Ziff Davis Inc (ZD) 2020 Q2 法說會逐字稿

Welcome to J2 Global's Second Quarter 2020 Earnings Call. I am Michelle, the operator, who will be assisting you today. (Operator Instructions)

On this call will be Vivek Shah, CEO of J2 Global.; and Scott Turicchi, President and CFO of J2. I will now turn the call over to Scott Turicchi, President and CFO of J2 Global. You may begin.

Thank you. Good morning, ladies and gentlemen, and welcome to the J2 Global investor conference call for Q2 2020. As the operator mentioned, I'm Scott Turicchi, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah.

We had our best second fiscal quarter ever, setting records for revenue, adjusted EBITDA, non-GAAP earnings per share and free cash flow. In addition, due to our strong free cash flow generation, we ended the quarter with more than $616 million of cash. In addition, our Board authorized a 10 million share repurchase program through August 6, 2025.

We will use the presentation as a road map 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've not received a copy of the press release, you may access it through our corporate website at j2global.com. In addition, you'll be able to access the webcast from this site. After completing the formal presentation, we'll 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 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 have 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. The second quarter of 2020 was the most challenging and disruptive quarter our economy has ever faced, With GDP in the United States estimated to have declined an unprecedented 32.9%, this period presents a test of business resilience, unlike any we've ever seen before.

I'm proud to say that J2 passed with flying colors on every financial metric. Revenue, adjusted EBITDA, adjusted EPS and cash flow, we exceeded our expectations and remarkably set records. This is a tribute to the thousands of hardworking and focused employees at J2 around the world who continue to demonstrate the ability to surmount challenges.

Three months ago, based on April results and trends, we believe we'd see a slight decline in revenues in the second quarter. Instead, based on a significant rebound in May and June, total revenues were up 2.7% in the second quarter versus last year. We saw improvement within the quarter, with May better than April and June better than May.

We were anticipating that our Digital Media segment revenue would decline in the quarter given the massive dislocation in the ad market. But instead, we grew close to 7%. Every single business unit in the Digital Media segment beat its forecast in the quarter, as we saw advertisers return to spending. As I said in our last call, our ad business has little local, travel, food and auto exposure.

Our display business is about 40% health care, which continues to show great strength. Everyday Health display revenues grew 35% in the quarter.

We're also advantaged by our performance marketing businesses, which exhibited a meaningful recovery in the middle of the quarter. The Cloud Services segment also weathered the Q2 storm very nicely. Revenues were down 1.2% on a year-over-year basis. However, if you adjust for ForEx and jBlast, which is a broadcast fax business we sold in October 2019, revenues were flat. Cloud fax is essentially flat in the quarter, notwithstanding a decline in medical record volumes. The significant reduction in elective procedures in the U.S. directly impacted our page volumes, but we're starting to see page volumes return to the cloud fax business as elective procedures are coming back.

The security and privacy businesses grew, while SMB enablement declined as we experienced some losses and reductions of larger contracts and a slowdown in customer ads. Overall, the cancel rate at Cloud Services continues to be stable, which, as you know, is something we closely monitor. We continue to be optimistic about our security and privacy portfolio, which is over $230 million of revenues. We just announced the addition of a new leader to oversee all 3 of the cybersecurity business units. Vivek Kapil joins us as the Group General Manager of Security, Privacy and Data Protection, having worked at NortonLifeLock and Symantec for the past decade. We're excited to have Vivek on the team, as we look to scale and develop our cybersecurity suite.

We're also excited that Nick Nelson, who came to us in the IPVanish acquisition and has been a catalyst for a number of growth initiatives, has taken on a new role, pursuing business development opportunities across the Cloud Services portfolio.

Even more impressive were the adjusted EBITDA and margin results in the quarter. Adjusted EBITDA grew 6.1% year-over-year, and our margins expanded by 130 basis points to 40.1%.

As I described in our last call, we were decisive in our actions to manage expenses, while continuing to invest in our organization. We have avoided the large reductions in force and more draconian cost reduction measures of many in our industries by focusing on better managing our vendor expenses and hiring.

The careful cost management paid off in the quarter, not just with respect to adjusted EBITDA, but also with cash flow. Our net cash from operations grew 46%, and our free cash flow grew 35% year-over-year. We closed the quarter with $711 million in cash and investments. This was after purchasing $24 million of JCOM shares during the quarter. And as we announced last night, the Board has authorized a new 10 million share repurchase program over the next 5 years. We believe that our own stock currently represents one of the best investment opportunities available to us.

Based on second quarter performance and increased confidence in the state of the operating climate, we have reinstated guidance for the year. Our underlying assumption on our new guidance is that the business environment in Q3 and Q4 will be stable. But to be clear, we are not contemplating a sharp recovery. We're assuming more of the same. On the bottom line, we are estimating an adjusted EBITDA margin of over 40%, as we continue to be very careful with our expenses.

On the M&A front, I'm happy to say that our acquisitions machine is back on, and we are pursuing a number of interesting opportunities, as we have better visibility into the market environment and have gained comfort in transacting in a virtual manner. We continue to believe that our patience will pay off in higher quality opportunities, while giving us the time to optimize our current portfolio. I would hope that our Q2 performance gives our shareholders confidence in that approach. We continue to focus our M&A efforts on some core themes, including health care embracing digital transformation; small and medium businesses seeking cybersecurity solutions; video games emerging as the #1 form of entertainment; and e-commerce becoming the dominant form of retail.

