Ziff Davis - Earnings Call - Q2 2017

Transcript

Speaker 0

Welcome to the J2 Global Q2 Earnings Call. Leading today's call will be Mr. Hemi Zucker, CEO and Mr. Scott Turecki, 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'd now like to turn the conference over to your host, Mr. Scott Thank you, Mr. Turecki.

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 Turicki, the President and CFO of J2 Global and Hemi Zucker, our CEO is with me today as well. 2017 was another strong quarter producing record revenues and for the second fiscal quarter record EBITDA and non GAAP earnings. In addition, at the end of the quarter, our Cloud division, J2 Cloud Services successfully raised $650,000,000 of 6% senior unsecured notes due August 2025.

And in July, we sold Cambridge Biomarketing, both of which we'll discuss in greater detail later. Our Board has increased the quarterly dividend by $01 to $0.03 $85 per share. We will use a presentation for today's call, a copy of which is available at our website. When you launch the webcast, there's a button on the viewer on the right hand side, which will allow you to expand the slides. You can also find a copy of our press release on our website at j2global.com/press.

In addition, you can also access the webcast from this site. After we complete our formal presentation, the operator will come on to instruct you how to queue for the Q and A session. However, at any time, you're free to send us questions to our e mail address at investorj2global dot com. Before beginning our prepared remarks, I'll read the Safe Harbor language, which is on Slide two. As you know, this call and the webcast includes forward looking statements.

These statements may involve risks and uncertainties that could cause actual results to differ materially Some of those risks and uncertainties include, but 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 have been included as part of the slide show for the webcast, which you'll find on slide three. We refer you to discussions in those documents regarding safe harbor language as well as forward looking statements. If you turn to Slide five, I'll quickly go through some of the highlights from our second fiscal quarter, walk through the financial results and then hand the call over to Hemi for greater detail. As I mentioned at the beginning, this was an all time quarterly record revenue for J2 in its history of $273,000,000 of consolidated revenue.

EBITDA came in at $110,000,000 free cash flow $71,000,000 and adjusted EPS of $1.33 per share. Our Q2 twenty seventeen revenue was up $61,000,000 or 29% versus the prior year, driven in large part by the full inclusion of a quarter of Everyday Health, which was acquired in December. EBITDA was up $13,000,000 or 13% versus the prior year. As we stated at beginning of the year, we continued to focus our M and A program in the early part of the year on our cloud business. Four small acquisitions were completed in the second fiscal quarter, one in the fax segment, one in backup bringing us to Australia and two in the Email Security segment.

For our cloud business, the second quarter revenues were $145,000,000 or up 1.5% versus 2016 with EBITDA up $1,600,000 or 2.2%. As we've noted before, in the first half of this year, the cloud business in particular experiences currency headwinds as approximately 40% of the cloud's businesses outside of The U. S. We see that now abating as we've lapped the one year anniversary of Brexit. So revenue growth in constant currencies for our cloud business was 2.5.

EBITDA margin was up slightly on a year over year basis to 53.2% versus 52.9% in 2016. I would note that part of this was aided by a low cancel rate of 2.1%, the lowest we've had in a couple of years. Our Digital Media segment did quite well posting revenues of $128,000,000 or up $59,000,000 or 85% versus the prior year and the EBITDA up $11,000,000 or 43% coming in at a 29% EBITDA margin. I'd remind you that's an improvement over Q1 and gives us good acceleration as we move into the back half of the year, particularly Q4 which is seasonally positive. On slide seven, this is how we as you know break out our revenues.

So the cloud is broken out into Cloud Connect which is fax and voice posted slightly less than $96,000,000 of revenue despite some currency headwinds, almost $53,000,000 of EBITDA, maintaining strong margins at 55 plus percent. Our Cloud Services business, which includes the backup, the email security and email marketing came in at $47,800,000 On a constant currency basis, it would be $48800000.0.23100000.0 of EBITDA and 48% consolidated EBITDA margins for those businesses. IP Licensing remains small. It was up year over year 1.3 in revs, very high profit margin of almost $1,000,000 plus in EBITDA. Add those three together, get you total cloud segment revenue of $144,700,000 $77,000,000 of EBITDA or 53% EBITDA margin.

As I mentioned, our Digital Media business had a good quarter with $120,500,000 of revenues, almost $37,000,000 of EBITDA, 29% EBITDA margin, a several point pickup in margin from Q1, in part driven by the continuing integration of Everyday Health. Finally, J2 Global Inc, the parent, had non GAAP losses of about $3,700,000 consistent with Q2 of last year and consistent over the last several quarters. Bringing us finally to the consolidated results that I mentioned of $273,100,000 of revenues, 110,200,000.0 of EBITDA and aggregated consolidated EBITDA margin of 40%, adjusted non GAAP income of approximately $65,000,000 $1.33 in non GAAP earnings and zero six three dollars in GAAP earnings. The primary differential between the two is the amort of intangibles, which have gone up this year in large part because of the size of the Everyday Health transaction. I'll now turn the presentation over to Hemi on Slide nine to walk you through the individual business units.

