Ziff Davis, Inc. (ZD) Q3 2019 Earnings Report, Transcript and Summary

Welcome to j2 Global's Third Quarter 2019 Earnings Call. I’m Sherry, the operator who will be assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] On this call will be Vivek Shah, CEO of j2 Global and Scott Turicchi, President of j2. I will turn the call over to Scott Turicchi, President and CFO of j2 Global.

Thank you. Good morning, ladies and gentlemen and welcome to the j2 Global investor conference call for Q3, 2019. As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah. We had the best third fiscal quarter performance ever, setting records for revenue, EBITDA, free cash flow and non-GAAP earnings per share. In addition, we completed four acquisitions this past quarter, which Vivek will address in his opening remarks. In addition, we repurchased 200,000 shares of our stock at a price of $80.74 per share. We will use the presentation as a roadmap for today’s call. A copy of the presentation is available at our website. We launched the webcast; there is a button on the viewer on the right hand side which will allow you to expand the slides. If you have not received a copy of the press release, you may access it through our corporate website at j2global.com/press. In addition, you’ll be able to access the webcast from this site. After we complete our formal presentation and remarks, we will be conducting a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, you may e-mail us questions at any time at investor@j2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that will 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 that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we've included as part of the slide show for this webcast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements. Now let me turn the call over to Vivek for his opening remarks.

Thank you, Scott, and good morning, everyone. This was another terrific quarter across the board. Revenues were up over 17% which is the strongest growth quarter we've had this year. Cloud services grew 14% while digital media grew over 21%. We were particularly pleased with our 34% growth in digital media subscription revenues. And importantly, we continue to see strong growth in free cash flow which increased over 12% year-over-year. We also completed four acquisitions in the quarter, and I wanted to use most of my time today to talk about them. As a reminder, we completed four acquisitions in Q1, and two acquisitions in Q2, making the total number of acquisitions this year 10. Generally speaking, we're seeing attractive deals across the markets in categories in which we operate. Our ability to transact efficiently, transparently, and reliably and to see and create value where others cannot has allowed us to succeed in an M&A environment that can at times seem frothy. As you all know, we organized the company into 13 business units. Of the 13, 5 of the units are below $75 million in annual revenues. As we continue to grow as a company, it's a priority for us to scale these units to be north of $75 million and ultimately north of $100 million in annual revenues. Meeting those marks not only achieves growth goals, but also ensures the kind of diversification we look for, in our portfolio of businesses. To that end, since January 2018, of the 21 deals that J2 is consummated, 11 were in cloud services, and 10 were in digital media, with 11 of our 13 business units closing at least one transaction. Through a combination of organic growth and programmatic acquisitions, we have more than doubled our revenues and adjusted EBITDA at j2 over the past five years, making a recalibration of scale important and appropriate. Two of the acquisitions consummated in the quarter, should put two of our BUs north of the $75 million mark in the next 12 months. Let me address the first one, which is BabyCenter. The parenting and pregnancy space is a very attractive one to us. It sits at the nexus of a broad range of digital health extensions including fertility services, women's health, child and family health care and genetic health services. By owning both BabyCenter and What to Expect, we believe we have become a global leader in this vertical where users can be served at every stage of the pregnancy and parenting journey. In the U.S. BabyCenter and What to Expect register a combined and be de-duplicated 70 plus percent of pregnancies annually. The BabyCenter, we now also have reach into non-U.S. markets. BabyCenter operates 10 international sites, which include five that are non-English language. BabyCenter also brings a broader editorial focus, which extends beyond pregnancy and the first two years of parenting to include preconception and parenting upto nine years of age. From a value creation point of view, this is very similar to our past digital media acquisitions. We see opportunities for business model innovation, as well as focusing the business on profitability. On the former, we have at what to expect and that many of the j2 digital media brands a great track record with performance marketing solutions, where we generate customers and leads for our clients. Today, the BabyCenter business is primarily display advertising, while the What to Expect business makes a majority of its revenues from performance marketing. We believe, we can successfully implement performance based solutions at BabyCenter to drive growth. On the profitability point, BabyCenter was a non-core asset for its prior owner and not run for earnings. As you all know, that's not uncommon in the digital media world. But we've identified synergies and approaches to the business, which we believe will make the business solidly profitable in 2020. We're also very excited with some of the talent we're picking up in the business who are both mission oriented and embrace the focus on profitability and profitable growth. The other acquisition that we expect to allow a business unit to achieve revenue scale is Spiceworks. We love the information technology industry and over the last several years have acquired assets in the B2B space such as emedia, Toolbox, Salesify and demand shore. Spiceworks is the most established of these brands, the deepest roots in IT. It's a professional network and a true community of IT pros, who look to it for content, product reviews and apps. Its business model is centered on being the marketplace, where tech buyers and sellers come together. The combination of Spiceworks with our existing B2B tech assets should position us as a close second to another fantastic public company in the space called TechTarget. We will go to market under the Spiceworks brand as it is highly recognized and admired amongst tech professionals. There are 18 million IT buyers in the Spiceworks community. For IT vendors, the combination of our assets will provide them a unified suite of advertising, performance marketing and content solutions. And while the company has done a fantastic job in building true value for its audience and clients, as a venture backed company Spiceworks was not focused on profitability. We see a number of margin expansion opportunities when combining Spiceworks with our other B2B brands and therefore a clear path to earnings. And Spiceworks team is onboard and excited for the change in focus. The third acquisition in the quarter, SaferVPN is notable as it represents our first acquisition for our privacy business unit, which is looking to be active in the VPN space. While it was a very small deal, it is a step forward for the privacy unit's global expansion, as SaferVPN is localized in 26 languages. We hope it represents the first of many tuck-ins in the VPN space. I’ll also point out that the business is looking for ways to offer a broader suite of privacy and security solutions. For instance, we are working on ways in which we can bundle our VPN offerings with our SugarSync cloud storage offering, and our Viper antivirus offering. The fourth acquisition in the quarter OffsiteDataSync is in our cloud backup business unit, which as you all know has been in decline for the last couple of years, but highly profitable. OffsiteDataSync is a market leader in providing backup and higher margin services such as Disaster-Recovery based on VM Software. These VM based offerings enable us to better serve and retain our customers, and to acquire new customers, both organically and through tuck-ins. Buying businesses is one thing, but when we can buy brands, we tend to get very excited. A hallmark sign of a great brand, especially in the Internet business is its ability to endure and maintain a leadership position in its space. BabyCenter was founded in 1997. Spiceworks was founded in 2006, and iContact, which was our first acquisition of the year was founded in 2003. We believe, we have an unparalleled track record at our company of enhancing brands and improving their business models. With that, let me hand the call back to Scott.

