Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Scott Turicchi – President

Kathy Griggs – CFO

Hemi Zucker – CEO

Analysts

Naved Khan – Jefferies & Company, Inc.

Brad Whitt – Broadpoint Capital

Brian Schwartz – Piper Jaffray

Daniel Ives – Friedman, Billings, Ramsey & Co.

Valan Yadav [ph] – Raymond James & Associates

Raimundo Archibold – Kaufman Bros.

Robert Breza – RBC Capital Markets

j2 Global Communications, Inc. (JCOM) Q2 2008 Earnings Call Transcript August 5, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Communications second quarter earnings conference call. It is my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global Communications.

Thank you Mr. Turicchi, you may begin.

Scott Turicchi

Thank you very much. Good afternoon and welcome to the j2 Global investor call for the second quarter of 2008. As Kelly just mentioned, I am Scott Turicchi, President of j2 Global and with me today is Hemi Zucker, our Chief Executive Officer, and Kathy Griggs our Chief Financial Officer.

We will be discussing the second quarter financial results as well as providing you with an update on operations. We will use the IR presentation for today’s call a copy of which is available at our Web site. Also if you have not received a copy of the press release you may access it at our Web site at j2global.com/press. In addition, you’ll be able to access the webcast and the related slides from this site.

After completing the formal presentation, we will conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. In addition, at any time during this call you may e-mail questions to investor@j2global.com.

Before we begin I will read the Safe Harbor language. As you know this call and the webcast will contain 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-Q filings, various proxy statements, and 8-K filings, as well as the additional risk factors that we have included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements.

As we noted in our press release, we were very pleased with the operational results for the second quarter. Our focus this year has been on continuing to improve the already excellent margin profile of j2 Global as well to deploy our cash balances and free cash flow into higher yielding assets. Consistent with this philosophy, we remain disciplined in our overall subscriber acquisition costs and have been successful in both improving the gross and the operating margin.

For more specific details I will turn the presentation over to Cathy who will walk you through the second quarter results on slide 9.

Kathy Griggs

Thank you Scott. Good afternoon ladies and gentlemen. Please refer to slide 9 as Scott has indicated in our web-based results. I am pleased to announce that our subscription revenues grew 13% or approximately $7 million. Despite the current economy, our international revenues grew 26% and our domestic revenues grew 10.5%. Total revenues for Q2 were $60.7 million this quarter compared to $54 million in Q2 ‘07 for an increase of 12.4%.

Similar to last quarter, we continued to generate strong DID growth while maintaining a stable cancel rate. We had 64, 200 DID in Q2, our best quarter in the past six years the majority of it coming from our two acquisitions. Currently we expect our quarterly organic run rate to be more in the neighborhood of our Q1 performance going forward. Our voice brands and corporate fax continue to perform the strongest. We continued to benefit from our corporate customers’ trend about certain IP services and new voice customers were benefitting from the intricate value of our Voice products and features. In total, Q2 ending paid DIDs are approximately 1.16 million, a 20% increase over a year ago.

Now for an update on usage. We are encouraged that our usage levels are relatively consistent with the prior two quarters despite a continued deterioration in the economy as a whole. Overall, variable revenue continues to remain stable at the low 20% range of our total DID-based revenues. You can refer to slide 22 for additional details on usage.

Compared to last quarter we have improved both our gross and operating margins. Our gross margins improved by half percentage point to 80.7% and our operating margins improved by 1.3 percentage points to 39.7. In our last call we indicated our goal is to reach a non GAAP gross margin of 81% by the end of 2008. I am pleased that we have been able to achieve this in half the time. Overall, expenses as a percent of revenue declined across the board. Q2 GAAP selling expense was 17.5% of revenues, R&D was 5% of revenues and G&A was 18.6% of revenues. The improvement in our margins reflects our continued commitment to managing our cost and increasing our efficiencies across our entire organization.

