Ziff Davis - Earnings Call - Q3 2017
November 2, 2017
Transcript
Speaker 0
Welcome to the J2 Global Q3 Earnings Conference Call. Leading today's call will be Mr. Hemi Zucker, CEO and Mr. Scott Turicki, 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 our host, Mr. Scott Thank you. 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 with me today is Hemi Zucker, our Chief Executive Officer for his final earnings call, his fiftieth. Q3 was another strong quarter producing record revenues, an all time record and a third fiscal quarter record of EBITDA and non GAAP earnings.
In addition, during the quarter, we sold our Web24 web hosting asset in Australia and just after the quarter ended disposed of tea leaves. Our Board has increased the quarterly dividend by $01 to $0.03 $95 per share. We will use a presentation for today's call, a copy of which is available at our website. There's a new enhanced webcast facility. So when you launch the webcast, you will see that there is an icon which
Speaker 0
is in
Speaker 1
the middle of the page. And when you press on it, it will enlarge so that the slides take up the full page and you'll be able to read not only the contents of the slide, but also the footnotes. If you've not yet received a copy of the press release, you can access it through our corporate website at j2global.com/press. You can also access the website the webcast from this site. After we complete our presentation, we'll conduct a Q and A session.
At that time, the operator will instruct you as to the procedures regarding the asking of a question. However, at any time, you may e mail questions to us at investorj2global dot com. Before beginning the prepared remarks, I'll read the Safe Harbor language. As you know, this call and webcast includes forward looking statements. Such statements involve risks and uncertainties that could cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include, but are not limited to the risk factors we've 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 slideshow for this webcast. We refer you to discussions in those documents regarding the Safe Harbor language as well as forward looking statements. I would now ask you to turn the presentation to Slide five, and I will briefly go through the highlights for the third fiscal quarter. As I just mentioned, we reported an all time record revenue of $274,000,000 resulting in EBITDA of $111,000,000 free cash flow of $57,000,000 and adjusted EPS of $1.34 per share. Our revenue increased by $6,063,000,000 dollars versus Q3 twenty sixteen or approximately 30%.
EBITDA was up by $16,000,000 or 173%. Of course, a large portion of this came from a full quarter inclusion of Everyday Health. We ended the quarter with slightly in excess of $400,000,000 in cash and cash equivalents, aided in part by the financing we did at the end of Q2, which gave us $150,000,000 of excess proceeds. Specifically for the Cloud segment, its revenues were $146,000,000 or up $2,000,000 or 1.7 versus 2016. In constant currencies, the revenue growth was 2.3%.
The EBITDA margin for the segment remained strong at 51.5%. Cancel rate improved slightly versus 2016 and remained within the normalized range of 2% to 2.25%. Our Digital Media segment hit an all time high of revenue of $128,000,000 or up $67,000,000 or 91% versus the prior year. EBITDA was up $16,000,000 or 67% and showed margin expansion from Q2 to Q3 as the integration of Everyday Health continued. Now briefly on Slide seven, the Cloud Service the Cloud segment is broken down to Cloud Connect, which are fax and voice business, doing slightly less than $97,000,000 of revenue for the quarter.
Other Cloud Services did about $48,000,000 in revenues and IP Licensing about 1,200,000.0 adding up to the $145,800,000 EBITDA coming in at just over $75,000,000 for the total cloud segment and the 51.5 percent margin I just referenced. The Media business did $128,000,000 of revenues and 40,000,000 of EBITDA or 31% EBITDA margin. And then finally, the parent had about $3,750,000 of cash costs, up somewhat from 2016. And this is usually a seasonally higher quarter for us as we incur additional accounting fees. Adding up our Cloud, Digital Media and the parent gives you the total consolidated financials of $274,000,000 of revs, 111,000,000 of EBITDA, slightly in excess of $65,000,000 of adjusted net income, dollars 1.34 per share of adjusted non GAAP earnings and $0.66 of GAAP earnings.
The two primary differentials between the non GAAP and GAAP are the additional amortization of intangibles, particularly the increase this year from Everyday Health and excess costs that we had related to the bond refinancing, resulting in both additional ongoing interest expense as we raised $650,000,000 at 6% at the end of Q2. We also had a $5,000,000 of premium that was written off in Q3 when we retired the 8% notes. Now I'll turn the call over to Hemi. He'll walk through some of the operational business segments.
Speaker 2
Thank you, Scott, and good afternoon, everybody. This is symbolically my 50s earning call. Let's enjoy this last one the same way we enjoyed all the others. And I also want to say a special thank you for the analysts that have been following us for so many years getting used to my Israeli accent. With that, let's go to Page nine, when I will discuss our third quarter Cloud Connect Fax and Voice highlight.
Q3 had again an all time high Cloud Connect revenue of $97,000,000 which is 5% year over year. I believe that in the next few quarters, we have a chance to cross the $100,000,000 revenue based on our still growing fax business and voice business. The fax revenue was $80,000,000 and continues to grow versus last year. We also have an all time high fax revenue in Q3 twenty seventeen, up 3.5% versus prior year. Voice revenue of $17,000,000 also grew 10% versus last year same quarter.
Corporate fax revenue continued to grow, up 7% versus Q3 twenty sixteen, and we have successfully completed the integration of Fax 87. We are still working on the integration of Sfax. In the bottom here, we decided to do some demonstration of the growth of corporate fax since 2013. Compounded average growth rate since 2013 was 9% on the revenue. Of that, 4% was organic.
We are positioning our fax for API growth for fax. We see strong demand in compliance oriented verticals like health, pharma, legal and finance. Next page, Page 10, I will discuss the cloud backup highlights. Q3 revenue was $28,000,000 International revenue grew 5%. We now have 40% approximately of the cloud backup outside The U.
S. EBITDA continues to be at the 50% level. Cancel rate is favorable versus prior year, driven by Keep It Safe and LiveRise. Actually, the cancel rates of the backup is lower than the average of the company. The backup team is doing very good job on maintaining its largest customers with their periodical contracts renewals, very good job there.