Thanks, Vivek. Q3, 2019 set a number of financial records for j2 including revenue, EBITDA, free cash flow and non-GAAP EPS. These results were driven by several areas of strength in our portfolio companies notably strong growth in our media subscriptions, continuing growth in our VPN business, continuing good display advertising revenue, and our relentless focus on costs resulting in strong EBITDA margins. We ended the quarter with approximately $191 million of cash and investments after spending $165 million in the quarter on acquisitions and share buybacks. Now let's review the summary quarterly results on slide four. For Q3, 2019 j2 saw a 17.6% increase in revenue from Q3, 2018 to $344.1 million. Gross profit margin, which is a function of the relative mix of our 13 business units rose to 82.3% from 81.5% in Q2, 2019. We saw EBITDA grow by 13.2% to a third quarter record of $134.8 million. EBITDA margin for the quarter was 39.2% which is strong, in light of the fact the four transactions completed in Q3 contributed an insignificant amount of EBITDA. Finally, adjusted EPS grew 11.1% to $1.70 per share versus $1.53 per share for Q3, 2018. Turning to Slide five in Q3 we generated $80.5 million of free cash flow, which was 12.7% increase from Q3, 2018. On a trailing 12-month basis, we generated $366.4 million of free cash flow for 69.4% free cash flow conversion of our $528.1 million of trailing 12-month EBITDA. Now let's turn to the two segments; cloud and digital media for Q3 as outlined on Slide six. The cloud business grew revenue 14% to $171.2 million due primarily to growth in our new VPN business unit. Reported EBITDA increased by approximately 12% to $83.9 million compared to $75 million in Q3, 2018. The EBITDA margin is 49% after corporate allocations, down approximately one percentage point due to higher corporate allocations and a lower contribution margin from our VPN business. Exclusive of the corporate overhead allocations, EBITDA was $86.5 million for the quarter with a margin of 50.5% compared to 50.9% in Q3, 2018 due once again to the lower margin contribution of our VPN business, which I continue to invest in for future revenue growth. Our media business grew 21.3% to $173 million and produced $53.5 million of EBITDA or 16% growth. EBITDA margin declined by 1.4 percentage points from Q3, 2018 due to higher corporate allocations and negligible EBITDA contribution from our two newest media assets, BabyCenter and Spiceworks. We are reiterating a revised guidance range for the year as outlined on Slide eight. To remind you, our original high end of our range was $1.33 billion of revenue and $540 million of EBITDA with $6.95 in non-GAAP earnings per share. Those have now become the low end of our new range of guidance. We now expect revenues to be between $1.33 billion and $1.37 billion of revenues, EBITDA to be between $540 million and $556 million and non-GAAP EPS to be between $6.95 per share and $7.15 per share. Following our guidance slide, our various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. I would now ask the operator to join us to instruct you on how to queue for questions.

Thank you. [Operator Instructions] Our first question is from Shyam Patil with Susquehanna. Please proceed.

Hey guys. Congrats again on another great quarter. I had a few questions. Vivek, you talked about VPN -- the VPN opportunity in your prepared remarks. Just wondering if you could talk a little bit more about kind of how you see the broader opportunity, the ability to M&A. And then just also, just how you think about the revenue growth and margin profile kind of overtime for this business. And then just maybe a little broader on that, and how you see that the cloud business evolving with the new head of cloud that you brought on. I know you talked about security in your prepared remarks. Is that – is that how you see that the focus kind of evolving for that?