Our diluted GAAP EPS of $0.37 a share was an improvement of $0.02 from the prior quarter. While we grew our revenue 3.5% from Q1 to Q2, our EPS grew 6% which again reflects the successful management of our overall costs as well as the effectiveness of our stock buybacks. To get to our non-GAAP EPS you will need to adjust to 123R of approximately $2 million pretax or $1.4 million after tax. The tax impact of 123R is approximately $0.03 per diluted share. Excluding 123R expense, our non-GAAP EPS was $0.40 per share. Our 10-Q and our press release are there to provide additional details by expense categories.

Moving on to the balance sheet, in Q2 we provided our investors with a return on equity of 29.4% annualized. We continue to generate strong cash flows and in fact our year to date free cash flow of $50 million is a new record for j2. During the quarter, we effectively deployed over $50 million of our cash by acquiring two entities, one in the United States and one in the UK and the repurchasing our j2 stock. As a result, our cash and cash equivalents, short and long-term investments decreased from the prior quarter of $181 million to $151 million Approximately 1 million shares of common stock totaling approximately and 21.4 million and we have now completed our share buyback program. In total, we have purchased 5 million shares with an average share price of $21.59.

Now Hemi will provide you with additional operational update.

Hemi Zucker

Thank you Kathy and good afternoon everybody. I would like to refer you to slide no 11. Phone People, mid May we acquired a San Diego company called PPHCO, Phone People Holding Corporation. The company offices are conveniently located only a few miles away from our San Diego offices and we already have started to consolidate the offices and next month all of our staff will be sitting in the same office, the office of Phone People. We acquired a very well managed company that had a full feature virtual PBX. They have also individual Find Me/Follow Me and the unique features the j2 did not have before is the Vanity number search engine. Basically customers enter the spelling of their name, product, company name or whatever they like and get a vanity number right away that can become the lead number for the company. The company that we have bought is very well managed and has very strong free cash flow. We have here a marketing opportunity to expand the targeting and are able to serve more customers and more targets.

We now have two US platforms. One platform is our Onebox platform and the new platform from Phone People. We are working on consolidating the two platforms into the Onebox and eVoice platform which again will add additional margins and will increase our profitability. As we already said in our previous press releases, the acquisition is already accretive and is going to become more accretive after we continue with the consolidations.

Now, let’s move to page 12. I broke it into two paragraphs, one is dealing with the US and Canada and the other one with Europe. In the US, we are operating under three brands, eVoice Receptionist, Onebox Receptionist and now Phone People. In the last earnings call if you remember I said that by the end of April we had approximately 100,000 DIDs under the Voice services. Now, by the end of July, we are having 150,000 customers. So basically in the three months of May, June and July we have added approximately 50,000 net DIDs. We believe now that with this addition we are the leading largest company in the Virtual PBX, we believe that we are the largest in the US and we are not aware of any other company around the world that has more paying subscribers in the Virtual PBX bases.

We are now catering to different customers in different segments. The Onebox is the world’s choice [ph] has everything you need, eVoice is the basic service and Phone People is focusing on Vanity numbers and companies are searching to have a service that is more used to our customers, customer support, sales organization, etc, etc. We have, as I mentioned before, deployed the voice-to-text basically the ability to convert voice into text. We deployed it into the Onebox base, we were very encouraged by it and now we are going to continue to deploy it into the eVoice Receptionist and later on to the Phone People. I want to pull your attention that we are not advertising yet on our Web site about the capability, we are doing it after sales and we have been very pleased and in the next 90 days we could also add it into the Web site as a feature that customer can find at the moment of decision making.

We continue to evaluate other features and as you know, we are a marketing company and here we can see a small sample of our new Onebox Web site that we are testing currently and all is geared towards increasing conversion rate and increasing the convenience for the customers. On the eReceptionist, which is our product in Europe, the eReceptionist and also YAC, You’re Always Connected, we have started with Western Europe. We are not as advanced as we are here in the US but we are making progress. We have started to do cross-selling to our European eFax base and we are happy with the results. eReceptionist is covering mostly the Western Europe and we have now inventory of numbers that are covering the rest of the UK because up to now we were kind of covering only (inaudible) and premium numbers, the numbers in our inventory and you should expect in the next few months heading those numbers into our inventory so we will be able to cover the vast majority of the UK citizens getting local numbers.