We also acquired a very small company and we integrated its backup online in Europe. Let's summarize a little bit about the progress of Cloud Backup. Since 2013, the revenue grew annual rate of 96% and EBITDA margins have improved over the period from high 20s to approximately 50%. Page 11, FuseMail and Campaigner, Email Security and Email Marketing. FuseMail had strong organic growth, quarterly growth of 7.2% driven by Europe.
2017 revenue of $11,400,000 EBITDA of approximately $4,000,000 strong new business sales in XLMicro, this is after the McAfee migration. Ongoing investment in Diffuse Mail product roadmap, features and packages to replace to place it in the leading edge of email security. The Nordic acquisition of WeCloud integration is on track. Campaigner, our email marketing business, Q3 revenue of $7,700,000 Year to date revenue is up 17% versus last year. Campaigner continued to enhance its digital marketing product suite and ARPA is up 17% versus last year same time.
Digital Media, Page 13. Digital Media had another strong quarter with revenues of $128,000,000 and adjusted EBITDA of 40,000,000 Margins were 31.4%, 2.6% improvement versus last quarter. Total multiplatform AVCs were at $1,400,000,000 UCLa. UCLa app adoption and installed base continues to grow and reach an incredible new milestone of over 300,000,000 total installs. Mobile platform test achieved a record high of $600,000,000 in this quarter.
Both figures are very significant business driver as the larger our installed base, the deeper it is and it enables our testing analytics and it is becoming very, very important. Commerce. Commerce continued to be significant grower. It's a growth engine for our company, up 34% year over year. We set a quarterly record in shopping clicks to our merchant partners with over 36,000,000 clicks.
That's 10,000,000 clicks more than the same period last year. Next, Page 14. IGN continues to grow its video programming and distribution. The IGN show had successful 30 episodes. This is our first season on Disney XD over the summer.
We also extended its Facebook partnership, creating six original video series for the launch of Facebook Watch. Everyday Health. Everyday Health consumer continues to bring new products and programs to the market. To expect brought some new products to the market as well. We launched a new baby product session in this site.
What to expect partnered with the International Medical Corps to raise awareness for maternal health care for the third Annual Bump Day. This day was a big success For the cause, media coverage providing over two fifty million impression on social network, up 100% year over year. Before I pass the call to Scott, I wanted to thank Scott, thank him in public for working with me over twenty years, so many years together. Scott is a true professional and a friend for the rest of my life. Thank you,
Speaker 1
Scott. Thank you, Hemi. Thank you for the kind words. Before we turn it over to Q and A, we've got two more slides. One is on '16, which is reconfirming our guidance.
And to remind you, that's for revenue range for 2017 of between $1,107,000,000 of revs and $1,147,000,000 of revenues and adjusted non GAAP EPS of between $5.6 a share and $6 Although this is not the point in the year at which we give fiscal twenty eighteen guidance, I would remind everybody, particularly those that already are building models that with the disposition of Cambridge earlier in the year, Key Leaves and Web '24, there's about $35,000,000 in revenue in 2017 that will not be there in 2018 as we roll forward. We talked previously about the amount of revenue that we would lose in the balance of this year of $23,000,000 but just remember that other chunk of revenue that doesn't roll forward into 2018. And then finally, before we go to question and answers, a lot of times these calls as they need to be are very short term focused. We're talking about the quarterly results. We're talking about our expectations for the not too distant future, one or two quarters in advance.
But Hemi clearly has been a contributor for more than twenty years at J2. And so my own small tribute to him is on Slide 17 to give you a little bit of perspective of the contribution that he has made in the various roles over twenty one years of service. He started in October 1996 when to say J. Fax at the time was a start up was probably even generous as the company was in New York and ultimately moved to Los Angeles and was really restarted in the 1997. He served in almost every C level capacity that we have had or ever had.
The time I joined, at the time of the IPO, he was the CFO. Then in 02/2001, he became the Chief Marketing Officer. We actually shared titles of Co President for a while as he was also the Chief Operating Officer and then he assumed the CEO role in 02/2008. I think and I've said this to some of our employees internally, twenty one years is a long time, but there are defining moments within a career. And I think two of them that are worth highlighting is the leadership that Hemi provided through the .com bubble implosion, which is now very distant.
But for those of us that were around our time still remains very fresh in our memories. And through his steady hand, his leadership and his focus on costs, we were able to survive where many around us at the time did not. Then we got a second time, although we were clearly much more stable, which was the financial crisis of two thousand and eight and 02/2009. There, was a little bit different. It was really how do we take that crisis as an opportunity to improve our overall business.
Some quick thinking allowed us to improve our cost structure, most of which actually survive to this day. We did do some things on the sales and marketing side that were temporary. And as the environment improved, we started to spend more on sales and marketing. Diversification is big. When HEMI started, this was to some extent a unified messaging company, but really its core product at that time was really digital fax.
Very important to this very day, but as we've talked about over the last number of years, even though fax continues to grow, it's a smaller piece of our consolidated revenue, roughly 30% versus literally 100% back in the earlier days. And the diversification has occurred into 12 different business units across both cloud services for small businesses as well as digital media. Every year this company has grown. Below is a little graph on the right. You can see from 2001 when he assumed the CMO role, the revenue growth and the adjusted EBITDA, revenue up 24% compounded through the end of this fiscal quarter, stock price up 29%, adjusted EBITDA up 46%.
M and A as everybody knows a big part of what we do. Hemi has been involved in all 01/1958 acquisitions that we've done over a seventeen year timeframe and the employee base is growing from less than 100 to 2,300 employees from literally one office in one country to now many offices in 14 countries. So Amy, it's been a pleasure to be at your side for these 50 calls that we've done, but more importantly to be at your side for seventeen point five years in my case as an employee, but over twenty years both my tenure as a banker and then as an employee of J2. So congratulations on your success here at J2 and we look forward to greater successes in the future.