It’s a great question. I'll start on the -- on the VPN front, and talk a little bit about the privacy space. And I think we've talked about this a little bit in the past. We think consumers and businesses really do care about privacy everything you see in the news revelations about social media, tracking, government surveillance, are all just contributing to I think market demand for the kind of service that IPVanish in our VPN offer. So we think just from a marketplace point of view, we are well situated to take advantage of those trends. Specifically IPVanish is really performing well. It's at or above expectations. However, we look at it. We're really excited about the team under Nick Nelson who is running that business for us, and having our first tuck-in done for this business unit is pretty exciting. Typically business units that are new to j2. It takes a little while for them to consummate their first transaction. They probably broke a record in terms of how quickly they were able to move. And part of that has to do with prior to our ownership. They also had done some tuck-in acquisitions in the space to get to the scale that they were at. So in many ways and one of the reasons why we view them as the right acquisition for us originally was that a demonstrated track record from an M&A point of view. Long-term you know the way we often think here is, you know you often hear in SaaS companies they talk about the rule of 40 where you take your revenue growth, you take your margins, and you try to get to that. And historically on the cloud side, we would achieve that or more than that, by more focus on margin than on organic growth. I view IPVanish as being a little bit different in that, it has real organic growth. And so there I'd be careful about managing the margin at historic cloud levels. And you see it a little bit in our cloud margins for the quarter about 40 basis point drag from the VPN business, so it doesn't make a huge impact in the segment, but we don't want to choke it from a growth point of view. And then, on I think your last question, which relates to Nate Simmons, so super excited to have Nate. Nate's been with us now for 60 days. Nate and I work together in our prior life at Time Inc. So we know each other well. His last stint was the COO of Symantecs, a multibillion dollar consumer business. And so when you look at our portfolio and you look at our Viper business and you look at our IPVanish business and you look at our SugarSync and cloud businesses, and even when you look at the Cloud Fax business, they're all security businesses, right. We've talked a lot about Cloud Fax for instance, and how it's consensually a secure document transfer business. So, so much of the portfolio fits within that world, having an executive who brings industry perspective was really valuable. And then, I'd also add, that you know he's an expert at customer acquisition, and retention understands subscription models really from the beginning of his professional career, so having that skill set also at the leadership level was was really valuable for us.

Great. And on the on the -- on the digital media side BabyCenter looks like a really good deal. Just wondering kind of how how the M&A environment is now in digital media as you look across the key the key verticals where you are, where you are a larger player?

Yes. I think if you can be a cash buyer in the digital media industry, which we are, and historically have been. I think your advantage. I think it's a buyer's market. There've been a lot of other deals in the industry that have been equity deals. Those are different. I think you know because there it’s relative valuations it's trading stock for stock. I think if you are interested in asset or were interested in an asset, and we're willing to put our cash behind it, we generally are doing well. And so I think that is in this environment an advantage for us and we're very excited for BabyCenter and we're very excited for Spiceworks, in its industry it is similarly well-known and respected and established. So look, I think as we said in the past, the market and I said in my prepared remarks, it can be frothy. But I think the proposition, we often present as a buyer in whatever space we're looking at can be attractive. And then the volume, the deal flow that we're seeing with all the general managers in place, with the divisional presidents in place, with corporate in place, continues to be pretty pretty vibrant.

I mean, we deployed over 420 million this year in the nine months.

Great. And I had one last question. Scott, could you talk about just how to think about that the margins for the segment not just in 4Q, but general framework at a high level, just going forward. And also for 4Q, how are you guys thinking about the various OpEx lines particularly sales and marketing?

Okay. So in general, let's talk about the EBITDA margins by segment before corporate allocations, because I'm starting to see that. And the reason we do the corporate allocations, I think as you know is because of our bond structure at the cloud business and the fact that we have separate audited financials and as a result we have to impute a fully loaded charge to the cloud business, and as a result we do the same for the media business. But one thing I'm observing and you'll see it even in the sequential numbers from Q2 to Q3, is an increase in corporate allocations, albeit the total corporate expense was roughly the same. And the reason for that is, that you're seeing as we've talked about both in the prepared remarks and the first question now, an increase in revenue for these deals without a commensurate current increase in EBITDA, but it is triggering more corporate allocations to be sent down to both the cloud and the media business units. So I think that the target margins for the segments before allocations continue to be around 50% for the cloud business. It was slightly higher than that in the quarter, and the target margin in media is about 35%. It's a little bit under that target margin. And that's a -- that's a trailing 12-month or an annualized margin, because to your point in the fourth fiscal quarter, we will generally see our media business perform in excess of 40% EBITDA margin, not uncommon for it to be 41ish, and the cloud business really is not so much impacted by the fourth fiscal quarter seasonality. And to the extent it is, it actually is negative. So there tends to be some dampening more on the top line if we look sequentially from Q3 to Q4. I would expect all those trends to be true in this fiscal year. One of the things that has changed though in the last year, is that in the cloud business, it was common around the middle of November to pull back on sales and marketing. And so that was a compensating offset for the fact, that there was less business days and as a result less revenue generating opportunities, and that would not only sustain the margin in Q4, but sometimes even elevated a bit. That's something we began to reverse about a year ago. Obviously that's something that Nate is studying right now, in terms of the amount of marketing we should put into these businesses, but clearly as you've heard Vivek talk both as it relates specifically to the VPN assets bytes and more broadly the cloud, where their operatives spend money, we should do it. If there is profitable growth to be had, we should do that even if it means some slight degradation in the margin for the quarter. I would -- I would make one further comment about Q4. I do expect our corporate expenses unallocated to increase as they normally do from 3 to 4 because we're now in the heart of the period from an audit standpoint for the filing of what would also be the 10-K in February of 2020. And so it is typical that we have a several hundred thousand dollar increase sequentially in our corporate expenses from Q3 to Q4, as the Sarbanes work is done, and the audit work is done and various tax work is done.

