Ziff Davis, Inc. (ZD) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the j2 Global’s First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Scott Turicchi, President and CFO. Thank you, sir. You may begin.

Thank you. Good morning, ladies and gentlemen and welcome to the j2 Global investor conference call for Q1 2020. As the operator mentioned, I am Scott Turicchi, President and CFO of j2 Global and I am joined by our CEO, Vivek Shah. A presentation is available for today’s call. A copy of the presentation is available at our website. When you launch the webcast, there is a button on the viewer on the right hand side, which will allow you to expand the slides. If you have not received a copy of our press release, you may access it through our corporate website at www.j2global.com. In addition, you will be able to access the webcast from this site. After completing the formal presentation, 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 would cause actual results to differ materially from the anticipated results. Some of these 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 have included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements. Now, let me turn the call over to Vivek for his opening remarks.

Thank you, Scott and good morning. I hope everyone joining us today is doing well and are safe and healthy. I want to start by thanking all of j2’s employees worldwide for their dedication and determination. I continue to be inspired by our organization’s response to this crisis and impressed by the tremendous resilience shown by our people and businesses. We were early in our embrace of social distancing. We began shifting our entire workforce, which is more than 4,000 people in over 60 locations to remote work on March 10, which is well ahead of local orders. We are very thankful that our workforce remains healthy. Our ability to move everyone to remote work as seamlessly as we did is a tremendous tribute to our technology organization and the preparation and investments the company has made over the past couple of years. We have always believed that being a company that produces and delivers nearly all of its products and services digitally is an advantage even more so in this environment. We are pleased with our Q1 results, which were in line with our expectations. We are closely monitoring every part of the portfolio to evaluate the impact the pandemic is having on our businesses. Our March revenues were up 9.2% percent year-over-year, which was a tick under the first 2 months of the quarter, but in no way represents the kind of revenue drop, many of our peers are reporting in March. Our April revenues are also relatively healthy coming in flat year-over-year. As we stated in the business outlook section of last night’s press release, we anticipate Q2 2020 revenue to be slightly down and adjusted EBITDA and adjusted non-GAAP EPS to be down single-digit percentages versus Q2 2019 based on current performance. It’s important to understand that our decision to withdraw our full year financial guidance in no way reflects the lack of confidence in our business. Quite the contrary, we feel our portfolio is demonstrating remarkable resilience rather it reflects a reluctance to engage in pure guesswork as to what the world is going to look like starting in July. It might be helpful however for me to share some of the broad market trends that were observed. Let’s start on the advertising side of our business. In any downturn, the first expense cuts happened within the marketing and advertising budgets of companies. It’s the easiest thing to turn off as there are few long-term non-cancellable contracts. There are few penalties or costs associated with cancelling. And the revenue impact is felt in future periods. In this particular market, we have another factor, which is the explosion of ad inventory based on significant increases in media consumption that are causing compression on advertising rates. As a result of all of these trends, a number of the largest sellers of advertising in the world have reported significant, sudden and steep declines in revenue. At j2, however, we are cautiously optimistic that our $510 million annual ad business can perform better in relative terms. First, our advertising business has little local retail exposure in terms of customers. We have roughly 1,100 advertisers who are mostly big companies, while many of the social media companies have millions of advertisers, a good number of them, local businesses that have been hit hardest by the pandemic. Second, we have little exposure to the hardest hit ad category so far, travel, retail, food and auto. In fact, roughly 40% of our ad revenues fall into the health category, where we are seeing growth from pharma marketers. As a point of reference through April, Everyday Health has seen organic ad revenue growth of 5%. Third, the last marketing dollar cut is usually the best performing dollar, and as you know, about half of our ad business is performance-based meaning cost per click, cost per lead or cost per acquisition and the other half which is impression based display is usually measured and optimized on performance outcomes. We are hopeful moreover if these are mitigating factors for us in a punishing environment for ad sales. On the subscription side of our business, which is about $850 million annually, we are closely following subscription acquisition cancellation trends. We have not yet seen any appreciable slowdown in our subscriber ads. We are stable in the near-term we believe for a few reasons. For starters, our services are viewed as more essential in a work-from-home environment. In fact over the past 6 weeks, we have seen that net adds for eFax in North America running about 50% ahead of plan and is a rapid shift to remote works spurred orders, but we expect that will likely return to normal levels. Our voice businesses, which offer soft phone services, are relevant at a time like this and we are seeing meaningful increases in e-mail send volumes with our MarTech services. Security and privacy are as important now as at any time. Also, much of our subscription revenue employs a lighter touch sales model meaning web and phone based customer acquisition, which have been less disrupted by the pandemic. Finally, our lower ACVs likely make purchasing much easier than larger ticket items. Where we have seen customer acquisition impact is where field sales and/or physical contact are necessary. Larger cloud fax deployments, which require in-person sales efforts, and Ekahau, which sells tools for commercial Wi-Fi deployments have seen slowdowns. We have also seen meaningful reductions in corporate fax page volumes from healthcare customers who have suspended elective surgeries and therefore have lesser movement of medical records. On the cancel side, we have not yet observed higher rates of cancellations evidenced by a slight decline in Q1 cancel rate from Q4 2019. But if past recessions are any indication and we would expect to see increasing cancels, as credit card statements and accounts payable ledgers all around the world get even greater scrutiny. Another headwind we have on subscription side is Forex, which has already cost us $1.5 million in the first 4 months of the year. All taken together, we are cautiously optimistic that the headwinds and tailwinds will cancel each other out, but much depends on the broader environment. Across the entire company, we have developed contingency plans to manage expenses, including pauses on hiring, delays on salary increases, delays on certain development projects, reducing less productive marketing spend, renegotiations with vendors and suppliers and reductions in our real estate footprint. At the same time, we have not had to resort to the more draconian measures that we are observing by many in the industries in which we operate. And we are also funding some key growth initiatives of the company given our very strong balance sheet and free cash flow. In the category of longer term themes that we believe will emerge out of this crisis, we have identified four that are important to j2. The first is our belief that healthcare will finally embrace digital transformation. There are two areas in which we believe we can benefit. The first is in our cloud fax business. As we said in the past, we estimate that the vast majority of healthcare faxes are done with machines and servers. This crisis underscores the need to move from an on-prem to cloud solution. Furthermore, we recently launched a new platform called Consensus, which combines an improved enterprise cloud fax solution with secured direct messaging and patient record query capabilities. We believe that this will be an important platform as healthcare moves to the cloud. To learn more about it, please visit consensus.com. The second area, where we see opportunities and what’s referred to as detailing in the pharmacy industry. Historically, that’s meant sending sales reps in to see doctors. We believe that, that will be replaced almost entirely by e-detailing, which is reaching doctors digitally through websites, e-mail and webinars. Everyday Health Pro is in this business and our flagship site, Medpage Today, saw 33% increase in its physician promo revenues in Q1. The second theme is the rise of remote working. In Cloud Services, we are focusing our product development, marketing and sales at our security, privacy and voice businesses on work-from-home needs. What might have taken months of development is now being rolled out in weeks. A prime example of that the eVoice Meet product, which is a fully encrypted videoconferencing solution for our customers, you can try the beta for yourself at meet.evoice.com. The third theme is our belief that video game play will only grow and establish itself as a leading form of entertainment. The spikes in consumption are evident and our ambition at Humble Publishing to be the leading indie game publisher is as promising as ever. We expect to launch 19 games this year and another 60 games are in development for the future. The fourth theme is our belief that e-commerce will become the dominant form of retail. Prior to the pandemic, e-commerce has only represented 11% of all retail sales. Now, the entire public is growing accustomed to shopping online. As you know, we have long focused on being a driver of qualified traffic to online retailers, to our editorial sites such as PCMag, IGN and Mashable as well as our deal sites like offers.com and our Black Friday sites. Now, a few words about M&A, we are pleased to have consummated two transactions in Q1. While small it’s nice to see us get our first cloud fax deal done in a few years as well as add a condition specific site to the Everyday Health portfolio. During this pandemic, we are very reluctant to close on transactions without visiting companies. Right now, we are planting a ton of seeds and when the clouds lift, we think we are going to be very well positioned strategically and financially to act on some very interesting opportunities. We are also very focused on building our cash balance through ongoing free cash flow from our operations. Before I hand the call back to Scott, let me reiterate my utmost confidence in j2 and its prospects. I personally bought $1 million worth of shares during our open window in March. The resilience and strength we are showing convinced even our biggest doubters to j2’s portfolio, operating discipline and capital allocation are special. Scott?