I'd like to take a moment to talk about corporate governance. Earlier in the year, as we were speaking to shareholders in their proxy departments, the topic of Board refreshment was discussed. At our February Board meeting, our Board supported the idea of identifying new Director candidates for J2, as the company and its recruiters developed a slate of potential candidates. We're very pleased to have announced yesterday that Scott Taylor has been appointed to our Board of Directors. Scott has spent over 20 years working in Silicon Valley, including 12 years as EVP and General Counsel of Symantec, a leader in consumer and enterprise cybersecurity. Scott brings a deep understanding of the cybersecurity industry, a market that is very important to J2, as well as extensive legal, corporate responsibility and M&A experience to our Board. Scott has more than 10 years of experience serving as a public and private company Director and brings a wealth of governance experience. We're grateful to welcome him to the J2 team.

Scott's appointment does not mark the end of our refreshment efforts. We are studying policies, best practices and approaches to ensuring and advancing ongoing Board refreshment. The company has identified a number of highly qualified individuals who would make excellent Directors at J2, bringing fresh, new and diverse perspectives to the company. The Board is confident that we will be able to add an additional Director in the near future.

Also essential to our ESG framework are our diversity, equity and inclusion efforts at the company. Last week, we published J2 2020 Diversity Report, which provides detailed demographic and representation data at the company. We have unequivocally embraced the business and societal imperative to have a diverse and inclusive organization. I believe that doing is greater than talking, especially with diversity, equity and inclusion. Since January 2019, 65% of all new hires at J2 were women or people of color. As a result, today, 62% of our employees are women or people of color. We're proud of the progress we've made, but we have more work to do, especially at ensuring diversity at every level and aspect of the organization. I encourage you to read the report, which is found on our website, to better understand our diversity initiatives and the seriousness with which we are pursuing them.

Our commitment to diversity and inclusion goes beyond the company's walls. This past quarter, we leveraged our resources and platforms for educational and philanthropic purposes in support of the Black Lives Matter movement. We committed $5 million in advertising to the NAACP, APP Council and other advocacy organizations to promote messages of racial equality. We raised nearly $4.4 million for the legal defense fund and raced forward through our Humble Bundle Fight for Racial Justice Bundle. We launched a Black Game Developer Fund, a $1 million annual program focused on supporting black game developers. We have earmarked $1 million of our annual freelance editorial budgets for journalists of color. In our publishing brands, including IGN, PCMag, Mashable, AskMen, Everyday Health, BabyCenter and What to Expect have produced great content, exploring topics relating to race and racial equality.

Before I hand the call back to Scott, just a word about the report recently issued by a short seller. We are confident that we addressed the unfounded claims made in that report on the day in which it came out. We also believe that our actual performance and results are healthy reminders of the company that we are.

With that, let me hand this call to Scott.

Thanks, Vivek.

Q2 2020 set a number of financial records for J2, including revenue, EBITDA, non-GAAP EPS and free cash flow. Despite the COVID environment, these results were driven by resilient top line performance and a focus on cost containment. We ended the quarter with approximately $711 million of cash and investments after spending approximately $25 million in the quarter primarily on stock repurchases.

Now let's review the summary quarterly financial results beginning on Slide 4. For Q2 2020, J2 saw a 2.7% increase in revenue from Q2 2019 to $331 million. Gross profit margin, which is a function of the relative mix of our business units, rose to 83% from 81.3% in Q2 2019, in part due to lower content fees in the media segment. We saw EBITDA grow by 6.1% to a second quarter record of $132.9 million. The EBITDA margin for the quarter was 40.1% versus 38.8% a year ago due to the aforementioned cost discipline. Finally, adjusted EPS grew 7% to $1.71 per share versus $1.60 per share in Q2 2019.

Turning to Slide 5. In Q2, we generated a record $115.9 million of free cash flow, which was a 35% increase from Q2 2019. This was after continuing to make significant investments in our businesses through our capital expenditure program. On a trailing 12-month basis, we generated $371.4 million of free cash flow for a 66.2% free cash flow conversion on our $560.8 million of trailing 12-month EBITDA.

Now let's turn to the 2 businesses, Cloud and Digital Media for Q2, as outlined on Slide 6. The Cloud business saw a slight decline in revenue of 1.2% to $167.1 million in revenue due primarily to currency exchange rates, the elimination of jBlast revenue and the lower variable revenue contribution as a result of fewer elective procedures in health care that we have discussed previously. Reported EBITDA decreased by approximately 5.2% to $80.7 million compared to $85.2 million in Q2 2019. The EBITDA margin is 48.3% after corporate allocations, down approximately 2 percentage points due to higher corporate allocations, less variable revenue, which has a high incremental margin, and a larger contribution from our VPN business, which also operates at a lower EBITDA margin in 50%.

Our media business grew revenue 6.9% to $163.9 million and produced $54 million of EBITDA for 27% growth. The EBITDA margin increased by 5.2 percentage points from Q2 2019 due to an improved cost structure, lower content costs and BabyCenter beginning to contribute at its synergized margins.

On Slide 7, I am pleased that we are reintroducing fiscal year 2020 guidance. As you know, due to COVID-19 and the uncertainty surrounding the economy, as well as work from home, we suspended guidance on our Q1 earnings call. Our economic assumption is that the economy will modestly improve from its May, June levels. We're expecting more of a tilted U-shaped recovery versus a V-shaped recovery. We are expecting that each of our 2 segments will perform in a similar fashion.

