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TMF Interview With eFax.com
CFO Todd Kenck

August 16, 1999

With Brian Graney (TMF Panic)

Based in Menlo Park, California, eFax.com is a provider of Internet messaging services. The company's free fax-to-e-mail service, which allows users to send fax messages directly to an e-mail box, has attracted over one million users since being introduced this past February. We talked with eFax.com CFO Todd Kenck about the company's business model, its revenue prospects, and its growth plans for the future.

TMF: Could you start off by telling us a little bit about eFax.com's overall corporate mission and how you're creating value in the Internet marketplace.

Kenck: One of the interesting stories is that this is a new business line for the company. It began really during the third and fourth quarter in '98. The company had been in the hardware, fax, and communications space doing both manufacturing devices as well as licensing technology. One example of what we had done in our past life is that there is a Hewlett-Packard (NYSE: HWP) all-in-one product which we had done all of the software development for. We will continue to receive royalties from that on an ongoing basis.

The company re-launched on February 8, changed its name to eFax.com, and launched a free fax e-mail service. Our success has been greater than I think we initially anticipated. We've hit a million subscribers as of a week ago Friday and are beginning to work on growth and selling premium services which we launched in late June. So to complement our million free subscribers, we have somewhere between 15,000 to 20,000 paying subscribers over the last five or six weeks.

The fax-to-e-mail service is a fairly simple service today. It's a free fax-to-e-mail service and I think that simplicity has helped us be so successful. It's a very simple product to get people to understand. I'm not really trying to change consumer's behavior -- everyone understands fax, they get fax in one way or another. I'm just making it easier for them to receive fax while they're on the road, at their desktop, from home, from the hotel, as well as adding a layer of privacy on top of that since it does come in via their own e-mail.

TMF: Is the idea to replace the fax machine altogether, or do you think the two products will continue to coexist?

Kenck: I don't think you'll ever wipe out physical fax machines. That's one part of our system and you'll still need either a fax or a scanner today to acquire a physical image. We provide capability of faxing from your desktop so you'd either need to have a scanned document or, say, an office-based document. We can fax those for you to any fax machine anywhere in the world. But on the other side, their still is something like 500 million people that have access to fax machines today. And there are areas of the world where I don't think that's going to change as rapidly as I think that this country has moved toward other electronics distribution vehicles.

TMF: Over the short term, where do you see the company's main competition coming from and what are you doing to position the company to be a leader in its market?

Kenck: Where we probably see our competition right now is some unified messaging players because I think that's the direction our technology is going. And since we've been in the fax-to-e-mail space there have been a number of firms that have cropped up. To date none of them have a significant number of users. So I think we captured a lead on the fax side by really having a large installed base of over a million users that are using the service on a daily basis.

Other companies -- public companies -- have entered the space, one in particular is JFax.com (Nasdaq: JFAX). They've been in the space for a couple of years providing a paid fax and voicemail service to e-mail. They launched the e-mail product sometime after we did and I think we both probably have similar intentions of using our free [user] installed based to drive premium sales down the road. It's getting to be a more and more complicated space because there's a number of people trying to enter it, so I think the fact that we've established a large user base and have significantly invested in our brand will help us get the largest number of consumers and business users on our platforms.

TMF: How do you intend to keep the user growth going and what are some of your goals in terms of numbers, if you can get into that kind of information?

Kenck: It's difficult to give you specifics on that because it still is a relatively new business. I think initially when we looked at it, we would have been happy to get to a million [users] by the end of this year. Now we look back, it's probably more likely to be two-plus million by the end of this year and next year I certainly see it growing by a hundred percent again.

I think the way to continue to gain new subscribers is, one, we have a great word of mouth distribution. The product seems to get installed into corporate departments mostly by word of mouth. A manager begins using the product and disseminates it to his work group. It's an easily referenced product from one colleague to another or from a friend to a friend. So, I think that will continue to drive users in our favor.

But on the other side, we are spending a significant amount of resources marketing our brand, trying to drive people to us. And there will be more of that as well as other partnerships that will develop users. And I think as we add other technologies and other services, we make a more compelling offering.

TMF: What in your mind is the ideal eFax customer? Is there a certain target customer that you're trying to market the product to?

Kenck: One is just by the demographic. We're targeting the professional business user -- a consumer of fax who is more than likely a sub-business customer. We think we're targeting the global professional, the road warrior. Those people have a high utility for being able to get their communications, whether they're voice or fax or e-mail, anywhere in the world, anytime. So I think the target market is always going to be the mobile professional.

It's difficult to know exactly where our user base comes from today because we don't collect a lot of demographics. We're trying to improve that as we go forward. But I think in terms of today, probably a third of our user base is hard core road warriors. We have another third that's small office, home office. I think the final third is mixed between corporate desktop as well as your general consumer.

But, as we add features to our service, I think we'll be continuing to target the mobile professional and the road warrior side of it. So as we add voice services and other services down the road, they will be targeted towards business users.

TMF: For your company, and for other Web companies overall, do you think adding the targeted services is going to be a more lucrative model than leveraging the user base for ad revenues? Or do you think they're about equal?

Kenck: Just speaking for ourselves, our model is more dependent on service revenue, or selling premium-based products as opposed to the free service. Although, we are making strides toward monetizing our free-user base. I think advertising or sponsorship will be a portion of that and I also think direct e-commerce opportunities are going to be another significant slug [revenues]. Right now we're sort of early on in the conversion from moving our free-user base to a paid or premium-subscriber base. I think we've gotten about one-and-a-half percent of our user base converted in the first six weeks, and we feel that's a pretty good starting point.

TMF: I know you came from an investment banking background. As you look at Internet investments, is the media model of the Internet really a viable model for companies?

Kenck: I don't know if it's a viable model for us entirely. I think the content environment is probably going to survive on a media-based model. I don't know if you're going to be advertising only, but one of the things we're recognizing is our free-user base is going to be very valuable to us. We think [we have] a demographically rich group that has a lot of dollars available to spend on e-commerce offerings. We can also use our user base as a leverage point in partnerships with other people.

For us, I don't want to be associated as an advertising-supported service necessarily. We're using our free service more as an acquisition vehicle for users and it's working out to be very cost-effective for us to offer free fax-to-e-mail services as a simple way to drive people to our business. And then it's our job to upscale that into more profitable services to us from there. It's a relatively cost-effective service model. Our highest cost is our marketing cost and acquiring new users, but our offering expenses on monthly basis, per user, are quite minimal.

TMF: E-commerce is on everybody's lips recently, of course. As you start to get the eFax name out there to investors and analysts, what have you found to be some of the main misperceptions or misunderstandings still lingering out there about doing business on the Web?

Kenck: I haven't seen any resistance to doing business on the Web. There is some resistance towards what we've done and transitioning our message to the financial community. We've sort of turned our company 180 degrees from where it was headed a year ago and it's still a little bit of an uphill battle to reintroduce everyone to a new message, that Internet-centric service model as opposed to technology manufacturing.

On the e-commerce front, I think the analysts we speak to recognize that we do have a very valuable user base and I think it'd take us a few quarters to convince them that we're going to be able to generate revenue from that user base. Beginning this quarter, I think we will begin to show progress towards actually monetizing that base.

TMF: I appreciate your taking the time to talk to us today.

Kenck: OK. Thanks a lot.

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