Speaker 2

Thank you, Scott, and good afternoon everybody. As Scott just said, our Q2 revenue was $273,000,000 This represents a run rate of over $1,100,000,000 And as you know, our Media business is disproportionately stronger in Q4 and we should see and we should bring us to new records for the end of the year. I'll start with the Cloud Connect, which is the fax and voice. Q2 twenty seventeen all time Cloud Connect revenue high of $96,000,000 which is 3% versus last year quarter. Q2 twenty seventeen, the fax revenue the fax alone was $79,000,000 continued to grow driven by the strength in our premium eFax brand and the AirSac acquisition that was completed last quarter.

All time high represents 29% of our consolidated Q2 and this is versus 36 prior year. As I said again, fax continues to grow, it's just that the rest of the business is growing faster. Our subscriber base reached 2,400,000 DIDs, 1.4% versus last year quarter. Corporate Fax continued to grow 11% up versus last year. Voice revenue $70,000,000 grew 6% versus 2016.

And we also acquired in the last day of the quarter a company called My Fax. My Phone Fax is known to the public by the brand of Fax 87 and Online Faxes. We did not add the phone numbers or DID or the subscribers of this acquisition, even though they are in the tens of the thousands and they also had no impact on our revenue for this quarter. Moving back moving forward to Page 10, when I talk about the Cloud backup business, quarter two revenue of $28,000,000 flat versus prior year in constant currency and 4% down versus Q2 affected by foreign exchange. The international revenue of the backup is 40% and this helps you to understand the FX impact.

EBITDA continues to be above 50. We also acquired a company called Cloud Recover in Australia. And by doing that, we expanded our services into Australia and we now have backup operations in 10 countries. We also domestically upgraded to new state of the art data center to improve the backup performance and recovery time acceleration. Page 11, Email Security and Email Marketing.

Email Security had a great quarter of 10,600,000.0 almost $11,000,000 and EBITDA of $3.7 which is 35% EBITDA, a sequential quarterly growth of 6.5% top line and 17% increase in the EBITDA. We are seeing in this business renewed organic growth, increasing margins and M and A. We also acquired this quarter a Nordic based company called WeCloud and Simitur and this increased the revenue in The Nordics by 40%. Email marketing, second quarter revenue of $7,700,000 22% up versus Q2 twenty sixteen. EBITDA margins remained above 50%.

Campaigners continues to focus on product development and sales efforts upstream to higher premium mid market customers. And to demonstrate it, usage is up by 14%. We had almost 10,000,000,000 emails in last quarter. And ARPA, which is average revenue, is up 22% from $2.60 and three seventeen. And also we are in final stages in acquiring another company that will bring the email marketing revenue same quarter in full quarter four to something like $10,000,000 Next, Digital Media, and I'll take you all the way to Page thirteen.

Our Digital Media had another very strong quarter with revenues of 128,000,000 with adjusted EBITDA of $37,000,000 and with margins of 29%. This is a four point improvement versus last quarter. Total multi platform visits were up 17% year over year up to 1,400,000,000 visits. The integration of everyday health and the execution of our strategy remains on target. We are continuing to develop products and building capabilities across the three core businesses.

Those core businesses are Consumer, Professional and Pregnancy. New channel of distributions are very important and we are seeing in everyday health nice growth in its social followers up 16% year over year. We are also seeing nice growth in video and MedPage today saw a nice increase in video views up 40%. Before moving to our from everyday health, as previously announced, we sold recently the Cambridge BioMarketing. Cambridge is an orphan drug advertising agency that we just sold and had a release on that.

Our Commerce business. Commerce continues to be significantly significant growth engine. Commerce is up 45% year over year. This is with record shopping clicks to our merchant partners of over 34,000,000 in the quarter. This is even higher than what generated we generated during 2016 when it was peak buying and holiday shopping season.

Our main commerce sites, offers.com and techbargains performed very well. Also the commerce content of our editorial site performed very well too. Congrats to all the team. Next we go to Page 14. I talk about IGN Ookla.

With IGN, we've reached the point where it's truly video first and text later or text second. We launched our first cable television show called IGN Show, which runs every day on the Disney XD channel. We were Twitter's exclusive E3 export partner broadcasting live from the show for thirty hours. IGN is also becoming a go to partner for TV, movie and video game premieres. We now have over 10,000,000,000 YouTube subscribers and we set record with over one billion minutes viewed in IGN on YouTube.

OO class app adoption and installed base continued to grow at a remarkable clip, up 30% to two eighty million. We saw over 800,000,000 consumer initiated tests in the quarter. Finally, with the acquisition of Everyday Health and the growth of the Media business, we have added four top executives across several key business units. Jeff Black and Lisa Kennedy join us in Everyday Health, Jeff to head the Professional business and Lisa to head the Consumer business. We also have Mike Finnerty joining us to run Ziff Davis Tech and Commerce business.

And last but not least, Mitch Glebright, Glebrest joined us to run IGM. With that, I'm passing the call to Scott, who will talk about our outlook, review our few more outlook, and open the call.

Speaker 1

Thank you, Hemi. On slide 16, as Hemi just mentioned, we reconfirmed the fiscal year 2017 guidance. I'd like to though give a little additional color in detail. First, for those that are newer to remind people that even though we have during any given fiscal year movements within the range, it is our policy we do not alter or change the range unless it is clear that there will be a violation of other either the upper or lower bound of a given range either for revenues or non GAAP EPS. So we reaffirm the range of guidance.