Moving to slide 13, our Corporate Fax. We are very pleased and we are happy with the increased demand for our fax to email service in the corporation. In the last two, three quarters we averaged more than five big contracts every quarter. Big contract is a contract in the area of 1000 plus fax numbers. In the last three quarters we have sold – in one of the quarters we sold seven over 1000 deals, one of them four and one of them six averaging over five. Those large enterprises are continuing to buy from us recognizing the leadership and the solution that j2 has to offer. Among others they are finding because they can deploy very easily across all the countries, across all the companies, corporations. With a click of the mouse they can deploy fax numbers to email addresses and have immediate service up and running. They can eliminate less scalable solutions in multiple locations. We helped them to comply with ever increasing demand, you know, compliance issues like extra copies (inaudible) etc, etc. Also especially in this environment they would like to pay as you go rather than to make an investment in capital assets.

We are continuing also to work on our available opportunities, those opportunities to make some of the eFax developer, basically application that allows you to run directly from your database and your corporate environment and faxes that go directly from your systems out. We are enabling companies to sign for domain levels send which means that while you don’t want to give fax numbers, inbound fax numbers to every employee you do want to empower every employee to send out fax, so you can come to us and say okay, every fax that comes from a domain company.com, take it grab it and send because of the deal they are having with us and it has been successful as well, we have affinity programs when we will sign a deal with a major corporation allowing each department or organization, allowing everybody who is part of the organization to enjoy the pre-negotiated price and all the other features and we have started to do cross-selling of our voice services and I am very pleased to announce, I am not sure maybe I talked about it the last earnings call, I think I didn’t , we have made our first voice sale that was 700 plus DIDs to one organization. It is an organization that has deployed it into its sales and service organization when they have their full features Find Me/Follow Me that it can also be managed by the back office. So, if let’s say you have a salesman who is in Detroit and (inaudible) mobile number now we can give a Onebox number and they will call and discuss if the sales person leaves the company to move to another place, you don’t have to bother with a new phone number, you just continue to take the Onebox number and forward it to the phone number of the new replacement. So, we are also happy to see initial (inaudible) in the corporation for our Virtual PBX services.

Last but not least, slide 14, last quarter we won the Stellar [ph] Award for a creativity this month, our talented creative team has won the 2008 Silver Communicator Award for eFax Direct Marketing under the slogan You Are Here, we congratulate this team and hope that they are listening to the call.

I will now pass the call to Scott.

Scott Turicchi

Thank you Hemi. I turn your attention to slide 15 want to talk and remind you a little bit of the 2008 goals and then talk about our guidance for 2008.

On slide 16, you will recall in the February call to discuss the Q4 results and the initial guidance for 2008, we made an assumption that both the financial services sector and possibly broader sectors of the economy will find it difficult in 2008. As a result, we instituted a certain operating philosophy for 2008 designed to hit upon the following points. One is to grow the voice services business into a leadership position. I think we are well in our way to doing that both with the organic growth and also with the ability to have been able to acquire Phone People during Q2. As I told many of you, I was skeptical that we would do an acquisition in the voice space, because of the rate of growth generally the acquisition multiples are much higher than we find justifiable. However unique circumstances presented themselves that allowed us to acquire Phone People and we have been very pleased.

Second is the focus in the fax area on the corporate and the international markets, Hemi has commented on the corporate in his slides that we just talked about. Second or the next important is to improve the margins both at the gross level and the operating. Next is the focus on the free cash flow generation because that we can put to work by deploying it into a combination of M&A by adding assets to our base and where those are not available to buying our own stock if we find the price attractive. So, if we go to slide 17, we are pleased that we hit the half-way mark in a way to have really met most if not all of the objectives. As I mentioned voice services is well on its way to establishing itself as a leader in the space, if not the leader, having deployed more than 150,000 DIDs. The corporate fax enterprise group continues to sign up a large number of deals. There were four that were signed up in Q2 plus there was one renewal, so there were actually five negotiations of large deals 1000 DIDs or more.