In addition, we are divesting our Australian and New Zealand voice assets in a transaction that was announced earlier today in Australia. We expect the transaction to close by the end of August, and it will have an impact of reducing our revenues in the back half of our year by approximately $5 million and EBITDA by approximately $2 million.

Our reinstated full year guidance now estimates revenues between $1.38 billion and $1.4 billion; adjusted EBITDA between $556 million and $570 million; and non-GAAP EPS of between $7.17 per share and $7.41 per share. Following this guidance slide are various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent.

I would now ask the operator to rejoin us to instruct you on how to queue for questions.

(Operator Instructions) Our first question comes from the line of Shyam Patil with Susquehanna.

Congrats on the great execution during a volatile time in the economy and on the buyback and the Board member. I had a couple of questions. So Vivek, you talked about the acquisition machine being back on. I think we were all waiting to hear that. The question is just kind of how are you approaching M&A kind of in this environment. If you -- I don't know how you guys are looking at it, but whether it's larger and smaller deals or costs of these deals. And how are you guys approaching M&A in this environment right now?

Great. Shyam, so look, we're running our entire business, over 4,000 people, entirely remotely. I think, over the last 3 months, we have grown confident in our ability to operate in a remote fashion. We have hired and on-boarded senior executives, I mentioned Vivek Kapil, even a Board member, Scott Taylor, and it was all done virtually. So we now feel the same way about M&A, that being virtual is no longer a real hindrance, and so we are prepared to transact without physically visiting companies. In instances where we can and in locations where it's safe and permissible, we'll do so, but I think that's been a change. And I think, really, when we spoke about this 3 months ago, we were at the heart -- we were at the height of the pandemic. I think we're now in an environment where we think we can transact. And look, we just sold a company in this environment, as Scott just mentioned. So look, I think those considerations are not really considerations or conditions anymore.

And I also think the other thing that we said in that call was that we thought being patient would be beneficial to us. And so I think seeing how the market is settling out, seeing how businesses are responding to the test of this pandemic is really important information that informs the asset that we choose to pursue and the price at which and terms at which we were going to pursue them.

So I would say that with respect to the size of deals, with respect to the categories, nothing has changed. I think we -- as you know, we look at deals, a variety of sizes from tuck-ins to more substantial deals, we look at them across all of our business units and operating divisions. And so I wouldn't say anything has changed in terms of the nature of the things. I've talked about the themes in the prepared remarks, the areas where we see the most opportunity. So you'll see us lean in on assets that fit against those themes.

That's very helpful. And then I just had a follow-up model question. I know you guys don't typically like to guide on a quarterly basis. But as you guys look out to 3Q and 4Q, any guidepost you can offer us just in terms of how to think about Cloud versus Digital Media revenue as well as EBITDA?

Sure. Let's try to unpack the back half of the year guidance, Shyam. So I think, first of all, as most people on this call understand and know, our media business is very seasonally positive in Q4, if you look at the 4 quarters, so keep that in mind. So when you look at the back half of the year guidance, after you take out the first 6 months, it's by far from being equally weighted on the media side.

Secondly, remember that we made an economic assumption. That's generally not things we like to do. We think that's important in you understanding how we see the economy in the back half of the year. I call it the tilted U, meaning not a sharp V-shaped recovery, but that leg of the U having some upward slope from Q2 through Q3 and Q4. That may end up being a conservative assumption. But obviously, as we've talked about it now 2 earnings calls, things evolve very much in the COVID environment week to week.

So with that kind of as the headline, then let's break apart the 2 segments. I think in the Cloud piece, the first thing you need to do is recognize -- and we can -- another question if it's of interest, get into greater detail on the ANZ sale, our Australian and New Zealand voice assets that are under contract to be sold. We assume that will occur between now and the end of August, so the implication is we'll lose about $5 million of revenue in the back half of the year in Cloud. Roughly, that's going to be $1 million in change in Q3 and $3.5 million to $4 million in Q4. The exact number will, of course, be a function of the exact timing of closing. So that's number one.

Then number two, if we look and unpack Q2, really, in the Cloud business, as you know, it's very sequential. I think for a lot of businesses, both our Cloud and our media, April, you kind of have to ignore because as the movement from work from home and the hit in the economy was the most dramatic, we eliminate that. So in the Cloud business, we look at May and June, and we see that after you've adjusted for ANZ, there's probably a 1% to 2% decline in revenues versus, what I'll call, the pro forma numbers for Q3 and Q4 of 2020 versus '19.

Now let's turn to the media side of the business. In the media side of the business, we actually think that June of the 3 months in Q2 was probably the most representative. As Vivek mentioned, we saw sequential improvement from April to May, May to June. So if we look at the media business, that's going to be a 2% to 3% decline year-over-year using the June run rate. Now remember that, that's not equally weighted based on my earlier comments between the 2 quarters.

Also I think in our own analysis, we would put more of that decline in Q4 as a degree of conservatism since it is the more important quarter between the 2 for us in 2020, as it is in most years, but also because the visibility will become clearer as we get closer to Q4 and that will have certain implications as to advertise.