I want to now walk through for the model how some of the things we've done at the end of the quarter or subsequent to the end of the quarter affect your model. As Hemi mentioned, we sold Cambridge Biomarketing in early July. We received $30,000,000 in cash. It's one of the reasons why you see a difference between the cash balances at June 30 and the $380 plus million that we have in real time. We also have the ability to earn up to an additional $5,000,000 based upon EBITDA performance over the next twelve months.

The impact of the model is that we will approximately $15,000,000 of revenues in the back half of the year. Point

Speaker 0

Those revenues are profitable, so we'll hit the bottom line by approximately

Speaker 1

$4 Then we did our refinancing. When we originally budgeted the refinancing, we were looking to do a $500,000,000 financing to take out the 8% notes and the $225,000,000 bank line paid fees and expenses. The deal was well received. It was oversubscribed. We felt that both the rate and the terms were good, so we increased the size of the deal to $650,000,000 Those are 6% unsecured notes at the cloud level only with no guarantee from either the parent or the media business.

However, the financial impact of taking the additional cash for the balance of the year is approximately $08 against our budget. In actual dollars, the non GAAP interest expense for the 6% notes and the converts is now $13,700,000 per quarter. That will be the interest expense in each of Q3 and Q4. At this point, we have no other borrowings. Also I would note that in order to call the 8% notes at one hundred two, we waited until August 1.

Had we done so previous to that, we would have paid 104. So the difference there, those two points was $5,000,000 However, because we did that, we would bear an additional month of interest expense for the month of July and also the last three days of June. In our non GAAP presentation, we are excluding what we call the duplicative or overlapping interest expense. So hopefully that will be helpful for you in your models. Obviously, on a GAAP basis, the full amount of the interest expense in the 8% notes is included as well as the write off of any unamortized fees.

And then finally, as is the case, the slide 18 and following are the financial metrics and the various reconciliations to GAAP of the various non GAAP statistics that we have used in this presentation. I'd now ask the operator to come back online and instruct you how to queue for a call for further questions.

Speaker 0

Thank you. At this time we will be conducting a question and answer session. And our first question comes from Shyam Patil from SIG. Please go ahead.

Speaker 2

Hello?

Speaker 1

Maybe he's not there.

Speaker 0

I'm sorry, Shyam, your line is live.

Speaker 1

Why don't we go to the next question? He seems to be not available.

Speaker 2

Or a different time.

Speaker 0

And our next question comes from the line of Greg Burns. Please go ahead.

Speaker 3

Liquidity that you now have. Could you just give us an update on kind of the outlook for M and A, the pipeline there and maybe the size of the deals that you may be looking at? Thank you.

Speaker 1

Sure. So as you know, as I stated on the formal remarks, the focus the first half of the year has really been on the cloud business. We spend most of our time certainly execution mode on things that are at the smaller end of the spectrum. I think we spent about $35,000,000 on the four transactions in Q2. It was 24,000,025 million dollars on the five transactions in Q1.

So you can see the average deal size is on the modest end of the range. The largest reason for that is just what you see externally going on in the market in terms of certainly major indices hitting all time highs and also certain select transactions, some of the multiples being paid for larger situations. You can look at a WebMD, for example, in the healthcare space that's being purchased at four times revenue, whereas we got into the healthcare space at two times revenue. So because of our discipline, while we will look at larger situations, I think the practical reality is we're unlikely to execute against them just given where valuations have risen to. So the focus has been on that small to intermediate size deal and really not much on the media the first half of the year.

I think as we look to the back half of the year, probably not much changes in terms of the focus on the size of deals because at least right now we don't see any abatement in terms of where the stock market is headed and expectation of valuations on things that are bigger. I would say generally there's a higher degree of correlation in what you see in the public markets with a larger size deal. And that correlation goes down as the deal becomes smaller. So I think the focus will be very similar. I think the changes, though, that we have made substantial progress.

I mean, in essence, we've done what we needed to do on everyday health. So our media management team now has cycles to commit back to M and A, not from so much the process standpoint and acquisition, but having cycles now available to integrate. So while there's no guarantee that we will do immediate deal, as you know, we didn't budget any this year. I think that as we look to the back half of the year, that's certainly a possibility and that's something we had not planned as we entered this year.

Speaker 2

And Greg, you have been with us for a long time. If we are in a negotiation with a company, we would not on the call say that we have them because it can put on us pressure that we don't want to have by committing to it. So this is something you know because you've been with us for I don't know how many years.

Speaker 3

Yes, got you. Okay. The improvement in the EBITDA margin on the Media business, I'm assuming majority of that's being driven by the integration of Everyday Health. Have you gotten all the integration synergies you're looking for? Are there additional gains to be had?

Speaker 1

I think from a cost perspective, the answer is yes. I think now we're in a mode of still that shrink to grow calling out some of the low or no margin revenue. We're getting close to I think finding that level. And then off of that base, I think what you'll see is further margin expansion because the replacement revenues that will come in, will come in at more of our traditional margin contribution. But in terms of I think the way you're asking the question, the strict cost synergies, yes, I'd say we are if not done, we are very, very close to being done.