The international business grew approximately 30% over Q2 of 2007. The gross margins are up 108 basis points. Since the end of ’07 our operating margins are up 241 basis points. I think the next two points are very important which is the incremental revenue we’ve added in the first half of 2008 against where we ended the year in 2007, 95% of that incremental revenue has flowed through the gross margin, 75% of that has flowed through to operating margin. As Kathy and Hemi have both mentioned, we had a record free cash flow first half that enabled us to repurchase 5 million shares of stock at an average price of $21.59 as well as to complete two M&A deals. So, we believe we are well on our way to reaching our 2008 objectives that allows us on slide 18 to reconfirm the guidance that we previously discussed. I get the question from time to time to remind people, it is our policy that when we go out with annual guidance it is not our intention to change whereby or alter that guidance unless and until it becomes clear that either the higher the low end of either revenues or EPS is likely to be violated. So we continue to reaffirm the annual guidance we gave you back in February.

There are the supplemental information following which include a continuation of the metrics, the computation of free cash flow and its reconciliation to GAAP and that as Kathy mentioned slide 22 is an update on the usage characteristics of the credit sensitive piece of the business and the non-credit sensitive piece, roughly stable and in line with where they were in Q1.

At this point, we ask Kelly to come back on and instruct you how to queue for the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, we’ll now begin conducting the question-and-answer session. (Operator instructions) Our first question comes from Youssef Squali with Jefferies & Company, Inc. You may proceed with your question.

Naved Khan – Jefferies & Company, Inc.

Hi guys, this is Naved Khan for Youssef.

Scott Turicchi

Hello Naved.

Naved Khan – Jefferies & Company, Inc.

Hi. My first question is on eVoice, can you guys break out the organic growth in this business during the quarter?

Scott Turicchi

No. As you know we give you the aggregated metrics. I think Kathy mentioned majority of the 64,000 net DIDs added to the company as a whole came from the two acquired businesses Phone People being bigger than the Mediaburst deal. But no, there is no supplement and I don’t think we intend to give one.

Naved Khan – Jefferies & Company, Inc.

If we compare the growth rate versus the first quarter, would you say that it was relatively same or did it go up or down, any more color?

Hemi Zucker

As we say, the organic growth rate in Q2 was the same as Q1, maybe a little bit higher but very similar, anything above it you can assume came from the acquisition.

Naved Khan – Jefferies & Company, Inc.

Okay great, just looking at the cancellation rate, it bent up slightly quarter on quarter, was there anything specific going on here?

Scott Turicchi

No, I think as we’ve said before I think the weaker economy clearly has biased it up a little higher than we would have (a) liked and (b) expected say relative to a year ago. With the price change rolling off, something anywhere in the 2.5 to 2.75 percent range would be acceptable with an ideal target somewhere in the mid of that range like two six, two six and a half, I think the delta that is higher than that is the weaker economy. I think we see some of that. Also, as you roll out new services, they tend to have a higher degree of cancel initially as people are getting used to the service and really understanding what it is that they have bought.

Hemi Zucker

We also have a last corporate account that has cancelled some numbers the end of the quarter and took them back in the beginning of the next quarter. This might have also had some impact. Usually it is not cancellation, it is just the migration of moving you know, I think it is marginal.

Naved Khan – Jefferies & Company, Inc.

Okay, for the remainder of the year, do you expect cancellation rate to stay around this level or trend back down?

Hemi Zucker

You know it is above the economy but I see that the weak ones already weed themselves out so I would expect it to be same or better. But I see Scott and Kathy nodding their head but you cannot tell the last affirmatively. I would assume it will be just better but you know it’s a forecast.

Naved Khan – Jefferies & Company, Inc.

Okay, understood. Lastly just on the use of cash, would you consider increasing the authorized share buyback?

Scott Turicchi

Would we consider another share buyback?

Hemi Zucker

It is opportunistic –

Scott Turicchi

I think the answer to your point, we recently just literally about two weeks ago, the existing 5 million share program was exhausted. So, yes, we will look at now – obviously we saw the meaningful amount of cash and very strong cash flow so we will look at ways to continue to deploy that cash one of which will be additional stock buybacks. That obviously is a board decision we will put that in a broader context. At the immediate moment there is no plan but I think that is something we will address again.