Thanks, Vivek. I will provide a succinct overview with Q1 results on Slides 4 to 6 to ensure that we have ample time for Q&A. We ended the quarter with approximately $625 million of cash and investments after spending approximately $75 million in the quarter on acquisitions and share repurchases. Now, let’s review the summary quarterly financial results beginning on Slide 4. As Vivek mentioned in his opening remarks we had a solid Q1, which was in line with our expectations and saw 11% growth in revenues to $332.4 million, up from approximately $300 million in the year ago quarter. EBITDA grew 2.6% to $166.8 million. The slower EBITDA growth which was anticipated was due to lower margin revenue contribution from BabyCenter Spiceworks coupled with the timing of certain Humble Bundle payments in 2019 that shifted out of Q1 2019 and into Q2. Earnings per share was flat at $1.40 aided by the higher operating income and lower share count offset by higher interest expense due to the 1.75% convertible notes issued last November as well as a modestly higher tax rate. We completed two tuck-in acquisitions during the quarter and have repurchased 1 million shares of our stock since the beginning of this year. Turning to Slide 5, in Q1, we generated $95.2 million of free cash flow which was an 8.7% decrease from Q1 2019. The decrease was due to receivable collections anticipated in March that shifted to April approximately $5 million and higher CapEx of approximately $14 million versus Q1 2019 that has been funding variety of projects over the last year as well as the implementation of various corporate systems. Now, let’s turn to our two segments cloud and digital media for Q1 as outlined on Slide 6. The Cloud business grew revenue 11.5% to $169.8 million with EBITDA growing 4.3% to $78.4 million after corporate allocations the Digital Media segment saw a growth of 10.1% to $162.6 million with a slight decline in EBITDA 2.1% to approximately $40 million due to the shifting of timing of the Humble Bundle payments referenced earlier. I would note that absent corporate allocations, the digital media segment had a slight increase in EBITDA over Q1 2019. Finally, before going to our question-and-answer session I would like to turn your attention to our business outlook on Slide 7. As noted in the press release, we are withdrawing our previously issued financial guidance due to COVID-19 and the uncertainty of the macroeconomic environment. However, based on our current performance and expectations, we expect Q2 2020 results to be slightly down for revenues and adjusted EBITDA and non-GAAP EPS to be down single-digit percentages from Q2 2019. I would note that Q2 2020 will benefit from acquisitions that are not contributory to Q2 2019 financial results. The revenue contribution from those acquisitions represents approximately 6 percentage points of year-over-year growth in the quarter. Given the nature of this macroeconomic environment and the need to evaluate operations on a short-term basis, we have limited visibility at this time into Q3 and Q4 financial expectations. Following our business outlook slide are various metrics and reconciliation statements for the various non-GAAP measures and the nearest GAAP equivalent. I would now ask the operator to rejoin us to instruct you on how to queue for questions.