Speaker 2
Thank you, Scott, and thank you everybody. I know that many of the employees are listening. I want to take this opportunity to thank everybody and I'm continuing to be a big fan of the company, WattU, and I am going to help the next year to Vivek in succeeding. And I'm looking forward for him to succeed even more than I did. And I think we can open it for the analysts.
Speaker 1
Okay, questions now.
Speaker 0
We will now be conducting a question and answer session. Our first question is from Shyam Patil with Susquehanna. Please proceed with your question.
Speaker 3
Hi, thanks guys. Hami, my congrats as well on all your accomplishments at J2 and the next gig. It's been a pleasure.
Speaker 2
Thank you very much.
Speaker 3
I have a few questions. I guess the first one, Scott, on the point you made on the revenue lost from acquisitions for next year, can you talk about just how much the recent M and A either that you've done in 3Q or that you're confident in doing in the 4Q? Kind of how much of that $35,000,000 do you think you can offset? And then kind of as you go through next year, do you think you'll be able to offset that with the M and A you have planned for 2018?
Speaker 1
Yes. First of all, the M and A in Q3 was rather light. A lot of our focus not that we weren't focused on M and A, but the divestitures of Web twenty four and tea leaves were very important even though tea leaves actually closed in the fourth fiscal quarter, a lot of the work was done in Q3. So the M and A transactions on the cloud side that were done in Q3 will offset offset to a very modest way some of that $35,000,000 I am optimistic that what we have in the pipeline now and certainly as we look forward into 2018, we probably will be able to offset a big chunk, if not all of that $35,000,000 of revenue. I was just highlighting that for people to understand sort of where the pro form a or the correct starting point is as we go into 2018.
And as you know, I'm always a little bit reticent to commit so much on the M and A side because things fall out sometimes at the eleventh hour, other things come in to replace it. But our pipeline is healthy. And I'm optimistic as much as I ever can be in M and A that yes, we will through the end of this year and early next year complete transactions that should substantially offset most of that $35,000,000 if not all of it.
Speaker 3
Okay. And then just on the M and A, when you think about the cloud business and the media business, where do you see the most opportunity for midsize or larger deals from an M and A standpoint? I guess specifically when you look at media, any particular verticals there? Is it health? Is it games?
And then for cloud, which service areas do you think you see the most opportunity for that size of for M and A?
Speaker 1
Sure. I think that in short, there's a desire to particularly in our smaller business units and quite frankly, of them, whether you're talking media or cloud, we consider still to be not necessarily under scale from an economic standpoint, but smaller than we would like them to be. The one exception to that would be the digital fax base, which I think is of a size that is both scaled economically and as a result experiences the fullness of its margins and it's also a material player within its space. So if we look at the rest of the businesses, voice, backups, email security, email marketing, the tech vertical of which there's several different areas, the games vertical, even in healthcare there's different subcomponents. And then there's an international piece.
The answer would be, we're looking at all of those. So I don't think that there's necessarily the units that are the smallest, if we had our choice, we would probably be most interested in doing transactions in those areas because they're going to give us more prominence within the respective space that we're operating in and also on the margin more leverage from an operating cost standpoint. So that's where our preferences would be. But having said that, we are servicing all of the business units across both cloud and digital media. And in terms of as you know, we're active across all the spaces and sectors.
As I say, I think the goal is first and foremost to feed the existing business units as opposed to creating new business units, although sometimes those things happen. You run into a transaction that is very attractive, but it doesn't necessarily fit into one of the existing business units of J2 that prompts us then to start a new business unit. But all things being equal, the existing business units of which there are 12 or 13 depending on how you count would be the first priority. And then as I say, feeding probably the smaller ones where they can then bulk up in size more rapidly.
Speaker 3
Okay. Thanks. And then I said
Speaker 1
They'll do the deals as they come. And sometimes you don't always get your wish list in terms of the prioritization. So we are engaged in all segments and all sectors.
Speaker 3
Got it. And then just had one modeling one left. In terms of the $35,000,000 number that you mentioned for next year, can you just help us understand how much of that was kind of in Media with TLEs and how much was in Cloud with the Cloud asset? Just so we can get a sense of the breakout?
Speaker 1
Yes. Remember, this is the piece that is missing for this year. So it's not as annualized revenues. So of that 35,000,000 you're talking about just around 30,000,000 in Media and approximately 5 in Cloud. And the 5 in Cloud, of course, only relates to one asset, Web 24.
Speaker 3
Got it. Thank you.
Speaker 2
Thank you, Shayan.
Speaker 0
Our next question is from John Tanwanteng with CJS Securities. Please proceed with your question.
Speaker 4
Good afternoon, guys. Thank you for taking my questions and congratulations, Sami, on the move. And I don't if Vivek is on, but on the promotion as well.
Speaker 1
Cindy's novel, we'll pass it along to him. Okay.
Speaker 4
Could you just talk about the investment rationale in OCV? Do you think you can get a better return there that you can otherwise get in your core M and A strategy? Just a little bit more about the decision to go that route.
Speaker 1
Yes. The investment in other types of transactions is something that J2 actually has looked at since about 2012. In fact, we actually approved and formed an entity called J2 Ventures sometime during 2012, but we never funded it. And in large part, we never were able to pursue it internally within J2 because of allocation of internal resources. I don't mean money, I mean people's time and who would really be the quarterback for that.
And so as the whole process of management evolution began to unfold, there was an opportunity through this related entity called OCV for us to make an investment and with Hemi moving over into that capacity to also give us confidence of two things that one, there would be a focus, as I'm sure there would have been anyway, on delivering high returns and returns consistent with the returns that we are used to experiencing at J2, but giving us greater diversity in terms of the types of transactions that we invest in. J2 does wholly owned transactions.