So when you roll that all up, I think our media business should be roughly flat year-over-year in Q3 and then down somewhat in Q4. Obviously, the things -- we have a range, as you know. The things that will move us in that range will be, first and foremost, the underlying economic reality and then our own response to that reality.

In terms of the margins, we actually expect, in both instances, Q3 and Q4, our margin profile to continue what we've seen in Q2 and to be an improvement over Q3 and Q4 of 2019. So you'll see at the midpoint of the range, EBITDA is up, notwithstanding the fact that revenue is expected to be down in the back half of the year.

Our next question comes from the line of Saket Kalia with Barclays.

Okay. Great. Vivek, maybe just to start with you. You touched on this in your prepared remarks, but I'd love to just double-click on the Board composition comments you made. Maybe the question is can you just talk maybe broad-brush how the Board could look in the next 1 to 2 years. And just as importantly, how is that composition important/relevant for the business?

Yes. So look, I think as I said in the prepared remarks, we're committed to ongoing refreshment. So we've appointed Scott, who is a fantastic appointment for the J2 Board, brings a great cybersecurity perspective. As I mentioned, we have a $230 million and growing cybersecurity business. It's very important to the company. And having that kind of industry perspective and expertise is really valuable. So that will be something, as we think about future appointments, making sure that we align industry experience against the businesses we're in. So one, for instance, that I would tell you is that health care, we would like to see some more health care experience within our Board, and that's an area that we are very much looking at.

I think the other thing is just skill sets that align with the businesses that we're in. Subscription marketing skill set, M&A and transactional skill sets are all really important to having at the Board and at the Board level. And then diversity, I spent quite intentionally a lot of time on my prepared remarks around the company's diversity, equity and inclusion initiatives. They matter a lot to me personally. And they, frankly, matter a lot to our business. They are essential, and we are doing things up and down the organization, including at the Board level, to make sure that our workforce and our Board represents the audiences and the customers that we serve. So diversity is absolutely an important part of it.

And I would tell you even more broadly that we have a goal at the company to be a top-rated ESG company. And so we're going to do -- you're going to see a lot from us not just around DEI initiatives, but also our climate and sustainability initiatives. Look, our entire business is predicated on shifting from analog to digital, which really means shifting from carbon-heavy to carbon-friendly. So all of those things, I think, will come together into a larger ESG set of activities and communications initiatives and strategy design to really make us a top name and a leader in the space. So look, I think we're excited by what we've done, and we are really excited about what's coming.

That's great. That's super helpful. Maybe for my follow-up for the detail on the seasonality across those 2 businesses to keep in mind. Maybe just to dig a little deeper into the Digital Media business. Can you just remind us the split of performance versus display and maybe the -- maybe this is a question for both of you. How is that changing, if at all, in this new backdrop?

Yes. So the -- first of all, let me begin by just saying if you -- just to remind everybody and leverage off of the previous question, on Digital Media, irrespective of display, performance or subscriptions, there's a much heavier weighting to Q4 than Q3. So if we look at the full fiscal year, Q4, exclusive of any M&A, will be 31%, 32% of our total revs. That obviously reverses out in Q1. Q2 and Q3 tend to be, in most years, somewhat similar. So that's just one factoid.

I think as it relates to your question, we're starting to see a convergence when you look at the advertising between performance and display. Now in any given quarter, one may have a slight leadership over the other. So I believe that in Q2, for example, about 38% of our advertising revenue was display, 35% was performance. In Q1 of this year, that was actually flipped, where performance had a slight edge over display. So I think you should be thinking that all things being equal, they're starting to converge, and they're getting close to 50-50 from an advertising perspective. Then of course, the subscriptions would be on top of that.

The only thing, Saket, I would add to what Scott just said is that if there was ever a question about our ad business, I would tell you that this is as high quality an ad business as you can have. I mean, frankly, this environment for advertising businesses is incredibly punishing. And here, we are doing really well, with the advertising business up 10% year-over-year.

And I think you've got 3 factors. Number one, and we've talked about this, but the performance orientation of our advertising business, this is not just the performance marketing portion of it. But even our display business behaves like performance marketing. In other words, it is bought and judged based on its ability to generate return on ad spend. And performance, performance really stands out. Performance-oriented advertising does well in markets like this.

Two, I think our category mix is really favorable, particularly with the health care piece. I mean, as I said, the Everyday Health display business grew 35% in the quarter. So we feel really good about the mix we have between health, tech and gaming.

And then finally, we've got great brands. I think, over time, we've assembled, between Mashable and IGN and BabyCenter and Everyday Health and PCMag, we have a great collection of brands, and brands do matter. And brands sometimes matter more in markets like these, where I think prior to the pandemic, I think you had a lot of lower quality ad inventory in the marketplace that was creating sort of a price pressure and commoditizing effect. I think that's shaking out and there's a return to quality. And so we sell quality.

Our next question comes from the line of Daniel Ives with Wedbush Securities.

So maybe just talking on the Digital Marketing side, what -- are you guys doing anything different with customers' pricing just given the environment in terms of just making sure, especially even on some of the programs are facing headwinds, to make sure that you contain any risk as much as possible?

Dan, do you mean -- from a performance market, do you mean on the media side? Or do you mean Cloud Services, customer acquisition and marketing?

On the media side.

Yes. No, look, I think -- again, I think the focus has just been on -- in this market, trying to drive leads, transaction and sales, and that's where we're finding our customers have a lot of appetite to spend and lean into.

