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Executives

Scott Turicchi - President

Kathy Griggs - Chief Financial Officer

Hemi Zucker - President and Chief Operating Officer

Analysts

Brad Whitt - Broadpoint Capital

Daniel Ives – Friedman, Billings Ramsey

Corey Tobin - William Blair & Co.

Analyst for Shyam Patil - Raymond James

Youssef Squali – Jefferies

Ray Archibald - Kaufman Bros.

C. Darem – Cardinal Capital

Michael Hubbard – William Blair

j2 Global Communications, Inc. (JCOM) Q1 2008 Earnings Call May 6, 2008 5:00 PM ET

Operator

Welcome to the j2 Global Communications first quarter conference call. It is my pleasure to introduce your host, Scott Turicchi, Co-President of j2 Global Communications.

Scott Turicchi

Good afternoon and welcome to our j2 Global investor call the first quarter of 2008. As the operator just mentioned, I am Scott Turicchi and with me today is Hemi Zucker, Co-President and Chief Operating Officer, and Kathy Griggs, Chief Financial Officer. We will be discussing our Q1 financial results as well as providing you an update on operations.

We will use the IR presentation will be used as a roadmap for today’s call. A copy of which is available at our website. In addition, a copy of the press release is also available at our website at j2global.com/press. In addition, you’ll be able to access the webcast from this site.

After completing the formal remarks and 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, at any time, you may e-mail 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 various SEC filings, including our 10-K filings, recent 10-Q filings, proxy statements, and 8-K filings, as well as additional risk factors that we have included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding the Safe Harbor language as well as forward-looking statements.

As we noted in the press release, we were very pleased with the operational results for the first quarter, especially given the changing and challenging economic environment. Consistent with j2’s operating philosophy, we remain disciplined on our subscriber acquisition costs in generating new customers and focused on improving the overall cost structure of j2. This resulted, as noted in the press release, in record free cash flow for the quarter.

I’d like to now turn the presentation over to Kathy on Slide 9 who will give you additional detail on the quarter.

Kathy Griggs

Please refer, as Scott indicated, to Page 9 of the presentation. Before I begin, I want to point out that as we mentioned in our last call, we will be presenting and reviewing GAAP financials, however, for your convenience we will continue to provide you with 123R information.

Pretax 123R expenses for the quarter were $2 million and after tax 123R for $1.4 million, which is approximately $.03 cents per diluted share. In addition, you will find in press releasing divots, the allocation of a $2 million by expense category.

Revenues were $58.6 million for the quarter compared to $52.1 million in Q1 of 2007 which excludes the $2 million of revenue recognized in Q107 from our patent license settlement. This amounts to an increase of approximately 14% quarter-over-quarter. We are very pleased with this growth given the continued softness in our economy.

In the past few discussions, we shared our concerns regarding the impact of the economy on our variable usage revenue. We are encouraged that in Q1 we are seeing some stability in usage for both our credit sensitive and non-credit sensitive customers. Usage for both segments grew in line with the increase in business stage from Q407 to Q108. We are particularly pleased that the credit sensitive structure did not exist a decrease in usage that we saw in Q3 and Q4. Please refer to slide 18 for additional details on usage.

In this quarter, we continue to generate strong DID growth while maintaining a stable cancel rate. Our Q1 net DID additions was approximately 35,000 compared to 23,500 in Q107. Our voice and corporate tax segments continues to perform the strongest. Our paid DIDS are approx $1.1 million.

Q1 GAAP operating profits were $22.5 million or 38.41% compared to Q107 of $19.8 million and 38%, excluding call wave revenue referenced above. Compared to Q407, our margins are 1.1% better. Improvement in our margins reflects our continued effort to improve efficiencies, manage our cost, and streamline our processes.

Our diluted GAAP EPS was $0.35 cents a share, which is consistent with our expectations.

Moving on to the balance sheet, our free cash flow, as Scott indicated, was approx $27 million, which is a quarterly record. Please refer to Slide 17 for the free cash flow computation.

Our cash and cash equivalent, short and long-term investments, decreased from the prior quarter of $229.8 million to $181.3 million The decline in interest income and lower interest rates on our investments and lower cash balances due to our repurchase of j2 common stock During the quarter, we purchased approx 3.5 million shares of common stock totaling approx $76 million dollars.