Speaker 2
I think
Speaker 1
all 158 deals that I referenced over seventeen years, we buy the companies and we derive our synergies according to a variety of playbooks to get our returns. What we don't do are minority investments. We don't do lending. We don't do early stage more venture capital type investments, all of which are within the purview of an OCV. So we looked at it as we have an opportunity to deploy yet additional capital.
Think of it very similarly to buying into digital media. At the time people said, well, that's not what you do. You do cloud services. And we said, no, we really have a playbook and it can be applied to another area to drive a return. So we have yet another means of driving those returns and of investing capital.
And so that's how we looked at it. We think that there's going to be it will occur, of course, over time because their investments will have different maturity time frames. But I think, yes, we're going to get those kinds of similar returns and we're going to get exposure to other types of transactions that J2 would not find appropriate to do within the J2 structure.
Speaker 4
Great. That's very helpful. And then can you talk about any kind of strategic changes or operational changes at all with the change in the driver seat position with the vaca del? Are you planning anything? Is there anything that might be on or off the table now that the management has changed?
Speaker 1
No, would say this. First of all, Hemi is the CEO at the end of the year. So let's while we're sending him away today on the earnings call because it's his last earnings call, but he's still very much the CEO of J2 till twelvethirty one. Having said that, and this was by design, we wanted there to be an overlap. He has an incredible wealth of knowledge because he's been here for twenty one years.
And we didn't want there to be just a handover. And so there have been numerous meetings with Hemi, Vivek,
Speaker 5
the
Speaker 1
existing GMs, Presidents, Department Heads. They have different titles based on the kind of business unit they run. I think one of the things we've been looking at, and I don't think we have an answer whether it what kind of incremental benefit it will produce, if any. But how do we look at J2 maybe differently than the way we've historically looked at it? And as you know, and there were a variety of reasons why we did this, we always had Digital Media very distinct from the cloud business.
They're obviously in separate locations for the most part in terms of their management and their employees, but they were kept very much apart. And if you look at J2 from a different perspective and you lay out the individual business units, you can look at it as we are in a series of subscription based businesses, most of which exist on the cloud side, but not all. Ookla is a heavy subscription business these days on the media side. And we have advertising based businesses, most of which exist on the media side. Well, are there best practices that might be learned one from the other where there happens to be crossover?
We've also taken a look at the various industry verticals that we are participatory in. We do a fair amount across both businesses in the Healthcare vertical. I would say the cloud business is more heavily weighted to finance than the media business is. We do a lot in retail. So and in technology.
So there's also other areas where both media and cloud have points of intersection, in some cases even common customers. So are there elements that can be learned? Are there incremental benefits that can drive either incremental top line revenue growth at very little incremental cost by sharing the best practices and ideas across those that are in a common industry vertical. So these are some of the things that we're looking at. I think that as I mentioned in response to Cheyenne's question, we've got these businesses.
We love these business units. We intend to continue to feed them from an M and A perspective and from an organic perspective. I think we will look, as I say, to see where there are additional opportunities and are those worth exploring. But that is very much of a work in process. I think by the time that we have the Q4 earnings call and the budget is done and we're releasing guidance for 2018, there'll be a much more solid answer to where we might make some tweaks in the equation.
But I think fundamentally, the answer at this point would be no. We continue to move forward. We continue to try to pursue every piece of both organic and acquired growth provided that acquired growth is at a reasonable price.
Speaker 4
Great. Thank you. Very helpful. And just one last quick one. Just the rationale for the Web twenty four sale you're getting out of web hosting and did you get a good valuation for that?
Speaker 1
Yes, we did. We made a little bit of money on it. We owned it for about three years. So we both collected EBITDA while we owned it and then we actually made a modest gain. I mean, it's not a big asset to begin with.
It's very typical of J2 that we will enter a space, particularly when we entered the web hosting space several years ago on a small basis, in part to get our feet wet and see whether we correctly understand a space. And can we both use the roll up strategy to build a bigger presence in the space and also can it be multi jurisdictional? I think what we learned over the time, we picked Australia because it was a modestly competitive environment. At the time we were looking to enter the space, we found valuations in Europe and North America to be very high. And also there were fairly large players then and now that exist in the space.
So we said, let's go to a more limited competition environment and get our feet wet and buy an asset and maybe we can do create a nice little business in Australia and New Zealand. And at some point over an eight year period, there might be valuation corrections in other part of the world where we could then enter in a more serious way and it could be more impactful to J2. Now a few things happened over that time frame. One, we got obviously much bigger, so the business shrunk as a percentage of J2's total revenues. Market conditions did not materially change in North America and Western Europe to be able to enter.
And we found even doing the roll ups in Australia and New Zealand was somewhat more difficult because there were others that were looking to do the same. And in fact, we sold Web twenty four to one of the ones that we actually ran up against in a couple of situations down under. So we decided that at some point, an asset just becomes too small. And if it doesn't have an opportunity to really be impactful to J2, there's a management drain that you just can't justify. And at a few million dollars in revenue a year and with limited opportunities in our larger core markets, we felt that if we could divest it, get a gain, do it at a successful price, it made sense.
By the way, not dissimilar from the view we had when we bought Everyday Health as it related to Cambridge and Tea Leaves. There's not criticism of any of these assets. It's a function though of their value and their fit within J2's respective business units and allocation of management time. And Web 24 of those three assets was at the smallest end of the spectrum.
Speaker 2
And you know, J2 developed a strategy to be very profitable and have small investment in capital assets, which was not the case on Web 24. Also to say, I've calculated, we made cash on cash more than 20% a year on the Web 24. So all in, it was a profitable test. Sometimes we might do tests that are not profitable. This was we were lucky.
And we just as Scott said, and the target company that we had in mind, and we had one large target company in Australia that we met several times, their price started to go high and they changed their model to become more kind of servicing the Australian government. So we decided it's the right thing to do and we are very happy with it.
Speaker 4
Great. Thank you very much.
Speaker 2
You're welcome.