And I think the other thing you've got to recognize is if you weren't an online retailer or an online seller before, you are today. I think what the pandemic has done is it accelerated the embrace of digital marketing, digital transactions, recognizing that, right now, physical retail, physical sales even are challenging. And so to us, I think it's just -- the shifts in the market just favors essentially our capabilities and our value proposition.

Great. And just on the M&A, I mean, kind of like the first question just to drill into it a little. But from a size, in terms of acquisitions, when we think about tuck-ins versus more game-changers in Everyday Health as if -- I mean those are still on the table, right, in terms of this environment? Just so we're clear in terms of going forward, that even a larger potentially other sort of pillar deals are still on the table, despite the environment.

Look, I think everything is on the table, as it always has been. We are very open-minded about situations. We have a very clear set of criteria and thresholds. If we can uniquely create value, if we can generate cash-on-cash returns in excess of 20%, if we have a high level of confidence in our abilities to execute against our plan, we're going to do it, whether it's a small deal or a larger deal. So nothing, again, changes. I think that has been historically consistent.

What you should recognize is that, ultimately, most of the deal-making does happen at the business unit level, right, so that denotes a certain size. As we expand in the number of business units and the number of general managers against those business units, you're going to continue to see more deal flow there. And so I think if you look at it as a function of deal flow, I think the kinds of deals that fit inside the business units will typically be the most likely deals that ultimately get done.

Our next question comes from the line of Will Power with Robert W. Baird & Company.

Okay. Great. And I appreciate the Board and diversity comments. I guess, Vivek, maybe just coming back to Digital Media and just trying to drill down into some of the upside drivers in the quarter. I mean it sounds like Everyday Health was a big piece of that, particularly display. But I wonder if you could comment on what you're seeing in the tech and gaming verticals. I know there have been questions for some time with respect to the console, timing and how that would impact the advertising trends. And then secondly, what were you seeing on the subscription front as you look at Humble Bundle and Ookla? I mean has that continued the same recent trend line? What kind of impacts are you seeing from COVID, if any, on that front?

So just in terms of advertising, as I said, we're up 10% year-over-year in the quarter, organic -- strong organic growth at Everyday Health and Ookla. We did have the benefit of BabyCenter in Q2 versus last year that offset declines at IGN and Ziff Media, which is the tech advertising.

Now the gaming piece, we were anticipating, even before the pandemic, would be down just given the timing of the new PlayStation and Xbox going into Q4. So we were seeing seasonality. We were experiencing -- or expecting to experience a seasonality shift any way based on the timing of console releases.

And then on the tech side, there's still a little bit of pressure there, and that is not surprising, though. Again, as you start to look into June, you're starting to see some nice recovery.

One thing I'll point out about display is that we've had 7 consecutive quarters of growth in display. I think that's important for people to understand because I think there can be a perception at times that display is under a lot more pressure than it really is. Our display is different from other display, and I think that's one of the distinctions we're trying to make here and have people understand.

Now in terms of -- I think you were asking a little bit about the subscription business. I think we are up organically high single digits in subscription revenues, but we do have a couple of tailwinds, a number -- a couple of headwinds. Number one is the Ekahau business, which deploys WiFi networks in commercial space to sell software -- subscription-based software to do that, did see a contraction in its Q2 revenues as a result of COVID. So the planning being done in commercial spaces, obviously, was under a lot of pressure in Q2. We're beginning to see some reversal of that in Q3, but that's really tied to when our worker is going to go back in our offices and when are their IT department is going to focus on WiFi installations and upgrades. So we do have some pressure there.

And we have seen a deceleration in our Humble Bundle subscription business in the quarter. We had weaker games and weaker IP in the quarter. We've had some competition in the gaming subscription business. But then the Humble Publishing business, where we are a publisher of games, is doing very well. I think in the prior call, I think it was in the last call or maybe 2 calls prior to that, we talked about having 20 games on the slate for 2020, where we've released 11, either entirely new games or new platforms. So we are on pace. And usually -- I could argue we're ahead of pace, usually, Q4 is the heavy game release quarter, and we should see that, too.

Our next question comes from the line of Cory Carpenter with JPMorgan.

This is Ryder on for Cory. So you mentioned that your full year guidance implies EBITDA margin expansion in 2020, despite the headwinds from COVID-19. Could you talk about some of the drivers of the margin expansion? Specifically, are there any expense savings you've uncovered that may be carried through beyond COVID-19? Or any changes to the investment levels you plan to make on some of your growth initiatives? And then stepping back, as we come out the other side of the pandemic, has there been any change to your thoughts on the longer-term organic growth or margin opportunity in either of the 2 segments?

So I think that the -- in terms of the overall cost structure, as we outlined at the beginning a quarter ago when we were obviously right in the midst of it, we initiated a number of projects to improve our overall cost structure, but leaving sort of 3 things intact. Number one, first and foremost, was the employee base. Number two was to preserve good sales and marketing spend. And the third piece was our capital expenditure program. And all 3 of those actually have been at levels that we would consider to be consistent with where we were pre-COVID.

Having said that, we did look at the other portion of our cost structure, which, on a cash basis or a non-GAAP basis, represents about 40% of our total cost structure, and we have renegotiated terms and conditions. We have eliminated a number of activities that pre-COVID were thought to be necessary, but now are deemed luxuries. And so a lot of those are going to be permanent. I believe even our T&E will be lower from the levels that it was pre-COVID, even once we're in a post-COVID world.