Thank you. [Operator Instructions] Our first question comes from the line Cory Carpenter with JPMorgan. Please proceed with your question.

Great, thanks for the questions. Hope everyone is doing well. Maybe one and then a a follow-up if I coul. Vivek and Scott, appreciate the color on the margin April trends. Very, very helpful. I guess my question is any signs of stability you are seeing in the first few weeks of May from a trend perspective and then maybe kind of pulling it all together, could you talk about Digital Media and cloud services, maybe the revenue and EBITDA assumptions embedded within your 2Q guide? Thank you.

Hi, good morning, Cory. Thanks for the question. So, with respect to May, I mean, we are only 12 days in, but May looks just like April does, so essentially flat across the board. I do want to point out what Scott said in his prepared remarks, which is adjusting for M&A that contributes to this year that was not present last year, that’s about 6 points. So on an organic basis trending about 6 points down in April and May and that’s our expectation for Q2. And look I think considering the environment in which we are operating, where essentially every business is feeling the negative impacts of the virus, particularly media businesses and ad based businesses, we think that’s really outstanding and then it reflects the strength of the portfolio and it reflects the strength of these brands. And so, I think at this stage and as I said and as Scott reiterated, really the reason why we are not going to really speak beyond Q2 is we have no idea what the operating environment is going to be. It has nothing really to do with our businesses. Our businesses are showing, I think a fair amount of strength and resilience in this period, but it’s really as I said pure guesswork to figure out what’s going to happen starting in July and for the rest of the year, I keep seeing all forms of different recovery notions I think this morning was the swoosh recovery. So again, I think everyone is trying to understand what’s happening in the marketplace not just us.

And I would just follow-up on that, Cory, that in terms of the two segments, they look similar in their operating performance in the first 5, 6 weeks of Q2 meaning flattishness on both. But as Vivek just mentioned, the media business does benefit from some M&A in Q2 that was not present in Q2 of 2019 where that’s not the case for the cloud business to any material degree.

Okay, thank you. Very helpful. And then just one follow-up and you touched on this on the call as well, but just hoping you could expand some – on your 4Q call, you did lay out some investment areas in 2020. Could you speak to how the current environment changes your plans if at all, maybe where you continue – or plan to continue investing or even lead in, any areas where you may pull back?

No. So, I don’t think it changes our investment themes and where we would like to put capital to work. I think it changes our timing and I think it changes valuations. And so from a timing point of view, as I said, we are holding back right now and it is us holding back thinking that we would prefer to be in an environment, where we can actually visit companies before we transact. And so that’s something that we will see for how long that’s going to be our reality, but that’s the training issue, it’s not about availability of ideas and availability of opportunities per se. And then in terms of valuation, I think that particularly in the media world and in the digital media world, I think seller expectations have come down appreciably and not surprising. And so we think we are going to benefit from being patient here. In the meanwhile, we are going to continue to add to our balance sheet and continue to add to our buying power, but I think when the time comes for us to transact, I think we are going to see some very, very interesting opportunities.

Thank you. Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.

Okay, great. Hey, thanks for taking my questions guys and thanks for having me on the call here.

Absolutely. Good morning.

Absolutely. Good morning, good morning. Hey, Vivek, maybe just to start with you, understanding to your point, it’s really hard to think about the back half of the year here, in terms of the pace of recovery etcetera. So definitely not looking for any sort of quantitative forecast here, but maybe the question is what are you hearing from advertising – advertisers here for the latter part of the year and what are some of the leading indicators here that maybe or informing your thought around how the back half of the year would sort of transpire for your advertising business. Does that make sense?