Naved Khan – Jefferies & Company, Inc.

Okay great.

Scott Turicchi

We in the company I think collectively including the board and everybody have been very pleased with the execution of the buyback and what it has done for us. So, we are certainly not only not adverse I think we are supporters of buybacks.

Naved Khan – Jefferies & Company, Inc.

Okay thank you.

Operator

Our next question comes from Brad Whitt with Broadpoint Capital. You may proceed with your question.

Brad Whitt – Broadpoint Capital

Hi guys, thanks for taking my questions. Going back to I think Kathy’s comments about revenue going back to the Q1 revenue run rate, can you go just run through that again and give us little more color there?

Kathy Griggs

Yes. As I indicated, we said that the majority of our goods this quarter Q2 came from the two acquisitions that were previously discussed. We do expect that our quarterly organic run rate to be more than April we are going to put (inaudible) which I believe was in the 35 or so range.

Scott Turicchi

Mid 30s.

Kathy Griggs

Mid 30s.

Brad Whitt – Broadpoint Capital

Okay. I thought you were saying the revenue, Q1 revenue –

Kathy Griggs

No, no. It’s DIDs, we were talking about DIDs.

Brad Whitt – Broadpoint Capital

Okay. Hemi, can you talk a little bit maybe give us a little more color around targeting voice towards your corporate customers, is that something that you had started or just something that kind of happened in the quarter with one customer and how do you think customers will look to deploy that service potentially, corporate customers?

Hemi Zucker

Hi Brad. The customer that we got, the call or the sale was not done by our corporate sales team, it was done by our telesales team or the telesales team that focus on voice services. Encouraged by that, we are just now starting to deploy several up sales, up sales mostly when corporate customers call us to our service or telesales and we are testing emails. One of the keys for success in Corporate, you don’t want to broad brush the entire base and get some people annoyed. So eMarketing into the corporate base is an art that will be different to the one that we do on the – we started and we are encouraged by the result as again you know corporations have large PBXs deployed but there are certain segments of the organization like the example that I gave of sales, customer support, the 24x7, all those that we believe and experience are going to acquire the service and again as usual with the stock releases, we do have already with the existing voice base some large corporations that made a department initiative or something like that that took the numbers. So, to answer we didn’t start yet but we are in the process of doing it now.

Operator

Our next question comes from Mark Murphy with Piper Jaffray. You may proceed with your question.

Brian Schwartz – Piper Jaffray

Hi this is Brian Schwartz in for Mark Murphy. Just had a question on the churn which ticks up here a little bit, did you give us an update on the churn within your credit sensitive customer base, has there been any change here throughout the quarter maybe so far here through July?

Scott Turicchi

No, I don’t believe there is, I think it has been fairly consistent probably for the last two, three quarters.

Brian Schwartz – Piper Jaffray

Fairly consistent in that it is leveled out or –

Scott Turicchi

Yes, it has been roughly sustained over that time frame.

Brian Schwartz – Piper Jaffray

Okay.

Hemi Zucker

And most of the credit sense of these customers are what we succeed not any more a drop in usage but not really cancellation.

Operator

Our next question comes from Daniel Ives with Friedman, Billings, Ramsey & Co. You may proceed with your question.

Daniel Ives – Friedman, Billings, Ramsey & Co.

Hi guys, question on the month to month patterns, because I know you always get that feedback when you have made April, May, June, was there any sort of anecdotal sort of pattern that you talk about month to month to finish stronger in June in terms of usage?

Scott Turicchi

Let’s see, the usage patterns, if I recall April and May were fairly consistent with each other. I think June was a little lighter and July was a little stronger. But they are all sort of modulating around a mean line that is fairly consistent. I don’t want to use the word stable because I think that there are elements of the economy that could change those patterns but in terms of the actual data that we have seen, they have been fairly consistent on average month to month with some variation in part based on business days and in part based upon elements that are not exactly discernable in terms of wider movement positive or negative around the mean.

Operator

Our next question comes from Shyam Patil with Raymond James & Associates, you may proceed with your question.

