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Executives

Scott Turicchi - President

Kathy Griggs - Chief Financial Officer

Hemi Zucker - President and Chief Operating Officer

Analysts

Daniel Ives - Friedman Billings Ramsey

Corey Tobin - William Blair & Co.

Youssef Squali – Jefferies

Brad Whitt - Broadpoint Capital

Robert Breza - RBC Capital Partners

Ray Archibald - Kaufman Bros.

Shyam Patil - Raymond James

Tavis McCourt - Morgan Keegan

j2 Global Communications (JCOM) Q4 2007 Earnings Call February 19, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications Fourth Quarter and Year End Results Conference Call. It is my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global Communications.

Scott Turicchi

Good afternoon, ladies and gentlemen and welcome to our Investor Call for the fourth quarter and fiscal year end 2007. As the operator just mentioned I am Scott Turicchi, Co-President of j2 Global, and with me today is Hemi Zucker, Co-President and Chief Operating Officer, and Kathy Griggs, our Chief Financial Officer.

We will be discussing our Q4 financial results and guidance for fiscal year 2008. In addition, we will provide additional DID and financial data that we believe will be useful to you to better understand our business. We will also provide an operational look back on 2007 and an outlook for 2008.

Our IR presentation will be used as a roadmap for today’s call. A copy of this presentation is available at our website. In addition, if you’ve not received a copy of the press release you may access it through our corporate website at j2global.com. In addition, you’ll be able to access the webcast from this site.

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

Before beginning our prepared remarks, allow me to read the Safe Harbor language. As you know this call on 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, 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 those discussions in those documents regarding the Safe Harbor language as well as forward-looking statements.

I’d now like to turn to the results for the fourth quarter. This was a good quarter for j2 in light of the continuing difficult market conditions for our credit-sensitive customers and the usual decline in business days relative to Q3 due to the holidays and related vacation. Our revenues were $56.8 million, up 16% from the fourth quarter 2006. Our gross margin was approximately 80%.

Operating earnings exclusive of 123(R) charges were $23.3 million, or 41% of revenues. Net earnings before non-cash comp charges were $18.4 million or $0.36 per fully diluted share. On a GAAP basis, our net earnings were $16.9 million or $0.34 per share. We had approximately $0.02 of 123(R) non-cash comp expense for the quarter and approximately $0.11 for the full fiscal year.

Our funds available to finance our business, repurchase stock and acquire company is $230 million and that’s after we spent $32 million in the quarter on stock repurchases which completed our previously outstanding program as well as the acquisition of the RapidFAX.

At this time I’d like to turn the presentation over to Kathy who will discuss our financial results beginning on page 9.

Kathy Griggs

Thank you, Scott. Good afternoon, ladies and gentlemen. Please refer to page 9 of the presentation. I’ll start there.

Our revenues as Scott had indicated were $56.8 million for the quarter compared to $48.9 million in the prior year fourth quarter for an increase of approximately 16%. We are very pleased with this growth given the continued softness in the U.S. economy.

We continue to experience strong DID growth. Our Q4 net DID additions grew to 45,700 from a Q1 low of 26,300 DIDs which was heavily impacted by the product change early on. The Q4 net additions include the DIDs from our December acquisition of RapidFAX.

Q4 non-GAAP operating profits were $23.3 million or 41% compared to Q3 at $23.1 million and 41.5%. Full year revenues were $220.7 million, a 22% increase over prior year revenues of $181.1 million. And finally, full year non-GAAP operating profits were $93.8 million or 42.5% compared to prior year profits of $71.7 or 39.6% of revenues.

Before I start my discussion on expenses, I want to remind everyone that both 2007’s and 2006’s non-GAAP financials exclude the 123(R) non-cash compensation expense. The non-GAAP growth margins for Q4 were at approximately 8%, which was similar to Q3, and full year gross margins were at 80.4%, a slight improvement over the prior year’s gross margin of 80%.

At this point I’d like to remind you that going forward we are going to be reporting on a GAAP basis. This will be our guidance as well as our actual results as we move into 2008. Q4 2007 non-GAAP selling expense was 17.2% of revenues. R&D was 5.1% of revenues and G&A was 16.7% of revenues. Overall [average] expenses were in line with our expectations.

Slide 10 provides you with an overview of our quarterly 2007 margin trends. Our diluted non-GAAP EPS was a solid $0.36 a share for the fourth quarter, consistent with our Q4 guidance. Full year non-GAAP EPS was $1.45, a 29% increase over prior year’s EPS of $1.12. Q4 GAAP EPS, which includes 123 non-cash compensation, was $0.34, and 2007 full-year GAAP EPS was $1.35.

A GAAP reconciliation schedule can be found on slides 23 and 24 in the presentation. Total 123(R) non-cash compensation for 2007 was approximately $7.5 million pre-tax and $5.3 after-tax, or approximately $0.11 a share.

Moving on to the balance sheet, our free cash flow was a healthy $21.4 million in Q4 and $84 million for the year. Please refer to slide 22 for the free cash flow computation.

Our Q4 2007 capital spending of $4.4 million includes upgrades and investments in our network and related data centers. With this infrastructure investment, we are well positioned for future growth and efficiencies, and this will enable us to further improve our already strong gross margins in the coming year.

Our cash and cash equivalent short- and long-term investments increased to $229.8 million for the quarter. In Q4 we spent approximately $32 million, as Scott had indicated previously, completing our previously authorized share buyback and the purchase of RapidFAX. As you’ll note in the press release, the Board of Directors has authorized a new buyback program of 5 million shares through December of 2010.

Moving on to slides 11 and 12, we’ll spend a little time there. These contain new information that we have not previously provided. We’re providing this information to give you a historical insight into the evolution of our business. The data on the slides are provided for informational purposes only, hence should be used with discretion. We do not intend to provide an update on these charts on a go-forward basis, but this is why it’s included in this section of the presentation and not in our metrics section on page 21.

On slide 11 we’ve provided you with 2004 to 2007 paid DID trends by both service type and by market. As you can see, over the past three years we’ve experienced consistent growth in both our fax and voice businesses in both the United States and international markets.

In particular, I want to point out that this year we’ve grown our domestic voice business by almost 150%, and it now accounts for almost 8% of the total paid DIDs in 2007. We expect strong organic growth to continue in 2008. And overall we added 160,000 net adds in 2007, while raising prices by about 30% to a substantial portion of our fax customers and in a deteriorating economy in the second half of 2007.

On slide 12 you will see the same breakout but for revenues. Note that the other revenue line is comprised of revenues derived from our non-subscription-based businesses, namely email, advertising, patents and jBlast. As I mentioned earlier, 2007 revenues increased by approximately 22% over the prior year. U.S. revenues increased 19% and international increased 48%.

This concludes our quarter and year-end financial highlights. I would now like to turn the call over to Hemi, who will provide you with a recap of our 2007 accomplishments and 2008 outlook for our products and markets.

Hemi Zucker

Thank you, Kathy. Good afternoon, everybody. It is my pleasure as usual to discuss our 2007 results and our 2008 outlook. This year I’ve structured my presentation into fax 2007, fax 2008 and then voice 2007 and voice 2008. And in each of them I’ve broken it also to the U.S. market and the international.