Yes, it does. I mean, look I think it’s category dependent. So if you look at the categories in which we operate, you have different things going on and you have different ideas amongst our advertising clients. So, let’s start with pharma. Pharma as I pointed out in my prepared remarks continues to grow and it grows both on the direct consumer side, but even more so on the direct provider side. So pharma advertisers have historically had messages for patients and messages for providers. And so we are seeing some pretty healthy trends, particularly on the provider side. And I think part of that has to do with this notion of physical detailing as sales rep going into see a physician is essentially isn’t happening right now and I think this will affect our permanent shift. There are some exceptions. So if there is a drug that has any concerns about a negative interaction between that drug and the virus they have gone dark. So, we have seen a few drugs go dark from a marketing point of view, which I think is understandable in the gaming area. We have something entirely different going on in prior to COVID-19. I believe I mentioned this at the at the Analyst Day in early March is we were anticipating that many gaming advertisers and publishers were going to hold their stand to support the next generation of consoles both Sony and Microsoft’s consoles that are coming out during the holiday season in 2020. And so we saw that already happening and then after that demand for game play is so high. There is probably a notion amongst some of the publishers that they don't really need to advertise right now, because the demand is coming in. But again I think with the console cycle, if it still comes in the fall, I think we are – we are going to see some budgets release. And then on the tax side again, it depends if you are direct to consumer, you are trying to feed online sales where we are well positioned. If you are enterprise and orientation right now, you may not value lead, but you can’t follow-up on and have an in-person call. So it really is there isn’t one answer in the categories in which we operate and I don't know if it's we're lucky or we are good but the thing is we're not dealing with are when many people arguing with which are travel and auto in these affected categories as well as having the longer tail of advertisers we don't have that we have mostly enterprise buyers of advertising so that's kind of it's not one neat answer but as we often do we are unpacking it based on each of these different categories.

Got it. That makes a ton of sense and is super helpful. Maybe for my follow-up for you, Scott, just maybe digging into the digital media business, just a little bit more how do you think about the subscription component of that business right? I think that’s going to include parts of businesses like parts of measurement maybe some components of healthcare as well, I think that was down sequentially, how do you think about that sort of seasonally in a “typical year?”

Yes, I think that’s an interesting point, because our subscriptions in digital media do behave differently than the typical subscriptions in the cloud business, which is very sequential in nature and for those of us and I know Saket, you are relatively new to j2, if you go back to Q4 of 2018 and Q1 of 2019 you'll also see a sequential dip in subscription revenues in digital media as they're heavily weighted into the Ziff Davis business unit into the first two categories you mentioned which is our Humble Bundle on the game side and Ookla in the broadband division and each behaves somewhat differently but let's take the games key to the business. We tend to see a surge of activity later in the year in the second half of the year particularly in Q4 that was noticed in Q4 of 2019 which had. Even relative to our own expectation about 10% outperformance in that quarter now the interesting thing about Humble Bundle is people are allowed to pause their subscription which is very common as we execute when going to Q1 so which we actually expect to see sequential declines in the Humble Bundle subscribers and then as the year goes on we tend to. We amalgamate that growth and then even go beyond it. Ookla is a little bit different and that it tends to be a very small number of subscribers. They are very chunky. So, the timing of which they subscribe and for what they subscribe tends to influence the total revenue we book. Those two also seemed to be a little bit weighted from Q2 to Q4 versus Q1 and it’s also a function of the package they buy. So, some of are very short-term in contract relationship, maybe measured in a matter of few months and some come at higher value levels than others, a lot of it has to do with types of data that they are subscribing to. So I think if you look at our total subscription revenues on a year-over-year basis for Q1 are up 12.5%. I would say there if you look at the run rate the way we look out of the business once again with some degree of caution has we look at the back half of the year. We think that’s tracking to about 10% year-over-year growth.

Got it. Very helpful. I will get back in queue. Thanks guys.

Alright. Thanks, Saket.

Thank you.

Thank you. Our next question comes from the line of the Daniel Ives with Wedbush Securities. Please proceed with your question.

Yes, thanks. So, when you talk about 2Q and obviously being down so far it’s been flat. Can you just maybe talk about like assumptions in some of the businesses from a high level as you think about the quarter?

Yes. So, I think I will start and then Scott can jump in. But so again when we are looking at it segment level, we look at cloud being essentially flat to slightly down with really no M&A in that mix. And remember against last year, you have a full quarter of ownership for our IPVanish business. And then within that, if you just look within sort of the areas that we talked about at the Analyst Day, security and privacy and corporate facts continued to be very strong and strong organic growers offsetting a little bit of decline on the web fax side and a little bit of decline on the backup side. In the digital media segment, again, we are saying revenues on a reported basis will be flat year-over-year, but it benefits in the advertising portion from BabyCenter and Spiceworks on the revenue side being in our Q2 ‘20 numbers and not in our Q2 2019 numbers. So, on that basis, really that 6 points of M&A really all falls within the digital media segment. And so as a segment, it’s down, let’s just say if you want to see what the organic decline in the digital media segment, it’s 6 points.

Got it.

That’s great.

Could you – and maybe Scott get on the expense areas, but for me from a media perspective, can you just talk about like day-to-day what you are doing in terms of just with navigating all the businesses. Look, obviously, all the different businesses has – they are almost running their own businesses, but just maybe talk specifically in digital media, what you are doing on day-to-day with clients, with the business to kind of navigate this storm? Thanks.