Got it. Thanks guys. Congrats again.

Thank you.

Our next question is from Nick Jones with Citi. Please proceed.

Hi, good morning thanks for taking the questions. First, one on I think you said in the prepared remarks that 11 of 13 units closed at least one transaction. I guess can you talk about the ones that did not close on transaction. Is there something specific to those units that is more challenging in the pipeline?

No. It’s like, so the two units that didn't transact were our gaming unit, which is IGN and Humble Bundle, which is doing very well, and growing very strong. And so we're really focused on the organic opportunities that exist there. And actually from a capital allocation point of view, one of the things that we're doing at Humble Bundle is really building out our Humble Publishing business. So this isn't the subscription service. This is where we serve as the publisher with an indie game developer. And we right now have 47 games that we've either launched, or in development that will be Humble games. And so those games get released in the normal cycle and channels of game releases. We have participation as the publisher in the revenue generated from those games. And then the ability to include those games in our subscription service, which obviously has great advantages since we have an economic interest in those very games. So we're putting capital to work there from a game development point of view. The other business unit where we haven't done a transaction is actually cloud facts. And so there, I think I would also say in a lot of the focus has been on the corporate fact side where we continue to see solid growth and continuing to pursue that. That isn't to say that we wouldn't be interested in what fact deals we are. There just aren't as many of them today as they've been historically, and so our equation historically was sort of maintain the business, through acquisition of webfacts and bringing those subscribers on. What we're doing now is, really growing the corporate business to sort of manage any of the pressures we're feeling on the webfact side. So those are the two where we haven't done a deal in the last little bit.

Another one kind of on M&A, is there is kind of the ad business, it seems to be really focusing on audio and video. I mean, are those verticals or areas that you guys would like to monetize. And is that kind of on your radar for acquisitions?

Well, a video is a key part of how we monetize properties today inside of our advertising business. You know IGN has got a substantial video business. Mashable has got a substantial video business. Everyday Health has a video business. So video has been part of our advertising mix for a while. We don't do as much in audio. We know it's the space, we'll look at. But remember, in our advertising business I say a couple of things. Number one is, the display business continues to grow. And it's been growing for four consecutive quarters after there was a period of time when we were having some challenges. So we feel very good about that. And then the customer generation performance marketing components of what we do, where we're not selling CPM advertising, cost per thousand display advertising, but we're selling cost per clip, cost per lead, cost per acquisition, that is sort of that. That is what the marketplace is really looking for. So when you put format aside, what they really want is, can you generate customers for us? Can you get us measurable ROI where we're fitting into their cap LTV equations? That's where we do our best. And so any format that can produce those outcomes we're interested in. But we're really focused on being able to drive those outcomes got it.

Got it. And then just one last one, given kind of the size of the deal, [Indiscernible] any kind of color you can give us on organic revenue growth?

Yes. So look, I think our view on organic growth and our perspective is unchanged. We still look for mid-single digits on the digital media side, kind of low, flat to low single digits on the cloud side. And then the balance really coming from the acquisition activity. But as I've said in the past, it's one of those things where we look at it at whether I'm putting marketing dollars to work or staff dollars to work at the income statement level to drive top line, which we will do, or I am putting cash from our balance sheet to work, to acquire businesses where we can generate more cash. We'll do that too. And so we kind of look at it as how do we put our capital to work, to generate the best returns. And that changes over time. It also the changes on the portfolio.

Yes, it's very much business unit by business unit. Absolutely.

Great. Thanks for taking the questions.

Thank you.

Our next question is from Will Power with Robert W. Baird and Company. Please proceed. Will, your line is live.

Yes. I'm sorry, can you hear me now?

Yes.

We hear you, yes.

Yes. Okay, great. I guess a couple of questions. Maybe Scott, just starting with guidance framework, you had some upside in revenue, in particular in the quarter here. How we think about full year guidance in conjunction with that, given you have a full quarter in Q4, the recent acquisitions. So why don't I -- why don't we start with that, then I have a second question.

Sure. I think it’s a good place to start, because obviously, we only had a partial impact to the four deals Q3 and I think as we've highlighted the media deals, BabyCenter and Spiceworks were meaningfully more large then the two deals on the cloud side in this particular quarter. So I think that if you look at full-year guidance range which we reaffirm, we do expect that on the revenue side we should be trending towards the very high end of that range, which if you recall as $1,370 million for the year. However, given that the fact that Spiceworks and BabyCenter are very much in transition in terms of gaining profitability both at the EBITDA and the bottom line from an EBITDA and EPS perspective I expect this to be around the midpoint of those ranges. So that's -- 548 is the exact midpoint of the revised increased range of EBITDA and the 705 in EPS.