Speaker 3

Okay. And then in that the shrink to grow vein, you still have tea leaves. How much revenue is that contributing? And Yes. How much of a drag on

Speaker 1

Tea leaves is about a $20 ish million annual revenue contributor, a little bit more that weighted to back half of the year than the first half of the year given the fact that it is in a hyper growth mode. It is modestly EBITDA negative, but the drain is really immaterial in the context of 5.6 to $6 in earnings. We're talking in the order of magnitude of a couple to $03 for an annual drag on the bottom line. We are continuing to explore how to maximize the value of that asset, whether that is within the J2 family or whether that's selling it to a third party. And I hope that we will have a decision on that, at least in terms of the path forward within the next few weeks.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Speaker 0

Our next question is from Walter Pritchard from Citi. Please go ahead.

Speaker 4

Hey, Question for you on the guidance. You changed or you left the guidance unchanged for the year. You've taken out the $15,000,000 If I look at the quarter it seems fairly in line. I'm wondering what

Speaker 5

do

Speaker 4

you expect in the second half of the year to sort of fill the hole the $15,000,000 hole you're talking about from the divestiture?

Speaker 1

I think most of that will probably come from what we'll call the unbudgeted M and A that is in the process of happening. So as you know, we budget this year we budgeted no M and A for Media and a modest amount for Cloud. I think we are now at this point in the year in real time complete with the M and A that is inclusive in the budget. And so any M and A that goes beyond that would in your terminology sort of fill that gap that's being brought to the table by the loss of Cambridge.

Speaker 2

And I also wanted to add that the fax and the cloud connect business is growing faster than we thought. It's doing well.

Speaker 1

Yes, we're getting more out of the cloud business than against the budget.

Speaker 2

That's the organic side. We are finding that we can acquire fax and voice, mostly fax customer in lower than planned cost per acquisition.

Speaker 1

This is organically. This is on the marketing basis. So we get more

Speaker 2

bang for the buck from the advertising budget.

Speaker 1

I mean basically, we've got more gross adds coming in than budgeted. As I mentioned, cancel rates with lower end of the range in the last couple of years. So that's driving a positive wedge.

Speaker 2

And it's our bread and butter.

Speaker 1

So we have very We have a good margin on

Speaker 2

it. Excellent margins. You had very good handle on the forecast.

Speaker 4

And then just on you entered Australia in the backup market. That market I guess organically not really growing. If we think about sort of your confidence and it feels like you are buying more maybe not the rate you were a year ago there. But is that market a market you think can organically grow for the company? Or is I guess to me it doesn't feel like it necessarily has the consolidation and economics at this point of the fax business.

So I'm wondering how you're thinking about backup from a growth potential versus profitability?

Speaker 2

So on the M and A side, we had I'm not sure, but two to three companies, each of them were $10,000,000 of revenue and they were bought by like prices that we would never think are in our range. Businesses are still out there and some will come back come back to reality and some not. And we are ramping up our sales and product and we see organic growth especially on certain segments of the business actually in Europe on one of our product which is called Keep It Safe. And I believe it is a grower. I believe that the market is tough for acquirer and we have some companies in the space that are pure play that are paying dollars that we'd rather keep and invest in other side of the business.

I think you should listen to some of the earning calls of the pure plays and you will figure it out.

Speaker 4

Great. Thank you.

Speaker 1

And I just add one comment to that, that as we've talked about before, one of the goals in each of what we call the cloud services businesses, which are bundled together from a reporting standpoint is to bring those assets up to economic scale. And our view is that in the cloud backup business, we're it's an art, not a science, but 50,000,000 to $60,000,000 away. And the view and the premise has been that that will come from M and A. So there's been less an emphasis on the organic growth potential of that business or of that space and a much heavier focus on M and A. And if you go back just a few quarters, I think from September 2015 through probably 2016, the backup business had at least a dozen transactions around the world that acquired and then was in the process of integrating.

So I think that's kind of that's really the focus. And then once we get to that level of critical mass, then I think there is a conversation to be had as to what is the right mix going forward between organic growth and future M and A. And particularly as it relates to the smaller transactions, because every deal that you do is a separate mapping of integration. So as Hemi mentioned, we talked about this I think in either Q4 or Q1's earnings call, there's been a desire from an operational standpoint to try to get not large businesses from an M and A standpoint, but larger ones on average than what we've done in the past. Get more chunky revenue 5,000,010 million dollars $15,000,000 as opposed to 1,000,000 to $3,000,000

Speaker 4

Got it. That's helpful. Thank you.

Speaker 2

Welcome, welcome.

Speaker 6

Okay. Next question.

Speaker 0

I'm sorry. Next question is from John Tanwanteng from CJS Securities. Please go ahead.

Speaker 6

Good afternoon, gentlemen. Thanks for taking my question. Average revenue per customer was down in the cloud business. Was that an FX thing, mix or something else that we should be thinking about?

Speaker 1

It's noise. It's very, very it's about $03 year over year. It's a combination of all the above that you mentioned. And it is So you have mix, you do have FX because the cloud business has about $1,300,000 of FX drag 2016 to 2017. So when you roll that through, that's going to be a few pennies.

So on constant currencies, it will be up. Also though you do have in any given quarter, there is sensitivity to the mix, not of the products or services, but across the various business units. So as certain business units on a relative basis say gain a little bit of share against others that has implications for the ARPU. But in general, I would say that $03 on the ARPU, it's noise.

Speaker 6

Got you. Thanks. That's helpful. Anything special going into the reduced cancel rate? Is it a business confidence improvement on the macro side or something that you're doing on your end?