Yes, it’s a great question. I mean, I think we are staying in constant contact with all of our clients. It’s interesting in this remote work environment, there almost seems to be more of a willingness for clients to engage, I think everyone finds themselves with more working hours and less travel and commuting hours and an interest in having these discussions. So I think the quality of the engagement between us and our clients is very strong, lots of discussions about future plans. So, I do think it’s very healthy that way. And then from an operating point of view and I will say this for all of j2 and I said this in my prepared remarks, but it is remarkable to me how quickly and early we were able to get into this new environment. And I think the productivity levels that the company haven’t been higher, and I am pretty amazed at the product development work that’s going on. I mentioned a couple of the things that we rolled out in the first quarter, but the pipeline is very strong and the product roadmap is very strong. So, that is a mindset that the company has right now, which is look you can’t control the external environment, but we can certainly control our pace of development and our pace of innovation. And that shows up a little bit in the expenses. I will be the first to tell you that the driver expenses year-over-year is compensation and that has to do with the organization that we’ve built to pursue the opportunity that we see in front of us and those aren’t changed. So we have not engaged in any sort of large scale reductions in force or layoffs and we don’t believe that our businesses are in anywhere close to feeling the effects that other businesses in our industry our feeling and have gone to those. And so we feel very fortunate at this point that we can keep this team in place and pursue all of the things that we are pursuing. And so whether it’s the Everyday Health Group, Ziff Davis or Cloud, each one of those – each one of those divisions and inside of each of those business units have pretty ambitious projects on their plates.

Thank you. Our next question comes from the line of Shyam Patil with Susquehanna. Please proceed with your question.

Hey guys. Good morning.

Good morning, Shyam.

Vivek, at your Analyst Day, you talked about having some larger deals, it sounded like in the middle of the funnel, it sounds like there could be somewhat of a pause now given the travel restrictions, but can you just talk about kind of how you feel about those deals coming out of this and if you expect M&A to be weighted more towards larger deals kind of during the recovery if you could just talk about that?

Yes, it’s, Shyam, always hard to predict, but I will tell you that what might have been larger a couple of months ago just got smaller on the very same target potentially. So that we recognize which is making sure that we understand the right price on pre-existing assets things that we have been working on and then new assets start come into view. Right, I mean, so we do have those dynamics going on. But I will give you the answer I always give, because it is the truth. It really isn’t – it’s about putting capital to work to get maximum returns and if that comes – and we are built to do a series of small things or even larger things. And so to me it’s going to come down to one of the best available opportunities when we are in a position to transact. That’s the key is that’s the unknown is when are we going to be in a position to feel comfortable to transact and will we ever get comfortable transacting without ever actually seeing a company physically. So, it’s a question and the debate we have right now. Right now my view is I think that’s a hard thing to do, but again depending on how long this reality is in place it’s something that will at least have a healthy debate about.

Okay, great. And then just a quick follow up for Scott. In terms of gross margins overall and by segment and the OpEx by the by the bucket any color you can give us in terms of how you think about those for Q2 and just perceptually how you're thinking about those for the rest of the year?

Yes. Well, I think I will limit my comments to Q2 just in general, because of let’s say the uncertainty of the macroeconomic outlook for the balance of the year although I think some of these trends have a likelihood of persisting in terms of the cost structure really that's more about probable revenue question in Q2 specifically I would say that the gross margins they're not moving around a whole lot within each of the two segments I think that those trends you saw in Q1 are likely to continuing to Q2 in terms of the EBITDA margins I would expect that our EBITDA margins to be somewhere between where we were in Q1 which was 35% EBITDA margin or where we were Q2 of last year which was 39 you can use the midpoint of that just so as a guard rail and a lot of where the margin comes in Q2 would be a function of a couple of things as Vivek mentioned at the beginning as we step throughout this call this is very much of a week to week analysis primarily on the top line so incremental revenues that come in or don't come in relative to our current expectation will generally have a very high flow through to EBITDA most of that's going to come because there's not a lot of OpEx associated with that incremental revenue there might be 15 to 20 points of COGS that's about it. And then the second thing is that a number of the initiatives that Vivek outlined at the beginning of his call and answered to some degree on the question that was just asked by Dan is really a timing issue so we're tracking independent of the revenues where all of the savings that are coming in from things like lack of T&E although I wouldn't say that it's absolutely zero. Things like where there are elimination of certain costs that we previously thought were necessary and have deemed now to be more of the luxury. So those things are coming in during Q2. I think the good news is they will more [Technical Difficulty] 50 basis points range. So just to make it clear to everybody I am looking at our interest expense net assuming no currency translation adjustments in other income of $16.3 million for Q2. I think that’s likely to sustain it self in each of the following quarters and our non-GAAP depreciation right around $15 million. As you saw in Q1, our tax rate came in consistent with our budget which is right around 22%. And then one last thing because I normally get asked it is we have the share buybacks technically they spilled into the second quarter but as a practical matter we actually execute all the trades in Q1. But we paid for about 250,000 of those shares in Q2. So that’s why referenced early we repurchased a million shares there was a partial benefit of that in the effective share counts for Q1. That will be fully realized in Q2. So if you look at the EPS the effective share count in Q4 last year was $40.5 million in Q1 of this year was $48.1 we are expecting at to be in Q2 around $47.2 million to $47.3 million.