Okay. That's helpful. I think makes good sense. I guess the second question is just coming back to BabyCenter and Spiceworks, any color with respect to how you're thinking about either revenue contribution or revenue growth trends from here, and how kind of the normal strength to grow kind of fits in to that. Just trying to get a sense for contribution kind of growth rates going forward? And I guess, just, Vivek, maybe tied to BabyCenter, what do the display trends there look like, because it sounds like that's the bulk of the business. Is that business still growing too or how do you think about transitioning that and how fast performance marketing?

Yes. It's a great question. Look, the first order of battle here and it is consistent with what we've done in the past whether it was Mashable, IGN, even PC Mag at the beginning is to really get the profitability. As Scott said and as I mentioned earlier, these are not profitable businesses. We believe they will be profitable businesses. We've seen -- as I said we seen the scenarios before. It will be a combination of the two things. You mentioned in the case of BabyCenter for instance, building in the performance marketing revenue streams, the lead gen and affiliate commerce revenue stream that are nascent or nonexistent there, that are a majority of what to expect business does will unlock new revenues and likely offset some of the challenges that do exist in the display business on the BabyCenter side, they've had some challenges there. But again I think as we add in these new revenue streams, those offset those challenges, and I think we can also probably bring some of our skill set on the display side. But then really on the cost side, the business wasn't run for earnings. It just wasn't the purpose of that business inside of it's -- inside of the prior company. And obviously for us having earnings assets and cash flowing asset is critical and central to what we do. So is a bit of the shrink to grow. It is a revenue diversification and I think it's also just at being clear about what successes and what the goals are for the business which I will say, the team that is the go forward team absolutely embraces and understands.

Okay. No, helpful from that standpoint. I mean, any other color you're able to provide at this point in terms of how to think about general growth trajectories? I mean, does it fit within the broader Digital framework in terms of what the been generating over the last 12 months in terms of growth rates?

Yes. Look, I think there'll be – I think they will look like the other businesses that have gone through the process that I just described. And so I and I actually think particularly in the parenting and pregnancy space it could be even more attractive. This is a specific leadership positions in a lot of different categories. This could be our strongest leadership position from a Digital Media point of view. It sort of reminds me of the position we have in our broadband world with Ookla and some of its assets. So it has those characteristics.

Okay. Thank you.

Our next question is from Rishi Jaluria with D.A. Davidson. Please proceed.

Good morning guys. This is actually Hannah [ph] on for Rishi. So, Vivek, you said on BabyCenter it's primarily display advertising currently, and then you plan on developing performance marketing down the line. Do you see an opportunity to monetize it as a subscription offering at all?

Yes. It's a great question and obviously building the subscription business inside of Digital Media is a focus. What we may more likely see is that I think we can be an engine for other subscription services within the broader space and either become a marketplace and therefore get compensated for driving subscriptions to various services for instance. We do that today in the Cord Blood industry with what to expect, where we are a pretty significant provider of customers for what is essentially a subscription service that last quite literally the life of the Cord Bloodthat is bank from the babies. So that is an example where, no, we would likely not be a Cord Blood Bank ourselves, we would much rather be in the business of generating subscribers for them. I think there may be other instances where if it’s a subscription service that feels like the kind subscription service we can either -- that we could operate, either build or acquire that is closer to what we do then that might be something that we would we would spin up to leverage the media audience like we've with IGN and Humble Bundle. But if the question is what I charge for what is currently free; the app, the pregnancy tracking, the tools, no, we wouldn't do that.

Okay, great. That's helpful. And then could you talk about how Ekahau performed in the quarter? And I think you previously mentioned integrating Ekahau speed test, I was wondering where we are on that?

Yes. So Ekahau is doing great. It's as a strong double-digit organic grower. It will continue to be that. It is primarily right now it's market, our systems integrators who use the software and sidekick hardware to design, deploy and manage Wi-Fi networks in commercial settings and Wi-Fi in commercial settings is very important, right? Any business, any entity, if their Internet is not working or is not working at the level it like it to work it's a real problem from a productivity point of view. So that market continues to be great. We do see opportunities in other ways of looking at this market more from a monitoring point of view versus more at the front end of design and deployment. And so we are starting to see some interesting traction there. And then the integration right now or building of a product in speed test that essentially allows you to do at home what Ekahau allows you to do in commercial places is on the roadmap. It has taken a little bit of a backseat to things that we're doing in the VPN space between IPVanish and speed test. That is presented itself as a more pressing and more interesting opportunity and so we'll be launching a new product, a collaboration between speed test and IPVanish in the fourth quarter.

Great. Thank you, guys.

Our next question is from James Breen with William Blair. Please proceed.

Thanks for taking the questions. Just one clarification, Scott, I think you said that you spent $420 million through the first nine months on M&A. Is that correct?

That's correct.

So, I think you were 270 through the first six months. So if you look at what you spent, the 150 this quarter. Any sort of guidance in terms of the relative size of those deals and maybe the general multiples how they been in line with what you've done historically?