Speaker 2

Several things, John. First of all, as you see when the corporate segment is growing, those customers tend to be much more stable. Many of them are sitting on long term contracts. And we rarely, really rarely lose one of those customers. And that's number one.

Number two, we are all the time trying to get better on our processing of credit cards, all those things. So we are getting better there. And just this is a reflection of the hard work of everybody in the company, support, product, outages that we don't have, competition that is not doing great. But we were positively surprised. We budgeted for higher churn rate.

A little higher.

Speaker 6

Okay, great. From a strategic standpoint, we also have WebMD sold for. Do you ever see a situation medium or longer term where you could flip or divest the everyday asset after you've cleaned it up if someone is willing to pay that much?

Speaker 1

That's not our intention. I mean it's an integral part to our overall Digital Media business as we think about it. So there's no contemplation about hiving off assets or verticals within Digital Media. As we talked about, there are a couple of assets, one is now gone that we felt were non core to being in the Healthcare vertical, but not in terms of hiving off a whole category. We're just entering the space.

We think there's a lot of running room, there's a lot of additional assets that can be acquired that will be complementary to what we currently have with everyday health.

Speaker 2

It's not the intention, but you know, the Board is very opportunistic.

Speaker 1

I think it has to be a much better multiple than the WebMD, though. Right.

Speaker 6

Okay, fair enough. Then just

Speaker 2

It should be twice our multiple. Right.

Speaker 6

And just finally, earn out payment to Ookla, are there any more payments like that in the pipe from prior acquisitions just to help us think of what's out there?

Speaker 1

No, no. The biggest one that we've had in the last few years has been Ookla, which paid out at the beginning of each of 'sixteen and 'seventeen, and that is now concluded.

Speaker 0

Okay, great.

Speaker 6

Thank you very much guys.

Speaker 2

You're welcome, Joe.

Speaker 0

Our next question is from James Breen from William Blair. Please go ahead.

Speaker 1

Thanks for taking the question.

Speaker 7

Just a couple on the cloud side. It seems that the marketing and backup and back to voice segment all have EBITDA margins up north of 50% now, email securities in the mid-30s. How do you think about that with run rate of $10,000,000 10,600,000.0 in revenue this quarter? What's scale there where you can get those margins up north of 50%? And then You're talking

Speaker 1

about email security business, right? Email security. You're talking about email security or general?

Speaker 7

Yes, email security.

Speaker 2

Email security, excellent question. So email security, we have two flavors. We have when we resell others and we have when we sell our own fuselage. So for example, the Nordic based company, WeCloud and Cimitu, They are on a platform that is actually sitting on the border of Sweden and Denmark. We are planning to move all those customers to the fuse mill.

This might take a quarter or two. When we are done, it definitely would increase the margin because we are moving from two platforms to one platform. And the more we sell fusel, fusel has ability to scale as you become bigger. So definitely, I would see there improvement definitely versus last year because if you remember last year was heavily impacted by McAfee. It was the largest piece of the business with its lower margin.

So yes, yes, yes. I hope I answered your question.

Speaker 1

Yes. Think maybe more maybe numerically or analytically, I think that it's a business that can get to 50% EBITDA margin. But I think in terms of if you look at the $42,500,000 run rate, we're talking about scaling the business probably if not to $100,000,000 close to $100,000,000 before that's a reasonable expectation.

Speaker 7

Okay, perfect.

Speaker 1

Ways to go there, but I think the key thing is that and I want to reemphasize it that the McAfee end of life is behind us. I think that was definitively seen by the sequential revenue growth from Q1 to Q2 from the $10,000,000 to the $10,600,000 Doesn't sound like much, but it, I think, did put a stake in the ground that migration, which was a seven, eight month process is over. It did have a reset on the revenues to this level. We're now growing off of it. And I think maybe more importantly, as we said, it constrained us from doing M and A in that category for a number of months because of our internal people migrating customers internally.

As you see, we've just now acquired a couple of companies in The Nordics. So M and A activity or the ability to do M and A activity is now reopened in the Email Security business. So everything now looks much more positive on a going forward basis than it did over the last couple of quarters.

Speaker 7

Okay. And then just relative to guidance and follow-up on the other questions. In the first half of year, you guys spent I think around $60,000,000 in M and A. Is that correct?

Speaker 1

Correct.

Speaker 7

All right. So I guess if just thinking about it on the back half, if you spend another 60,000,000 to buy, call it, 50,000,000 to $60,000,000 of revenue, that would more than make up for the Cambridge revenue loss and then add some additional revenue above and beyond the guidance range?

Speaker 1

Well, let me maybe slightly change what you said. If we spent the same amount of revenue same amount of $1.60000000 dollars right? Yes. And let's say we paid roughly two times revenue, we'd acquire $30,000,000 of annual revenue. And we would have, depending on the timing, somewhat less than a half year contribution, so somewhere between, say, 10,000,000 and $15,000,000 of contribution of revenue to this calendar year.

Obviously, if we spend more, where you are headed, if we spend $120,000,000 roughly and acquired 60,000,000 we would get somewhere between 15,000,000 and $30,000,000 depending upon the timing and the size of each individual deal.

Speaker 2

And as you know, we have ample cash and a lot of enthusiasm to buy more companies. So $60,000,000 was just an outcome of the disciplined approach. When we see bigger targets, we pay more money and everything grows faster. And as I said, we do have deals in the pipeline.