[Technical Difficulty]

Thank you. Our next question comes from the line of Nick Jones with Citi. Please proceed with your question.

Great. Thank you for taking my questions. Could you dive in a little bit on the cost services side and what you are hearing from the SMBs I think you have a pretty broad coverage there of the types of users any additional color there would be helpful? Thanks.

Hi, Nick, thanks. So again, I think the question that everyone’s asking really is on the cancel side, are you seeing a kind of cancellations that others that are SMB focused are experiencing and the answer to that to this point is no actually cancelled. As I think I mentioned in my remarks in Q1, where our improvement is over Q4 and in the early goings of Q2. We yet haven’t seen any indication of it, but Scott does remind me that in past recessions we had seen increasing cancels. We were at very different product portfolio there we were largely web fax so it will be interesting to see how the non-web fax portion which is larger than the web fax portion within cloud will behave. I think you got a couple of things going on. I think 1 is I don’t think, we are not selling very high price point products. I believe that the products that we are selling if you are a going concern in business or products that you need in somewhat essential to what we are doing and when you look at our email marketing business. I was surprised by this that the send volumes are even bigger. And that’s because if you are a retailer and you are tying to drive online sales you are going to use email marketing as a cost effective a quick to turn on tools I guess it’s shouldn’t be that surprising. On the ad side, again because of most of our acquisition, customer acquisitions is done on the phone or on the web those have been unaffected in some could argue have been more effective in this environment than other forms of customer acquisition. Where we are seeing challenges as I mentioned, is we are seeing significant page volume decreases it’s not a huge portion of the overall revenue but we are seeing fewer sends amongst health care enterprise customers where we do get a marginal amount we get an incremental amount of revenue on volume but we think that will return when elective surgeries and non-COVID care start to kick in are across our customer base. The only other thing, sorry, sorry, just the only other thing is I would say the just on the health care piece because health care is a huge part of the cloud customer world. I really, really do believe that this event is going to trigger a lot of change. And I think that change is going to be helpful to us and you should spend some time on consensus because I think you are getting appreciation for the interoperability solution that we're building. So I just I am bullish about that obviously, again I can’t tell you when health care will return to some form of normalcy. But I do believe that the solutions that we are building here are important. So in many ways these are health care solutions that are big part of the cloud business.

And what I wanted to follow up on, Nick, was that when Vivek said that the be product mix is substantially evolved from say the Great Recession of ‘08/09 I'll be a little bit more I think a definitive on that that really the business if you look at the late ‘08 early ‘09 timeframe we called the web fax business that was outlined in the Analyst Day by me and so that was heavily really SOHO weighted at the time not even what we now call SMB. So the mix between SOHO SMB enterprises substantially different today than it was back in 08, 09 and just to give you a benchmark going into the Great Recession in terms of the peak the cancel rate increased about 50 basis points per month it started at a higher rate it was a 3% versus the current 23, 24 and it peaked to 3.5%.

Great.

Thank you our next question comes from a line of James Fish with Piper Sandler. Please proceed with your question.

Hey guys. Thanks for the question. You guys actually have answered most of mine but just one for you one thing that was not addressed at the analysts day was the prior cross-sell programs that I think are important in the cloud business that didn't work out in the past cycle when you guys tried to it under the old management team but I guess what are the differences time and how are the early cloud cross-sell programs going with this environment?

Yes thanks Jim appreciate that question so we're doing a few things so we and we might have talked about this I can't remember at the Analyst Day, but so we started to bundle Sugarsync and IPVanish. That really is a retention play so same price both products together and it's early because we're not in that many renewal cycles the month to month look good but we haven’t yet an annual cycle but from a retention point of view that seems to be working and we're seeing some good early positive signs we have also bundled VPN with VIPRE we've done a VIPRE being our endpoint product and then we created a VIPRE VPN. leveraging our white label VPN technology inside of the security and privacy business and there we are trying to drive more average revenue per user and there we're seeing some good progress in solid numbers double digit growth in revenues on that bundle. Then we've got to Speedtest VPN which is actually a digital media and cloud services collaboration where we're leveraging the footprint of the native application speed test inbuilt inside of it a white label speed test VPN that for the beginning was just free with some data limits and now we've added the monetization layer to that and the early results are good where if you get a certain when you hit the usage cap you have to convert to a paid subscriber if you want to continue to use the speed test VPN and then another cloud digital media bundle we actually use Humble Bundle and so Humble Bundle did a work from home bundle that had non-j2 and j2 products I think we have Encrypt.me, which is our remote access VPN product in that bundle and we drove some good order so for the most part I think the natural bundling has happened and that's mostly in sort of security plus privacy coming together as well as we're now exploring some more on the SMB enablement side which is do our MarTech customers want our soft phone services, do our soft phone services want our MarTech? So that's sort of a next wave of exploration in terms of ways in which we can cross-sell.