Speaker 0
Our next question is from Greg Burns with Sidoti and Company. Please proceed with your question.
Speaker 6
Good afternoon. In addition to the divestitures, had in the past talked about walking away from some low calorie revenue that Everyday Health was going after. Have you exited that business? How much was that revenue? And how much won't be recurring next year?
Speaker 1
The answer is yes. We talked about that a few comments at Everyday Health. I think one is that you should understand that we are basically done and have been done with the integration of Everyday Health, the heavy lifting, which in part include the divestiture of the two assets previously discussed, the elimination of some non profitable revenue and the change of a significant portion of the senior management team at Everyday Health. So I give a lot of kudos to our media team. They spent solid nine, ten months really working that.
There were a lot of moving pieces. In answer direct answer to your question, dollars 20 some million between 20,000,000 and $25,000,000 of revenues was expunged from what I'll call the core of everyday health. We believe over time that revenue will come back, albeit in a different form, but certainly not in the immediacy of the next, say, quarter or so. But as we look forward to 2018, we're obviously still deep in the budgeting in terms of how much of that revenue we'd expect to come back in 2018. And part of that will be a function of looking at the three business units, their opportunities.
As Hemi mentioned, there's a number of changes that have been made. He highlighted what's going on and what to expect, but there's also been changes made at MedPages, which is for the doctors and everydayhealth.com, which is consumer patient. So it does take a little while for those changes to bear total fruit. So I'd say this is a partial year of bearing the fruit. But the big things that have been accomplished and there's been substantial margin improvement in the business that we retain from Everyday Health.
Speaker 2
Also the landscape of pharma changed a little bit. All those things are things that we are catching up with and improving towards.
Speaker 6
Okay. And when we look at the pack up business, it looks like growth stalled out a little bit here. I'm assuming it's not growing much organically. But what's your view on that business, its ability to grow organically? Are there things that you could do to maybe run it differently to generate some organic
Speaker 1
growth? There's a as you know, our and we've said this fairly consistently, the backup business, really all of the smaller businesses in the cloud, but led by the backup have been premised on and they've been tasked with almost a purely M and A driven growth. And the idea behind that was to get to a degree of scale and critical mass, which we've targeted in the 175,000,000 range of revenues and really not overly exert in the area of organic growth. Now two things have occurred in that space over the last probably nine to twelve months, say mostly this year. Part of it was us.
In the late twenty fifteen through probably most of 2016 period, we did a lot of small transactions in the backup space. I want to say it was something like 12. Now that meant there were 12 integrations to do. And generally speaking, 12 different technologies and platforms to integrate. So the team had asked actually at some point in 2016, if instead of having X revenue across 12 deals, we could have X revenue across one third of 12 deals, four deals, three deals and do focus on somewhat larger deals, not gargantuan deals, but somewhat larger deals where there would be fewer integrations.
So we try to accommodate that this year. And I guess it was the good news and bad news. The good news is we found situations, but we also found that some of those situations invited bidding competition and we were not successful in acquiring those assets. So as a result, there's been very little M and A done for the cloud backup. So it's something we're reviewing now as we go into 2018.
Do we want to continue to pursue that more chunky strategy or go back to a strategy where we do smaller transactions, but it does require more integration. Also in the backup space, you have really it's a misnomer to call it the backup space. It's really a data protection with a series of underlying services that each have a different dynamic. For us, about 30% of our revenues would be, I would term primarily B2C, B2C consumer. That would be our LiveDrive business in The UK, almost all of that would be B2C.
And then a portion of our SugarSync business, which is predominantly in North America, but not limited in North America. I think in the B2C space, one should not expect much growth. I think those businesses, you run for high margins, and they're very nice businesses to have. But if you can hold your revenue, that's good. 70% of our business would be a combination of server backup and disaster recovery as a service and some additional flavors like file sync and share.
Now what we've observed, and I'd say there's a tension here, is particularly in the faster growing areas like disaster recovery, you've got a lot of players out there that on an organic basis will live with very little, if any margin. Now we've chosen to maintain 50% EBITDA margins in this space, which are quite frankly unheard of. But that does come at the expense of being able to aggressively add new customers. So while I believe that, that B2B space in the jurisdictions in which we are operative probably can grow in somewhere in the double digit range, 1012%, maybe 15%. If you want to do that in the current environment, you would do it at much lower incremental margins.
So that is one of the conversations that we are clearly having as we look to 2018 and budgeting, which is we've got a business, it's got an M and A component, how do we want that to be going forward? And then what do we want to do on the organic side? But I can tell you that for the higher growing pieces of that space, there are more than a handful of firms that are prepared to accept very, very little margin just to have the organic revenue growth.
Speaker 2
And let me add something. Scott said it very well. We are doing strategical sessions and I was presented with the competitive landscape. Than 90%, maybe 95% of the companies that are active in the backup are smaller than J2. Our run rate is over $110,000,000 Those companies we were trying to beat some of them.
We couldn't companies of $10,000,000 $20,000,000 and everything. I strongly believe that they cannot exist on the long run. It's a space that is consolidating, will consolidate a lot of development there. I think that we are positioned well. And you remember, we come from a background of patience and discipline.
And I believe that those with patience and discipline will survive and capture the market. What we have developed is basically extended range of backup businesses that we can absorb. So I think it's a matter of time, it's a matter of discipline. I just cannot believe that 95% of the companies in this space can survive in the smaller scales. We see them, they're not profitable.
I think it's just a matter of time. So I'm optimistic about it.
Speaker 6
Okay. Thank you.
Speaker 2
You're welcome.
Speaker 0
Our next question is from James Breen with William Blair. Please proceed with your question.
Speaker 7
Thanks for taking the question. Juan, just on the modeling side, Scott, talking You said there's about $23,000,000 in the back half of revenue that won't be realized. Is it fair to say that that revenue mainly falls in the fourth quarter? There's maybe a couple of million there, but essentially there's a sort of a $21,000,000 change between third and fourth quarter in terms of the jumping off point?