Speaker 7

Okay. And then along those lines, just Scott, can you just go through sort of what the pro form a balance sheet looks like with the cash and debt post this most recent financing?

Speaker 1

With now well, let's do it kind of in real time, the key element. So first of all, when we say cash, we literally have it all in cash. It is distributed around the world, but we've got cash north of $380,000,000 on the asset side. On the liability side, we have the 3.25% converts, that's $402500000.0.402.5 And they have a final maturity in June 2029. They're in the money, but not yet convertible into equity.

And then we have the newly issued $650,000,000 of 6% notes at the cloud level. I think I said earlier due August, it's due 07/15/2025. So a little under eight years from today. So we have gross debt of 9 and $52,500,000 And the 8% notes by the way were retired on August 1, they're gone. So even though you'll see in the June 30 balance sheet the notes and you'll see cash offsetting it, that's gone.

So you've got 952,500,000.0 of debt and you've got $380,000,000 of cash. So our net debt is $4.70 And the $3.80 cash

Speaker 7

sorry, the $380,000,000 in cash, how much of that's held in The U. S. Versus outside The U. S?

Speaker 1

I'd say it's roughly $150,000,000 would be in The U. S. He's telling me I'm wrong. Percent currency. Couple 100,000,000 in The US and a little bit, well 180,000,000 The US, 200,000,000 overseas.

Speaker 2

If we sell everyday house we'll have more local, no, if we sell Tealings. Tealings, sorry, sorry, Tealings. Tealings, right. Tealings, that is under every day, yes. Tealings.

Speaker 7

I guess just lastly, does that sixty-forty split roughly reflect the M and A that you're doing? Are you doing kind of 60% of your M and A outside The U. S. And 40% in excluding obviously Everyday Health?

Speaker 1

We are, but it's not because of that. I think it's more coincidental. I think it's more driven by the fact that we're finding in general better valuations outside The United States than inside The United States. But it's not the case that all of our deals are outside The U. S.

But I think if you look at the nine deals this year and probably rolled back even into Q4 of last year, But yes, more than a majority of the deals certainly in number are outside of The U. S. Obviously, you go back to Q4 of last year in dollar based, it's going to be heavily weighted to

Speaker 2

The U. S. Because of everyday health. Yes. The cloud is buying more outside deals versus the media and the cloud is also because of the pays lower taxes, actually impacts the accumulation of cash.

Speaker 1

Well, that also affects the valuations. Right, right. The ability to pay.

Speaker 2

If I tell you that the X percent of the revenue is international, the cash accumulated is not driven by revenue only, but also by tax rates. So you understand it accumulates faster because we pay less taxes there. Okay.

Speaker 7

Perfect. Thank you very much.

Speaker 0

Our next question is from Rishi Jaluria from JMP Securities. Please go ahead.

Speaker 8

Hey guys. Thanks for taking my questions. On Cambridge, my math is right, the change in GAAP or the granularity that you gave us implies that they had somewhere around 6% to 7% net margins, which is obviously well below where you are on Digital Media and Cloud. I mean was Cambridge an asset that didn't have room for margin leverage? Or was it just too different and too high distraction relative to the other businesses to justify the investments to get that leverage?

Speaker 1

The second one. It's primarily the second one, but I think also the niche that it is in, we looked at it as being a range bound asset from a revenue standpoint with some degree of volatility. I'd say at the $30 ish million level of revenue today, it's probably roughly in the midpoint of that range of revenue. It's clearly highly dependent upon what's going on in the orphan drug community and the pipeline of those drugs being released. So the fact that it was an agency business, which is something we don't do in Digital Media, the fact that it was involved in this niche where there really wasn't an opportunity to take it to the next level revenue wise and as a result that had implications to its ultimate margin.

And of course, there's management time exerted just to manage that business. For all of those reasons, we viewed it as non core and therefore appropriate to sell subject to getting what we thought was a fair or reasonable price.

Speaker 2

And we couldn't scale it. The only one who can scale it is somebody who is the ad agency business.

Speaker 1

Because it's not an area that we are in or intend to be in.

Speaker 8

That makes sense. And with the new hires within the Everyday Health on both the professional and consumer side, can you give us an idea for what the plans with Everyday Health are going to be under the new hires and if there's any change relative to when you first announced the acquisition?

Speaker 1

Well, think as Hemi commented in the slides and there's several bullet points that granted they took effect before these new General Managers showed up. But the key was really to bring in General Managers with a consistent vision and understanding of how to optimize the traffic within this space. And so as we noted at the time of the acquisition, I think in the subsequent calls, we found that there were areas within everyday health that were not being either they didn't exist at all or they were not being fully optimized. To take just one example, affiliate commerce is very big for us in our other verticals within Digital Media. And it was not a significant enough stream within Everyday Health.

That's beginning to change. That's primarily at the what to expect site. The two new GMs, they'll come in at the Med Pages area or the professional. Video views and having video content, which generally is a better monetizer, is a big deal. That's now starting to take trends.