The other thing that we're working on that actually has no current benefit to the Q2 financials and, for that matter, is not expected to impact Q3 and Q4 is our whole real estate program. In fact, I would just note that we're working right now on negotiating the exit of certain of our leases. And you'll actually see in Q3, on a GAAP basis, a charge as we exit some of our real estate because we no longer have the necessity for it given what will become the work-from-home environment, either on a permanent or a hybrid basis, for a portion of our employees.

So I think we feel very good that, while there will be some flex in the cost structure as we look out, a large percentage of what we have accomplished so far should carry forward. I think in terms of your second question, while, as you know, we don't generally give multiple year guidance, in large part because of the M&A that is yet to be done, I think that in a post-COVID world, whenever that occurs, 2 things will have benefited us. One, we will be stronger as a company with a better cost structure. Clearly, there will be certain competition that will be eliminated through this process. And so I think that our general view would be that the growth rates certainly -- aggregated growth rate and margins would be consistent, or in the case of margins somewhat better than what we've articulated in the past.

The only thing I might add to what Scott said is that, as you know, we run a decentralized operation, where we try to push as much authority, P&L, product and business authority down into the business units. We believe that, ultimately, that's how they'll perform better.

One of the disadvantages of that is that you don't have the ability to aggregate often your spend to command better rates. And so during the pandemic, or really right prior to it, we identified it as an opportunity and established a procurement function at the corporate level that never existed before at J2. That procurement function has worked across the organization to extract far better deals with vendors. So we don't change our mindset around, look, the vendor selection and partner selections can happen at the business unit level, but we're going to run it through corporate procurement to attract the greatest value, and that's been very successful and will be permanent, to Scott's point.

I also think you should recognize that we've got some favorable mix. As the advertising businesses continue to do well, the advertising flow-through is very strong, and it is one of the great benefits. There's a lot of operating leverage in our advertising business, as we don't have much in the way of traffic acquisition costs, which is another, I think, unique feature of our advertising business.

Our next question comes from the line of James Fish with Piper Jaffray.

How have the early bundling efforts on the Cloud Service has been going? Is that what helped kind of the monthly churn rate go lower at all? And is there any way to kind of disaggregate between the DID and the non-DID services in terms of churn this quarter?

Yes. So just with respect to bundling, it is a significant opportunity. I wouldn't say it was a top priority in Q2. We were really just focused on maintaining strong service levels and delivery and support. We were moving the entire organization to work from home. A lot of our customers had questions that we wanted to manage. So retention programs were the top priority, and I think you see that in our cancel rates, slightly improved actually quarter-over-quarter, which is, I think, sensational. And so a lot of what we were focused on, so we put a few of the bundling initiatives on the back burner.

Now with Vivek Kapil's appointment, overseeing the cybersecurity business units, we think we can accelerate those going into the back half of the year and look at ways in which we can combine our VPN, our private endpoint, our backup, our file sync, our endpoint, e-mail security and put those pieces together.

Got it. And then maybe while we're on security, obviously, with COVID, VPN is a material product category in cybersecurity. But why is your VPN solution having as much success with a lot of the competition out there? And is there a way to think about the stability and the overall business Cloud Services ARPU versus what the impact of the VPN asset is having? Because from our angle, it looks like, on an organic basis, x the VPN business, it's actually been relatively stable outside of that VPN impact just having a lower price point.

Yes, that's right. So the -- you're seeing that in the ARPU numbers as VPN is priced lower. But to answer your first question, look, I think that the VPN space is a rising tide lifts all boats space. I think there are a number of quality brands in the personal VPN space. We believe IPVanish is amongst the leaders there. And so I think we continue to feel that we'll do well. We think the market's going to do well. We think this is one of those -- this is one of these markets that have really strong tailwinds.

The part of the market where we do not yet have a significant toehold, but we would like to, is really around the B2B side, which is corporate VPN, which is remote secure access into networks. And so that is where Encrypt.me, we think, can be really compelling. And part of the logic, by the way, of bringing these units under Vivek Kapil's leadership is that what we need to ensure that Encrypt.me does well is to actually have channel and sales force distribution that the VPN business unit didn't have. The VPN business unit is a consumer marketing business unit. It does a fair amount of customer acquisition online in order to succeed. In the corporate market, the B2B market with Encrypt.me, unique channel and unique sales force. Talent, channel and sales force exist, for instance, at our VIPRE business. And so leveraging the various distribution channels is another almost -- sort of think of it as an extension of the bundling question that we think we're going to be able to pursue with Vivek Kapil's appointment.

Our next question comes from the line of James Breen with William Blair & Company.

Just with respect to cash flow, obviously, a strong quarter there. And you've talked a little bit about the margin structure and some Tea and stuff being down. Can you just talk about maybe the relationship between EBITDA and cash flow and how you see that trending from here? And then, Vivek, maybe if you can remind us a little bit about, you touched on it briefly, the impact of the video game platform recycle, some of the new boxes coming out in the back half of this year and how that generally can flow through the business.

