stating that there is modest growth. There is nothing there that we can say going to be more than modest growth. So it is stand with strong reason. We have more of them. We talk with you usually every quarter. We give you all colors we have but now, I am sure that everybody like us is trying to figure out how to model the next year. We control our expense and we have proven our certain devices. You can do good job there. We know we have control. On the behavior of the customers, we can provide the best services. We are going to make sure that this favor usage and the mix of product expense versus high margin ones, very hard to predict. So that is why we came with a modest growth and also growth in the profitability.

Operator

Your next question comes from the line of Mike Latimore - Northland Securities.

Analyst for Michael Latimore - Northland Securities

This is Bill Swanson pitching in for Mike. One housekeeping item, the tax rate was lower in the fourth quarter and you are talking about the tax rate going to, so what is from online purposes, what type of tax rate should we assume for 2009?

Scott Turicchi

We are using 30.5 as an approximate tax rate for the fiscal year. It might at least could be a little lower than that but I think that 30ish number is appropriate.

Analyst for Michael Latimore - Northland Securities

Can you comment on how much revenue acquisitions contributed in the fourth quarter?

Scott Turicchi

Yes, it is about $500,000. By the way, both of the deals that we closed late November were the deals that we wrap during the Q3 call and you may recall at the time that we talked about that being roughly 2% of j2's revenue. Their annualized revenue will be roughly 2% and those two deals both close, we got effectively one month of revenue.

Analyst for Michael Latimore - Northland Securities

Okay from the acquisition pipeline, it sounded like you are fairly deep. Are you assuming some acquisitions happen in Q1, in Q2's?

Scott Turicchi

I am certainly very hopeful that the answer to your question is yes. I am only cautious because they say last year we were very deep in the situation and at the 11th hour and 50th minute, it did not happen. But yes I will think that, I will be disappointed and heavily be more disappointed if we do not close deals over the next two to three months seeing hardly in this quarter, hardly in next quarter.

Hemi Zucker

And we have good indications that it is moving forward but again it will not be so big to aggressively move the needle.

Scott Turicchi

No.

Analyst for Michael Latimore - Northland Securities

You have done a tremendous job on reducing expenses. You are still in the current strength at about 18 months ago and started raining cost. Can you improve cost more and improve margins even if the mix of business shifts more towards corporate fax and voice?

Scott Turicchi

Yes, first of all, some of the improvements that we put on 2008, we have now the benefit of the full year. Secondly, the corporate customers while they are coming in a lower ARPU, they are also coming in lower usage and the end result is that percentage wise, they have a very healthy contribution to the margins. Albeit smaller revenues for some of the corporations will buy thousands of phone numbers and will have an insurance approach when they some money for a fax line but never use it.

Operator

Your next question comes from the line of Dan Ives - Friedman, Billings, Ramsey.

Daniel Ives - Friedman, Billings, Ramsey & Co.

I guess just kind of to my level, in this environment, you guys had done a great job. As you look at 2009 and with your customers, are they actually you are going to do different in terms of your sales methodology, pricing and just given the macro, can you walk through from your perspective what you need of anything different to make sure that there is no hiccup over the coming quarters?

Hemi Zucker

Yes, marketing is an art and science. In 2009, with the word science and art, we are expecting to be in. What do I mean? There are ways to target certain customers. There are ways to work deals when you pay for the advertisers. Everybody, let me for a moment form a standpoint of somebody who serves advertising, everybody will want to be a CPA and to pay you two months after they collected their money. In the old days, they would pay you nice chunk of money before you start talking with them.

So now in this environment, also advertising are looking for companies that have cash and have product that can be attractive and adding value to the users because at that environment, we believe I have to prove it but in this environment we believe that it will take 'risk results' and giving us some opportunities to pay as we go versus the product that is less likely to serve in this environment. So we are working on those things and I cannot explain more about our idea as you know I called it half joke secret but we have over the year learned to know the customer control website, how much we are willing to pay and how good is it and how much will it speak and therefore we can manage our cost.