In Q1, we provided our investors with a healthy return on equity of 6.6% for annualized 26.4%.

I’ll now provide you with an expense overview. Q108 GAAP selling expense was 17.4% of revenues. R&D was 5.4% of revenues and G&A was 19% of revenues. G&A was slightly higher than prior quarters due to non-return professional and litigation fees. We continue to execute a disciplined approach to all costs across the organization, including careful review and tracking of stock costs, consolidation and rate negotiation with telecom vendor, prioritizing capital expenditures, and ensuring optimal staffing.

Overall, aggregated expenses were in line with our expectations as well as prior quarters.

I’d now like to turn the call over to Hemi, who will provide you with an operation update.

Hemi Zucker

Today, I broke off my presentation for two slides, one focusing on our fax business and one of our voice business.

The fax services are Slide 11. This was a very nice quarter for us. We focused on both growth and improving efficiencies for the company. On the web channel, we’re able to stabilize our cancel rate and we are pleased to see that we continue in our eFax brand and with the secondary brands. Our secondary brands of RapidFax and Send2Fax and they’re growing a little bit faster than the eFax brand.

Also, as you know, very key fact over j2 is our capability and ability to communicate via our creative content and design. Our marketing message is communicated through the creative talent that we have here in-house and this quarter the team won three second place awards for content and for design. The award is something that is very similar to the embassy award for the creative world. We won our second place in three places out of 14,000 competitors around the world and those of you interested can go to www.efax.com/awards and see the winning creatives.

On our corporate channel, it was a very strong quarter for our corporation. We saw high conversion rates and our pipeline that continues to grow are converting better than before and we are seeing that we have higher success rate in converting and replacing fax servers. This translates into new seven large contracts; usually our large contracts are in the area of talent and more. Together we now have 47 large customers and around the world and of those 350 customers are international corporate customers. Our pipeline is still healthy and we are 50 far and large.

On the international front for the fax, we have now entered in other two countries, Slovakia and Slovenia. We have now 44 countries and year-over-year growth was 41%, but the 41% is fax, voice, and email. Fax only is approx 25% for international.

Go to the next slide about voice services. In the US, we are operating mainly on the two, receptionists, and we are approaching 100,000 paid deeds. This is critical mass that helps us define our leadership in the states. There is no clear leader in the states yet, but we are working very hard and strive to become the obvious leader in the space.

New features that we have introduced this quarter, we have a live receptionists, basically for those customers that besides the automated services that we offer require to have the life certain. We are offering it. We also expanded our coverage into 50 US markets and we began to roll out voice-to-text. Let me explain a little bit about it.

As you know, there are several companies out there offering translation of voice-to-text and as any new feature and people are on the adoption curve. Unlike many of the other services, this is a semi-manual, semi-automatic. So to give try before you buy to all of our customers is something that is costly, but because of our size and our capability and our marketing muscle, we were able to negotiate with a text-to-speech company to allow us to roll into all our 100,000 base customer a trial in which they would each get it for I think a month or so in which they would be exposed.

They would see how special it is and we hope that through this exposure that it not cost them money and corporations and companies allowing us to do it, we will traction educate the market and do it so an upsell that will add voice channel.

On the international front, the reception is the way of the brand that we are going to operate in Europe. It’s ready to launch. As you see here, the launch web site, and it should be launched either tomorrow or later this week. We have a product called call manager, we redesigned it and also going to start to do cross sells between our fax customers, free customers, and try to sell in the voice services.

I’m going to forward the call to Scott.

Scott Turicchi

A couple of final comments and then we will turn it over to question-and-answers. Before commenting on the annual guidance, I want to give just a brief update on M&A as we discussed in the context of the Q3 and Q4 call. As the economy weakened, we saw pickup in the pipeline of our M&A activity, which continues to be the case.

However, as you will note, to date we’ve not yet closed a transaction and that is in large part because although the evaluations have come down somewhat, they have not fully adjusted to the new market realities and consistent with company philosophy on its disciplined approach in its other areas of cost, it is also an area we intend to maintain and stay disciplined on in the area of M&A.