Great. So let me address your question, Jim, on the free cash flow. And I would just note for everybody on the call that free cash flow is not linear nor perfectly correlated with the timing of the earning of EBITDA. So you'll note, both in the prepared remarks, and if you go back into prior transcripts, we tend to focus on the trailing 12-month EBITDA and trailing 12-month free cash flow. That tends to smooth out, particularly things like the timing of estimated tax payments and their magnitude. So in this specific quarter, it was a phenomenal quarter, particularly from the cash from operations standpoint, up 40% year-over-year. Best cash collection quarter the company has ever had in its history. That's after. And then free cash flow is after we spent $23 million in CapEx in the quarter, still produced a record free cash flow of almost $116 million.

Now I would note that talking about tax payments, there is a timing difference that happens to slip into Q3 this year of some estimated tax payments of about $14.5 million. But even if we had paid those in Q2, it still would have been the best second fiscal quarter for free cash flow. If we look at the trailing 12-month conversion, we're at about a 66% conversion of EBITDA to free cash flow, and that's within the range of our expectations. So don't look at the 85% conversion in the quarter, the spot conversion rate, because, I say, there are things that can influence that. And we do see variation if you just look at the quarterly contribution of free cash flow from EBITDA. Vivek, do you want to answer the other question?

And then just on -- yes, yes. Just on the gaming piece, we saw the cancellation of major live events, like E3 and Comic-Con, which, in the video game industry, that's like the Super Bowl being canceled. They are moments where you see large marketing activations and you see just a lot of economic opportunity. And so we have to weather the cancellation of these live events. But I will tell you, the IGN team did really an extraordinary job. They staged something called the Summer of Gaming, which is a virtual event that the gaming industry really came around, and we sort of took the place of those events that were canceled. We generated something like 600 million content views, 280 million video views, 45 million global live streams. I mean it was a big deal. And while it helped drive a ton of Q2 traffic, did help support some of the monetization, it really just lays the foundation for the future because I think we're going to see more of these virtual events. And even possibly post-pandemic, we still may find that virtual events for other reasons are compelling. So I just feel like the brand has done a very nice job in responding and adjusting to the realities of the market.

Now with Q4, with new consoles coming out, that should free up dollars. And that is -- we do anticipate that will come into play in Q4 and be helpful to the IGN business. And then I think I also said that Q4 should be a strong release quarter for Humble games. We'll see the revenue for that until 2021 that we think it's going to be a strong game release window for us.

Great. And then just one follow-up. You reauthorized the share buyback. I think you bought back shares in the low 70s, in April, generally around sort of 8, 8.5x forward EBITDA. Can you just kind of refresh us with your thoughts on that and how you think about buying back shares?

Look, my view is it is part of the capital allocation toolkit. And as far as we're concerned, the company right now at these levels represents a great buying opportunity. And I also want to tell you that we want to support our shareholders internally and externally. We have a very popular employee stock purchase plan. A lot of our employees are shareholders. And when we see the ability to generate returns in excess of what we could do otherwise, whether through capital investment or through M&A, that we're going to do it, which doesn't mean that we don't have capital investment on M&A opportunities. We absolutely do, but it should sit alongside those within the -- what's the -- in terms of uses of our capital. As you all know, and many of you have reported, we're at historic lows right now in terms of the valuation of the company.

Our next question comes from the line of Shweta Khajuria with RBC Capital Markets.

Okay. Let me try 2, please. Vivek, you pointed to 10% year-over-year growth in media business. Maybe I misheard you. I see 7%. What does that 10% refer to?

That was advertising. Shweta. That was the advertising.

The advertising portion.

Okay. Great. And can you please quickly talk about some of the key strengths that you saw that largely beat your expectations? Every unit came in ahead of their expectations. Which ones were the key outperformers that you would like to call out?

And then in the back half, the guide assumes -- Scott, thanks for giving the color for the back half. Given the tougher comps, could you provide some color on what does it mean for organic growth rate for the back half? I mean is it fair to say that you're assuming a U-shaped recovery, so stable to improving assumptions for going forward with Q2 being the worst you've seen?

Okay. So maybe, Scott, I'll just start with respect to the Q2 question, Shweta. So yes, look, I think that, again, this was -- when we were talking about this in May, we really only had April. And April was the -- really, the height of the dislocation in the ad market. We quickly saw some recovery basically by the middle of May and then into June. And again, I think it's the factors I spoke about, which is performance, marketing and orientation as dollars shifted from brand, advertising in the marketplace to performance, that if we're going to advertise marketers, we said, "Look, we need to generate ROI and real return on ad spend." It does benefit that we are significantly in the pharma -- ad pharma -- pharmaceutical advertising market at the Everyday Health Group, which was very, very helpful overall. It's a very strong category and a major driver of that. I've talked about before, which is the marketing that's done to physicians, which, in the industry, exceeds the spending on marketing to patients and consumers has gone from a physical process of sales reps visiting physical doctors' offices to entirely a digital process, and our MedPage Today and associated assets are leaders in that space. So that movement was a big driver in the overall pharma and health care performance component.

And then just the retail performance marketing, where we get compensated, we're driving traffic to online retailers who then pay us a percentage of the ensuing transaction, in that business, what we were seeing early in the quarter were a number of retailers saying, "Look, we can't take the demand. Don't send us the traffic we can't fulfill." Those supply chain issues were fully resolved faster than we had thought. And so that came back entirely. That rebounded in its entirety, and we're optimistic about it for the rest of the year.

Our next question comes from the line of Rishi Jaluria with D.A. Davidson.