On the other hand, it is about people, we are able to increase their level and the sophistication of our staff and therefore, do more with less in tele sales wise, we still have separate people answering separate phones in corporate files then you would want to voice and we have to patch you. We have to strain our agents, both here and outsource to provide more single-stop or one-stop shopping. We have shifted some of the task to India and some of the transformation to the US. So aim to provide 24/7. We did not provide 24/7 to all our services last year.

Now, to most of our brands, definitely the top tier we are providing 24/7. We have gross strain. There maybe some technical improvement between the lead that we are seeing improve conversion rate on the phone calls. So all those are helping us and it will help you to becoming more profitable. It is all based on focus in both details that I have shared with you now.

Scott Turicchi

I would like to add one comment to that which is this is one of the advantages in having the multiplicity of brands that we do across the different spaces that we operate in but as you know, many of the brands have different price points, different packages and different service sets. So the main point is how do we allocate our marketing dollars to get highly profitable customers and are we supplying them the right price point, the right brand, the right set of features and services. I think at this point, there is no view on all turning the current set of services and the relative pricing associated with that.

One question before we take the next live question came by email which is what the percentage of international bids as the percentage of the total and the answer is about 10%. Are there any more live questions?

Operator

Yes. Your next question comes from the line of Brad Whitt - Broadpoint AmTech.

Bradley Whitt - Broadpoint AmTech

Scott, did you give any guidance on the CapEx for 2009 and how that might compare to what you did in 2008?

Scott Turicchi

No, we have not talked about it. I think it was very large in 2008. It was about $2.5 million. I think we said the range last year would be $2 million to $4 million but we can never let $2 million to $3 million for this year. We are obviously reviewing every capital expenditure project with the fine-tooth comb and we are also looking for ways where that equipment can be purchase at cents and the dollar, something we experienced few years ago during the last recession and when the tech world had a difficulties with the [60.16] and there as a lot of good in many cases unused equipment available at $0.10, $0.15 and a $1.

So, we may actually be able to spend less in CapEx but do and buying more of the things that we typically buy in the course of the year but I think if you are modeling, you could hold it roughly equal with last year and you will probably going to be okay.

Hemi Zucker

Yes, I also want to add that our hardware providers are much easier this year when we negotiate with them. They like that fact that they know that we are strong and the customer with them and you can buy not only on the advertising levels of the hardware, you can buy more for less and software and licenses. I mean we are doing as well as those the same that we are going to have. That is with lower ARPU.

Bradley Whitt - Broadpoint AmTech

How should we think about patent royalties right now? Do you cover run rate there, Scott and you mentioned I think that you may hope to see a tick up of that second half of the year?

Scott Turicchi

Yes, even though it is working, I will say right now is at heartbeat of maybe $2.5 million to $3 million a year but some hundred grand and quarter, let us say. Now, depending on the timing and if you go back to 2007 timeframe, depending on the timing and obviously who was this that we had signed up, then you start to bring in additional revenues and they can occur really in three flavors. There is the running royalty rate flavor which is just every month we get a certain percentage of the revenues and it is generally paid in a quarterly basis and auditable on an annual basis. So that will be incremental. But we need to sign new license fees to that to occur.

The other flavor, the fully pay up license where there is a lump sum settlement and a portion of that is based on prior damages and it has fully broaden the income at that moment in time for M&A and then the remainder is put on the balance sheet and amortize it in over the remaining useful life with the patents or where was the license was granted and then the third is a combo deal like we did a couple of years ago with Call Way where there was a certain amount of upfront money and then in addition, there was running royalty rate. So there is all the different flavors of how it can occur but the key is either signing up new license fees and/or winning some of the cases that are currently pending and many of them stayed because the patents would not leave them.

It will take a little while so yes, I think you are correct to think of it as more a back end loaded as it relates to fiscal 2009 events and something that is more stable that relates to Q1 and Q2.

Bradley Whitt - Broadpoint AmTech

Okay and then on the cash flow from operations front, where there any particular working capital benefits you expect this year so we just kind of model the same kind of trends for next year.

Hemi Zucker

As we have said, Brad, we said we will have more cash with lower yield so we anticipate significantly less millions of dollars into this income.