So we have several situations that we are pursuing, situations that are active in discussions and negotiations, but there’s still some degree of bid spread between the sellers, the buyer, and what j2 believes is a fair value for the targets company.

So we will continue to pursue those activities and discussions and to the extent that a deal closes before we have a next quarterly call, we will inform you through either press release or 8K.

As it relates to the annual guidance, it’s being reaffirmed it’s the same range on both revenues and GAAP EPS. You saw on February 19, which is $240 million of revenues to $270 on the top line and $145 to $165 of GAAP EPS on the bottom line. I would remind people that in the GAAP EPS in Q1, it was roughly $0.03 cents of 123R expense, non-cash compensation. That will move around quarter-to-quarter based upon both the granny practices of the company as well as the variables involved in calculating through the black, shows the model what those expenses are.

At this time, I would like to just note as you see in our prior presentation, slide 16 provides you with all the metrics updated through these of the first quarter of 2008. I would note that you saw an uptake in our R proof from the fourth quarter of about $.13 cents per DID per month.

As Kathy noted, we saw stabilization in the usage revenue actually grow in both the non-credit sensitive and the credit sensitive. The non-credit sensitive was actually was somewhat in excess of the business day growth from Q4 to Q1. That, you will note, is outlined on Slide 18. It is the blue and the green bars. The blue representing the non-credit sensitive sectors of our customer base and the green representing our B-to-B credit sensitive customers plus our individual heavy users, which we’ve deemed to all be credit sensitive in nature.

At this time, I’d like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Brad Whitt - Broadpoint Capital.

Brad Whitt - Broadpoint Capital

I was just looking at the balance sheet, I was wondering if you think that’s sustainable in the next quarter. It looks like you may have to send Uncle Sam a check or two, but just curious.

Scott Turicchi

That’s correct. Historically, and you can see it in the reconciliation chart, free cash flow modulates from quarter-to-quarter and one of the largest modulations has to do with the timing of when income taxes are paid and the estimated tax payment. So usually Q2 does take a dip from Q1. Now we’re standing revenue in earnings growth, so I would not take $27 million and multiply by four across the whole year.

Brad Whitt - Broadpoint Capital

Hemi, I think you mentioned on the last call that you may hit that million dollar per month revenue run rate for the voice services. Just curious as to whether you’ve gotten there yet or when you may hit that expectation.

Hemi Zucker

We are very near. The people that operate it are supposed to invite me to come and visit them when it’s a million dollar and I guess by the end of May, it will happen.

Brad Whitt - Broadpoint Capital

Great. The seven enterprise deals looks like the most you’ve had in a while. Are you noticing any particular drivers there?

Hemi Zucker

Yes. CIOs that didn’t use to give us importance and now answering our emails. I think with all the economic change, we are seeing, the preferred solution like j2, that they have a small monthly rate of expense and we are now seeing more and more companies that are considering us versus servers.

Scott Turicchi

The corporate sales channel had a very good Q407. They closed six large deals in that quarter. So as you know, Brad, prior to Q407, the average was between two, close to three, big deals a quarter and if you go back a couple of years, it was closer to two a quarter. So we’ve seen a building that we saw an average of the closed deal rate move from two to three and now for two successive quarters, it’s been six-plus and I think we’ve got good reason to believe that it will be close to or in that range again in this quarter of Q2.

I think some of the reasons for that are one, as Hemi mentioned, clearly over that time period there’s been a change in the economy. We’ve always believed there was a value proposition that’s attractive to our services. We think that it becomes more compelling. We don’t have to lay out the money for CapEx and license fees on a one-time basis, but rather pay as you go.

Secondly, I think that our team has done a very good job of being able to get a keen eye for which of the situations they’re involved in are more right and which of the potential customers are more serious in terms of taking the service. I think we mentioned in past times when the sales force was a little younger, we spent some time on some situations only to find out that the opportunity really wasn’t as right as we thought.

So I think that combined with the evolution we’ve made in our own service sets, I think better marketing, better sales, all of those things combined to begin to see a much better conversion rate against the pipeline.

Operator

Your next question is from Daniel Ives - Friedman Billings.

Daniel Ives – Friedman Billings

Can you talk about the quarter month-to-month, because I know you do those stats after every month. Did it get better February over January, March over February? Can you talk about any sort of pattern in terms of credit sensitive and non-credit sensitive?