Valan Yadav – Raymond James & Associates

Good evening, this is Valan Yadav [ph] filling in for Shyam. Could you talk about credit sensitive revenue component in terms of the fixed versus the variable revenue stream?

Scott Turicchi

We would have to pull it – I would want to say based upon the aggregate metrics it is probably similar to Q1 which would be slightly in excess of $7 million of fixed revenue and five and a half, five and three quarters of variable but we would have to actually double check that, it’s going to be in that range.

Valan Yadav – Raymond James & Associates

How should we think about sales and marketing expenses for the balance of the year?

Scott Turicchi

We are continuing with the philosophy that we entered this year which is very disciplined, so the sales and marketing dollars are being allocated by brand and by region of the world based upon a number of months' payback. It is not cap in the sense that if a brand or a region of the world is able to deploy more marketing dollars at their target month payback they will be allocated that. What we are not doing this year is trial marketing, a lot of testing, anything like would be equivalent the radio spend of last year which was a separate budget with basically a view that this would be money spent with a future payback but very little current return. So, I think you can – that is true not only on the dollars spend with vendor’s side but it is also true on the people’s side. So, I think you should continue to see fairly tight sales and marketing as a percent of revs with probably not as much variation quarter to quarter as you may have seen in previous years.

Hemi Zucker

Let me tell you something, you were trying to basically correlate the spend to the economy, so how do you do it? If you say to your sales people you can spend a fixed amount which correlates to the monthly usage of each service, is the economy better and they sell more, they will spend more. If the economy is weak and people don’t click and don’t buy they will spend less. So, what you are seeing here in the modeling is basically economy goes strong, we sell more we spend more, economy is weak, it is less. Because of the nature of our business we are able to manage it pretty tight in correlation with our sales.

Operator

Our next question comes from Raimundo Archibold with Kaufman Bros. You may proceed with your question.

Raimundo Archibold – Kaufman Bros.

Thank you. Hemi in the past you have given us some patent in terms of some of the pricing trends on the voice side and that you were looking at perhaps tweaking some of the pricing, so first question relates to if you can give us an update in terms of what the pricing trends have been on the voice service?

Hemi Zucker

Hi, Rai. Yes, I did talk about it in the past and I mentioned that that the way that we are going to manage the prices up or increase the ARPU this was the admission of features. So for instance if you are led to take the speech to text, you will be charged another $10 for the basic and $34 the more advanced service so with the live Receptionist and so with everything else. So because we are entering the market now and we are trying to grab market share, the prices are where they are but the additional features are helping us to drive the ARPU up and while we don’t discuss it based on the conversation that I had this morning with the Dow Managers the output is inching up.

Raimundo Archibold – Kaufman Bros.

Okay. The second question is on the corporate business where you highlighted that you have been averaging about five large contracts over the last, I guess, three maybe four quarters. So, I have two questions, one is can you give us a sense as to what the backlog of DIDs are in terms of the deployed because I understand that is taking time to ramp, so where are we in terms of how many DIDs are yet to be deployed?

Hemi Zucker

Okay we measure it in how many DIDs we have in the pipe and there are also DIDs to be deployed. The DIDs to be deployed is the gap between how many contracted DIDs we have versus how many deployed. I don’t know but maybe Scott knows the number. About 10,000?

Scott Turicchi

My regulation is about 10,000 DIDs that have fallen under contractual negotiation but are yet to be deployed and as you pointed out usually those will be deployed within a 90-day period from the contract being signed. So DIDs and deals signed up in Q2 will deploy throughout Q3 some have already deployed but they should be fully deployed by Q3. And as far as the pipeline, I believe it is 62, it went up from the previous quarter where it was in the mid 50s. The pipelines stayed healthy. There are some DIDs yet to be deployed which means right now they are coming in at modest revenue if any and as they get deployed then the usage starts to build up and we see higher ARPUs out of those DIDs.

Operator

The last question comes from the line of Robert Breza with RBC Capital Markets, you may proceed with your question.

Robert Breza – RBC Capital Markets

One quick housekeeping question, Kathy the tax rate was a little higher than what I anticipated. Can you give us any guidance on how we should think about the taxes for the second half of the year?

