JCOM
#You're welcome.
Because you have a different mix in revenue, particularly as you move from Q4 to Q1.
So in Q4 to Q1, you have in Q4 incremental display and video advertising revenue that comes in at very high marginal margins.
That drops off as you enter Q1.
Yes, <UNK>, if you can realize or visualize this business, it's a business that has almost fixed costs, so once you pass a certain threshold, it goes all the way to the bottom line.
So we passed the revenue, and usually Q4 is very high while costs maintain the same, so it drops all to the bottom line.
But your mix of revenues changes from quarter to quarter.
That's why you have to look at the margin in the same fiscal quarter, so Q1 to Q1, and not compare it to a different quarter even though there might have been the same level of revenue, because it's likely that the mix of revenue is different.
See, we are catering to technology, PCs and everything strong in the last quarter.
Everybody wants to buy towards the end of the year.
Games ---+ the same, men's lifestyle.
Everything that we do is geared towards the end of the year, when we have even the carriers that want to do this year's special, so everything is geared towards the end of the year, when we basically have much stronger ---+ and that's one of the challenges of forecasting how our year is going to end up, because our first quarter ---+ how much was the first quarter last year, a percentage of total year, <UNK>.
About 30% of revenue and 40%-some of EBITDA.
Right, so instead of 25%, 30%, so that's the challenge.
It's also the upside of this business.
Look, it was a strong quarter.
I will tell you that it beat ---+ it beat both our internal budgets, it beat our own organic growth rate sort of expectation.
Yes, I understand you have a different issue than I do.
So I've got a range for the year, and as I said, we're not changing the range even though we might be shifting within the range.
I think it would be ---+ I think if you took the Q1 results, where everything went almost perfectly, and extrapolated that out, that could lead you to a conclusion that is somewhat aggressive.
Well, I can give it to you for Q1 of 2016 versus Q1 of 2015.
The media business was a low double-digit organic growth rate, which is also where it was in Q4.
The Cloud Connect business was about 1%, and the cloud services was also about 1%.
Going back to 2015, I only remember it ---+ and by the way, that's in US dollars, so we have ---+ it's not a huge issue, but we have about a 1-point currency headwind in Q1 of 2016 versus Q1 of 2015.
Two million dollars, yes.
Yes, it was about $2.5 million, so it's a little over 1%.
In 2015, I know that there were some analysts who did some work on the various pro formas and disclosure in the K's and came up with an aggregate growth rate in 2015, in US dollars, of about 2% to 3%, and then in 2015 we had a 2% FX headwind that you would add to it if you wanted to look at it in constant dollars.
And it would be a little bit higher growth rate for the media and lower for the cloud business.
Yes, and I also tried to predict this question and the answer.
The smaller units are growing faster organically than the larger ones, and the reason is because they have less churn to cover for, but all of them are growing organically.
Excellent question.
Well, I'd say a few things about the patents.
First of all, we have a very robust portfolio, so we've got about 200 patents, of which about 130 are in the US.
They relate predominantly to the cloud business, and most of them have applicability to the Cloud Connect business, including the fax business.
Historically, for the portfolio we own, including patents that have already expired, we have about 125 companies that have taken a license.
We have patents that extend out to 2032, most specifically in the fax space, and I think they're interesting ones because they cover the outbound portion of fax to email.
And some of those patents have been actually recently asserted against some of the outstanding litigants that we have, because as you know, these patent cases tend to go on for years, so you'll find in our K and our Q a few cases that have been around for a while, so we have now added additional claims to those cases and specifically on some of the patents I'm referencing now that have elongated expirations and deal with the outbound sending.
But I would also say this ---+ and I know that people have commented and they've put undue emphasis on the patents ---+ we are big believers in intellectual property.
You can see in the chart here we invested $70 million over the year in acquiring IP, developing it internally, et cetera.
It's important.
We think it's an important element to our business, but we also don't believe it is a seminal piece or the seminal piece.
Obviously, the SaaS and cloud space is not like a drug company, so others are in all the spaces that we are in today.
As I mentioned, a number of companies have a license from us, but there are others who don't, hence the reason for pursuing them either with litigation or trying to reach a settlement through a licensing program.
And what I would say is that when you compete in a space, it's nice to have the patents, and it might marginally change the cost of doing business for someone because either they take a license and they've got to pay you a fee or they litigate with you and they've got those costs, but the real day in and day out benefit and ability to compete against third parties is about your operational focus and excellence.
So in the Cloud Connect business, it's the fact we've been doing it for the better part of 20 years.
It's the fact that we have very strong brands both regionally and globally.
It's the fact we have millions of telephone numbers around the world on a very cost-effective basis, which is hard to come by.
It's the fact that we have specific programs to target customer acquisition on a discipline basis in terms of cost per acquisition for each sub-segment of the market.
That's the real benefit.
The patents are nice.
They're an added increment, but if you don't have those other things, the patents are not going to save you or protect you.
Yes, and to add to it, every large player that we are aware of or mentioned in any of those lists is already licensed with us, one of those 125 companies that did, and anybody new that wants to enter this space, it is not very expensive to license it, so that's not a barrier.
But we'd like to.
You saw our patent license revenue.
It was only $1 million a quarter in the last quarter, so we're open for more licenses for those that are out there.
So <UNK>, if you want to start to compete with us, I'll get you a plan.
It's not so expensive.
Okay.
So we are selling the product for the same price of the website, $16.95 for eFax, and I believe it's $10 ---+
$9.95 for MyFax.
Yes, around $10 for MyFax, and so we are selling it at the same prices.
We are giving very similar ---+ one month free or not.
Usually, actually there's a free trial and then ---+ so pricing is the same.
Long story short, pricing is the same.
Deliverability is a little bit different.
People that use it only on the mobile are more exposed to the ability to sign the documents and to ---+ there are some interesting features that are easier to use on the mobile, but basically the pricing is the same.
Did I answer you, <UNK>.
Oh, yes, I mean, in terms of the revenue contribution, again, and all the signups we do in digital fax, it's small, but it's encouraging both in terms of in the last probably six, seven months since we launched it, the last ---+
We launched it ---+
In December.
Yes, it's ramping sequentially week to week.
Right.
That's what's encouraging.
And then we started only with the Android, and now we've brought in the IOS, and we can go into other brands, other countries.
It's US only.
And I think the other thing that's interesting about it, even though the revenue is de minimis today against the base of the digital fax business, I'm sure it's counterintuitive to a lot of people thinking, well, if I've got a mobile device, why would I either be having fax as a service or certainly engaging and signing up through a mobile device, but that's exactly what we're seeing happening.
So I think it'll be a while before it would be millions of dollars in incremental revenue to eFax, but if it's keeps accumulating each week over the remaining portion of this year, it will start to have some impact.
Very good question.
You mean, for cloud as a whole.
No, only for email security.
Or email security.
Yes.
Email security, okay.
So FuseMail is a business that has several elements.
We have in the Nordics Comendo and Stay Secure, which are ---+ Comendo is a public company that we acquired in Demark in the end of 2014, I think, and we paid ---+ there was a question before about how time it takes to integrate.
Usually we try ---+ if the integration is slow, we are very careful that it would be reflected in the lower price of the acquisition.
So this was an example of a company we didn't pay a lot knowing that the integration would take a longer time.
So that's one part of the business.
The largest part of the business is Excel Micro, which is 20 ---+ I think $5 million out of the $40 million, which is basically ---+ am I right, <UNK>.
Yes, that's about right.
Right, which is basically licensing of various providers of cloud backup.
The largest would be McAfee.
Second largest probably is ourselves, our own product.
Cloud security.
You said cloud backup.
Oh, sorry.
Sorry.
Email security (inaudible) anti-virus.
So basically the more we migrate from foreign and different systems into ours, the higher is the EBITDA.
The cost of us providing the service from our own system is like less than half with what we would pay McAfee.
So if McAfee is announcing end of life, there are less choices in the market.
People are buying from us, and the EBITDA increases.
I think that we should have Q4 at over 40%, and it depends on the next acquisition, but if we don't acquire, it should go organically, naturally, to 45%.
You have to remember also in the migration, you have to keep resources to serve the old and the new system, and you have stuff that is busy in migration.
Once it's stabilized, there is a lot of synergy out of that, so 45% I think is easy to achieve, unless we will do acquisitions that will throw us again into additional work of integration.
Did I answer you, <UNK>.
Thank you.
All the best.
Okay.
Thank you very much for your time and attention today for listening in on the Q1 2016 earnings call.
We will have a press release out shortly announcing a series of conferences that we will be presenting at over the next several weeks, primarily on the East Coast and the Midwest, although there's also one here in California.
I believe there are four of them.
So look for that.
If you happen to be in one of those regions and would like a follow up in the form of a one-on-one, let us know.
And then we look forward to speaking to you again to report Q2 results in early August.
Thank you.