Scott Turicchi

Yet there wasn’t sequential positive progression throughout the quarter January through March specifically in terms of usage pattern of the credit sensitive. I would say they were fairly stable across the three months, January through March, and actually I don’t have the breakdown yet for April, but if the aggregates are any indication, I would say that’s true for April as well.

So as Kathy pointed out, I think what we’ve seen coming off of the latter half of ’07, six months of month-to-month decline, we saw possibly a stabilization and we don’t intend to predict the call a bottom, but possibly a stabilization represented by the usage patterns over the first four months of this year.

Daniel Ives – Friedman Billings

Does it seem on the corporate side, I mean a lot of those are getting ramped up over the last 12-18 months and now you start to see more variable usage from there as they ramp up and you’re starting to see that as well.

Scott Turicchi

Definitely correct. As you know, you close six deals in Q4, a very small fraction of the DIDs contracted for an ultimately deployed are actually deployed during the quarter and even those that are deployed, unless they are DID supported to us, there’s a ramping effect in terms of those DIDs getting deployed to the end employee’s hands and then published and then seeing traffic. So two or three months out after you sign the contract, you should see a ramp in usage on those DIDs and I think we experienced some of that in Q1 as well.

Operator

Your next question is from Corey Tobin - William Blair.

Corey Tobin – William Blair

The free DID count dropped fairly substantially sequentially, I was just curious what might be the story behind that.

Scott Turicchi

The story behind that is if you go back in our history over the last several years, this occurs from time-to-time. Basically we go through DID clean up and so we had a decent amount of gross add in Q1, but we also by our own choice exited a fair amount of customers during Q1. So it had about $700,000 or so net decline in free DIDs.

Corey Tobin – William Blair

So nothing more than just sort of typical maintenance?

Hemi Zucker

We are just managing it, you know. I think in the past we discussed free customers, we break and rate them based on open rate and faxes that they get and how responsive they are to our advertising and once in a while we take the bottom worst customers that don’t set well and we clean them out and make room for new ones and this is what you’ve seen.

Corey Tobin – William Blair

Diving into DID numbers, I saw the data point of approaching 100,000 DID in eVoice reception, that’s great. Any other DID information that you could provide with deal to corporate or in the international segment?

Hemi Zucker

I’ll give you some color. Our corporate, the number of DIDs of corporate is in the mid 20% and seems the others are in the little bit less. So you could extend to the revenue contribution is at a 20 range and percentage of DID is in mid 20’s.

Corey Tobin – William Blair

The percentage of total paid DIDs.

Hemi Zucker

Correct. On 1.1, they are less than 25%, but close. On the revenue, less because they apple there is lower. International, Scott can help you, but our international revenue is like a little under 15%, which includes also our emails, our voice, and our fax. From a standpoint of international fax users, I think it’s safe to say that it’s approximately 10% give or take. The apple there is higher and we have free income coming from the CPP, which is unique for international market. It pushes it up.

Corey Tobin – William Blair

Can we use that proxy of roughly 10% of revenue? Can we translate that to roughly 10% of DIDs as well?

Hemi Zucker

We said 15% of revenue internationally.

Corey Tobin – William Blair

I’m sorry. I was talking international fax.

Scott Turicchi

The apple business total is about 15%.

Hemi Zucker

Fax is a vast majority. I think it’s more than 10%.

Operator

Your next question is from Analyst for Shyam Patil - Raymond James.

Analyst for Shyam Patil - Raymond James

Can you talk about turn with credit sensitive customer base and has there been a noticeable change since the last quarter?

Kathy Griggs

I would say that we had probably less activity from a default standpoint or from a bankruptcy standpoint than we’ve had in previous quarters. I think total for the quarter is probably two or three that we were notified. I think previously we have seen upwards of six, seven, eight, nine, ten in any given quarter. So we certainly seen a slowdown in that, but I also believe we’re monitoring those very closely and we stay on top of them and we feel that they’re falling out of line, we jump on them right away.

Scott Turicchi

I can see the aggregate cancel rate roughly consistent with where it was a quarter ago. So I think overall, you know, there’s clearly some element that feeds through the cancel rate. We see some of it, as Kathy pointed out, there are some discreet instances that are very obvious to us, but it is not anything that is overwhelming by any means.