Kathy Griggs

And the one that always moves around obviously are the income taxes payable from the cash flow from operations. We have been actively surrounded here in your second and third quarters slide and the third, it can be heavier in the second and third and light again in the fourth. You are just looking our tax but we did not pretty much figured that one out but the rest of them, they are going to fluctuate into some perspective to pretty flat to what we seen.

Scott Turicchi

Yes, how we handle the late receivables, payables, the deferred, it is probably the case in the environment like this there will not be many exercises stock option and as a result there will be no cash tax benefit but that is something we have already experienced on the last two quarters.

Bradley Whitt - Broadpoint AmTech

And just finally, Hemi you mentioned you talked about from the features like fax and messaging, is that something that will be now part of standard product or..?

Hemi Zucker

Yes, thank you for asking. We took I think hundred some thousands eFax customers. We took all the faxes that we hold in storage. If you remember we provide one year of storage and we skip their fax rate so they can go now into their message center and keyword and it will rapidly go and find the word appear on the faxes because we take all the faxes including hurdles on OCR. So this service is available for hundred some thousand customers. It will be available to more customers. From your angle, we are priced at $60.95, the highest product out there. We are trying to provide more value.

Many companies provide more pages but most customers do not need it so at the bond of pushing the page, the page comes up when people do not need it. What we are trying to do is include value when people appreciate it and definitely we believe that it is innovative to search your faxes. A lot of other customers I believe that is depreciated. We are, I am [holding my fear] not to talk with about other features which we are having but basically, we can because our infrastructure in patents and knowledge, it value to justify hard environment by the joint product and. So I hope I answer the question.

Bradley Whitt - Broadpoint AmTech

It is. I have one question, is that unique feature that competitors do not have?

Hemi Zucker

Yes, as far as I know no competitors have searchable faxes. We have five patents. It is also not so easy to do and then we are ready and…

Scott Turicchi

The patent.

Hemi Zucker

It is not [66.32] I think it is not easy and cheap to do unless you have, you have to remember we also own an email company so the combination, discipline belongs more to the tune email, to the email industry rather than the fax machine and combining both gives us an advantage so others can do it. I feel that it would come for them much more expensive.

Operator

(Operator's instruction) Your next question comes from the line of Corey Tobin - William Blair.

Corey Tobin - William Blair & Company, LLC

Couple of quick follow ups. Scott, you have mentioned in the past that the voice market is growing. It is about 100% a year or so and granted that was a while back in some insurance that been slowed now but what do you think the growth rate is for the voice market at this time?

Scott Turicchi

It is hard to say, by the way, you are correct to think earlier in 2008, I think it a fact than from 2006 to 2007, it probably doubled the space. The expectations in early 2008 is that it was doubled yet again, I think you are correct that probably if people will pop up later in the year, they will be lower that expectation. Very important though because I think as we talked about before, this has sort of been an internal exercise that we have done, the glean information fits I think all the companies were talking about in the space or private and there is no, we have not identified any third party that has attempted to survey them or aggregate them.

It is little factually that we have picked up along the way in the aggregate. I think you are correct but I think today, people will have a certainly much less robust view of growth in 2009 versus 2008 but I think that it would still view as a very much a growth business. I think the challenges for the space are that it is still service that is being defined in the market place. There are certain advantages in the fax space and email space, either very well understood services. The issue is, how are you going to deploy them and who are you going to use to deploy them?

The voice services or virtual PDX given that is primarily catering the SMB customer, the first issue is well if you do not have a traditional PDX, the idea of calling it a virtual PDX does not really resonate with you. So it is an understanding of that customer base and making them aware of what it is, what is the value proposition, how was it deployed, how does it make their business more efficient? There is still an educational profit going on that is an industry issue. Separately, Hemi mentioned in his part of presentation within j2 there is some brand segmentation evolution that is going on which you will see over the course of this year.

Hemi Zucker

Yes, I want to say here we are doing voice for several years. I think companies that serve voice only will have very rough time ahead of them that private companies, I do not know if they agree or their number show, but we get 'free customers' that stood by [69.55] and fax base. They do not have it.