Let’s go to page 14. Our accomplishment on the fax services business in 2007 brought us to 870,000 USD. Most of them are eFax at the price of $16.95. And if you add it to our international pages, we have at the end of year 981,000 DIDs. And I believe that we already now in mid-February crossed the 1 million fax-only DIDs. Our price increase is virtually done, and it was very successful. And let’s say we’ve increased the prices by 30% to our individual customers.

Also in perfect timing for 2008, we have launched our multi-brand approach to fax services. As you know we are now supporting multiple brands like fax.com, RapidFAX, and Send2Fax. We are offering service as low as $7.95 on the recently acquired RapidFAX that we bought in December 2007 and up to $20 per DID per month on the eFax Pro.

We are basically catering here to various customers. Each of them has different approach to marketing and support different customers starting with fax.com that has a talking figure that is simplified for those that are first time in the market trying to look for a solution, and up to the full professional eFax and eFax Corporate.

As said, we completed the RapidFAX acquisition in December 2007 and fully integrated by now by our dedicated team. We also in 2007 increased our telesales staff both to the SMB market and to the corporate sales, and we continue to do it during 2008. We also launched our Message Center into the corporate customers. And now we offer our corporate customers fax, in-and-out logs, and copies of all the fax and voice messages in the Message Center.

Now let’s move to the accomplishment of 2007 in the international market. Our fax DID internationally grew by a healthy growth of 47% and we now have 111,000 customers. We have recently established new languages like Italian, Polish and Portuguese on the web presence level.

We have added 17 employees in Europe, most of them in Ireland and we now have 50 people in Europe, mostly in Ireland, Dublin, and Galway. We acquired YAC in mid last year and extended our network into 42 countries and covering 3,000 cities. We also have completed the development of our multi-byte product and we implemented into our systems in 2008.

Now let’s go to slide 15. This slide talks about our outlook for 2008 for the fax services. The M&A environment in 2008 is very exciting for j2. We have in j2 all the ingredients to make a successful M&A. We have the expertise, we bought six new companies, and we have the cash, $230 million. We have very comfortable multiples now. We have over 100 fax candidates that we identified and we also have a very supporting board.

All in all, we are very excited about the opportunity in the fax arena. And we have three full-time dedicated people engaged working on it together with some bankers and together with other people on the staff that are working on it on a senior level from part time. And we are in various discussions starting with first meeting and ending with a letter of intent.

On the U.S. market, on the fax service, we are projecting a double-digit growth and the corporate segment will go faster than the individuals, the corporate also is represented by lower churns. We have also in our model assumed that we will have stable price environment and with our multiple brands we are basically ready to cater to each price point in each markets. We will focus our marketing effort mostly on eFax and later on the other secondary brands.

We are going to assume that the usage will continue to delight especially from the credit sense of the customer. And we are going to launch, hopefully Q1, maybe the beginning of Q2, indexing or searchable factors. We are going to invest all the factors that are now in our Message Centers, allowing our customer to search them.

On the international front, we are going to continue and increase our market penetration to the top European countries in Canada as well. Continue the penetration into our U.S. markets and into international market, both organic and through acquisition.

We are planning to increase our corporate European presence both in field sales people and telesales. We actually started in the beginning of the year to support a corporate sales via telesales in multiple language out of our Dublin facility. And we believe that in 2008 we will see how the effectiveness of all our consolidation in Europe will come into effect in our number. We also are planning in 2008 to deploy the multi-byte system.

Now let’s move to our voice platform. To those of you who didn’t follow the company for many years, we started in ‘95, and then went public on the premise of unified messaging, unified communication. We started as JFAX and then we changed our name to j2 Global because we saw that fax only is not going to simplify or to symbolize the fact that we are unified message and unified communication story.

The truth was that beside all our attempts to sell conference calling and e-mail by phone and everything, we never have seen any success in anything beyond fax, so we focus on our fax and made it a very profitable business. And only in 2007, we saw the first success in unified communication through our very exciting success in the voice services. And I think now unified messaging for j2 is no longer hype only, but it’s going to be a cash cow. Let’s go into the presentation.

We have demonstrated very strong and excellent brand growth in our e-mails and voice services. Our voice services or our DIDs grew 147% and we’re now at 77,000 DIDs, and based on our general results we already hit our $10 million revenue run rate for the year. The two founders of Onebox are working for us in the U.S. and I just promised them that when they will hit $1 million per month in the U.S., I would spend a full day with them, and they are telling me it’s going to be sometime in March or April. I’m looking forward to it.

We have also introduced new features in Q4, including click-to-call. Basically click-to-call is when you get the voice message you can click on it and return the call. That is basically a bridge is launched and connecting you and the caller to get your message.

We also have included a data of speech to text. Basically voice messages are converted to text and we believe that with both the services we will be able to sell them and increase the ARPU. The ARPU for voice services are slightly lower than those of the fax but we are enduring to bring penetration period and we believe that with all these additional features and a good upsell of those, we will slowly but surely increase our total ARPU for the voice services.

In the U.S. during 2007, we also increased our telesales staff and expanded our customer support. Now we have much more scalability that we had before. As I said before, the continued growth, a quarter by surprise and we will have to wait now I think we are ready both on the sales and the support side.

On the international side, we have here a history. When we bought Call Sciences that have Onebox, they have both Onebox U.S. and Onebox U.K. The Onebox U.K. was a very old platform producing approximately $1 million a year and was based on calling parties base. And we couldn’t do a lot with the technology and we were thinking about taking the U.S. developed in modern platform and basically doing a selection actually in Slough in the U.K.

Luckily when we bought YAC we found a company that was ready for the market with a modern platform and an already existing business. It saved us a lot of time to market and cost. In May 2007, we started to focus on the YAC product for voice and basically we are working on it and launching the next quarter or during this quarter a receptionist-like product similar to the U.S. market.

And let’s move to slide 17, our outlook for voice services. The voice services as a whole are in the early stage, but we feel as of the beginning or the middle of last year, this market is ready and we see very high and healthy growth with lot of competitors. And we already are starting to do some investigative discussions with them looking for targets to be acquired and grow our voice services. There is no clear leader in the market, and we are hoping that through our actions we will become the market leader soon.

In the U.S. market, we expect in 2008 that our organic revenue without opposition will more than double. And as you saw in the slide that we provided to you in 2007 we had $6.6 million of revenue and we are going to double it this year.

We are going to launch new websites, both for eVoice and Onebox. We continue to test all the marketing tricks. We continue to do cross-selling into the SMB, into the fax customer base and upsell also to our eVoice base. We are going to complete the rollout of speech-to-text.

And also we just launched a live Onebox Receptionist which is basically for those customers that want to outsource the PBX and also want to have a receptionist that can take the call when nobody else can. There is an outsourced solution that we are providing on a small scale, but so far initial response is very exciting.

On the international front, we’re set to continue organic revenue growth of approximately 50%. We are going to launch in this quarter the improved YAC website which is going to cater to our voice services and we are going to launch a European-centric brand.

Not always names like eVoice Receptionist and Onebox Receptionist translate well into the European markets, and I hope that I would be able to talk to you in the next earning call the new name and the new logo for the services in Europe. Also as I said before, now with the position of YAC, we were able to integrate our U.K. and Irish platform into one to be serving the entire European region.