Speaker 1
Not you're a little bit heavy. You're directionally correct, but you're a little bit heavy because remember we did sell Cambridge during early Q3. So we actually we lost Cambridge revenue in Q3. We'll lose roughly 7,000,000 to $8,000,000 in Q4 from Cambridge alone.
Speaker 7
Then You're biased a little high, but
Speaker 1
you're directionally correct.
Speaker 7
Okay. And then just on the margin side there, when you add up all three of those and the combined revenue of what you've recognized when you have it is what $57,000,000 what was the EBITDA assigned with that? Was it pretty much flat?
Speaker 1
No. Cambridge was profitable. Web twenty '4 was profitable. Tea Leaves was not on an EBITDA basis. So if you take that $57,000,000 combined, we're talking about probably $7.5.8000000 dollars of EBITDA.
Speaker 7
Okay. All right. Perfect. And then on the just on the cloud side, as you look at the Email Security business, getting through the MAXI transition, what will happen now? Can you think you continue to grow in that business?
And obviously, you want some scale there as well to get those margins from the 30s up into the 50s?
Speaker 1
Yes. Yes and yes. In fact, I'm very happy with what's happened to that business. As you know, our Q1, we bore the brunt of the McAfee end of life and the quarterly revenues for Email Security was 10,000,000 And now we're back to almost $11,500,000 two quarters later. And that was a pretty strong growth sequentially from Q2 to Q3 as well as some growth 2017 versus 2016.
And I would say that in 2016, we were at the very early stages of some customers recognizing they needed to do something vis a vis McAfee end of life. So that business is actually, while it took a hit in Q1, has rebounded very nicely in the two succeeding quarters on both an organic basis and then also the people's time has been freed up for us to be able to do M and A so that they have time to integrate.
Speaker 2
Yes. So see J2 people ask me, now that I'm about to leave, what made you so successful? And I think what made J2 so successful is we try to have in every piece of the business an edge, an advantage that nobody else has. This advantage makes us so profitable and makes us helps us to win the game. And in the game of fusemail, we buy companies and we migrate them successfully to our fusemail brand.
That's not something you see. People buy brands, they stick them on the brand, they have a feature. We migrate them to our platform, not only the brand, the platform, which basically generates the profitability because you see at the end of the day, the platform is built on certain elements that size matters. So I'm very optimistic, like the WeCloud company that we bought, it's a Sweden company. Think about the language, the market and everything.
We are integrating them into FuseMail. We are doing it very successful. The conversion rate is very high. Some of those are also we are adding features, so we are updating their prices. So we end up buying a company and A, migrating it B, adding features, increasing the prices.
It's a very, very good game to play and we can go into endpoint and web based, a very similar space. The same decision makers, the same buyers also buying the web security, ability to control what the employees of the companies are doing online and all those kind of things. So I'm very, very bullish about this. And of course, on container as well, as container is a market that are too many small players that are not being integrated because the competition there when you're trying to acquire companies is lesser because not too many companies are capable to integrate. So this is the special edge that J2 developed over the year and I'm very bullish on those both spaces, very bullish.
Speaker 7
Great. Thanks. And then lastly, luck, Kemi, in the next stage. Vivek's got some big shoes to fill and hopefully you'll bring good companies for J2 to invest in the future.
Speaker 2
Absolutely and stay in touch. Thank you very much.
Speaker 1
Thank Thank you, Jim.
Speaker 2
To all the analysts that cover us, if you come to LA, I'm known to buy good lunches and good dinners, stay in touch.
Speaker 0
Our next question is with Charlie Erlich with Robert W. Baird. Please proceed with your question.
Speaker 8
Hey guys, thanks for taking my question. I wanted to ask about the sequential growth expectations in the Digital Media business from Q3 to Q4. I know it's typically a seasonally strong quarter and now you've got Everyday Health as well and have made a number of divestitures. So just wanted to know how we should be thinking about that sequential growth in the segment?
Speaker 1
You're right. It's the best fiscal quarter of the four. I would point you back to the guidance we gave on the Q4 call, although you need to make various adjustments for the divestitures that we talked about. We don't guide quarterly. So I'm not going to actually directly answer your question.
But I think you can interpolate from both the history and what we said in February, where it's fairly typical that the fourth fiscal quarter for Media represents somewhat in excess of 30% of their annual revenue. And I believe that will continue to be true this year.
Speaker 2
The same blend goes also to Everyday Health. They're also heavier to in Q4. And as you know, we have announced that we acquired a company called Humble Bundle, which also should come into play. So I think if you get all the facts, you can come to the right conclusions.
Speaker 8
Did you guys disclose what the revenue contribution from Humble Bundle would be?
Speaker 1
No.
Speaker 8
Fair enough. And then just one more question on the Digital Media business. Could you talk a little bit about your expectations for EBITDA margin expansion? Is it your expectation to get back to that pre Everyday Health margin level? And if so, is that a multiyear endeavor?
Or could that happen a little sooner?
Speaker 1
No. I think look, as I mentioned, we've done the heavy lifting on the integration of Everyday Health. We've got rid of two lower margin businesses through divestiture. We pruned out revenue that was nonproductive. So I think as we enter 2018, as we talked about when we bought Everyday Health, there was a shrink to grow strategy, which had several different components and elements to it.
And I think that we have successfully pruned Everyday Health down to its core, where now it has an opportunity to both organically grow, but also perform at EBITDA margins consistent with our Digital Media business. Now we are, as I mentioned in budgeting, we're going to refine exactly what that means. But I think that when we have looked at our Digital Media business, we have felt that somewhere in the mid-30s EBITDA margin is the right normalized margin for that mix of assets. I'm talking about all of the Digital Media assets combined. So clearly this year, because there's been some drag of the Everyday Health as its margin has been catching up to that margin will be somewhat lower than the 35%.