You got it. That's exactly right. Now -- so yes, the $150 million is spent although was across obviously different business units and the two segments, we are consistent with as you know the multiples we historically pay. I'd say on a revenue basis although as you know that's not how we buy these businesses, but you can think of it in that way. Obviously, we don't have – we're not giving specifics by deal or even by business unit because we don't report that way. But I think if you take the aggregate and as I mentioned earlier that $150 million of spent is heavily weighted to the media segment versus the cloud segment in this particular quarter. The $270 though that was spent in the first six months was all cloud.

Okay. All right. And then just as I look through your -- the supplemental stats looking at cash flow, you tend to see a pretty good bump up in the fourth quarter. Looks like you have to up north of $110 range to be sort of in that $375 level that you were – I've been talking about previously. Is that given the M&A this year and despite some of the increased expense in the fourth quarter it still seems you can be that $370, $375 for the full year?

Yes. I think that's correct. I think it might be a little high on what we need to book in Q4, but you're in the ballpark. And I think that yes that is would be consistent with our expectations in terms of the EBITDA generation in Q4. Now you know, the Q4 EBITDA on media part is collected in Q4. A larger chunk is collected in Q1 of the following year. So, a lot of the cash flow that we'll collect in Q4 will be basically all of the EBITDA generation on the cloud side and a fraction from the media side. But I think that if you look at what we did last year, you look at the kind of growth rates we're having that maintains, that remains achievable.

Okay. And then just one on the buyback.

Yes.

Some of the details there and then how you guys structurally thinking about that?

So, in the quarter we bought just under 20,000 shares at about $80.74 price. As you know in Q4 of last year it was 600,000 shares at right around $71. So we're in about 800,000 shares since we evolve the program at about $73 a share, so it's worked very well. The philosophy and I think the evolution in our thinking on buybacks and it's even predated the cessation of the dividend. Although I think now in hindsight you can see the value in eliminating the dividend given the capital we deployed this year, the 420 and M&A plus almost $20 million on buyback. So we have, I'll call it an algorithm that we come up with a price where we can say internally to our business units and division presidents, that if we’re going to take this capital and going to the market and buy our stock, we believe it will have a competitive return versus if we gave it to your business units to go do a deal. And so the good news is having bought 800,000 shares that $73 and the stock at $95. That point has been validated within that 800,000 buyback. So that's how we do it every 90-day window. They don't map the calendar quarters. They offset little bit. But every 90-day window we come up with the price. And if that price is hit during the quarter as it was in Q3 we buy. When the stock then travels above that price we don't buy. And so I think given the history and what's been almost the year now under this program. I think our judgment is it is working. I think in hindsight, we wish we would have bought some more shares at these prices. But we do need to spread the capital around. So, we will continue under this program. No doubt that we'll be, I think as we look forward some tweaks to it. We -- as next year in February, it's – in February of every year that we look at the total size of the buyback program we been operating under a program that was started several years ago with 5 million shares and we've just been degradating that as we bought shares back. I think now we're close to 1 million shares left under that program. So one of the questions in February will be the size of the program on a going forward basis, but that's for a few months from now.

Okay. And then just strategically maybe for Vivek, as you look across the 14 business units are there any that you feel maybe under scaled here, were there opportunity get bigger through M&A obviously, and then drive just better margins profitability?

Yes. Look, I mentioned earlier in the call there were five units that haven't yet met the $75 million annual revenue threshold, and that was the pregnancy and parenting unit and our B2B unit in Ziff Davis side. With those strategic acquisitions we move those above that hurdle. The three are still not there are voice business, our martech business and our endpoint security business. Though I could say on the endpoint security business depends on how you define things, because if I attached the multiple of our security brands together, we would certainly be at that scale. So, those are areas we would like to see some traction. We've done some interesting things obviously in martech. We bought the iContact brand which we like a lot. In voice couple of years ago we bought Line2 which are really good product, which make scale it as a business. So those are probably some areas where we would like to see some activity.

And in terms of the pipeline, obviously, you guys stepped up the M&A this year and big part of what you spend the other day was the VPN transaction. But do you feel like without sort of that level of transaction you can sort of maintain this about $400 million, kind of run rate over the next couple of years, there are enough deals out there?

I mean look, I think again I think it is – first I'll say, I think there are lot of interesting acquisition opportunities for us right now and I think again depending on where the markets are and what business climate is, there may be even more. So I'm optimistic from an acquisitions point of view in terms of what the next 12 to 36 months will look like. I'll start there. Within the portfolio we have a number of high quality organically growing businesses where we see runway and that's our broadband businesses with Ookla and Ekahau, that's our gaming businesses with IGN and Humble, it's our Everyday Health Group which continues to grow organically high single digits possibly low double-digit on the corporate fax side, on VPN. So there's a number of things that we feel very good about within the portfolio businesses. And then look, I think as you know historically we probably generated about $3 billion of cash since…

Since we became cash flow positive.

Since the company became cash flow positive. And we probably spent about $3 billion on acquisitions. And so it's kind of what we internally refer to as the cash flywheel. We generate cash from these operations. We deploy them to generate businesses that we can optimize to generate cash that will allow us to go back and continue to do that. So I think you should expect and from my perspective that's what we do. And I think the markets are aligned for that.

Yes. And I would just add one comment. I think in the last couple of years the – I'll call it the system of acquisition G2 has been refined and evolved and part of it is the structural elements of the M&A team, the size of it I think bringing into corporate, not having it fracture between cloud and media is an important element in the amount of M&A that can get analyzed. The other thing is just the sheer diversity of the number of business units and the expansion of the number of business units over the last two to three years, because we've got more eyes and the ears out there seeking deals to make and enhance their business units and their divisions. And so the combination of those two which I think we've seen accumulate over last two years is why we're able to spend this level without doing a large transformational deal, because I get that question a lot. Well, don't you have to do a large deal to perpetuate this kind of spend and this kind of growth? I ask no. No, we’ve got really 17 different places we can put money if you count the parent is 18 [ph]. All looking for deal and those deals with some exceptions maybe at the parents don't have to be that large. But they could be very impactful and very meaningful for a given business unit or for given division.

Great. Thank you very much.

Our next question is from Daniel Ives with Wedbush Securities. Please proceed.

Yes. Thanks. Scott, to you point that you talked about, just talk about appetite for maybe – is this something where you feel like you can lever up more if the right deal or the right number of deals came through just given the success you guys been having. And maybe just talk about that and even the leverage structure, in terms on the parent or on media and cloud?

Yes. So, let's start with where we're at right now. So, I would say, we are modestly levers. As I mentioned earlier we have somewhat of a unique structure and that all our debt is not at the parent. The bulk of it is at the cloud. The media is not a participant on obligor in any way that converts it at the parent. So we look at the structure. It's interesting both the cloud level and consolidated were about little over two times gross debt to EBITDA lever. So we take – at the cloud level there'll be $650 million of the 6% notes plus a 128 million drawn with the line divided by a trailing 12-month EBITDA. Then when we do consolidated we add another 402.5 at the parent for the coverts but we bring in the media EBITDA, coincidently it's about 2.1, 2.2 times. We've got about a $100 million of cash in the bank. We've got about $72 million of borrowings under the line of credit, because while we did bring it up to acquire Spiceworks and BabyCenter we also intraquarter paid it back down to the 128 level. So we've got between the cash flow we regenerate every month, the availability into the line and the cash and the balance sheet for, I'll call our garden variety, M&A, what we just did the last quarter, spent $150 million, that's already in house. Now, as we look forward, I think there's two opportunities. One is and that it's not necessarily in direct relation to your question. But I think we have an opportunity in a low interest rate environment over time to cleanup our capital structure. I think we can make it more efficient. I think we can also lower our cost of capital. I think in conjunction with that we can also expand though the availability of our access to capital. And one of things that I'm looking for overtime not necessarily imminently, is for us to get to a position where we've got $200 million to $300 million of undrawn lines of credit available specifically for our capital allocation activities. So that we do have a larger transaction in a given quarter, we borrow under the line, then as cash flow comes in we pay that back down. But certainly from a direct answer to your question, the ability for us to take leverage up from two to three times, very easy to do in a very accommodative marketplace. We told the rating agencies. We told the public that we're very comfortable up to three times gross debt to EBITDA. We've also have the caveat that said, look, under the right circumstances we might temporarily take it higher than that. So I feel very good about our positioning in terms of access to the capital markets, our liquidity for both what are likely needs but what might also be our theoretical needs if certain other situations present themselves.

Great. That was really insightful. That's it. Thanks.

Our next question is from Pat Walravens with JMP Group. Please proceed.

battle :

You know, look, I wouldn't comment on a specific situation. I do think, I call it, sort of there's an anti-unicorn sentiment that seems to be pervading the marketplace. I think is benefiting us from a few points of view. I think you've got investors who are or taking a look at our name and our story that may not have in the past and we're having those conversations and that's nice to see. I think it's also in the M&A market. I think some of the transactions we're doing BabyCenter, Spiceworks, iContact, these are known brands out of known owners. And so when you do that, that also puts you on some other radar screens. Look, I think we're well known as a buyer, but I think some of these deals have put us on some other radar screens that we may not have been on. So I think that's helped us from an awareness point of view. And then, generally speaking I think, look, I think you've got a lot of owners whether they're venture owners, PE owners, public companies that are looking at their futures and wondering would it be better right now to seek a strategic alternative. And that's our wheelhouse. When you think of the three deals that I've mentioned, two were carve-outs from large public company. And not everyone is able to consummate that kind of deal and do it in a way which we can do it which understands from their point of view what makes the deal a smooth deal.

Right. Great. Thank you. And then my follow-up is, what you guys think in the macroeconomic environment. Are you seeing any signs of change? And then can you just reminds us, and Scott, we talking about this when we had you on the road, but can you just remind us sort of the last time around when we hit an economic downturn, what did you see? How long did it last? And then what happened afterwards?

Sure. So I think the answer to your first question is no. I think we continue to see certainly in our core markets which, about 80% [ph] of our revenues derived in the U.S. on the media side is probably close to the 95%, on the cloud side its around 75%. So, really for us U.S. and Canada would be the core marketplace followed then by Western Europe where there is and has been some volatility particularly in the U.K. more on the currency side around Brexit. So we've seen some toing and froing on the GBP, the U.S. dollar which had some headwinds in the most recent quarter particularly on our cloud business because that's where most of the GBP revenue is coming from within j2. But I think in terms of general macro conditions in the U.S. there's some economic information out this morning on jobs, I think we can –we see it to continue to be in a good stable category. And we look at sort of some underlying KPIs or metrics from some of our business unit. And what you're referring to, we'll go back to the great recession which is now 10 plus years ago and obviously, hopefully the – whatever the future recession is, is not of such a draconian magnitude. But there, we were able to see things in some of the underlying metrics, some number of months ahead before Lehman went bankrupt in September of 2008, which really triggered what became very obvious in terms of declining GDP in layoff spike in unemployment et cetera. So, I'm not suggesting that once you use that as an analogy for what might be a future recession, but if you want to stress test and say that this is sort of at the three standard deviations out there from the norm. What we saw at that time was and of course we didn't own the media business, so this is really a cloud perspective or subscription business perspective with an increase in the cancel rate and what tends to happened there is, your smaller customers depending on the severity of the recession and its duration, just close shop. And so, we saw an increase in the cancel rate over about a two-quarter period. It escalated over that six-month period of about 75 basis points per month over what was the then norm. But then by March 2009 when really the worst had already occurred, then the cancel rate started to come down and in fact hit new lows, lows that have been pretty much sustained within a tight band to the present time. And really what happened on the cloud side was both smaller weaker SMBs that could not withstand the recession were gone. The customer base that remained was inherently stronger and then new customer to added through that period also tended to be stronger, hence the lower cancel rate on a going forward basis. So, that gives you some sense of it in terms of how the business responded under very difficult circumstances about 10 years ago.

That's super help. Thank you.

Our next question is from Jon Tanwanteng with CJS. Please proceed.

Hey. Good morning guys. Nice quarter. My first question, Vivek, can you clarify just a bit on the opportunity you said you see in M&A for the near term. Is that more to do this year in Q4? And does the pipeline support kind of the $400 million run rate you've done already in 2019?

Yes. Look, I'm going to speculate on this quarter. Right now there's a lot of thing taking place. I kind of look a little bit over longer period of time. So I think if you look at the next 12 months, I think if you look even further out there, this is kind of the run rate. I think its around equal to our free cash flow. This year was a little bit higher. I think there can be years where it’s a little bit lower and if you look by year that kind of proven to be true. In fact, I don't think this even is the year where we've deployed the most amount of capital that was priced several years ago.

That was 60 [ph].

Right. So if there are deals of that magnitude then obviously that can change the capital allocation in a particular year. So again, I'm just looking at more on through these longer – on these longer views than just the next quarter or the next two quarters.

Okay. Fair enough. And what are your target margin expectations for Spiceworks and BabyCenter. I get they're not contributing or maybe not even profitable in Q4. But do they get to that 35% segment margin next year?

No. That's the goal. As you know that margin may not be attached to the same topline because we often fire revenue that can't make that, so we get rid of or empty-calorie revenue might be a different way to say it. So we like highly caloric, I guess, revenue. But we do anticipate that for both those business.

Okay, guys. It was in the next year?

Yes. That one, again, it may not be for the next 12 months, but that will be the run rate. It takes a while to optimize it. It doesn't -- it's not a light switch.

Okay, perfect. And then finally just a little bit more into the breeze on the Ookla side of the business. Can you update us on the integration of both Ekahau and Mosaik [ph], some really good IP there. Is an opportunity ahead of the 5G deployment here in the U.S. and around the world?

Yes. Now look, I think there are big opportunities for all the brands and I'd also add Downdetector, which is another brand within our broadband family that has just launched or relaunched a subscription service to help NTDC when their services have service interruption. So, I think across the board there are collaborations, sales teams are working together. Just to be clear, they are individual sales teams, but sales teams working together. We go to certain events like Mobile World Congress together to look for ways in which we can support one another proposition. The buyers are a little bit different. Just to be clear on the speed test intelligence side, our DaaS, Data as a Service product, you generally selling to network buyers at ISPs and carriers, some degree device makers, government, cell tower companies. Where as in the case of Ekahau today as the business is currently constructed is mostly system integrators that are hired by commercial tenants or commercial building owners to develop the Wi-Fi plan within the structure, right, so little different. But we're also beginning to see as the new body of data that is different than consumer initiated testing, which you have at Speedtest that I think could become an interesting data set with our data as a service business. That hasn't happened yet. But that could be an interesting new opportunity for us. Ultimately, in all of these whether its carriers looking 5G deployment or commercial tenants looking for the best Wi-Fi and to be clear 5G is not going to solve Wi-Fi within workplace. That is not a replacement for. If anything it is possibly a increase in expectation of the experience you're going to have within your office.

Okay, great. Thank guys.

This does conclude the question and answer session. I would like to turn the conference back over to management for closing remarks.

Thank you very much. We appreciate everyone for joining us on our Q3 call. We did put on our press release few days again ago announcing our upcoming conference activity in November, a little later this month and we're putting out the conference activity for the month of December. I know there are several already slated including the NASDAQ conference in London, Barclays conference in San Francisco. So stay tuned for that. And then our next regularly scheduled call will be sometime in February to announce Q4 results and provide 2020 guidance. Thank you.

This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.