Secondly, the churn rate on the voice are higher due to the reason that if you are in business and if you have a phone number and a fax line, canceling the service on the fax you just no longer have fax. Canceling your voice servers, your stealing business because the virtualization of the voice is a number that is being forward to another number, the other number being your landline or your mobile phone still exists. So if times are hard, you just tell people, "I retire of my xx dot voice business, call me directly." You can basically give up on the reception start if times are really hard. Something you cannot do with the fax line.

So I believe that the voice products are going to serve us harder in bad economy than in good economy. Those that you deserve is to eliminate that overhead instead of the secretary that the upside. Those that want to show up big like one guy that is playing with four extensions, he is one for sales and he is answering it two for accounting and he is answering it three. Those guys are in this environment. My suggestion for them is to go back to the basics. So this is basically what we are seeing in the voice mail certainly and we are focusing and surprisingly are doing well with more expensive product because those represent a real need.

Scott Turicchi

That will have a real replacement opportunity.

Hemi Zucker

Yes.

Scott Turicchi

Big deals if you can won because some of those players might actually be considering or might have access to a PDX infrastructure and/or human receptionist.

Hemi Zucker

Which also have to explain why, we have hard time predicting the numbers because there are so many forces going the opposite direction.

Corey Tobin - William Blair & Company, LLC

I appreciate the explanation, just to kind of close out this topic, if you have to guess what the caveat, of course, it will be difficult to do so but if you have to guess, would you guess the market is still growing over 50% a year?

Scott Turicchi

I would say no.

Corey Tobin - William Blair & Company, LLC

Okay and last thing here just taking on the corporate side, a lot of success there this year and as you think about other reasons people would choose jCom over smaller providers, do you expect that success is going to continue there and do you expect the corporate gets the increase as a percentage?

Hemi Zucker

I think that we see that our competitors are getting more deferred. They do have infrastructures and you can see them. Yes, some but they do have infrastructure that they can at customers, when you look at customer and you bring a new one because it is already there baked in. So, what really matters is how much importers are the corporate customer putting on price versus quality and how good our sales people. I am pleased with the quality of our sales people. I think because you are talking about, to start with low prices, I hope that more corporations will say, "Okay, so I am working with jCom and it is 20%, 30% more," but it is only half a dollar and we would continue to stride and do those deals. If the world will implode and only the price will count, our competitors will do better.

Scott Turicchi

In fact we do see and we do believe they are valuing the intangible benefits of a financially stable company that has been in the business for long time and this is quarter what they do.

Hemi Zucker

And the coverage that they provide, also a lot of it has got to do with compliance and again not to talk down some of our competitors probably provide everything that we do but maybe not.

Scott Turicchi

And I think the answer to your question is yes, the pipeline remains healthy. There are already have been winners in Q1 even if the economy has deteriorated. As we stated before, we think they actually do the great value proposition weakening economy for outsourcing these two service providers so yes we believe that there will be continue to be an increasing percentage of the bids and the overall base.

Hemi Zucker

Oh I am sorry, I have to say that just having and being a competitor is not enough for the corporate world very significant and I say very significant investment in administrative to infrastructure just pinning on the price is not enough. You will have companies that want to slice and dice that by department. They will have those that want to have alerts. I mean it is a pretty complex world out there and we even see some companies that want to buy together with the inbound solution, outbound solution that we provide our research over there to send a certain fax alerts or bids or many things and being in a one-stop shop environment when they can pick up the phone and talk with one person helps and I sure hope and believe based on our pipeline that we will continue to have healthy growth there, relatively to the environment.

Operator

Thank you. There are no further questions in the queue at this time. I would like to turn the call back over to Mr. Turicchi for any closing comments.

Scott Turicchi

Alright, well thank you all for joining us today for the Q4 call. We will be on the road over the next few weeks. I will be presenting on Thursday, the 26th of February in New York with the Jefferies Conference and then a couple of weeks later, in Orlando at the Raymond James Conference also. Over that four weeks time period, we will be on the road meeting with investors in various parts of the country in our traditional road shows so feel free to alert us if you are interested in the meeting. We will, as we get later into the quarter, announce the timing for the Q1 results that probably would be scheduled for the first week of May. We thank you all. We look forward to talking to you in the near future.

Hemi Zucker

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: j2 Global Communications, Inc. Q4 2008 Earnings Call Transcript
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