Thanks for the color and good luck this quarter.

Thank you.

Thank you. Our next question comes from the line of James Breen with William Blair and Company. Please proceed with your question.

Thanks for taking the question. Just a couple. One, I think Vivek just talked a little bit about Ookla. What have you seen as a trend there? It seems like people working from home a lot of people are checking their speed to make sure they get the bandwidth remotely and then two just from an M&A perspective obviously not a lot happening when you are face to face what is sort of net capitalized operating from operating perspective your ability do multiple deals in a single quarter. Things were to open up a bit and you do a bunch of stuff at one time to what extent can you do that across your different operating segments and new different general managers? Thanks.

Yes great question. So just on the on the speed test side we've seen volume testing volume increased 25% year over year really for the reasons that you just described that doesn't. necessarily immediately translate into revenue is remember the foundation of the business is subscription and licensing of data certainly having more data helps improve that product it's not something we would necessarily charge more for it certainly cements our position in measurement and broadband measurement. So, we will take it and it’s good – it doesn’t, it’s not a – it’s not a traffic lift does not equate to a dollar for dollar lift in revenue. And then in terms of the second question, look I think as we said in the past given our general manager structure as long as the deals are spread generally across the various general managers. We did a lot once. And so to go and get the deals done at the general manager level, we get deals done at the divisional level, we get deals done at the corporate level. So, when you look across the number of sponsors that you have inside of the company, it’s close to 20 sponsors. And it really – sponsors being individual sponsors just to clarify. So having that many sponsors allows us I think to integrate and to acquire fair number at the same time, if that’s what ends up happening.

Thank you. Our next question comes from the line of Shweta Khajuria with RBC Capital Markets. Please proceed with your question.

Great. Thank you. Could you please, Scott, talk about how you are thinking about marketing spend just overall across the business, how we should think about it as maybe traffic on some properties increase and you may want to lean into it if pricing is attractive versus not on some other businesses? How should we think about marketing spend in Q2 and if you can for the rest of the year? Thank you.

Sure.

Go ahead, Scott.

No, go ahead, go ahead.

No, I was just going to say through the first 4 months of the year, we have actually increased our market spend year-over-year slightly not in a significant way largely due to what we have just described. We think there is some interesting buying opportunities as a marketer from a customer acquisition point of view. This is entirely on the cloud side, right. On the media side, we don’t do much in the way of traffic acquisition. It’s mostly organic. But on the cloud side we spend marketing to acquire subscribers. And as I think I might have mentioned in my call, you are seeing, for instance, on the web fax side, a nice uptick in customer addition to adds, sub-adds. So, we want to lean in because as others we compete with maybe pairing back, there is some interesting prime real estate available for us. So, we are going to do that. Having said that, we have cut other spends than we just didn’t think held the same kind of returns of some of this new incremental spend, so our ability I hope to manage the marketing budget to being slightly up by getting far more yield out of it is what we are attempting to do.

And what I was going to go, I think Vivek has said most of the points is, this was as we started to look at Q2, but also beyond meaning Q3 and Q4 in this environment, where should marketing be. There was an implementation in the great recession of ‘08/09 of I’d say across the board cuts in marketing. And we chose to take a different approach this time because it really is a function of the effectiveness in the yield of that spend. So, one of the things, particularly with the cloud business since that’s where most of that spend originate is to really look at it day-by-day and week-by-week. So, we are monitoring the effectiveness of this spend. We are making judgements about the LTV of the customers acquired and of course, the important aspect on marketing is most of that can be moderated positively or negatively very quickly. So, that’s one of the key items that we are very vigilant on as we look forward not just in this Q2 that we are currently in, but also for the balance of the year. But right now as long as the spend is good, certainly in those areas that Vivek mentioned, we would continue to spend the money.

Okay. Thank you, Vivek. Thank you, Scott.

You are welcome too.

Thank you. Our next question comes from the line of Will Power with Robert W. Baird & Company. Please proceed with your question.

Great. Thanks. Yes. A couple do. I guess maybe just to comeback or follow-up on some of the SMB commentary obviously encouraging, I guess thus far not to be seeing an increase in cancel rates, but I wonder if there is anything else you are seeing with respect to deferred payments, any higher bad debt, anything along those lines that gives you early signs of caution there?

No, look nothing meaningful, nothing appreciable and again it’s early and possibly one thing to think about it is, because our price points are relatively low and as people start to study their expenses whether it's showing up on a credit card or showing up on the P. ledger yeah we're further down that list so that could be possible a possibility you know the other thing is remember our industry happened to be healthcare legal financial service those seem to be doing better than some other industries and then I think it's important to draw distinction between the local retail and SMB I think they're conflated in a lot of people's minds and so we're thinking about all of the businesses that have shuttered on main street that's not our customer base so that's another distinction but again it's early and that’s the thing that I continue to press internally and externally is we're only two months into this.

Yes okay. That's helpful color okay. And then I wonder if you can just touch on VPN I mean because it turns out I think moving into that business was probably timely given the yes your demand for work from home and whatnot so I know you touched on some of the cross selling industries there but may be just talk about the other broader trends you are seeing there anything on growth rates it would be great?

Yes, no, we are continuing on the personal VPN side we continue to grow organically in that business. It’s nice growth rates. We think to stay at home orders absolutely help us where we are very focused I was talking about product development and road map one of our brands called Encrypt.me is a remote access VPN. So think of VPN, both as a privacy tunnel as well as a remote access platform. We're more of the former but we have the technology and ambition on the ladder and that we think to be a very, very interesting opportunity for us but we have some product development and marketing work that we need to do there were also had a white label VPN business that we've used internally with speed test and VIPRE but we also work with other partners who would want to build VPN technology into their offerings and then we get paid a licensing fee or a seat fee and that’s also picking up so we're happy to be in that business I agree with you I think we really like the business prior to the pandemic but we like it even more now it's a it's a very relevant and timely proposition.

Right. Thank you.

Thank you our next question comes on the line of Rishi Jaluria with D.A. Davidson. Please proceed with your question.

Hi Vivek and Scott. Thanks so much for taking my questions. Glad you are all staying safe out there. Just wanted to ask about the two of the different businesses first on the Everyday Health side Vivek I appreciate your commentary that advertising revenues up 5% in April just what are you seeing out there in terms of traffic patterns there especially with the flagship Everyday Health property and then Scott on BabyCenter you did mention that it’s a lower margin business which hit a little bit of the EBITDA growth in Q1 can you just remind us on BabyCenter what the EBITDA profile right now looks like and what kind of work needs to be done to get those margins more in line with the rest of the media business and then rest of healthcare business? Thanks.

I will start just on the Everyday Health traffic question so our consumer facing property is Everyday Health what to expect in BabyCenter I have seen low double digit increases in traffic is obviously more and more individuals go online to search on COVID and COVID related items. Where we're seeing a very significant amount of traffic is on the provider side with MedPage today where traffic has increased 100% and that's where by the way more of the monetization opportunities exist as I mentioned with more focus on direct provider advertising versus direct to consumer advertising I think there are two reasons why, why our MedPage traffic is growing one is that I think you've got more medical professionals who are at home who are researching and that page today's coverage of COVID-19 has been just outstanding and so we're seeing the provider community come in but they also think we're seeing consumers we're seeing patients we are seeing individuals who want a deeper medically driven and scientific set of answers and content that may be historically they haven't looked for. So we are seeing the traffic growth we're seeing it in consumer far more on the professional side smaller base albeit but again the it's the professional side that's really driving our revenue gains and again that 5% is the organic overall Everyday health growth rate is higher than that because BabyCenter is in the mix. And then I think your question then Rishi on the BabyCenter integration although I would say this is probably an applicable statement also the Spiceworks so BabyCenter being in the Everyday health group Spiceworks being of course within Ziff Davis we are seeing improvement as those assets are being integrated I would say that there still is probably. 7 to 10 percentage points yet to be picked up as BabyCenter continues to be integrated into what to expect so and there is some seasonality in that business as well as the broader trends in digital media so that integration is very much on track very much continued and I expect that we will continue to pick up those points over the balance of the next in real time probably 4 to 5 months that was a Q3 2019 transactions and we said it probably take about a year in each instance to bring those two target margins.

Right. Thank you.

Thank you. We have reached the end of our question-andanswer session. I'd like to turn the call back over to Mr. Turicchi for any closing remarks.

Thank you very much. We did receive one question via e-mail. So I would like to address that before we actually close up the call we were talking earlier about the first six weeks of Q2 the question came in whether we were speaking about its blackness relative to Q1 or Q2 of 2019. I remember particularly digital media the quarters matter so sequential really is not what we look at in digital media you can look at that in cloud in the case of cloud I would say both year over year and sequentially black would be appropriate in the case of digital media we're speaking about the year over year comparisons and then there was just a question in terms of the mix of our revenues in Q1 of 2020 versus Q1 2019 in our media business I do actually want to note this that we did see in Q1 of 2020 actually performance based marketing that's slightly eclipsed display the display was 35 percent of the revs performance marketing was 36 subscriptions were about 28 and if we look at the year ago period which was Q1 of 2019 that would have been 37% displayed 34% performance and 27% subscription. So I think as we talked about throughout this call and throughout the number of calls the goal has been to move more and more of that advertising revenue into performance category and we are seeing some shifts in the proportional relationships. As the operator mentioned this does conclude our earnings call for Q2. Normally I would say we will be out there meeting you at a variety of conferences I think they’ve all converted even through mid June to the virtual format so we do have a number of those we have a press release out already talking about the two we will participate in May including one tomorrow but they're also in early June are 6 or 7 conferences in the first 10 days of June so I think there is 7 or 8 between now and mid June and so we look forward for you to reach out to the various brokers firms hosting those conferences we will be doing a one on one in some cases fireside chats as well and then we would look to announce our Q2 results as we normally do in the first 10 days of August. Thank you very much.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.