I think that as we look forward to 2018, we're very confident that, that is an asset then that should be roughly consistent with where the rest of our Digital Media assets are at.
Speaker 8
Great. Now that helps a lot and congratulations, Hemi.
Speaker 2
Thank you.
Speaker 0
Our next question is from Walter Pritchard from Citi. Please proceed with your question.
Speaker 5
Thanks. On geographic ambitions, you're coming out of Australia, guess, that a sign that we have some things going on over in Europe with privacy. I'm wondering how you're thinking about just geographic expansion at this time?
Speaker 1
Well, to be clear, we're not exiting Australia. We exited a business in Australia.
Speaker 2
We actually
Speaker 5
Right. Guess pulled just a pullback from Australia. I'm wondering what that signals.
Speaker 2
At the same year that we exited twelvetwenty four, we bought larger assets in Australia. So net net Australia grew for us. And about Europe, the privacy, we're dealing with it for the last six months. It's a compliance issue. The company has spent all the time and we have all the experts and then we're in full compliance.
GDPR, I think it's called or something We're like in full compliance. All our we have to remember, we have a very strong management team in Ireland. I've been there for the last three quarters. We are talking about it. It's happening, not a problem at all.
Actually, I hope that it will scare some of our American competitors not to acquire there while we are acquiring there with high confidence. We think it actually
Speaker 1
can become a competitive advantage for us.
Speaker 2
Yes. It's not an easy thing for a small company to do.
Speaker 5
Have to
Speaker 2
remember, we have the accountants we have a full set in Europe. We're good. We're strong there.
Speaker 5
Got it. Okay. Then just sorry, I'll let you finish.
Speaker 2
No. Go ahead, Walter.
Speaker 5
Okay. Thanks. And then just the Scott, on the low end of the backup business, I recall you had been kind of letting some of the lower quality subscribers churn off. Is that done at this Right. Then last one go ahead.
Speaker 1
The answer is yes.
Speaker 5
Okay. And then the last one, just on you mentioned in, I think, the deck, this idea of the Fax API. Can you talk about if that potentially and there's you could have a voice API and there's lots of enablement in from a technology perspective across the BCS portfolio. I'm wondering how big of an investment that is, if that potentially changes the trajectory in those businesses as you look So to participate that
Speaker 2
we have strong API in our business of Campaigner and very strong in fax. So the fax API is actually something that we were I will admit here surprised to see how big it is. And we were late to the game a little bit, but as we entered it, we discovered how big it is and how much is the market looking for large providers like us. And so far, we have bought some companies with API that were small. So immediately after acquiring them, we added to the API the coverage and the other features of J2 plus the customers of API of the nature are big organization with a lot of compliance demands.
They want to audit, they want to come, they want to see the TOR in compliance. So actually, we are very, very bullish about it. And we have API features that we are adding. We just bought a company called Sfax and we bought another company and we are talking with some other players in the space. Definitely API is the stickiest part of fax.
It gets involved and integrated into all the systems. And actually that's why I made a comment in the beginning that I think that fax can and the Cloud Connect could shortly become to over $100,000,000 per quarter because of the API. I hope I answered you, Walter.
Speaker 5
Yes, you did. Thank you. And then just maybe a question for Scott around Hemi's next activity here. For the capital commitment on the venture fund, was that contemplated in the recent debt raise? How are you thinking about that as it relates to your own capital structure and demands on that capital?
Speaker 1
The answer as it relates to the debt raise is no. In terms of the allocation, as you know, it's going to be funded as OCV finds transactions and makes capital calls. So although it's an eight year fund, we have assumed a more front end loaded amount of funding in the tune of 50,000,000 to $60,000,000 a year on average over the next, call it, four to five years that would exhaust the $200,000,000 commitment. So we look at our estimated free cash flows, obviously looking out a couple of years, the dividend and feel comfortable that, that given the cash balances we already have will be sufficient to make those capital calls and still do our M and A program. There's also something that we've been investigating, which is and it's very fluid right now because of what was proposed today in terms of tax reform.
But there's also a fairly good likelihood, whether actually tax reform passes or not, that we are agnostic as to where the cash comes from making the OCV investment. And certainly, there's repatriation that's demanded or required under tax reform, we'll be bringing cash back to The United States and paying the appropriate tax depending on whether it's cash or unrepatriated earnings. But we'll see how that whole tax reform plays out over the next sixty days.
Speaker 5
Okay, great. Thank you.
Speaker 0
Our next question is with Rishi Jaluria with JMP Securities. Please proceed with your question.
Speaker 9
Hey guys, thanks for taking my questions. First, I'll start off by echoing the others. Hemi, it's been a pleasure. Wish you all the best at the next gig.
Speaker 2
Thank you, Richie. It's been a pleasure to work with you too.
Speaker 9
Great. Hemi, since you brought up the Humble Bundle acquisition, can you help us, I guess, understand kind of the rationale and plans here, especially since it appears to be more of a commerce driven asset. And I know you have properties in that area, but most of the digital media side and especially on the gaming vertical tends to be very much traffic and advertising driven.
Speaker 2
Rishi, I promised Vivek that I allow him to celebrate this acquisition. So I'll let him do most of the talking. But I can tell you, it is a very exciting business with a very nice upside that integrates very well into IGN. It's a really good deal. Vivek is coming in ninety days and he will be going into the deal.
I do know them, but I want to keep it for him.
Speaker 1
I just want to add one thing though. And I think it is not the correct perception to think of our Digital Media business as only being advertising driven. If anything, we would like to find opportunities to have more subscription based businesses within Digital Media. Right now, Ookla has been the primary asset or business unit within Digital Media that has become over the years really more of a subscription based business than an advertising business. It happens to be a hybrid.
It does both. And as I noted earlier, everything on the cloud side is subscription based. There's very little advertising, although there's technically still is some in terms of monetization of some of the free bases of customers. So I would say that's more of an affirmative strategy as we look forward on digital media to find where appropriate subscription based businesses to knit in and not have it be purely traditional advertising.
Speaker 2
Yes. It has special stickiness to it. People that play games like to play more and more games, and we are very happy to cater into it. It has again, I'm not going to steal the thunder for Vivek, but it integrates very well. The crowd of IGN and Humble Bundle are the same people.
Subscription base is growing. It's very nice.
Speaker 9
Got it. That's helpful. Scott, can you help walk us a little bit through the tea leaves divestment? Was this a competitive process? Any sense of And maybe just alongside that, I mean tea leaves did sound like an interesting asset.
Was there ever the possibility of keeping maybe a stub of it within the OCV venture?
Speaker 1
We never thought of the latter, but it was very important to us to have some going forward participation. So in answer to your question, yes, we ran a competitive process. And the difficulty in selling tea leaves is that we saw great value in that asset. The question was what was the best way in which to realize it? We did look at running it ourselves as more of a venture capital investment in the health IT space.
Decided that if we had to do it, we would do that. But that was not our preference because it's not really what J2 does. There's no demonstrated track record of J2 funding a business that's going to grow 40% to 60% a year, but have EBITDA losses along the way with the hope of some exit down the road or some form of monetization.
Speaker 2
So we always And massive sales force that go to enterprises, very long cycle to more kind of governmental and other kind of things. It wasn't our DNA. It It our DNA.
Speaker 1
But nevertheless, we said, look, we want good value for that asset. We believe in this asset. We believe in this space. But that was our bottom line. So we were not prepared to give the asset away.
So we knew certain scenarios we would run it. Then yes, it was competitive. And yes, there were multiple bids. But some wanted to give us all cash. That's nice.
We can always use cash and redeploy it. But that would give us basically limit well, in one case, I think there was a little bit of upside in a much larger company. In other case, it was pure cash. So we have virtually no upside in the asset. What was to us very fascinating about Welltalk is that they have a suite of health IT services.
And tea leaves actually fit very nicely into their portfolio. So it makes them stronger. They have a great leader in Jeff Margolis who's already taken a company public and done very well with it. So when they emerged as one of the bidders, then we started to think real hard about, all right, can we end up with sort of a couple of benefits, really three. Put the asset in a better set of hands who's likely to get the full value out of it.
In this case, move into a diversified portfolio. So our upside isn't limited to just what tea leaves does, but it's against the whole portfolio of Welltoc. And also have a great senior management team who this is what they do because this is their DNA. So from a structural standpoint, WelpTalk met all those criteria. Now in terms of the price, it's about $90,000,000 And the reason it's about is because we got some amount in cash.
I'm not allowed to go into the exact terms, but a minority of that $90,000,000 is in cash. We've already collected it. And the remainder is in a couple of different tranches of securities that we receive, which can be converted into equity. And so that's where our upside comes in terms of the future. We looked at the deal.
We thought that the certainly the total purchase price was fair and good. And we like the fact that we have a fairly meaningful back end upside and what we think is a very powerful, exciting company in the health IT space. So we'll keep those securities. Those are to be clear. Those are J2 wholly owned securities.
So they're ours. And at various points over the next several years based upon what Welltalk does, I think there'll be various opportunities for monetization of some or all those securities.
Speaker 9
Got it. And just to fully understand, so J2 has a minority position in Weltok as a result of the divestment? That's correct. It. It.
Speaker 1
Not in key lease, but in Weltok, in the whole entity. Can go to Welcox website, you can see the various services that they are involved in, in the health IT space. And as I say, it's robust. I think TLEASE was a very nice fit for them in terms of their whole suite of services. And so we thought it made a lot of sense.
As I say, we think they've got a great management team. We're very excited about it. But obviously, at this point, we're just we're an investor.
Speaker 9
Okay. Got it. And just last one from my end. On the topic of divestments, I mean, are there other assets that may be worthwhile considering divesting, if not now, then down the line?
Speaker 1
Look, would in general say no, but I always leave the caveat. We have these 12 business units. We are not affirmatively going out right now to do anything with those. However, if interest comes in on a business unit, then we have to deal with that seriously. So as I mentioned in response to an earlier question, I think our goal right now is to look at these business units, many of them are below their full potential in terms of size and scale.
So I think the question we're more focused on is how do we drive to that scaled size? And what is the organic path to doing that? And what is the M and A path to doing that? And of course, for J2, it's really a combination of both. But to take it business unit by business unit.
But we do retain a certain amount of flexibility and I'll never say never. But I think right now the goal would be to take our assets and increase them in aggregate size through both organic and M and A efforts.
Speaker 9
Okay, got it. Thanks. And Hemi congrats again.
Speaker 2
Thank you, Rishi.
Speaker 0
This concludes today's question and answer session. Thank you for your time. I would now like to turn the call back over to Scott Turicki for closing statements.
Speaker 1
Well, thank you very much. Hemi, a final goodbye, but not a farewell for these 50 quarterly calls that we sat next to each other. All the best as you move on over time to OCV And they will be hounding you because we're looking for you here. They want great returns.
Speaker 2
They will. They will. I want I promised my wife. And you know when I promised my wife, I always deliver. So I hope to listen to your next earnings calls, and I hope that you will hear good news from the lines of OCV.
And thank you very much everybody. Bye bye.
Speaker 1
And then finally, are several conferences that we will be participating in between now and the end of the year. There'll be press releases out in terms of the specific times, dates and ways to participate. But next week will be the RBC Conference in New York. Then in December, the NASDAQ Conference in London followed by the Barclays Conference in San Francisco. For our high yield holders out there, I will be at the Merrill Lynch Conference in Boca Raton at the November.
Those are the ones that come to mind. There may be a couple of others. So look to our website and to our press releases for the specific details. And then we will look forward to talking to you again roughly in mid February to report Q4 results and also to talk about 2018. Thank you.
Speaker 0
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.