Hemi Zucker

If you read the mortgage magazines and literature, you find out that in order to get mortgage these days, you need to get much more sophisticated and much more data in to get the same mortgage. I hear that it takes two or three times more approvals to get one mortgage because of the credit sensitivity now. So we don’t know, but we think that those that are doing good mortgage business do need more preference action.

Analyst - Raymond James

Have you seen any weakness in your credit sensitive customer base from your non-credit sensitive customer base?

Scott Turicchi

No. You’ll see in the specifics in the back of the slide, as we said in the last couple of calls, is a pretty noticeable divide between the way the credit sensitive sector of the economy is behaving and I think this is brought out by financial services firms that are pure plays that have their own earnings announcements versus those companies that operate in other sectors of the economy. When you push it all together, you see less than 1% GDP growth, but really what you’ve got is negative growth and weakness in the credit sensitive sector bolstered by a much stronger non-credit sensitive sector and all usage data would support that and confirm that.

Analyst - Raymond James

In light of the recent GAAP, does it change anything with respect to the timing of the resolution?

Scott Turicchi

I think what you’re referring to was the recent ruling a few days ago by the FCC to cap ETCs in terms of distribution, which they’ve spent probably a year since the original recommendation was made to have any action on it. I would note that was on a straight party line vote three to two. Three of Republicans voting in conjunction with the Chairman and the two Democrats voting against. So they did accomplish that. They have their own press release indicating there’s about 13 other elements of USFs that they would like to now pursue.

I would note that in a district court hearing I think it was yesterday, the court itself was very skeptical as to whether they could even get through inter-carrier compensation within the next six months and that’s one of these 12 or 13 items. I think it will be a challenge in a political and election year to move anything quickly. Clearly there’s nothing moving at any speed in the congress, although there are a number of bills regarding USFs that are pending.

Some of them are important in that they have elements, the various senators and congressmen are interested in the FCC taking into account to the extent they wish to address the issue, but in terms of the congress having any hearing, I think given we’re almost in June and this is an election year, it’s unlikely in congress.

Now obviously the FCC can act independent of congress, although it has to be sensitive to any oversight and review that congress may have. So we will continue to monitor it. As we’ve said before, even if the commission were to go down the path of implementing a change in the contribution system and even if they were to go to a straight numbers approach and even if they were not to allow any carve outs or exemptions, we could take all the way back to March of 2005 that we’re not going to allow that to in any way impair the economics of j2 Global.

We would take some action via our free base. I would note that because of the price change last year and because of our focus on the price change and on the free base toward the end of the year, it’s relevant to us in terms of producing gross paid adds was down to about 5%.

So whether we would monetize the base, which is an option, or whether we would do a partial monetization and pass through the USF on an annualized basis is still something I think is too early to discuss, but clearly we will monitor the situation. Our views are well known to the FCC as well as too many members of congress through the efforts that we’ve had over the last three years to educate them. None of them seem to intend or want to disenfranchise millions of free customers, but that’s really the only update right now. Stay tuned. We’ll see what happens.

Analyst - Raymond James

With regard to the reconciliation, are you providing a breakout about line items. I know that you give the numbers for the operating expenses, but are there any other line items?

Scott Turicchi

That is all available and I think Kathy can give it to you. It’s also in the press release in terms of if you want to create non-GAAP gross profit margins or sales and marketing as a percent of revs. Maybe you’ll take a moment and go through each line item.

Kathy Griggs

In the three months ended March 31 of 2008, the consequent sold line has $175,000 of 123R in it. If you look down at sales and marketing, there is $338,000 dollars in sales and marketing of 123R. R&D, $214,000, and G&A, $1.3 million. If you want to tax effect that, you can use approx 40% from a tax effect standpoint.

Operator

Your next question is from Youssef Squali - Jefferies & Co.

Youssef Squali – Jefferies

Could you speak to net apps, in looking at that prior quarter’s, that’s kind of the lowest note we’ve seen in some time. I know in Q1 of last year was in the mid-20’s, but that was the effect of the price increase. I was wondering if maybe you could, one, in looking at the business going forward, is this kind of the new level of net apps that you kind envisioned or can you just give us an equivalent number, Hemi, to that 100,000 DIDs for eVoice that you reported this quarter? What was it last quarter?

Scott Turicchi

We’ll get you that answer. Going back to the view particularly in a difficult economic environment, ultra strict on the prescribed requisition cost, so I guess if you believe that the economy is going to stay in the doldrums for the balance of the year, the answer is going to be yes. We’re going to spend very disciplined and if that means less gross adds and a stabled cancel rate, it probably does pull in the net apps.

Now whether 35,000 is a fair appropriate target or goal, for us, it’s really all in the margin of how much dollars will we spend at the approved stack cost, which as we mentioned in the last call, are between four and eight months of revenue. Everybody is very clear within j2. Those are the objectives. Obviously we will month-to-month, quarter-to-quarter, review whether those are a reasonable stack cost to maintain. They’re quite frankly very low, but I think we’re much, much more focused here on the margin than whether we have 5,000 net DID adds to report in any given quarter. So we’re going for the cash flow; we’re going for the margins.

Hemi Zucker

The 100,000 voice customers that we have is a number reflective not the end of the quarter, but the best number that I could get yesterday, and last earning call, which was around 90 days ago or so, we had 85,000. So from earning call to earning call, not from quarter end to quarter end, we added 15,000 and because of the relative smaller base of the voice the share impact is smaller there. You understand what I’m saying?

Youssef Squali – Jefferies

Yes, if I strip out the voice business and just look at the web and corporate, they’ve cut an average I think, if my memory serves me right, we’ve actually seen an improvement in net adds for the web and corporate quarter-over-quarter. Is that true?

Scott Turicchi

Compare Q107 or Q407?

Youssef Squali – Jefferies

No, Q4, because I think in Q4 your voice net apps were substantially higher. My numbers may be kind of stale.

Hemi Zucker

But I think we had an acquisition.

Scott Turicchi

We did. So if you take that out, I think the answer is the organic piece of net DID activity for corporate and web Q4 and Q1 probably roughly the same.

Youssef Squali – Jefferies

Lastly, if you can just reconcile a couple things that you said. So I think in answering a question earlier, you said that month-to-month sync seems to be at least stabilizing if not improving a little bit and I was wondering what it is that you’re still kind of baking into your ’08 guidance. I guess the assumption is you’re not changing your estimates.

Scott Turicchi

That’s correct. I think the way Q1 ended relative to sort of the midpoint of our assumptions, obviously we have no acquisitions sitting here on May 6 and at the midpoint of the range we talked about some acquisition activity contributing. On the other hand, we seen better usage revenue particularly from the credit sensitive. Not so much a dealt-in change on the non-credit sensitive, but better usage patterns on the credit sensitive for the first four months of the year than previously anticipated. They sort of outwashed each other.

Hemi Zucker

In other words, our guidance is combination of organic and acquisition. As Scott said, acquisition, we are trying to do them, but we are keeping our evaluations the way we believe is fair. On the organic side, we in the first quarter delivered organic side, but in a more cost effective way meaning we’re able to deliver it with better expense management and continuing as we said to be better disciplined to cost management and focus.

Operator

Your next question is from Ray Archibald - Kaufman Bros.

Ray Archibald - Kaufman Bros.

On the corporate business that you’ve signed, the seven deals I guess in this quarter, you mentioned six in the fourth quarter. Can you, Scott, give us a sense as to what the fixed versus variable ratio is in terms of revenue stream and has that changed much relative to existing customer base?

Scott Turicchi

Probably not a lot. I think it’s too early to tell, as one of the earlier callers mentioned, there’s a ramp effect. So we would know the fixed portion at this time, I’d say that even the Q4 customers were probably not absolutely certain as to their usage patterns. I think it’s fair to say that the way on average, it’s probably similar to what the corporate businesses exhibit in the past, which is closer to what 50-50 open mix between fixed and variable. Now, any one customer with a variety of programs. We do have some customers that want predominantly fixed and we have some that want predominantly variable, but they tend to average themselves out in the law of large number where you kind of get a 50-50 mix.

Ray Archibald - Kaufman Bros.

Just on the voice business, now we’re over a year into the launch and maybe can give us an update as to what your experience has been in terms of turn. Is it materially different from the core fax service and also are you starting to see the new customers in particular moving up or existing customers moving up in price point, because I understand to date anyway that the new customers have basically come in at the low end. So I’m just curious if you’ve been able to walk those people up.

Hemi Zucker

On pricing, we are still trying to bring new customers, more on bringing them on the basic value of the service, and if you heard I mentioned that we are launching new features like speech-to-text and live attendant and all those things. So all those features, we will try to creep up the apple, but the goal is not so much on our port. You remember in our eFax business, we started by getting the customer base and then introduction of improvement, introduction of feature, to pick up the price. So we are still very much the same. We are thinking about value and we know that we are providing tremendous value in a way much higher value than the mature fax customers getting for a dollar, but it is part of our strategy.

Now regarding the turn, the turn rate is not higher than fax, but we have a lot to learn. Unlike the fax service where you’re selling solution for one customer, one phone number, one email address. Here it’s more a system approach and we do need to learn how to improve and we are following up with customers to make sure that they set it up the right way and we are learning and we are doing a better job and because we have a lot of copycats out there. I’m not going to discuss too much in detail what we are doing, but we are learning how to improve the turn rate there.

Ray Archibald - Kaufman Bros.

You talked you’re approaching about 100 DIDs, and this may be a duck tailing on your last answer, is how many specific companies or customers is that?

Hemi Zucker

The average is between three and four.

Ray Archibald - Kaufman Bros.

Secondly, is on the voice text. Is that technology that you all have acquired?

Hemi Zucker

No. Several companies out there and while I’m not a technical expert, to get those engines to improve, they are basically to analyze. I’ll give you something funny. Every time I leave a voice message to Scott or to Kathy or to anybody else and I say Hemi, they don’t know what Hemi is, because it’s not a very common name. So it used to be something announced Tommy.

They know who Hemi is, but the data in the machine will know, oh do you say Hemi. But how it works is very basic. Every time the machines runs into the word that cannot decide either because of the accent or it’s something it didn’t hear before, it goes to a human person and those humans are saying okay, from now on when you hear Hemi, it’s Hemi. It’s not Tommy or Chumi or Pumi. What we are doing is these engines are getting better and as they get better, they can drop the cost.

So now there are three or four dominant players out there. They all want to work, because we represent a big market for them and we think a lot of them believe the best one and they’re interested in selling more of their service and we are the target. So we made a deal that we would make the introduction to all the 100,000 and then we have an arrangement that we pay beyond the test, they’re a customer for message per variable metrics.

Ray Archibald - Kaufman Bros.

Who did you get the license from?

Hemi Zucker

I don’t think I can say, but it’s one of the big ones.

Operator

Your next question is from C. Darem - Cardinal Capital

C. Darem with Cardinal Capital

On the R2 trend, so sequentially looking at 16.1 a month versus just about 16 in Q407. So should we understand that has having been primarily because of the improved usage.

Scott Turicchi

That would be correct.

C. Darem with Cardinal Capital

Then, in terms of sales and marketing as a percentage of sales that declined sequentially, I think you talked about the business on the S&M side. So as we look for the rest of the year, is that kind of the percent, the ratio, that you think about or is likely to track up again to close of 17% rate?

Hemi Zucker

We are trying to work with more general partners on CPA versus CPM. If they want to work on CPA, we would be very happy to increase our expense, but also adjustment to the economy that has to be careful about advertiser. So today, the discipline is basically showing the lower spending on marketing. If we find, and we do find more and more partners, because of our sheer size and reputable brands, want to work with CPA, then the market increase might go up.

C. Darem with Cardinal Capital

When you say CPA, I think what you’re saying is we got more people to partner with us pushing the product, then we would be willing to sell. Then in DNA, again, I found that if it tracked up a little bit, is that the run rate for the rest of the year?

Scott Turicchi

Better not be. No, as Kathy pointed out, first of all you have some seasonal expenses that usually hit Q4 and Q1 in professional fees and accounting. Not purely accounting, but it’s the variety of things we do in a combination with a fiscal year end, the filing of the K, confirmation of the tax provision, a whole bunch of professional fees that you would probably generally aggregate as accounting related that spill into Q4 and Q1. Well obviously the K was filed in late February, so those expenses are behind us.

The other piece that also influenced both Q4 and Q1, you’ll notice when we file our K, these cost have ceased, had to do with some litigation that we were subject to by an entity called Bear Creek that claim that we’ve infringed one of their patents. In that case, during this past quarter, was staked. Pending a re-examination of their patent. So literally, a few $100,000 dollars of expense on a legal side between Q4 and Q1 has now ceased, pending the patent office’s review of that patent and the various claims associated there with.

C. Darem with Cardinal Capital

Okay, and then on the depreciation and amortization, the rate of 3.1, that was a little bit more than Q4, but certainly year-over-year as it tracked up, is that a run rate that one should assume a $3.1 million?

Scott Turicchi

Yes. The amortization and obviously, and we’re very hopeful, when we do an M&A transaction, you’ll actually add to that amortization as we allocate the purchase price and then have to run it through the P&O.

Before we go to the next live question, we have a few questions that have come by email. I think some of them have already been answered, but let us run through them fairly quickly. One has to do with CapEx.

As we mentioned on the Q4 call, we believe this is a maintenance year for CapEx, so ’07 was on the high side. We have some special projects that had to do with enhancing some of our data centers and disaster recovery areas. Those will occur from time to time, but they’re not slated for another few years. So we believe that this is a maintenance year, probably in the $4 million range of CapEx. As you know, we don’t spend the CapEx over the four quarters. So there will be some seasonal ups and downs on a quarter-to quarter basis.

The next question had to do with in a corporate business with our large customers, yes, these are defined with the new adds that we had are 1,000 or more DIDs contractually. As I mentioned, when they actually deploy, it is likely they will deploy on average in excess of that, but that’s their contractual minimum. And then, I think we discussed the RPU, we did have as you just heard in the last call, a pickup in the RPU from Q4 predominantly driven by the improvement in the usage, which was a combination of more business in Q1 than Q4, but also the stabilization and some improvement in the credit sensitive usage activity.

A few other questions is we did mention the fact that the corporate opportunity is 54 in the pipeline, that’s 54. The question is is there any corporate voice receptionist. It really depends how you define if all of the receptionist activity is corporate business, but it’s SMB business. Small business. As Hemi mentioned, you’re talking about three, four, five, six DIDs on average being deployed. We’re not looking for the multi-hundred or multi-thousand DIDs with that service and that technology.

The last piece was the breakdown between the US and the international in the DID growth. It was still with the combination of corporate and domestic web, weighted to the US, these being the international in terms of those roughly 20,000 net DIDs that were added in Q1.

Operator

Your next question is from Corey Tobin - William Blair & Co.

Corey Tobin - William Blair

Any change to the trends that you’ve discussed here today, particularly with respect to either cancellation rate or anything else in terms of the credit sensitive customer base? Any change in those trends through April?

Scott Turicchi

No.

Corey Tobin - William Blair

So the month of April has been fairly consistent with what you saw in the first three months of the year?

Scott Turicchi

I think it’s not that usage always is perfectly correlated with other levels of activity, but I think that basically we’ve seen a stable book of activities for the first four months of this year through April 30. Understand, not all the numbers have come in for the month of April, but the snaps, the flashes, etc. appear to be consistent with the first three months of the year that had stability. These are what we observed in the latter half of ’07.

Corey Tobin - William Blair

On the voice business, I think last year you talked about sort of 100% plus year-over-year growth in ’07 and if memory serves there was some commentary with respect that could remain at that rate through 2008. Is that still the proper way to think about the potential for that business in the near term here?

Scott Turicchi

Yes.

Operator

There are no further questions at this time.

Scott Turicchi

I appreciate it. We thank you all for joining us on this call. As you are probably aware from our press release that we put out a few days ago, the company will be presenting at four conferences over the next three weeks. The first one being Thursday of this week, May the eight, and the last one on May the 29, all in New York City.

There are details in that press release in terms of how to either listen to the webcast. Three of the four of them will be webcasts and on a couple of them, I think there’s still room for some one-on-one opportunities if any of our investors happen to be attending those conferences and then we will look forward to speaking to you again to discuss the Q2 results most likely the first week of August. Thank you.

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Source: j2 Global Communications, Inc. Q1 2008 Earnings Call Transcript
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