And then we think there's actually a vast array of things we can do on the consumer side. Visualizer, can go check it out, is one product that we've launched, which is sort of a new way of presenting health information and conditions. So you can look at multiple sclerosis as one of the first ones that we've rolled out. But it's really how do you engage the audience so that you're going to get better maximization or optimization of the revenue potential of that traffic. And these are people that we believe and we know from some prior experience have a reputation, a history in the space and a consistent philosophy with what we do on the Digital Media side.

So you will hear more over the succeeding quarters as they become more integrated and really take control of these business units.

Speaker 8

Okay. Got it. Got it. And last one from my end. But just going back to EBITDA margins in the Digital Media business, we saw some nice margin expansion.

And Scott, know as you said the cost structure with respect to Everyday Health is mostly in place. Just how should we think about the path for EBITDA margins from here within Digital Media?

Speaker 1

Well, I think you should see a continuing improvement. And by the way, just let me say that in general, is not the case that there's necessarily an improvement in both revenue and EBITDA margin sequentially from Q1 to Q4. Clearly, Q1 is the low watermark no matter what the mix of assets are in Q4 because of the seasonal bias is the high watermark. Two and three sometimes can be equal in revenue productivity, sometimes one is higher than the other. I think in this case this year though because of the dynamics of what's going on with Everyday Health, we would expect to see some margin improvement in Q3 versus Q2.

Just remember on the revenue side, we're going to lose, call it, 7,500,000.0 to $8,000,000 from Cambridge. So when you look out on a sequential basis, keep that in mind. And then obviously, we're expecting what I'll call more of a pop in Q4, where as we exit this year and we go into 2018, we would expect the Digital Media business as a whole and Everyday Health as a contributor to that to be within the same margin structure, which is mid-30s EBITDA on an annual basis, obviously with some variability across the quarters, generally low 20s in Q1 and approaching 40% in Q4.

Speaker 8

Got it. That's helpful. Thank you so much guys.

Speaker 1

You're welcome.

Speaker 0

Our next question is from Will Power from Robert W. Baird. Please go ahead.

Speaker 3

Yes, great. Thanks. Yes, I wonder first if you could give us any flavor for what the organic growth trends are looking like within the Digital Media business. And then I guess within Digital Media, there's been discussion in the past about working with the big, I guess, Internet platform companies, Facebook, Snap, etcetera. Maybe any update there as to the ability to monetize?

Or is that still work in progress and early?

Speaker 1

Sure. So I think let's break the Zip David business into two pieces. We're seeing right around double digit growth in the tech gains and shopping, obviously with some variability across the properties. The Everyday Health business, as you know, is in sort of a shrink to grow mode, so the numbers really are really not comparable because

Speaker 7

you'd have

Speaker 1

to go back and pro form a into Q2 of twenty sixteen revenue streams that we've now eliminated. So I'd say it's down a little bit on an actual year over year basis, but on a pro form a basis would be up. And I think that once we finish the shrink to grow there and we get it down to the core, then we view it as being a consistent grower with the rest of Ziff Davis.

Speaker 3

Okay. That's helpful.

Speaker 1

Okay. You have one other question?

Speaker 3

Yes. And then the second question was really just an update on trying to monetize some of the advertising you've been working on through Snap and Facebook and some of

Speaker 1

are monetizing. To be clear, we are monetizing probably most notably with Snap that's going on a couple of years now, the relationship. As you see, we were with Twitter on E3, thirty hours of coverage of that. And so there is monetization. It's still a very small piece of our overall media revenue.

And I think it's still a work in process in terms of where is sort of the optimal both balance and expectation of the financial relationship and margin profile from those third party providers. And it's really not them as a group, it's really case by case.

Speaker 0

Okay, thank you.

Speaker 2

You're welcome.

Speaker 0

Next question is from Jack Rosenberg from SIG. Please go ahead.

Speaker 5

Hey guys, this is Shyam. Can you hear me?

Speaker 1

Yes, we can hear you.

Speaker 5

All right. I have to sign in as my alias. Thank you. Thanks for taking the question. Congrats on the quarter.

On Everyday Health, what's next after that deal in the healthcare space? And when you look at the landscape of what you want to acquire, does everyone look or do the people that you want, do they look distressed EVDY was, like WebMD? And how confident are you that you're to be able to kind of acquire the assets that you want in that space?

Speaker 1

Look, it's a range of that. I mean, what comes next after WebMD, don't know. That's more of an industry question of who's likely to be in play next. Obviously, we've seen both from a capital raising and a transaction standpoint, a couple of data points that for larger situations point to very strong robust valuations. Obviously, for our model, we're going to be looking for smaller assets, maybe think of it more as a tuck in that's complementary to the core mothership of everyday health or MedPages.

Some of them may be distressed or have some level of distress. As you know, we're not afraid of wading into that. I think, as I mentioned earlier, the good news is that the seven, now eight months in real time effort by the Digital Media team to focus on everyday health and to make certain changes in the GMs is in place and done. And that frees up the senior management time of ZIF to go tackle another situation. And that other situation need not be pristine.

So I won't prognosticate or guesstimate, but I can tell you that even in the eight or nine months well, in the ten months we've been involved with Everyday Health, including pre the acquisition, we've seen a number of situations that fit into the health care arena. And if you think about what we're doing right now, we're kind of at the high level categories and you've got a whole variety of niche conditions or areas that some of which may make sense to add to the portfolio.

Speaker 2

I also can tell you with the size of Ziff Davis, every deal that is happening is definitely showing itself on our doorstep. And you can even sometimes read some press releases about companies that say, hey, Ziff Davis is looking into us. When it was not, it's their problem. But definitely, we are seeing a lot more much more we are now much more visible.

Speaker 1

Yes. Before we would have very rarely seen something in the healthcare space. And as I mentioned, it started really after it became publicly known that we had been in negotiations and awarded the acquisition of Everyday Health. Obviously, we still had to go through, since they were a public company, the tender offer process. But inquiries started to come in even before that deal closed.

But obviously at the time, the view was, look, A, we've to get the deal closed B, there's a fair amount of work that we see that needs to be done over the ensuing months that's our number one priority. And some of those happen to still be around, maybe we can circle back to them. Some may have had a change of heart in the intervening months.

Speaker 5

Got it, got it. Maybe just a follow-up on that. In terms of kind of pulling the trigger on sizable deals kind of in the healthcare space, how much time do you think you need to digest every day before you do that? And then do you feel I didn't say that they'd

Speaker 1

be sizable. That's your word.

Speaker 5

Yeah, yeah, no, my word.

Speaker 1

My definition of sizable No, I think the answer to your question is that we're coming to the end of the line of the senior management time of Ziff Davis that needs to be invested in the integration of Everyday Health. It doesn't mean everything's done, but the seeds have all been planted. As I mentioned to an earlier question, the integration elements are completed with the right people in place. We made the cuts that we needed to early on. So I mean those are the things that the senior management has to be intimately involved in.

And now they're becoming freed up to look to other opportunities. By the way, they need not be in the health care space. Remember, we're in several verticals. So it doesn't mean we're only looking in healthcare just because it's the latest category we've entered. Right.

And I remember, don't know

Speaker 2

if it was a slide that we show to the public, but when we were considering to buy Everyday Hair, there was a chart of all the players. OIBDA was number one. We were down there like number And then there were a lot of like a lot of eight that were There's hundreds. No, no, but eight that made it to the chart that they were between like $10,000,000 and $150,000,000 of revenues. And those probably are looking for an exit, But we have not have anything specific.

And as Scott said, we are not looking only in everyday health. We have other areas that we are very interested in increasing our dominance. In the media, it's very important to be sizable. That's why I say the others might, if you're not sizable, you're not number one, two, or three, very tough. So we are happy you know we are number one or two in all the elements.

Yes. All Right? Besides Aspin, which is small everywhere else we are between number one and number two. So everything we can do to become affirmative number one or stronger number two definitely are going to do it. Also, FMD was offered to us, but we didn't think it's going to the right places.

Speaker 5

And I got one last one. Just on the cloud business, it seems like you guys have done a great job of identifying areas like cloud backup and building up scale relatively short time period. Have you ever thought about or considered kind of potentially monetizing assets at scale within cloud? Kind of curious if how you think about that?

Speaker 1

Assuming you mean monetize, you mean sale of assets?

Speaker 5

Sell, IPO, reverse IPO.

Speaker 2

Okay. No, that's not what I said yes to.

Speaker 1

You better clarify what you said yes to.

Speaker 2

Yes, yes, yes.

Speaker 5

We thought about it. That's all I asked.

Speaker 2

Sorry? We thought about it. No, we actually thought about buying largest asset in the cloud in the last year. We saw two of size that we would be a very qualified leader, but the offer that was those are two public companies, the offer came 50% above us. And in both cases, the buyer are really suffering, really suffering.

So it obviously was not a good call of their side to offer 50% more than J2 did. And maybe eventually something happened. I think while we're opportunistic and so sometimes that means things that present themselves to you, you have

Speaker 1

to then make decisions about. I think if you look at the cloud business, the idea of the way you asked the question, taking any of them public, they'd be very small public companies. And I just think that there there's a detraction on valuation if you're out there as a small public company. And we've seen enough of them. Look, we were there at one back in our day.

We've seen others that have come out that end up sometimes becoming orphans. So to me, that's not the likely path. Now it's possible someone shows up and says, I want this piece of your business. Here's the price I'm willing to pay for it. And it is the case that our business units in cloud are set up as distinct business units.

That might be a different question and that might be a different answer, but it's not something that we're looking to do.

Speaker 2

Still our largest product business is the fax, dollars $320,000,000, very profitable. So well, 79,000,000 last quarter. And we got another company. So it is $320,000,000 The first time I'm correcting Scott. It is $320,000,000 And this is an amazing business.

Speaker 1

How many deals in run rate? I deal in trailing 12.

Speaker 2

Correct. Futuristic view.

Speaker 5

Got it. Thank you guys.

Speaker 1

Right. Thank Thanks,

Speaker 0

you. This does conclude the question and answer session. I'd like to turn the floor back over to management for any closing comments.

Speaker 1

All right. Well, we appreciate your time to listen to our Q2 earnings call. Look forward in the coming weeks to a press release announcing the various conferences that we will be at. I think they are all after Labor Day in September and then through the next earnings call, which is likely to be in early November. There'll be, as I mentioned, several conferences that we'll be at in September, October.

And then we will set the date in October for the Q3 earnings call. And clearly, you have any further questions, feel free to call or e mail us. Thank you.

Speaker 0

This concludes today's teleconference. Thank you for your participation.

Speaker 2

You

Speaker 0

may disconnect your lines at this time.