All in all, 2008 will be the year in which we anticipate accelerated and larger M&A deals. To remind you all, with all the 15 deals that we have done so far, with all the 15 companies that we have bought, we never paid more than $10 million. So we’re hoping to have larger deals this year, voice services will be the center stage of our growth and fax will continue to grow in a very healthy way.

Now I’m going to pass the conference call to Scott to talk about the 2008 outlook.

Scott Turicchi

Thank you, Hemi. On slide 19, you see our guidance for 2008. I would remind you that on the EPS, this is a GAAP number. By way of reference for 2007, we had $7.4 million pre-tax of non-cash comp expense pursuant to 123® or $5.3 million after tax, approximately $0.11 per fully diluted share.

As we have now completed the price change to eFax, we believe that the correct way to look at j2 and way we look at it pursuant to our own budgeting process is on an annual basis. As a result, we will not be providing quarterly guidance for Q1 or any subsequent quarters in the future.

Also we have attempted to build a range of both revenues and EPS this year that takes into account a number of factors. One, on the revenue side is the organic growth, which we believe will continue to be the primary driver of our total revenue growth.

However, as Hemi mentioned in his presentation, there are numerous opportunities for us on the M&A front, some of which are larger than the deals we have done historically. We believe that if the economy stays weak or further weakened, this will accrue to our benefit to acquire companies, customer bases and revenue streams as both they feel the effects of weak economy and also the valuation becomes more palatable to us.

On the other hand, if at some point the interest rate for other similar packages the economy rebounds, we would expect to see an uptick in both our net DID activity as well as our usage base revenue, but the contrary is you may do less M&A. On the bottom line, we have of course the flow through of the incremental revenue of both the organic and the acquired company’s revenue streams, combined with how we deploy our cash balances and our cash flow.

As both Kathy and I mentioned, the Board has authorized a $5 million share buyback. At where we are currently trading, it is a five or six year low in terms of multiple devaluation, whether you want to look at that on EBITDA, free cash flow or net earnings. So at these levels and also with declining interest rates, re-purchasing our own stock becomes very attractive.

So those are the elements that will be utilized in terms of coming up with our actual quarterly and annual results. It is our intention, unless there are changes throughout the course of the year, to reaffirm this range of revenue and EPS throughout the year. Obviously, if there are changes in any condition that would cause us to believe we’ll be outside of the range, we will make the appropriate disclosure.

And at this time, that concludes our formal remarks and I would now ask the operator to come back and to instruct the callers for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Daniel Ives - Friedman Billings Ramsey.

Daniel Ives - Friedman Billings Ramsey

On the quarterly guidance, I mean that’s a shift, right, not giving quarterly guidance, what sort of played into that because that’s a change from the past?

Scott Turicchi

Yes, several things played into it. One, I think, internally it’s something we would like to have done earlier on, ideally in ‘07. It was my belief that that was not the right time to not provide quarterly guidance given that we are going through the price change and as we know from both the current price change as well as the one three years ago, it creates a degree of uncertainty and volatility in terms of how analysts and third parties analyze it.

So we felt that maintaining the quarterly guidance was appropriate. But now that that is over, as I just mentioned, you know we do annual budgets, not quarterly budgets. We look at the business holistically over a twelve month period and we would encourage others to look at the business in the same way.

Daniel Ives - Friedman Billings Ramsey

But I mean could you just give some qualitatively just in regards to how it should trend throughout the year? Is it similar to other years ex price increase or you can’t talk about it?

Scott Turicchi

What I would say about this is as it relates to Q1 of ‘08 first of all since we are more than halfway through the quarter; you should assume that even if there are any M&A transactions consummated before the end of the quarter, they are not going to have a material impact on our revenue for Q1. So Q1 is basically an organic growth quarter. \

You’ve got the sort of the number of net DID activity that we produced over the last several quarters. As you can see in the last three quarters excluding Q1 of ‘07 it’s returned to a level that it approaching 50,000 net DIDs per month. We’ve given you the average monthly ARPU.

As I said on the previous call in Q3, probably there will be a downward bias over time on that ARPU given that there is a shifting mix towards Corporate DIDs, International DIDs and Voice DIDs, all of which have a lower ARPU than individual domestic fax DIDs for the most part. There are some domestic fax DIDs that have lower ARPUs, but for eFax it’s between $17 and $21 or $22 a month.

I think in terms of the margin structure, we are starting to experience any, as Hemi and Kathy both commented, increases in those margin. There will be some at the gross level as we reap some of the efficiencies of, what was it, a heavy year in CapEx for us in ‘07, over $10 million. I think it’s the single biggest year we had in a number of years.

So that gets absorbed. It causes some near-term pressure as that rolls off through depreciation, primarily through COGS. So you saw a little bit of that in terms of the near-term pressure in Q4 on the gross margin, if that gets absorbed we get the efficiencies out of that piece, we should see a lift in gross margin.

Also beginning 01/01/08, we’d previously been absorbing on behalf of our international customers the VAT that is now being passed through to them. So we will no longer bear that cost which also flows through COGS. So those two elements give us a lift in our gross margin and then on the operating margin as you see the R&D, fairly consistent with some minor volatility depending on our hiring practices, around 5%, a little over 5% of revs

The G&A moves around. We had heavy professional services fees in Q4. Those should roll off in Q1 to a large degree. So I would expect that to be a lower percentage of revs, and then the sales and marketing as has historically been the case will be the one depending upon the timing of the programs and where we spent our money and how effectively we spend it, they probably will bounce around from a range of 15% and change to a high of 18%.

Net-net that should still give an increase in the overall operating margin of the company. I am speaking right now non-GAAP, and then you’ve got to lay it on top of it the 123(R) expenses.

Daniel Ives - Friedman Billings Ramsey

And then just on the M&A. Can you just talk more about that? I mean how are you sort of looking at it, like let’s say ranges in terms of how high you can go up to from an acquisition, but just walk us through, because you’re [obviously into] the market continues to be bad, right? You get a lot of these potential private companies maybe on the cheap.

Scott Turicchi

Certainly cheaper on a relative basis and to their ask, and maybe even in some cases our DIDs in previous quarters or previous years. So yes, that’s correct.

Daniel Ives - Friedman Billings Ramsey

But just, can you talk about like size? I mean, you guys have traditionally done small deals.

Scott Turicchi

They range from the kinds of deals that I’d say have been our historic deals where the annualized revenue is, you know, a couple, $3 million, but there are deals that have tens of millions of dollars of revenue.

And they flow both in the fax base and to some extent in the voice base. The voice base is a narrower set which is why in Hemi’s presentation we’ve identified in excess of 100 companies on a global basis that are fax service providers either in whole or in part, but there is probably only 20-some companies primarily domestic, not exclusively, but primarily domestic, to approach in the voice services area.

Also since that space is a high growth space not only for us but from what we can and have observed for the industry as a whole those will command higher valuations.

Daniel Ives - Friedman Billings Ramsey

And just finally, when you look at the ‘08, I mean it’s a pretty big range for guidance. In regards to acquisitions, like does that guidance, I mean I guess like RapidFAX like just talk about in an organic way.

Scott Turicchi

Well, if you go to the lower end of the range basically there is no acquisitions. That would assume a continuing poor economy, no bounce back, no benefit from falling interest rates, no acquisitions.

If you go to the higher end of the range, that’s probably clearly some amount of acquisitions or some grouping of acquisitions plus, certainly in a worse economy than we’re suffering now with some up-tick.

If lowering interest rates does create lending from the credit-sensitive sector, something certainly that we saw in the late ‘02 to mid ‘03 timeframe when interest rates fell dramatically, in that case it was specifically mortgage related with a lot of re-fi activity.

We attempted to build a range taking into account over this 12 month period a variety of scenarios that may very well play out both in the economy and how that then would impact both our view as to organic growth and the trade-offs between organic growth and acquiring companies.

Daniel Ives - Friedman Billings Ramsey

So it’s almost like the middle of the range assumes kind of organic, a few more potential acquisitions, is that the right way to look at it?

Scott Turicchi

Yes heavily weighted to organic but with some acquisitions. Because as I say we have a history of doing at least a couple of these deals a year that normally adds probably 1-2-3 points to our growth rate if you look at it on a GAAP basis.

Hemi Zucker

Also Daniel, it’s important to watch the size of the acquisitions and the timing itself. So if we’ll do a big one early on, you should look at the upper end, if we’ll do the big ones later in the year, it will have an impact.

Operator

Our next question comes from Corey Tobin - William Blair & Co.

Corey Tobin - William Blair & Co.

Let me just keep going from that last line of questioning on the guidance if I could. So just to dive in, you’re saying the lower end of the range implies no bounce back and I think the words you used were “a falling economy”. Can you go into a little bit more detail on that? How much deterioration do you have baked in to the low end of the guidance range?

Scott Turicchi

Well, it assumes that the usage base revenue. And there is, I believe it’s the last slide of the presentation, 25, except for the logo slide, shows you the continuation of the credit-sensitive/non-credit-sensitive book of business that we discussed in the Q3 call.

And you will see that it basically, albeit there was some improvement on a relative basis, basically it shows similar trends to what was experienced Q2 to Q3, which is in the case of the non-credit-sensitive the usage held flat which is a positive given that there was about 4% decline in business days from Q3 to Q4.

You will notice the yellow and green are down about 15%, roughly equivalent to what it was Q2 to Q3, somewhat better in the sense that 4 percentage points of that can be attributable to the lesser business days due to holiday activities. So at the lower end of the range we assume that continues to slide. There continues to be lesser usage from the green and the yellow customers, the credit-sensitive. But it’s a relatively stable book of business from the blue that are less sensitive.

Corey Tobin - William Blair & Co.

So to be clear, yellow and green you say down about 15% totally combined?

Scott Turicchi

Yes, but individually and collectively, yes.

Corey Tobin - William Blair & Co.

And remind us again just one more time if you could, web happy users...?

Scott Turicchi

The users we deem to be all credit-sensitive, which is probably a bit conservative. They are really small businesses. for a reason they come in through the individual web channel. They pay with a credit or debit card. They generally take one or two numbers, but they have the usage patterns of multiples of that.

Corey Tobin - William Blair & Co.

You are assuming that this continues to decline 15% year-on-year across the board?

Scott Turicchi

I didn’t give you – I didn’t give that specific number. We continued at the lower end to see a continuing decline in the usage of the heavy users and the direct corporate credit-sensitive customers.

Corey Tobin - William Blair & Co.

And the high end shows it is steady, not necessarily growing?

Scott Turicchi

Well, at the high end you’re going to have it aided by more and or larger acquisition or lesser on the acquisition side, but some pickup from predominantly the usage sensitive customers if there is a reversal at some point in the year.

I will say one thing that could stimulate that would be if interest rates fall enough then lending loosens up. You start to get more lending activity and suddenly your brokerage firms, your banks and anything to do with real estate starts to show an increase in activity.

Corey Tobin - William Blair & Co.

What was the dollar hit, you said, from that segment, from the credit-sensitive customer? I think it was $1 million to $1.4 million or so last quarter, what was it this quarter?

Scott Turicchi

I didn’t quantify it but you take another 15% off of $7 million you’d be at a million bucks.

Corey Tobin - William Blair & Co.

And that’s both variable and fixed I am assuming, right?

Scott Turicchi

It’s almost all variable. So the hit Q2 to Q3 and the impact Q3 to Q4 is substantially all variable and in each instance it is about a million dollars.

Corey Tobin - William Blair & Co.

At some point though I mean you have to be seeing a point where it’s going to level out, right?

Scott Turicchi

Well, yes, it’ll get to a point where you are getting down to absolute.

Corey Tobin - William Blair & Co.

Exactly, you are just going to get to fixed?

Scott Turicchi

Yes, that’s exactly right.

Corey Tobin - William Blair & Co.

Okay. And just to shift back to the guidance here for a second, can you give us some of the nuts and bolts, what stock, what share count are you assuming for the guidance next year?

Scott Turicchi

We’re not assuming. I think it’s fluid this year. We have an internal share count that says various points in the range. But we are not specifically providing the share count because I think that depending upon the circumstances there will either be more cash and more shares or there is going to be less cash and less shares. It’s a function of where the stock price is; I mean it’s basically an ROI approach.

We got this money, we’ve got the authorization, we either buy back stock, and we can do M&A. So depending on the timing of the M&A that may influence it. And also you’ve got the interest rate component. If interest rate keep falling, almost anything relative to holding the cash is more attractive.

Currently the point of note, we are at about 50 million fully diluted shares. With the completion – you don’t see it fully effective during the fourth quarter numbers but as of 12/31 on a GAAP basis we would have about 50 million shares. So that’s our base line and then obviously there can be grants to take it up as well.

Corey Tobin - William Blair & Co.

And just to round off on the guidance, the tax rate should we still assume sort of the low 30s; is that the right way to look at it?

Scott Turicchi

I say no more than 30.

Corey Tobin - William Blair & Co.

No more than 30.

Scott Turicchi

Some of the decisions we make can influence the tax rate but I think at this point it looks like it’s no higher than 30.

Corey Tobin - William Blair & Co.

Okay, and then finally, on stock comp. It is about $0.11 last year after-tax, is that a fair amount to look at for ‘08 as well or should it trend up?

Scott Turicchi

I would look more in the dollars because remember if the share count moves around you can have a higher or lower on the EPS side. So, that’s why I gave you the dollar amount, the $7.5 million pre-tax, $5.3 million after-tax.

Now there are a lot of assumptions that go into that. One of it is the forfeiture rate. That came down this year, which means your costs go up. If the forfeiture rate goes up your costs come down. Also how much you grant during the course of the year also affects it, as does the stock rate. There are a lot of variables that go into it but I think that the $7.5 million is certainly within a range of the absolute dollar amount that you should then factor into your numbers.

Corey Tobin - William Blair & Co.

Back to then the operational metrics for a second, Hemi, did you mention the corporate DID number, where the corporate DID for fax is today?

Hemi Zucker

No, I didn’t but in Kathy’s presentation, I think it’s there somewhere. But I’m not so certain.

Kathy Griggs

Our total DIDs were 45,700 that we added for the quarter.

Hemi Zucker

No, but Corey’s asking...

Corey Tobin - William Blair & Co.

I was saying corporate, just the corporate business.

Kathy Griggs

Corporate component.

Corey Tobin - William Blair & Co.

Either for the quarter add or just where it ended the year.

Hemi Zucker

I don’t think we mentioned this.

Kathy Griggs

No, we didn’t.

Hemi Zucker

You want to know?

Corey Tobin - William Blair & Co.

Yes, that’d be great.

Hemi Zucker

I think about it during the call.

Corey Tobin - William Blair & Co.

Total voice DIDs, you mentioned domestic was 77,000. What are the international voice DIDs at this point?

Scott Turicchi

About five.

Hemi Zucker

Very low.

Corey Tobin - William Blair & Co.

So total about 82,000 or so for voice?

Hemi Zucker

Right.

Scott Turicchi

And as Hemi pointed out in the presentation, we really did not become engaged in looking at the voice services outside the U.S. until we had acquired YAC, which was in July. And then there’s a natural several months of integration timeframe. So it’s a focus for 2008, but really was not for 2007.

Hemi Zucker

At the end of 2007, we had almost 240,000 corporate DIDs, both local and international. But the vast majority are local.

Scott Turicchi

Meaning domestic U.S.

Hemi Zucker

Domestic.

Operator

Thank you. Our next question comes from Youssef Squali – Jefferies.

Youssef Squali – Jefferies

Scott, on your Q3 call you had guided for 17% top-line growth and at least that much in bottom-line growth. What did that guidance include, or it did include any acquisitions?

Scott Turicchi

No, it did not include any specific acquisitions. It was primarily organic. We know as I say that there would be at some point little acquisitions would probably contribute a modest amount of revenue throughout the year. You can look that as being primarily an organic model.

Youssef Squali – Jefferies

Okay, so from where you sit now versus where you sat three months ago, do you feel more concerned about the core organic growth it looks like, which is what’s causing you to kind of guide for the, by my math, kind of high single-digit organic growth that’s baked into your numbers, or is that a fair assumption?

Scott Turicchi

I think you’ve got six months of usage impacts on the credit-sensitive. And all the headline news from any of the banks or brokerage firms are not encouraging. So at the low level we’ve assumed a continuing deterioration in their usage profiles.

And we’ve assumed that will continue throughout the year, which may turn out to be a fair assumption or a conservative assumption depending upon the timing of the impact of the various stimulus package that’s been approved in Washington and the Fed interest rate cuts.

As you will recall in Q3, we gave the initial outlook. We said we’re holding the business as it is right now at the end of Q3. That’s the assumption. The assumption is that the usage patterns are as it is now. It gets no better; it gets no worse. But clearly in Q4 the credit-sensitive was off 11% normalized for the business base in terms of their usage pattern.

Hemi Zucker

In these growth we assume that we will have healthy growth during 2008. On the other hand, if we will end up selling more voice services or more of our lower-cost brands of fax, it will eat up the revenue.

Youssef Squali – Jefferies

And I guess given guidance inclusive of acquisitions implied to me that you’re relatively certain or you’re close to having some of these acquisitions sealed. Can you talk about the level of confidence you have in kind of nailing some of these acquisitions to get you potentially to the high end?

Scott Turicchi

Well, not deal with the high end. As Hemi mentioned, there are a number of situations that are active as we speak. They range from letters of intent to earlier stages in the process. I don’t think we’ve ever seen at any point in the company’s life such an active pipeline, whether they’re in the early stage, mid stage or late stage of negotiations. Now obviously in the M&A world you’ve got to caveat it.

All of them could fall out of bed for a variety of reasons, probably not so much to do with pricing per se, but other terms or diligence. So speaking as an M&A guy, I’m very confident that j2, as I said, if the economy continues to be weak, will probably do more M&A deals in number than it has done over the last several years.

And those deals will bring more total revenue to the company in 2008 than they have brought in past years. But the timing is an element. The later they’re done in the year, the less impact they’ll be in ‘08 although they’re roll into ‘09.

Hemi Zucker

Also Youssef, we are very disciplined when it comes to the M&A. We did 16 deals and all of them were very accretive and successful. We take a lot of pride in it, but if we have a deal and something in the terms doesn’t look right and we still have not signed a purchase agreement, we will walk away if we don’t think that the deal is right for us.

And we have history that proved itself that when we do the deal we are fully integrated and we are sure it’s going to be good. So the nature of the deals here are we are in discussion. We have many discussions. We even have a due diligence level with one of the deals but again till the last moment, till it’s time to...

Scott Turicchi

More than one.

Hemi Zucker

Yes, more than one division so you’re right. You have more than one. But till we sign, it’s not a done deal. And therefore we are very hesitant to increase the range because it’s too risky to predict, and also we don’t ourselves pressure. If the sellers are going to get crazy, we are not going to buy.

Scott Turicchi

That’s correct.

Youssef Squali – Jefferies

I’m assuming some of the sellers may be listening to this call.

Scott Turicchi

I think the important thing to understand is the way we look at it is, we’ve got strong cash flows and we’ve got cash balances. We’re going to use them in an ROI-efficient manner.

If the pricing goes up or the terms are unpalatable, my guess is it’ll weigh towards buying back more stock. If the stock is relatively expensive or on a heads-up basis an M&A deal is more accretive or has a higher ROI, we’ll lean towards that. The good news is that we’ve got the money to do both. So I don’t see them being necessarily in competition with each other. But that’s basically how we look at it.

Youssef Squali – Jefferies

No, that’s fair. And on the stock buyback issue, historically you guys have been very conservative about buying back your own stock, I guess except for last quarter where you bought a fair amount. Is it fair to assume that, assuming the stock stays at these levels, you’d have more of an appetite for it than you’ve historically had for others?.

Scott Turicchi

Yes. As I said, based on all the numbers that we’ve run and you can run or anyone else can run, we’re probably trading at about; I think it may be an all-time low as a multiple of either cash flows or earnings, but certainly over the last five years when the company had positive net earnings.

Youssef Squali – Jefferies

And now you are, certainly on a free cash flow basis.

Scott Turicchi

I think that that and, as I say, that combined with the fact that we used to get five-and-change on the margin on our cash balances in terms of interest income. Those are down to low threes, and in some cases even in the twos because we’re keeping it short; we’re keeping it liquid.

Hemi Zucker

And we are producing so much more cash now.

Scott Turicchi

Yes. So all those things certainly make holding cash balances less attractive.

Youssef Squali – Jefferies

CapEx last quarter, 4.3, that’s almost twice your usual run rate. What are you baking in for ‘08?

Kathy Griggs

That quarter was as a result of building out our data centers, our network infrastructure, which I talked about earlier.

Scott Turicchi

I think if you use the Q4 number for the full fiscal year ‘08, you’re probably on the heavy side. It should be under that quarterly number.

Hemi Zucker

Yes, under four.

Operator

Our next question comes from Brad Whitt - Broadpoint Capital.

Brad Whitt - Broadpoint Capital

Scott, will you be breaking out the stock-based comp per line item going forward? Are we going to still be able to model it that way?

Scott Turicchi

We have to actually discuss that in terms of when we file the Qs because we currently do that. We certainly intend to give you the aggregate number per quarter pretax, after-tax. And it’s the share impact, $0.02 a share, $0.03 a share, $2 million for the quarter pretax, etc. I don’t think we’ve yet addressed the issue in terms of the filing of the Q whether we would give it broken out by line item.

Brad Whitt - Broadpoint Capital

I guess another question would be do you prefer that the numbers that analysts report to FirstCall be GAAP now going forward?

Scott Turicchi

Well, I’m personally indifferent. I think from the company’s standpoint, it is easier for us and since the small portion of our total earnings that we think the GAAP number is now representative. They’re highly correlated with each other. It’s not like we’ve got a huge chunk of our earnings that are related to non-cash comp expense.

So it probably is easier if everyone goes to GAAP because that’s consistent with how we’ll report. It’ll make it easier for the Reuters and the Thomsons of the world in terms of doing their averages. But we’ve got a mix right now where we’ve got some analysts that dually report both the GAAP and a non-GAAP number. I’d say the majority historically has reported primarily a non-GAAP number. But we have a couple that have reported either only or primarily the GAAP number.

Kathy Griggs

I would say that our press release will probably break it out.

Scott Turicchi

Yes, yes. So I think you’ll have that granularity if you wish to do non-GAAP margin analysis and things like that.

Brad Whitt - Broadpoint Capital

How many shares did you buy back this quarter?

Scott Turicchi

It was a little under one million. We had 983,000 or something like that. 978 was what we had going into the quarter. We exhausted it.

Brad Whitt - Broadpoint Capital

And did you disclose approximately how many days you picked up from RapidFAX?

Scott Turicchi

No. We didn’t.

Hemi Zucker

Not so big.

Brad Whitt - Broadpoint Capital

Not so much? How about if we look at the other revenue for ‘08? You had a pretty big settlement this year with CallWave.

Scott Turicchi

Correct.

Brad Whitt - Broadpoint Capital

Are you kind of expecting that to be down next year or flattish?

Scott Turicchi

No, we do not expect. That’s an almost one point, a little over one point in growth ‘07 to ‘06 because it was about a little over $2 million, around $2 million in terms of the 4 million fully paid up license fee that was booked in Q1 of ‘07.

We do have other situations out there that we think could be equally as attractive. But given the fact that some of those situations there’s litigation pending and that moves very slowly, it’s doubtful I think that those would be settled in the course of fiscal ‘08. But you never know.

Our guidance assumes that what is our patent license revenue is the continuation of the existing programs, and for those companies that have running royalty rates, the continuation of their streams of revenues to us under the royalty program.

Hemi Zucker

It’s actually putting us one point down because we didn’t bake into our forecast another $2-plus million onetime.

Scott Turicchi

Right.

Brad Whitt - Broadpoint Capital

Okay. And, Hemi, are you doing any kind of testing for price increases for voice? Should we just assume that’s going to be flat?

Hemi Zucker

No, you see, the way we are going to do with voice is by introducing attractive services like speech-to-text and like click-to-call. All those are basically going to put our price up.

Brad Whitt - Broadpoint Capital

Okay, so like add-on services?

Hemi Zucker

The market is very competitive. And I know that we can definitely increase the prices because the value is much higher than the fax line. But because we want to penetrate, if you remember, we have a story of eFax that it was selling for $2.95 what is now sold for $16.95. So we are going to play the same game.

Brad Whitt - Broadpoint Capital

Can you discuss a little bit the differences between acquiring a voice services company? and a fax services company? Fax service historically has been pretty easy for you guys, seems like voice should be a little more complex.

Hemi Zucker

You’re right. Fax usually point the phone numbers to one of my points of presence, end of day, end of story. With voice, we still can do the same situation of pointing the numbers into our infrastructure. You have to remember that we have points of presence almost everywhere.

But then you have to decide either you are going to make the features look the same as yours and basically move either your customer towards the flavors you acquired or vice versa, or you can just say, I’m going to develop another flavor. The platforms that we have are so flexible and so sophisticated that we can do both.

For instance, in Ireland when we combined the U.K. system with Irish system, we basically gave the customers almost all the features that they had before but improved the GUI interface. And so to cut a long story short, we can do both. And probably based on the acquired company, if we think that the product is better than ours and simpler, we will change. If not, we will move it.

I’m not foreseeing a significant difficulty once we launch it. But since we have not done anything of this size, it might be that in the initial period of setup and everything, it would be different.

But I want to also refresh you; we have acquired companies in the past when you kept the platform for a longer period till we were comfortable with it. So those companies that we are talking, most of them are pure play. So the only things they have is the platform and customers. So we can take the platform, manage it with few employees, and do it as time passes in a more relaxed way.

Scott Turicchi

Yeah, I want to take a couple of questions from email before we go to the next live question. And one of the questions was had to do with the aggregated ARPU declining Q4 to Q3. Question was why.

Primarily, as has been typical in the fourth fiscal quarter but for the fourth quarter of ‘06 when we were in the early stages of the eFax price increase, which rippled through, there generally is a decline in the ARPU in the fourth quarter due to usage. In this case, it was both a combination of the lesser business days and, as I mentioned earlier, the lightness in the credit-sensitive customers’ usage patterns. That alone counted for almost all of the $0.40-some or $0.39 decline in ARPU from Q3.

The next question was regarding the cancel rate. The cancel rate has come into the range that we have previously experienced prior to doing price changes. It was 2.7% on average for the fourth quarter, which is within our range. But quite frankly, we didn’t think we would be there until Q1 of ‘08.

We also believe that at this point, any delayed cancels relating to the price change are behind us, so we don’t have a flash yet on cancel rate for the first quarter but I think, as we’ve said before, we would expect that this year to move around but be within the range of 2.5 to 2.75% per month.

Operator

The next question comes from Robert Breza - RBC Capital Partners.

Robert Breza - RBC Capital Partners

On the acquisition side in kind of trying to understand when you look at the growth on the revenue line, have you forecasted it? It gets kind of tricky here with the stock-based compensation as you bring on acquisitions, how did you incent the management team to stay?

And you talked about walking away from deals, I just want to make sure when we read a press release that said, “Hey, we’re acquiring X company”, that all of a sudden we don’t look at it and say it’s going to be in the middle of the range but all of a sudden it’s more dilutive.

Can you just talk us through this? The dilutive concept that if you look at these acquisitions, how you’re going to use stock-based compensation because obviously now with the change in earnings reporting guidelines that you’re issuing today, it just seems a little harder I guess from our perspective. So any color around how you’re kind of structured that would be great.

Scott Turicchi

I think, as Hemi mentioned, we’ve done 16 deals. I don’t think we’ve ever done one that’s dilutive.

So while we will not promise that we’ll never do a dilutive deal, I would say that what is on the plate right now all of which would be accretive to the company, sometimes there is a three to six month integration period where it’s kind of breakeven on the bottom line. But then once the integration is complete they’re accretive even on a GAAP basis which takes into account the amortization of the intangibles and the allocation of the purchase price adjustment. They’re much more accretive on a cash flow or EBITDA basis.

I didn’t quite follow the concept on the non-cash compensation stock expenses. It’s a separate issue. We are just saying roll it in if you want to report a GAAP number because that will then be consistent with how we report although, as we said in the earlier question, we will give you the pieces if you wish to create a non-GAAP number.

Scott Turicchi

Thank you.

Operator

Our next question comes from Ray Archibald - Kaufman Bros.

Ray Archibald - Kaufman Bros

For 2008 modeling purposes, what kind of tax rate should we be assuming?

Scott Turicchi

No higher than 30%, quite frankly its a little lower right now as we speak but I think if you look in the release, the last couple of years has been closer to 28%, than it’s been to 30%. We don’t see anything that would take it north of 30%.

Ray Archibald - Kaufman Bros

And then related to the voice services, I guess in one of the slides you talked about the organic growth doubling. I think I heard Hemi say that you weren’t doing much in tweaking prices. So is that growth going to be largely a function of adding voice DIDs or is there something else involved in driving?

Hemi Zucker

Yes, yes, it’s mostly going to be adding voice DIDs and getting full year impact versus partial year impact last year.

Ray Archibald - Kaufman Bros

And then of the voice DIDs that you have today, I guess 82,000?

Hemi Zucker

Yes.

Ray Archibald - Kaufman Bros

How many of those are new customers to take on exclusive of any acquisitions, etc?

Hemi Zucker

Only 5,000 or less I think. 3,000 came through acquisition in Europe and we have not done an acquisition of voice in the U.S. since 2004. So basically, virtually all of those customers are customers that we basically advertise to, they clicked, they bought.

Ray Archibald - Kaufman Bros

No, I understand but for example the 77,000 customers that you have in the U.S. I’m assuming that those are overwhelmingly existing fax customers. Is that a fair assumption?

Hemi Zucker

No, no, it might end up that the customer that gets fax; also have now the voice services with us. We are not counting customers; we are counting phone numbers. So there are some rare occasions when a customer that had a fax number wants to buy a solution, because one of our high-end solutions of the voice service are also the fax number, but those are fine between.

Ray Archibald - Kaufman Bros

How should we think about your advertising budget going forward? I appreciate that the economy is uncertain and that’s an easy throttle to move back and forth. Just in sort of thinking in the middle of your range, how should we think about advertising going forward here?

Scott Turicchi

Basically the way the advertising is allocated is for each brand and for each sector of the world. We think, or the marketing team does in terms of month’s payback. So we’re looking to organically acquire customers at between four and eight months of revenue payback.

So any and all programs, whether they be online or offline and the majority of our spend has been and will continue to be online, any of the programs that meets those profiles then can be spent. So we have an amount we believe can be spent per brand and per region of the world. But to the extent they perform within those tolerances, they can spend more. And to the extent they don’t, and then it will get pared back.

Ray Archibald - Kaufman Bros

And can you give us an update in terms of what the acquisition costs are today for a fax customer and a voice customer or online versus other channels?

Hemi Zucker

Yes, they go anywhere between zero, as you remember we have more than 40% of our eFax [inaudible]. So those cost zero. And then we allow depending on the brand to go between four up to eight times revenue. So eFax is $16.95, and then you add some dollar or two for the usage. So let’s say you’re looking at $18 or $19. Then we allow four times of that and eight times of that sometimes if it’s a product like one whose reception is that we are more excited about providing incentives there.

Ray Archibald - Kaufman Bros

Have those acquisitions costs changed much in terms of what the net acquisition costs are? Because you talk about how you’re budgeting. But the actual acquisition costs, have they materially changed in light of what...?

Hemi Zucker

Let me answer you. You see, as the company grows, even though we are holding our churn rate, the base is larger. So every time when you grow, you have first of all to cover for the churn [inaudible] in a larger base plus the net. So the calculation should be if you think that this year the base grew so much, you should add to the marketing because we have first of all to start by covering the churn and then the net growth.

Scott Turicchi

Now I would say, if you look at ‘07 there’s been stability on the SAC cost for gross adds across the various ways we spend our money. But recognize there are differences. We’re going to spend more per paid DID for an international customer than for a U.S. customer. We’re going to pay more for a voice customer than for a fax customer. So you have a whole range of SAC costs based upon which brand we’re talking about and which region of the world.

Also certain of the brands benefit on an average basis from very strong word-of-mouth and direct-to-site activity where there’s no hard dollar direct spend. That is not the case for the voice services generally speaking, and it’s also not the case for our newer alternative brands in fax like fax.com, RapidFAX or Send2Fax. So there you have a much higher proportion of the gross add where there’s going to be marketing dollars spent to acquire them.

Ray Archibald - Kaufman Bros

Do you have a depreciation and amortization number for the quarter?

Scott Turicchi

For the fourth quarter?

Ray Archibald - Kaufman Bros

Yes, for the fourth quarter.

Kathy Griggs

It’s right here in the exhibit, the cash flow statement.

Scott Turicchi

But that’s an annual.

Kathy Griggs

Yes, it’s annual, but if you wanted the Q3, [inaudible] Q3 and Q4 it’s there. It’d be approximately $3 million.

Scott Turicchi

I want to take another question from email before we go to the next live question. This relates to slide 25 I believe, and it has to do with how much or what percent of our revenues in Q4 came from the credit-sensitive. I’m assuming that to mean the yellow and the green bars, relative to the prior quarter.

And if you remember from the last quarterly call, in Q2 the yellow and the green represented about $14 million of quarterly revenues, $7 million fixed, $7 million variable. In Q3, those two represented $7 million of fixed and $6 million of variable for a total of $13. I don’t have the exact number for Q4, but I believe it’s in the range of $12 million where its $7 million fixed and $5 million variable.

Those are rough approximations but I think it gives you a sense of the trend and it’s consistent with what you see of the behavior of both the yellow and the green bars. So as a percentage of j2 total revs, that credit-sensitive piece is coming down both in its totality and in terms of the usage based or the variable piece as a percentage of the roughly $57 million for the quarter.

Operator

Our next question comes from Shyam Patil - Raymond James.

Shyam Patil - Raymond James

Last quarter you talked about shifting corporate customers more towards fixed versus variable revenue. Can you provide us with an update on how that’s going?

Hemi Zucker

We are continuing to do it and we have two exciting phenomena. First of all, on the very large deals, we have now corporate customers that are coming on low usage but with fixed fee that has no usage included.

We penetrated into some very large organization. When they covered in the initial stage, all the employees that need fax on a heavier and then they say, okay we have another few thousand employees that are using fax very rarely, but we still would like to give them a number.

In those cases, we will sell them the monthly number for much less, no pages included but the pages that will come will be faring between and, will be relatively on a higher price but in fact on usage will be lower. I mean it’s a complex reply but basically, we are continuing to move to less usage or being less dependent on usage.

Shyam Patil - Raymond James

I think last quarter you mentioned that you expect aggregate voice services revenue growth of about 100% in ‘08? Is that still more or less the expectation?

Hemi Zucker

Yes, more than 100%.

Shyam Patil - Raymond James

And that’s excluding acquisitions or including acquisitions?

Hemi Zucker

Organic only.

Shyam Patil - Raymond James

Overall churn declined sequentially, but when you look at your credit-sensitive customers who saw lower usage revenue last quarter, was there any noticeable change in churn activity there?

Hemi Zucker

It was included in the numbers already. So the numbers that you saw in Q4 included some customers that you know even better.

Scott Turicchi

Yes. I think it was similar to Q3, where there was some number of DIDs that were either canceled because of reduction in head count of their company and/or at the extreme they went bankrupt. So all the DIDs were given back. I don’t have an exact number, but I don’t think it was more than 1,000 DIDs.

Hemi Zucker

Yes.

Scott Turicchi

It was not a big number.

Shyam Patil - Raymond James

What assumptions are you building in for interest income in your ’08 guidance?

Scott Turicchi

Well, it moves around because as I mentioned earlier, it depends on the timing of how we deploy our cash both in M&A, on stock buybacks and also the falling interest rate environment. A lot of our cash is kept short term and very liquid. So you can assume that we are getting sort of the spot 3 to 6 month rate with a little bit of premium if we move out of CDs and just treasury type activities.

So even since three months ago, we gave our initial outlook, we brought in the rate by 50 to 75 basis points as the Fed took dramatic action, the unanticipated 75 basis points cut and then the 50 basis points cut at its regular meeting.

So right now we are kind of hovering around 3% as the assumption for cash balances, but to the extent they continue to cut, I would expect that to go down for us. In terms of how much cash we will have, that’s trickier. Because right now we’ve got $230 million plus January cash balances that is investable, but you could see an outflow of that based upon the timing of the M&A and the stock buyback that makes that a different number.

Operator

Our last question comes from Tavis McCourt - Morgan Keegan.

Tavis McCourt - Morgan Keegan

I had in my notes from last quarter’s conference call that voice subscribers were about 7.5% of the base which would indicate kind of a pretty flattish Q4 result, but I certainly could have written that down. Can you talk about the growth in Q4 in the voice business?

Scott Turicchi

Yes, the 7.5% was as of October 31. So, there were another roughly 7,000 DIDs added in November, December. December across the board is usually a light month for us. We don’t spend as much relatively speaking in marketing dollars. We basically get out of the way of retailers and others who are using that six-week period from Thanksgiving through the first week of January to do a bulk of their revenue.

So, across the board for all brands, we generally have lesser productivity in terms of gross adds and net adds in the December month. So, that’s why you see even if you take the 7.5% and look at October, you’ll say something looks light in the last two months of the year and that’s December. But I can tell you that it bounced back very nicely in January. As typically it does, but it was a little bit better than our expectation.

Hemi Zucker

Yes, January was one of the strongest net growth month, we ever had seen.

Tavis McCourt - Morgan Keegan

You talked about being able to do accretive acquisitions, is that a potential on the voice side of business as well because I would have imagine much smaller.

Scott Turicchi

Yes, but I think you should assume they’d be less accretive, because as I mentioned earlier, I think, I mentioned in the last call, everything that we can observe. And granted the companies we are talking about are not public, they are not having earnings calls, they are not disclosing much information.

But based upon information that’s available on their website, market intelligence we do, some discussions that they have been willing to have with us, this appears to be a space that is growing consistent with the way we view it for ‘08 and also the way we performed in ‘07. So the natural implication of that is people look for higher multiples of revenue because there may or may not be operating income or even EBITDA in these early stages.

First of all, I think it is less likely we do a voice deal because there is a smaller number to approach, just on a sheer number. There’s maybe 20 voice companies to approach and there is over 100 in the fax space. So sheer law of large numbers favors the fax deals over the voice. Secondly, I think the voice deals, if any can be done, will come at a higher multiple.

Now I think there are multiples that can be higher than the fax multiples and still be accretive on a GAAP basis, but probably less accretive.

And understand, my own belief is this is not an area that j2 needs to stretch in. We obviously have a platform. I think we are in a leadership position in this space already in terms of revenues, DIDs, the strength of j2 in terms of marketing and our capitalization.

So this is not a situation where we are looking at a space saying, “Wow, that’s a neat space we would like to be there. We don’t have a platform to develop, but we are going to be a year or two, so let’s go out and pay a big multiple to get in the space.”

That’s not going to be the case. I think if we can do a deal, we are going to pay more on a multiple basis than we do in fax, but we are not going to stretch, we are not going to do something crazy because at the end of the day we don’t need to pay that premium.

And I believe the day will come when some of those companies will hit their own road bumps and they will be trading at more attractive levels. And so, maybe it will be deferred in terms of the timing of when we can do one of those deals.

Hemi Zucker

Also you know, we can do many fax deals in a year. We can absorb many of them once every two months, deal. But with the voice services I can’t believe that we can do integration so fast. It’s the first time we don’t have experience. In the fax business we are very experienced and we can do many of them.

So I think once we do the first deal, we will have to take a break and see how long it takes us to get up with the expertise of integration of this kind of deal.

Tavis McCourt - Morgan Keegan

It’s great that the fixed revenues seem to be hanging in there for the credit-sensitive customers and would seem to suggest that you are not getting much churn there. Is there any long-term contracts that either the consumers do or anything like that? It’s a little counterintuitive to me, given there clearly can’t be as many mortgage brokers or real estate agents out there today as they were six months ago?

Hemi Zucker

I think you are asking is there a contract with the consumers.

Tavis McCourt - Morgan Keegan

Consumers or a corporate, but you know whatever you would classify as sensitive.

Hemi Zucker

With the corporate, we have many contracts. I don’t remember how many.

Scott Turicchi

I think six months to three years is typical in the corporate and the individual it’s months-to-month or annual with the predominant being the month-to-month. If I recall it’s about an 80:20 split month-to-month versus the annual.

But what I would comment on is that it is incorrect to assume or to infer that the base of customer is either corporate or individual are just credit-sensitive customers. That is not correct. There is a broad distribution of the numbers across a variety of industries. Obviously, a piece of that that we have shown on Slide 25 deals with the credit-sensitive customers and specifically their usage patterns.

Tavis McCourt - Morgan Keegan

I understand that but it’s fair to say even with the heavy usage consumers that you have seen a decrease in usage patterns with, you have not seen a material uptick in churn with that same user base?

Scott Turicchi

That’s correct. It’s hard to say that definitively on the individual base, because it’s such a law of large numbers. And there are pieces of that base that we cannot even if we wish to with all the diligence in the world identify, but certainly on the aggregate it’s a true statement.

Operator

Our final question is a follow-up from Ray Archibald with Kaufman Bros.

Ray Archibald - Kaufman Bros

I just wanted to follow up again on the guidance, so I want to make sure I heard correctly when you gave the 17% revenue growth guidance at the end of Q3 that was exclusive acquisitions and then the range that we are looking today includes some mix of acquisitions depending on low, high end, etc., is that correct?

Hemi Zucker

Well, we always do acquisitions. We did 16 acquisitions over seven years. So, we did include acquisitions, but we did not include the larger ones that are now much more close then ever were

Scott Turicchi

I think the way I articulated it is the correct way to think about it. And then if you look at the current guidance range you’ve got everything from no acquisitions to acquisitions being several percentage points of growth relative to ‘07. Now it could be in one deal but probably not necessarily in one deal, but some combination of deals.

We have one last question that’s come by e-mail regarding the corporate enterprise accounts and the question is basically to give some update on that. They had a very strong Q4 signing up six new large accounts and exiting the year with a pipeline of 60 large customer potential acquisitions

Hemi Zucker

And they also had strong January.

Scott Turicchi

So, yes our corporate business still heavily weighted to the U.S. had a very good Q4 and a very good entree in the beginning of Q1.

We thank you all for joining us for this conference call. As we put on a press release a couple of weeks ago, there are two upcoming conferences that we will be presenting at on February 27th in New York at the Jefferies Internet Conference and then the following week, on March 4th at the Raymond James Conference. Also we’ll put out a release as future conference opportunities present themselves so that you know where we will be later in the year and we’ll look forward to the Q1 call in early May. Thank you.

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Source: j2 Global Communications Q4 2007 Earnings Call Transcript
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