Kathy Griggs

Sure Rob, no problem. The tax was impacted and will continue to be impacted going forward based on the fact that we have a couple of recurring items going on in the tax rate. Previously to the extent we held cash balances in our domestic investment account we had interest that was basically tax exempt. That tax exempt interest was obviously a reduction to our income in terms of calculating the taxes. We no longer have those kinds of balances in the United States based on the stock buyback and the acquisitions therefore we don’t have that deduction any longer from our income. So that’s affected the tax rate. The second thing is that we are accumulating cash overseas as well and the interest that we generate off of that tax overseas is taxable in the United States that is what we call subpart F income. So, it is a little complex but those are the two basic reasons. Also of primary note here is that the R&D tax credit was not renewed by the Congress. The (inaudible) was represented at Congress was not renewed and therefore we don’t have that additional deduction going forward. So when they lease a term, until some of these balances change and are redeployed, you will find that our cash it will probably hover in the 31% to 31.5% range.

Robert Breza – RBC Capital Markets

Great, that’s helpful. Maybe you just do kind of the last question Scott. I understand that the FASB around the guidance violating the upper and the lower range, I guess I would have expected with two acquisitions we are halfway through the year that needed the range would have been tightened a little bit, can you kind of at least talk us through are you thinking about more acquisitions here or what is really going to give us a pretty wide range on a relative basis. Can you maybe just kind of talk us through what – or maybe expound upon the philosophy there?

Scott Turicchi

Well, let’s break it into two pieces. The real philosophy on guidance is that we obviously do annual budgets and those drive a lot of elements within j2, they drive the guidance for the year, they drive compensation programs, etc. and the philosophy is that once we state that range, irrespective of where we are falling in that range on revenue EPS, it is the range, it just stands there. Now, if it becomes clear during the year whether it is through M&A activity, through stock buyback, through deployment of cash, through organic growth, through any series of variables that a bound in the range is likely to be violated then we would readdress, rearticulate in that range to take those events into account. But under the analysis and the assumption, we are still falling within the range the range remains reaffirmed. That is a philosophical viewpoint of j2 as it relates to guidance. So, it is not meant to signal that we have x, y, z in our pocket which would take us from where you may think we are currently tracking in the range to some other level of the range. It is merely to say business consistent with our budget, this is consistent with what we are midyear, we reaffirm it. Now separate from that, the answer to your question is yes. The M&A activity and the M&A pipeline continues to remain active though the deals much like the stock buyback and much like our other activities are really ROI based. So, as we commented in the last couple of quarters and maybe we are starting to see a little bit of light here as we did in Q2, it is time for the sellers of assets to have an adjustment in their valuation expectation. So, we are probably a year into the economy being weak and only in the very recent past to maybe as we speak are some of the valuations in some instances becoming more rational. There are still many out there who have hope certificates that either something will turn quickly that will change people’s view on valuations and take them up or they are just going to hunk her down and weight for an exit strategy in a better environment. Those two are really distinct questions. The guidance is a philosophical viewpoint endorsed by the board of how we articulate our guidance and the M&A is really how do we deploy our cash, can we get the right rate of return, can we buy at the right multiple? If we can it is our preference to use that cash and the cash flow in M&A, but to the extent we cannot and we build it at the rate we are building it then at certain levels we also find the stock attractive.

Operator

The next question comes from Raimundo Archibold with Kaufman Bros. You may proceed with your question.

Raimundo Archibold – Kaufman Bros.

My question was just answered. Thank you.

Scott Turicchi

Are there any other questions?

Operator

There are no more questions in the queue at this time.

Scott Turicchi

Okay. We (inaudible) not to have received any questions by email so we’ll take it that everybody has had an opportunity to ask their questions. I will be presenting at the RBC conference this coming Thursday in San Francisco at 9 am Pacific. You will probably hear a lot of which you have just heard but we will be having that presentation a day of one on one but there would probably be some conferences coming up between now and the next earnings call which will be slated for sometime in early November to discuss the Q3 results and we thank you for your participation.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: j2 Global Communications, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts