Ziff Davis - Earnings Call - Q1 2017
May 8, 2017
Transcript
Speaker 0
Welcome to the J2 Global's Q1 Earnings Call. Leading today's call will be Mr. Hemi Zucker, CEO and Mr. Scott Tariqi, President and CFO. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Scott Thank you, Mr. Tariqi.
You may begin.
Speaker 1
Thank you. Good afternoon, and welcome to J2 Global's investor conference call for the 2017. As the operator just mentioned, I'm Scott Tariqi, the President and CFO of J2 Global. And with me today is Hemi Zucker, our Chief Executive Officer. We're very pleased with our Q1 twenty seventeen results producing another strong quarter of particularly EBITDA and non GAAP net earnings both well exceeding our budget.
As a result, our Board has increased the quarterly dividend by an incremental $01 to $0.03 $75 per share. We will use the presentation for today's call, a copy of which is available at our website. When you launch the webcast, there is a button on the viewer on the right hand side, which will allow you to expand the slides. Also, if you've not received a copy of the press release, you can access it through our corporate website at j2global.com/press. In addition, you will be able to access the webcast from this site.
After we complete our formal presentation, we'll conduct a Q and A session. The operator will instruct you at that time regarding the procedures for asking a question. However, at any time, you may e mail questions to us at investorj2global dot com. Before beginning our prepared remarks, I will read the Safe Harbor language. This call and the webcast includes forward looking statements.
Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.
Speaker 2
Some of
Speaker 1
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 ks filings, recent 10 Q filings, various proxy statements and eight ks filings as well as additional risk factors that we've 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. If you now turn to the slide presentation on Slide five, I will quickly highlight some of the Q1 accomplishments, go over the financial results and then turn the bulk of the call over to Hemi for greater detail. Our revenue of $255,000,000 for 2017 is a record for us for any fiscal quarter in the company's history. This generated approximately $100,000,000 in EBITDA, free cash flow of $62,000,000 and adjusted EPS of 1.19 Q1 twenty seventeen revenues grew by $54,000,000 or 27% versus Q1 twenty sixteen.
EBITDA was up $13,000,000 or 15% versus the prior year. Our Cloud division continued to execute acquiring small five companies during the first fiscal quarter, most of which closed towards the end of the quarter and had very little impact if any on Q1 results. The Cloud segment had revenue of $142,000,000 up $3,000,000 or 2.5%, although in constant currencies that was up 4% as we continue to experience currency headwinds particularly from the GDP and that will continue through Q2. EBITDA was up $5,500,000 or 8% versus Q1 twenty sixteen. Our EBITDA margin for the segment was 53% compared to 51% in the same quarter of the prior year.
Our Digital Media segment aided by the inclusion of Everyday Health for a full quarter had all time high revenues of $113,000,000 or up $51,000,000 versus 2016 and added $7,000,000 to its EBITDA or 35% versus 2016. I'll now ask you to turn to slide seven where you will see how we as we historically have done present the aggregation of our various business units. So on the top line, we have our Cloud segment, which includes Cloud Connect, which is fax and voice had a very good quarter at just under $94,000,000 of revenues and $51,700,000 of EBITDA or 55% EBITDA margins, a two percentage point pickup from 2016. The other cloud services suffered some FX headwinds, were roughly flat in revenues at $46,700,000 in the aggregate, but showed an increase in EBITDA to $22,800,000 49% EBITDA margin versus 46% in 2016. IP Licensing was flat on the top line at 1,200,000 of revs, although a little bit better flow through to EBITDA almost $800,000 or 66% EBITDA margin.
This combined for $141,500,000 of total revs for the Cloud segment, 75,300,000.0 of EBITDA or the 53% EBITDA margin I referenced earlier. Dropping down to the next line, you have the total Cloud that we just discussed added to the Digital Media segment, which had $113,000,000 of revenues, 27,500,000.0 of EBITDA, 24 EBITDA margin. And then the parent, and I'll remind you these are costs that we do not allocate to the various business units of $3,300,000 in costs on a non GAAP basis for the quarter versus 3,500,000.0 in 2016. So all told, we sum those together for $254,700,000 of revenues, dollars 99,500,000.0 of EBITDA or 39% total EBITDA margin for the company, adjusted net income of $57,800,000 or 1.19 per share on a GAAP basis $0.52 per share. The primary differences between the GAAP and the non GAAP are depreciation and amortization related to our various M and A as well as acquisition related integration costs in this quarter specifically related to Everyday Health.
Hemi, I'll turn it over to you for a greater depth of discussion on First Star Cloud Services.
Speaker 2
Thank you, Scott, and good afternoon, everybody. I'm very excited to be here today. My presentation, as usual, is two parts: Cloud and Media. I will start with the cloud at Page or Slide nine, and I'll start with Q1 Cloud Connect, which is our fax and voice. During 2017, we have reached all time high Cloud Connect revenue of $94,000,000 which is 4% up versus Q1 twenty sixteen.
Fax revenue of $77,000,000 continued to grow versus Q1 twenty sixteen, driven mainly by strength in our premium fax brand, which is eFax. Fax revenue, while still growing, represents 30% of our Q1 revenue and represents roughly 43% of our consolidated EBITDA. Our subscriber base reached 2,400,000 DIDs, which is 1.1% versus Q1. Growth in Q1 was organic only and does not include our latest acquisition that I will discuss in a moment. Corporate fax revenue continued to grow up 3.3% versus Q1 twenty sixteen.
We acquired the assets of Scriptfax, which specializes on the healthcare vertical. And as I said, we closed the deal in the last day of the quarter and we didn't feel comfortable to announce how many DIDs they have because we have our method of counting it, but it's 20,000 up
Speaker 1
of 20,000 DIDs that will be added next quarter. This further is expanding our corporate fax suite of products. On our voice front, our voice quarterly revenue is $17,000,000 grew 25% versus Q1 sixteen, driven by international acquisition and organic growth of our primary brands. Next, Page 10, when I will discuss the cloud backup of twenty seventeen Q1. Revenue of $28,000,000 up 1.5% versus Q1 twenty sixteen.
This revenue could have been up 5%
Speaker 2
in constant currency or $29,000,000 if we didn't have a big FX impact there. We achieved EBITDA of $40,000,000 which is up 4% versus last quarter twenty sixteen. Our Keep Itself Europe revenue grew 18% versus Q1 twenty sixteen. We continued the integration of our acquired businesses. We are investing in R and D to support and develop the platform.
We also successfully launched disaster recovery service and we have a strong M and A pipeline. Next, Page 11, where I will discuss our Q1 Email Security highlights. Q1 revenue of $10,000,000 versus $12,300,000 in Q1, and I will explain the decline in the revenue. During 2016 and 2017, we were very busy migrating to the FuseMeld platform four other brands that we have acquired. First is McAfee that ended its life in The U.
S. Second is StaySecure in Sweden, which we acquired in late twenty fifteen. Third is Commendo, a public company we bought in Denmark also in 2015. And fourth is KudaMail, a U. S.
Company that was recently acquired. We have successfully migrated over 2.1 users and retained 80% of those customers. The migration, when fully done, will increase our cost savings. All this effort was pre planned. And while revenue went down as planned, we are working and as it budgeted, of course, we are working on increasing the margins.
Once we finished migrating, we didn't waste any more time. And during the end of Q3, we already acquired three new small companies. One is SendInc, an email encryption platform then AmexForce, anti spam antivirus company and LoneScope, which is a small email encryption. We have a healthy M and A pipeline and plan to close the year strong. Page 12, when I will discuss on email marketing or campaigner.
Q1 twenty seventeen revenue, 7,500,000.0, 33% up versus Q1 twenty sixteen. Our revenue run rate is $31,000,000 We acquired marketing company Mail Mailer Small Rollups that is in progress now. This was done in Q1. Campaigner continues to focus on product development and sales effort upstream to higher premium mid market customers with higher usage. As you can see, usage is up 13% Q1 twenty sixteen and ARPA revenue per account is up 20% versus Q1 twenty sixteen.
These two are driving also higher EBITDA. Container won three awards three Stevia awards, a Gold Award for sales operations, Silver Award for Sales Distinction of the Year and Bronze Award for Sales Growth Achievement of the Year. Next, I will discuss the Digital Media and I'm guiding you to Page 14. Our Digital Media business had a very strong Q1. Total revenue were $113,000,000 or up 81% year over year, aided by the acquisition of Everyday Health.
EBITDA was $28,000,000 up 36% year over year. Total multiplatform visits were up 28% year over year, reaching 1,400,000,000 visits. At our newest properties, Everyday Health, Media Page Today and What to Expect, we had very productive quarter with new products, launches and features. Focus on productivity and profitability, we continued execution of our shrink to grow strategy. This is done by eliminating negative margin activities and eliminating low potential activities.
This will result higher EBITDA against reduced revenue. On the product side, we improved our site navigation and this is boosting our search engine optimization and also is improving the mobile experience. This effort resulted in 33% lift in page views per visit. What to Expect launched two new ad offering, also leveraging the know how and the platforms of Ziff Davis. First ad offering is Delivery Room, which is a branded content studio that sold over 30 campaigns to marketers, already sold.
The other offering is MomReach, which allows us to target mothers based on the age of the children. This is a very unique offering of ours in the parenting space. Next is our relationship with the Mayo Clinic. Our the Mayo Clinic diet subscription product, according to The USA News and World Report, it just tied for the first place for the best diet commercial. Next is MedPage.
Historically, our MedPage today received most of the traffic from search, direct and email. During Q1, we saw great success in using social media to drive traffic with referral being up 320%. Finally, we migrated many of our site to the cloud. This is resulting faster load times, cost saving and the ability to release new product and features faster. Next, Page 15.
As you know, our strategy at IGN is to continue to build our video offering and platform. Last month, we announced a very exciting partnership with Twitter in which we will produce over one hundred and thirty hours of live coverage of the annual E3 show here in Los Angeles. E3 is the biggest event in video games and IGN will exclusively be carried on Twitter. We are very excited for this partnership and yet this is another example of how we are leveraging social platforms for video distribution and monetization. The partnership is also represents our expansion into live video versus our historic strengths, which was video on demand.
Across all platforms, IGN generated seven zero three million views in the quarter, which is up 34% year over year. Social followers grew 60% to over 22,000,000. YouTube subscription increased 25% to 9,800,000 and app installed grew 10% to 15,400,000. On the international front, we launched IGN China in Mandarin, making us available in one of the world's biggest gaming marketing in the world. This marks our twenty eighth international version of the site of the IGN site.
Next, Page 16. On the Ookla front, total tests exceeded 600,000,000 tests in the quarter, up 10% year over year. The growth is led by mobile tests growing 22%. What's impressive about our mobile growth is that it is all done from our Speedtest native app. You cannot run tests via mobile browser as it is our belief that air based testing yields the most accurate results.
Finally, as you know, we licensed our Speedtest app to ISPs who use them on their own site and help us to generate more revenue and more tests to monetize. With that, let me pass the call to Scott.
Speaker 1
Thank you, Hemi. The final slide before we go to Q and A is on Slide 18, which is the reconfirmation of our fiscal year twenty seventeen guidance. As a reminder, that's for revenues between $1,130,000,000 and $1,170,000,000 and adjusted non GAAP EPS between $5.6 a share and $6 a share. And I would remind you that it is not our policy to alter our guidance unless and until it becomes very clear that the current guidance that we have is no longer tenable. So when we have raised guidance in the past, it's been much later in the year.
And then finally, supplement information beginning on Slide 19 and really the numeric analysis on 2020 and following, you'll see the metrics for the company, the cloud business, the media business and then a variety of reconciliation schedules that will give you the nearest GAAP equivalent to the various non GAAP measures used in this presentation. At this time, I would then ask the operator to come back and instruct you on how to queue for questions.
Speaker 0
Thank you. Ladies and gentlemen, we'll now be conducting a question and answer session.
Speaker 1
Okay. Before we go to before you finish polling for the live questions, we have a couple of questions via email, which I will address. It primarily is around there's a variety of questions, but I'll try to homogenize them. They're around our various M and A strategy. In short, the questions are, are we seeing that there's any resistance to sellers right now given the uncertainty as to the taxes in The United States?
I would say the answer is no. I don't think that's deterring sellers from selling. I'd also remind people that we are looking on a global basis. So while what is happening here in The U. S.
Or may happen is interesting, it certainly doesn't affect anything in the various other jurisdictions in which we do business. In terms of how we finance these acquisitions, we've had a preference for a combination of free cash flow and debt historically in the high yield market. We did issue a convert approximately three years ago. That has tended to be actually a fairly expensive piece of capital for us given how the stock has performed from the issuance at the time, which was around $50 a share to currently $90 It's one of the reasons also we don't use our common stock to acquire companies. Having said that though, we also are studying what the administration is saying about tax reform and that may very well influence our views on a forward looking basis depending upon the probability that the corporate tax rate is substantially lower from the current 35%.
And then in terms of our mix of M and A, it is correct that the last few quarters with the exception of Everyday Health, most of the businesses that we have bought have been very small. Part of that, I'd say in the
Speaker 3
last
Speaker 1
five or six months has been a function that larger transactions, which we've looked at outside of everyday health, have been too expensive. And a lot of that has to do with the correlation to the stock markets either approaching or at all time highs. So we've tended to focus on smaller deals. There continues to be a large number of them out there. Although as we get bigger, it is our desire to focus on what I'll call intermediate size deals.
And then in terms of those acquisitions, the goal has been a 20% cash on cash return. I'd say that historically we've been very good at, if not achieving, coming very close to achieving those kinds of returns. Although we use different models for different parts of the business generally in the cloud, It is the goal not to grow the revenues. In fact, as Temi will talk about or has talked about, there'll be cases where we'll actually shrink the revenues. So we know there'll be revenue decline because of either expected customer attrition or customer attrition upon migration.
In the Digital Media business, it usually is the concept of taking the asset initially shrinking it down to its core and then from that point growing its revenue. So we have these different models for the different parts of our business. I'd now ask the operator to take the first live question.
Speaker 0
Thank you. Our first question comes from the line of Greg Burns with Sidoti and Company. Please proceed with your question.
Speaker 4
Good afternoon. With the shrink to grow strategy on the with the everyday health assets, I was wondering if you could give us an update on your thoughts around Cambridge and tea leaves, how you see them fitting into the business? Is that are those assets that you'd look to keep and grow? And how much revenue are they currently generating?
Speaker 1
So they're about $50,000,000 five-zero revenues combined. And we have been exploring to your point that they are not in our judgment as strong a fit certainly for a digital media company as say the other assets such as everydayhealth.com, MedPages, Mayo Clinic and what to expect. At this point, we don't have an update. As we've said in the last couple of quarters, there have been parties that have been interested that have contacted us. We've actually now moved that into a more formal process to deal with those inquiries.
And I think that we'll be at a decision point probably in the next couple to three months as to whether those assets either individually or collectively are going to be kept or sold.
Speaker 4
Okay. Thank you. And I missed what you were saying about the converts earlier, but could you just give us an update on the, I guess, the broader refinancing or where you stand in that process?
Speaker 1
Sure. So as you know, we've talked about for at least a couple of quarters now a comprehensive refinancing that would take out the 8% notes at the cloud level, retire the bank facility that was put in place at time of the acquisition of Everyday Health in December 2016 and possibly raise a little additional capital beyond that. I think as I mentioned, it has been our preference and our bias to finance with in the debt markets, be it at a high yield market or the bank market. We are though studying, as I just mentioned, the contemplated proposed tax reform because obviously the lower the marginal tax rate goes, the less valuable those interest deductions are. Having said that, the convert that we issued three years ago is rather expensive because the stock has performed very well.
And so when you look at the overall IRR of that instrument, we're still better off having done high yield debt. So I would say that in the next couple of within the next couple of months, we'll have made those decisions and hopefully have a transaction done.
Speaker 4
Okay. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Shyam Patil with SIG. Please proceed with your question.
Speaker 5
Hi, guys. Good evening. First question on Everyday Health, Scott, can you talk about where you think you guys are in terms of the synergy realization roadmap? Would you say that you're in line with your plans? Would you say you're tracking ahead of plans?
Just kind of curious where you think you guys are.
Speaker 1
I think if you talk about it on a formal basis, we would be in line to slightly ahead of our plans in terms of cost reduction. But I think when you talk about synergies, there's two pieces to it. There's rightsizing the cost structure, which is something that the team was very aggressive doing almost immediately upon acquiring Everyday Health back in December. Then there's a second piece, which is a little bit less tangible or less quantifiable and that is evolving the understanding of how the business is going to operate on a going forward basis. And I'd say that's a process that takes time.
In some cases, it's correlative with also changing certain people out, introducing a new mentality as we've talked about before. And as you know, we're very focused on profitable revenue, not just revenue for the sake of revenue. Sometimes we call it internally empty calorie revenue. So it's getting into the business, it's calling that those revenue streams or those situations out, but it's also then reorienting the mentality on a forward looking basis in terms of what constitutes revenue streams and deals that we really want to do within the context of the health care vertical. So I'd say in the second or the second piece of it, we're probably tracking, but it's something that takes months.
Speaker 5
Got it. Got it. Next question. I guess, Jaime, I can direct this to you. In terms of the cloud services business, can you talk about kind of the M and A pipeline there?
And then within that business, are there certain pockets where you're seeing profitable growth in other areas where you have declining revenue streams? Just kind of curious if you could talk about the various pieces in the cloud services business.
Speaker 2
Yes. So thank you. So first of all, I want to add something to Scott's comments to Greg. On the two assets that are for sale, we are getting bids. We have competition on it.
Be conservative and not to create any lease, but we are making good progress there. Now to your question on our businesses, and I'll go one by one. So first of all, on the Cloud Connect. Cloud Connect actually is doing better than we thought. We have surprised ourselves.
We're seeing that we still have the facts assets to acquire and that's a very good one. Also in the last quarter, month, days, we are seeing much less expensive CPAs, especially in the largest market in The U. S. So that's very encouraging. So only good expectations there.
On the backup, we have strong M and A pipeline and we are about to close several deals within the next few weeks, small and one of them is kind of medium size. We're making good progress there. Assets that we acquired and we thought that they will decline are declining much slower than we thought. And as you can see, the EBITDA has maintained very high. Email Security, we have several M and A opportunities.
One of them is relatively to this is mid size. We hope to close it in this month. And as the revenue is only $40,000,000 if you do a deal of several millions, it's impactful on this side. And it is in the territory that we already are there, so we can do fast integration. And then on container, we have opportunities.
It is at $31,000,000 run rate and I believe that we can close the year in a run rate of 35,000,000 or even north of it with just our regular run of the mill M and A. Did I answer you?
Speaker 5
Yes. Thank you, Emmy. That's helpful. And I have one more question. Scott, you addressed this a little bit in your prepared remarks.
But in terms of language in the press release where you said you're currently ahead of EPS expectations, I certainly understand it's not in your nature to raise guidance this early in the year. But how should we interpret that comment? Is that relative to the midpoint of the annual range? Is that relative to the high end of the annual range? Just trying to put into context.
Speaker 1
Well, yes, the budget is the midpoint. So it's $11.50 dollars and it's $5.8 So it's in the context of our budget, which is the midpoint, obviously the range of guidance is just that it's a range around it. And for reasons that are not entirely clear to me, we seem to have in the first fiscal quarter a very wide range of analyst dispersion, even though within the full fiscal year, both individually and in the aggregate, all of our analysts tend to be within our revenue and EPS guidance range. I'm not entirely clear why this is occurring, but I know in this fiscal quarter, we had a couple of analysts that were on the bottom line fairly wide of the mark in terms of earnings, which caused the bias up in the average. So we wanted to make the point that we're comfortably ahead of our own EPS and EBITDA budgetary numbers, which bodes very well for the full fiscal year.
Speaker 2
And let me add, as you know, our media business is now almost half of the total revenue. Our media business is biased strongly towards Q4. We have also in companionate some other businesses of J2 strong Q4. So we have budgeted our EPS over the quarters to achieve the number. But as Scott said, there are two analysts that while of the total year okay, they ran ahead of us on the EPS.
So our budget is with most of the analysts, but not with the few outliners and the comment that I made under my quote is to get the shareholders comfortable that according to our budget, according to our numbers, with our twenty some years of meeting our numbers, we are still very comfortable with them.
Speaker 5
Great. That's very helpful. Thank you,
Speaker 2
guys. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question.
Speaker 3
Hey, guys. It's Jim Fish on for Walter. Thanks for the questions and sorry if you answered them as I'm jumping between calls here. No problem. Just kind of first, we're still seeing a large amount of sort of small businesses using hardware based fax.
How is the conversion of going from a hardware of a customer going from hardware to online working and sort of how do you categorize the opportunity there?
Speaker 2
Jim, so I addressed it, but I would gladly talk about it a little bit more. I just said that our sign ups our sign ups come from straight to site, upgrades of free to pay and most of it is coming from search. And our search results are divided between people that come directly to our website and those that go on the mobile app. We have developed a very expensive mobile app and we are seeing more and more and more and more sign ups coming through our mobile app. Those sign ups are much less expensive to us.
We have cases that the return is like less than two months of subscription. We also are seeing actually surprised ourselves with the low CPA and the high organic growth. We kind of budgeted for flattish year, but we are seeing it being much better than that. And yes, there is continued conversion from hardware and a lot of it is coming from other competitors that are not providing the service levels, especially in the corporate world. We just bought a company, as I said, that's specializing in the medical field, which you know, there are very high demands there on HIPAA compliance and other things.
So we bought a company. Actually, we didn't know about its existence up to a few months ago. They are bringing in more than 20,000 subscribers, which I did not include in our numbers because they counted a little bit different. So we are actually very encouraged on the facts. We surprised ourselves.
Speaker 1
And I think I'd add to that, Jim, that when we look at the corporate, particularly on the larger scale deployments where we have the actual sales force that's out there, I'd say almost all of their wins are conversions from an incumbent hardware system to the outsourced as a service solution. And I think that those earlier on, a few years ago, were some questions or resistance about the whole idea of outsourcing, security. There were all kinds of questions. I think that as the years have gone by, each of those concerns have fallen by the wayside. And so that's been one of the areas that's been very productive for us in the overall digital fact space has been that medium to larger enterprise customer.
Speaker 2
And I just came back last week from Japan, which is to our belief is the second largest potential market in the world with 120,000,000 citizens heavily relying on facts. We are there only like 50 some thousand DIDs. We love this market. The churn is low, the commitment. And one of the largest competitors of ours is actually giving us a sign that he's ready to move on.
At that point, I believe that we will leave even easier way to continue to grow. They're just late adopters, but they continue to use fax. And so this is going to be the next wave. I'm not announcing the wave, but I can tell every time I come back, I'm very excited to see the potential there.
Speaker 3
Got it. Thanks. And going after another question that was asked I know of, backup looks like it slowed as you guys have monetized and rationalized pricing. It's been a few quarters since you did a larger online backup asset like SugarSync, for example. What do you think of this market?
And do you really think you need to do a larger deal in this space to get this business sort of back on track and growing double digits again?
Speaker 2
So first of all, we would like to make a larger deal if it comes by and if it's profitable. SugarSync is example of a company that we bought and we paid very low price for business that in our plans, in our justification for the Board was to decline. Actually declined much slower. We increased the prices and it went well. We have several M and A deals.
We don't want to jinx them. We don't want to announce because we are still in negotiation. None of them is huge. None of them is very large, but there are so plenty of them. There are, I'd say, three to four companies with revenues between $10,000,000 and $20,000,000 that they're all coming and they're knocking on our door.
We think they're too expensive. We tell the VCs, go shop somewhere else. None of them sold and none of them shut the door with us. But because of the pricing and the expectations, I'm not even including it. It's not in our budget.
It's not going to be a part of our discussion. We have the patience. We have the money. We have the capability. And I'm optimistic.
Speaker 3
Got it. Thanks guys.
Speaker 0
Thank you. Ladies and gentlemen, our next question comes from the line of Will Tower with Robert W. Baird. Please proceed with your question.
Speaker 6
This is actually Charlie on for Will. In thinking about the Digital Media business and specifically your activity on social platforms like Facebook and Snapchat and with the Twitter deal this quarter, can you update us on where you are in terms of monetization related to those social platforms? And how big of a revenue opportunity do you think that could be in the future?
Speaker 1
Well, it's still small today. So the answer is we're monetizing against all those platforms. But and this it's a little bit of an apple and an orange. I think the last time we talked about this, we either didn't own Everyday Health or we owned it it was Q4 for a month. And so at the time, the social media component, which really applied to everything exclusive of Everyday Health set of assets, was less than 5% of the Digital Media revenues.
Now that will be an increasing percentage on the tech and games over time. As Hemi mentioned, there are some things that have been launched within Q1 within the Everyday Health portfolio that is also applicable to social media, but it's really at the starting line. So it's going to take a while for that to bleed in and to become a meaningful percentage of revenues. And of course, at least initially, the overall percentage of social media's impact on our overall digital media would be less because it's being diluted by the Everyday Health set of assets revenue that has close to zero today. But I think that in general, we're very bullish that this is an opportunity to extend our reach to build in additional demographics that we might not otherwise have access to.
But it's still very much the early stages. I think it's hard to predict, say, two or three years out what is the right percentage of Ziff Davis' total media revenue that could be off of the social platforms. But today, it's still a low single digit number.
Speaker 6
Right. Makes sense. And if I could squeeze one more in. Sure.
Speaker 7
Would you be able to provide us with
Speaker 6
a breakdown between performance marketing, display advertising and licensing revenue in the Digital Media business?
Speaker 1
That's a great question. Well, we've actually been talking about with the inclusion of Everyday Health, what's the right way to look at the digital media business. So we're not quite ready to go live with this, but I'll give you a little bit of a preview. So if we look at the Q1 numbers, advertising, which would be all of our CPM inclusive of video, inclusive of display is a little under 50%. So this now includes the Everyday Health revenue, okay?
Performance based marketing is about 35%. The licensing and a little bit of subscription is about 10%. And then the new piece is what we call services. And this would be predominantly tea leaves in Cambridge from Everyday Health also at about 10%.
Speaker 6
Great. Thank you very much.
Speaker 2
You're welcome, Charlie.
Speaker 0
Thank you. Our next question comes from the line of John Tanwanteng with CJS Securities. Please proceed with your question.
Speaker 7
Good afternoon, Thank you for taking my questions. I know you said that the goal isn't to grow revenue in a number of your businesses, but could you explain what's driving the growth in Fax this quarter, especially on an organic basis? And Hemi, I'm not sure did you give out any churn metrics at all this time?
Speaker 2
Can you repeat?
Speaker 1
Yes, the churn metrics are there.
Speaker 2
Yes. The churn metrics are there. They were slightly high. 21. 2.27.
Page 21, not 21.
Speaker 1
Page 21, you'll have the
Speaker 3
current metrics.
Speaker 1
So you'll see it was 2.22 in 2016, 2.27 in 2017, obviously creating some headwind in the 2017. All the things Hemi talked about as it related to the Email Security business, particularly McAfee end of life. And then we also had in the DID based business, one corporate customer that did a cleanup, which is not uncommon. Typically, the corporate customers will have a block of numbers and from time to time they'll go through based upon their actual employee base and they'll give back some numbers.
Speaker 2
There was This customer has almost zero impact on our revenue because he was like a bulk customer that bought and paid, here is my corporation, here is the amount. And as the contract came to renewal, they reduced the IDs, but it has almost zero impact on the revenue.
Speaker 1
But if you look at the five quarters presented there, I mean, it's been basically between 2.2225 or two point two and two point three. And there's all kinds of noise that will move it 10 or 20 basis points. And it could have been lower if
Speaker 2
I included the acquisition of the Fax, as I said, maybe even 30 that we bought in the end of the quarter, but we didn't want to bother with it.
Speaker 1
And you had another question?
Speaker 7
Yes. Was just wondering what was driving the strength in Fax?
Speaker 2
I don't know. As I said, we surprised ourselves. I think that more and more companies, as they are moving their telephone systems to SIP and all those things, suddenly they discover that they're naked because when they move to VoIP, fax is not supported by VoIP. There are some that claim it does, but it does horrible work. Actually, we have some VoIP providers out there that buy their fax lines from us.
So I think this push to VoIP and digitizing of the telephone switches is pushing corporation to find a reliable fax solution they come to us. Actually, as I said, I'm happy to see that it's still strong. I think that people are more people are aware of the fact that fax can be digitized and saves the money. And at that point, they save for the, I don't know, 100 and some a year or rather heavy than not, and we are benefiting from it.
Speaker 7
Got it. That's helpful. And then just on every day, it seems like you've made a lot of progress in launching and migrating platforms that are excuse me, practices that are the J2 best practices and new revenue streams. Are those proving to be as material and profitable as you want them to be? Or is it too early to tell at this point?
Speaker 2
They are material because not only we have speed and everything, we can actually have less system, less people. The people of everyday health, they want to be successful. So every time we bring something that they see as an improvement, it increases their satisfaction with the jobs. This is a company that was on a while trying to sell itself. It's not a great position to be when you know that your company is being sold.
Now they see that as if Davis guys are coming, the same cities are at the side of Manhattan. It creates an excitement. So it's all positive. And as you know, Scott and I over the years have been very conservative. But as I said before, we are ahead of our EPS.
Speaker 7
Great. Thanks. And then just finally on the refinancing or potential refinancing, Scott, I'm sorry, did you mention the size of the additional debt that you would want to take on?
Speaker 1
No. We've talked about in the past that given the refinancing that we intend to do here as it relates to the bank line, the 8% notes, the call premium, it pretty much necessitates a transaction or a mixture of financings in at least the 500,000,000 range.
Speaker 7
Okay. And the reasons to flex higher would be opportunities in M and A?
Speaker 1
Correct. It. That will give us cash to our balance sheet. That could be done through a line of credit that's undrawn. So it's as I say, you got to think about it more, I think particularly in this fluid tax environment, more about there's different pieces and different ways to get to that equation.
So there's a minimum number we need to just do the plain refinancing. Then if you think about accessing additional capital, there might be ways in addition to a single financing, how that might be achieved like an undrawn bank line. And then the only other wrinkle is where our marginal tax rate is likely to be. Obviously, higher marginal tax rates make debt more appealing. Lower marginal tax rates maybe make it less appealing relative to some other alternatives.
But right now, everybody's guessing in terms of what tax reform actually will happen, when it will happen and what form it will take.
Speaker 7
Understood. Thank you for the color. Thank you, John.
Speaker 0
Thank you. Our next question comes from the line of Rishi Jaluria with JMP Securities. Please proceed with your question.
Speaker 8
Hey, guys. Thanks for taking my questions. A couple of ones on Everyday Health. What impacted the shrink to grow strategy within the quarter have on the digital media side of the business?
Speaker 1
I'm not sure what you mean what impact did it have.
Speaker 8
As in, did that I mean, was that a headwind to digital revenue within the quarter? I mean, maybe directionally what size of it?
Speaker 1
Yes. But that was look, we the answer is yes, but that was also contemplated. I think as we mentioned last year, if you bifurcate the Everyday Health business into sort of two components, there's about $200,000,000 of advertising revenue and there's $50,000,000 of what we're calling services revenue. That's the tea leaves in Cambridge. And if you take a look at that $200,000,000 we're looking at about a 10% reduction in that revenue based upon our then estimates.
I think we talked about it in February during our Q4 call that those that $20,000,000 was not either at all contributory in terms of earnings or very marginally contributory. So that piece is being called out. And I'd say that that's reasonably ratable over the four quarters, but not necessarily perfectly so.
Speaker 2
Richie, when we bought Everyday Health, we knew about TLIFs, we knew about Cambridge. As Scott said, 30,000,000 of revenue $50,000,000 of revenue, sorry. And we budgeted it and they are meeting their budget, but they are an asset that we want to diversify out. And the only thing we don't know is when. And they actually are not dragging us down.
They're executing further plan. They're making the numbers. So just the only thing that is still up in the air is the timing.
Speaker 8
Okay. Got it. That's helpful. And staying on that topic with Cambridge and Tea Leaves, what I know we expect the Digital Media EBITDA margins to ramp as the year goes on, but how would Digital EBITDA margins in the quarter look today excluding those two assets?
Speaker 1
If you exclude tea leaves in Cambridge? Correct.
Speaker 5
They're going to be
Speaker 1
probably a couple of points higher. Maybe a little bit much, about one point higher.
Speaker 8
Okay. Got it. And just two quick housekeeping questions. First, what was the overall impact and I'm sorry if I'm making you repeat yourself, but to revenue from FX headwinds in the quarter?
Speaker 1
Almost $3,000,000 for the company as a whole. About $2,200,000 of that is the cloud and a little under $800,000 is media.
Speaker 8
Got it. And Scott, on the in the investor deck when you talk about free cash flow, I see there's the $20,000,000 for contingent And then I guess can you explain the rationale behind that and how we should be thinking about that number in our free cash flow models going forward?
Speaker 1
Yes. I actually think the free cash flow is understated by probably another at least $10,000,000 and I'll explain why. So when we bought Everyday Health, tea leaves have been purchased in 2015 and part of the consideration was an earn out. Obviously, we closed Everyday Health in December. So it was known to us at the time that it was highly likely that tea leaves would make its earn out criteria in 2016 payable in 2017.
So the way I've always looked at that is that's just part of the purchase price of Everyday Health, that $20,000,000 Now accounting wise, because we own the asset, it goes out of our cash flow as a payment in Q1. So we've added that back to normalize the free cash flow because I really look at it as we paid $20,000,000 more for the Everyday Health asset because that was a known entity at the time of closing. In addition to that though, we've had probably 10,000,000 of free cash flow hits in Q1 from Everyday Health that relate to primarily things like severance, cleaning up some of these contracts that we are getting out of. There are certain exit payments to be made. And although those are non GAAP from a P and L standpoint, they are not non GAAP from a free cash flow standpoint.
So I think that productivity of the business is probably $10,000,000 higher than what we're reporting for Q1. But we felt that the easiest and the most definitive and quantifiable is the Chili's payment because as I say, it was known at the time of closing and it really was part of the overall purchase price, albeit deferred by about ninety days pursuant to the terms of that earn out.
Speaker 8
Okay. Got it. So we shouldn't expect any more major contingent compensation going forward?
Speaker 1
No. No. There's none. The fact we're basically done within all of J2 in terms of the earn outs that were on the table. We did pay the last Ookla earn out also twenty sixteen calendar year 2016, they earned it.
That's been paid. That's behind us. So no, unless we do a new transaction that has an earn out, obviously then we'll have to give you the details of that if that were to occur. But no. Okay, great.
Thank you
Speaker 8
so much guys. I appreciate it.
Speaker 2
Thank you, Richie.
Speaker 0
Thank you. Our next question comes from the line of James Brennan with William Blair. Please proceed with your question.
Speaker 5
Thanks for taking the question. Just I want to clarify a
Speaker 9
couple of things, Scott. When you talked about sort of the shrink to grow strategy on the Digital Media side, of the $200,000,000 you said about 10%. So does that sort of mean those 3,000,000 to $4,000,000 impact this quarter and you'll see that sort of build throughout the year?
Speaker 2
That's correct.
Speaker 9
Okay. And then from a margin perspective with Cambridge and the tea leaves in there, you're 24%, maybe it's a point higher without them. But where do you guys see the margins in that division going as you work through the remainder of the synergies and get to sort of a more run rate level?
Speaker 1
Yes. Well, as you know, the Q1 is a low watermark for all of our Digital Media properties and Q4 is the high watermark. Obviously, there's a further complexity this year because you do have things going on in Everyday Health that are rolling out over the four quarters, which I think makes the analysis a little bit more complex than usual. But the goal is that by the end of the year, if not for the full fiscal year, if you take Key Leaves and Cambridge out of the equation, just because they have their own dynamic, that that $200,000,000 of revenue, we should be getting into certainly on a run rate basis, if not an actual basis around mid-30s EBITDA. Now that's where we see it moving towards as we build additional revenue and get leverage off of the current cost structure.
And that leverage will be in most Q4 because that's where you have the biggest jump sequentially in revenue would be from three to four, just like we have in the tech and the games piece of the business on the other side of Ziff Davis' business.
Speaker 9
Okay. And that sort of leads to my next question. I think prior to Everyday Health you talked about revenue within that Media segment sort of 20% in the first quarter, maybe mid-20s in the second and third quarter and then low 30% of revenue in the fourth. Is that still sort of applicable here even with Everyday Health on top?
Speaker 2
Yes.
Speaker 9
Okay. And then on the FX number, the $3,000,000 talked about, is that year over year or is that sequentially from the fourth?
Speaker 1
No, year over year. 2016
Speaker 7
And to '20
Speaker 1
that the biggest component there and you'll see it again in Q2 is the weakness in the GDP that occurred post the Brexit vote in June 2016. So the toughest comparisons currency wise are Q1 and Q2. Then the presumption is it becomes more normalized in Q3 and Q4 against where it was last year because most of that GBP had the GBP had essentially reset against the dollar.
Speaker 9
Okay. And then just on the cloud business, you saw some shrinking in the email segment there, just sort of rationalize some things. I think that the total cloud segment was down sequentially, obviously. How do you think about that going forward? Will it be sort of flat to down, maybe up a little bit over the course of the next couple of quarters?
Speaker 2
We are thinking that it's going up, not flat to down, of course. We have, as I said, this one time $2,300,000 that we budgeted for, which was the migration from three or four platforms into one platform owned by us. And we have M and A pipeline and we have other strong demand on the fax, on the voice. So we are optimistic about it.
Speaker 1
Yes. I think the key thing on the email piece is that the McAfee end of life has in fact occurred. And that occurred during Q1. I think we have borne the brunt of that impact. So that business is in essence with a combination of FX and the McAfee end of life has reset to this $10,000,000 a quarter level.
Now it has the ability to grow off of that base. It also and I think more importantly than whatever its organic growth may be off that base is cycles are now freed up to do M and A. And those were basically shut down for the last nine months. If you go back and you'll see, we didn't talk about any M and A for the Email Security business and that was primarily because those internal resources were Occupied. Yes, they were occupied with not just the McAfee and the wife migration, but also the other migrations that Hemi talked about in the presentation.
With those behind us now, those teams are available for taking on additional M and A and doing the migrations that would be necessary. And they
Speaker 2
started with these three small Yes,
Speaker 1
did three. They weren't very big. We did three small ones in Q1. So it shows you they're back open for business in terms of additional
Speaker 2
they started to grow organically also, especially in The U. S. I see weekly reports, they're growing organically now.
Speaker 9
Okay. And that actually leads into my last question, which is around the M and A side.
Speaker 2
Can you tell us how
Speaker 9
much you spent in the first quarter for those five transactions?
Speaker 1
Yes, about 25,000,000
Speaker 9
About 25,000,000 And last year was a little bit of a strange year from M and A perspective obviously because you had the auction midyear and then you had Everyday Help at the end which sort of came right on the heels of the auction. Are we getting back to sort of a more normal cycle for you guys in terms of more equal spending throughout the year to get to that sort of $200 $300,000,000 range
Speaker 1
Well, M
Speaker 0
and A
Speaker 1
it's very it's very tricky because
Speaker 2
We are opportunistic. If it comes and it's good.
Speaker 1
Yes. And also because we have spent the energy and you noted two of the examples, Gawker on the media side, which we didn't ultimately win and then of course, Everyday Health, which we did. But there's a lot more lumpiness, if you will, when you look at deals of that size because, a, they will generally attract some degree of competition, even if it's limited as in the case of a Gawker, all it takes is one who's willing to pay more. So I think that you've got kind of two things going on here, maybe three. A number of small to maybe low end, mid sized deals the cloud can execute against that are not terribly influenced by the market conditions, meaning where the stock market is at, things like tax reform or any of these other exogenous variables.
And that's what we saw in Q4 of last year. It's what we saw in Q1 of this year for the cloud. I think on Digital Media, by design, there's been somewhat of a hiatus, although we still look, because we're in that important phase right now of the integration of everyday health. As Hemi noted in the presentation, a number of new ideas being pushed through the different Everyday Health properties, making the decisions that we need to about Cambridge and tea leaves, whatever those may be. So we've not been terribly aggressive on the media front.
Now I believe as we get into the latter portion of this year, the Ziv Davis management time necessary for executing against everyday health will lessen. And as a result, cycles will open up for M and A. But of course, we budgeted none. I don't know what will be available as we get into Q3 and Q4. And then you have a third bucket, which are medium to larger size deals for either the cloud business or the media business, where I would say right now we're very enthusiastic, particularly on the cloud side because the management teams are available for the integration, it really comes down to one of pricing.
And in some of those cases, we've seen it. We've been involved in situations over the last few months where in fact larger assets, a la an everyday health size traded away to other companies who are willing to pay a much bigger premium than we were for those same assets. So those I put into a bucket of very hard to predict. Obviously, we pull one off, it changes the dynamics and it changes the spread of how we're spending our capital over the four quarters. I think if you limit yourself to only bucket one, which are basically small deals, the answer is yes, you spend $25,000,000 to $75,000,000 a quarter.
And over four quarters, because it's not perfectly linear, you probably spend a couple of 100,000,000 in the year.
Speaker 9
Okay, great.
Speaker 1
But a medium or a larger size deal can tip that scale pretty quickly and pretty easily in favor of a specific quarter. Obviously, that was not the case in Q1.
Speaker 2
We have the appetite for a larger deal. We tried several times last year outside of Everyday Health. We are now raising capital. We are getting ready. Last year, we missed two very large deals and the buyers are not doing very well.
And we are continuing to look and hope to tell you once we find something. And actually the media deal happened when we raised capital, some of the sellers we got attention of some people and this deal actually happened. So maybe it will be the same again.
Speaker 9
Okay, great. Thank you very much.
Speaker 0
Thank you. Ladies and gentlemen, that's all the time we have for questions today. I'd like to turn the floor back over to management for closing comments.
Speaker 1
All right. We thank you all for participating in our Q1 earnings call. We will be making a presentation at a conference on Wednesday, which will be the Jefferies Conference. So stay tuned for that presentation, which will be webcast as well as a release for the upcoming investor conferences that we'll be at in the month of June. And we would expect to have our Q2 earnings call the August, Look in mid July timeframe for the release that gives you the specific date and time and mode for participating.
Thank you. Thank you.
Speaker 0
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.