Nice to see continued resiliency in the business. Wanted to start by digging a little bit more into the divesting of the ANZ voice assets. Scott, your kind of directional guidance implies it's about a $15 million run rate business, about $6 million in run rate EBITDA, assuming it does close end of August. I guess, a, why -- what's the impetus for divesting the asset? And then, b, if we think about this along with the context of another of your relatively recent divestments, which is Web24, that was also an Australia business, is there just something directionally in the ANZ market that's leading you to 2 divestments here? Or is it just kind of a coincidence that both of these divestments happen to be kind of in the same area geographically? And then I've got a follow-up.

So I think there's a few things, Rishi. First of all, our ANZ business on the voice side has been in a state of revenue decline for several years now. So we actually probably will hit this year a somewhat lower EBITDA number than you just referenced in U.S. dollars. So we think we got a decent price for it, about 6x EBITDA. But as I say, it's one that's been in decline and likely to continue to do so.

Then if you go back to the Analyst Day, and you remember Nate's unpacking of the Cloud business, I think when you look at our SMB enablement, what we do in Australia and New Zealand from a voice perspective really is not a fit on a going-forward basis. So the core of our voice services are the second-line service and the Virtual PBX. We have different services down under in Australia and New Zealand.

I think the third element is just the management allocation of time. The voice business is not that big a business, and yet it's very geographically dispersed between Australia and New Zealand, on the one hand, the United States and Canada on the other, and then Western Europe. So for all of those reasons, independent of the decisions that were made in '17 prior to Nate joining us, on the Web24 side, it was determined that, a, those were not core assets; and two, we could take that cash and better redeploy it.

Got it. That's really helpful. And then I wanted to go back to an earlier question on free cash flow conversion. So I recognize we look at this on a trailing 12-month basis, so about 66% trailing 12-month EBITDA conversion to free cash flow, which is a nice uptick from last quarter. How should we be thinking about the free cash flow conversion on a full year basis this year? And then without getting into very strict free cash flow guidance, should we expect it to be directionally up from last year? Are there going to be some level of COVID-related headwinds as it comes to payment and maybe some delays on there and changes in accounts receivable that would lead it to be down? Any sort of directional color on how to think about free cash flow conversion for the full year would be helpful.

So far, the answer to that question, Rishi, on the collections is no. I mean, obviously, we have a number of different accounts. And yes, on a case-by-case basis, there have been some that have been stressed, some we've accommodated with more favorable terms. But in general, we have not seen a stress in collections. Now we did see, and I referenced this a quarter ago, certain collections from the media side of the business that would have normally occurred in March that did slip into April. I think that was more just a function of the conversion to the work-from-home environment, both for us on the collection side as well as our counterparties. But that money came in, in April. So under our sort of tilted U-shaped recovery thesis, I don't expect that we would see any material change in our ability to collect. So as a result of that, I think that we are in a fairly tight range, on a trailing 12-month basis, of conversion, and it's not 66%. It's not an absolute definitive point estimate. You could look at it as 64% to 67%, 68% on a trailing 12-month basis.

The one thing I would note is, remember, when we say free cash flow, that's after CapEx. And as I've referenced earlier, as long as we can justify that spend, we intend to continue to make that spend very similar to in the operating P&L. As long as we can justify the returns from a marketing perspective, we will continue to spend the marketing dollars. It's not an area that is targeted for cutting. So I think we're in that range on a trailing 12-month basis for this year. And as I said, I don't think under our economic assumption, there's much friction coming from collection issues.

Our final question comes from the line of Jon Tanwanteng with CJS Securities.

My first one, just can you talk about the health care fax business? One of the most profitable segments of your business, you mentioned like the surgeries had an impact in the second quarter. But given the surge in hospitalizations, can we expect more of the same in the third quarter? How do you expect that business to run? What's built into your assumptions there for the time being?

Yes. Thank you for the question. I think it's very important. So the overall cloud fax business was essentially flat in the quarter when you adjust for ForEx and the jBlast disposition. Corporate fax is up 7%, notwithstanding the issues we had on page volumes. So actually, corporate fax at a very strong growth -- organic growth quarter, notwithstanding the fact that we were seeing page volumes in April that were down 22% versus the Jan-Feb baseline. So we did see a significant drop in page volumes. May proved to be better than April, about down 14% in page volumes. And now we're looking in July and the numbers look like about down 3%. So this is page volumes in July down 3% against kind of the pre-COVID baselines, which make us -- which are great for us and we think could mean some -- leads to stronger numbers for the second half.

And I would just follow on and to quantify it. That decline in the page usage related primarily or almost exclusively to health care had an impact on the fax business variable revenue of about $2 million in Q2. So I think it's actually a very strong quarter. That was offset by new ads and the fixed revenue that comes with that. So if these trends continue to improve in terms of the usage, then that gives a little bit of tailwind to the fax business relative to its performance in Q2.

Great. And then Vivek, just to maybe jump back to the M&A topic that you started with. I was just wondering how the landscape has changed in terms of pre-COVID in terms of the number of opportunities you're seeing, the quality of them? And are valuations have come up or down? And kind of what sectors have shuffled around compared to before the pandemic? What's more available and what isn't at this point?

I don't -- look, I think you're seeing a little more in the Digital Media space because I don't think many have weathered the COVID storm, the pandemic storm as well. So I think those that have advertising-based businesses that have not done well, obviously, are looking for strategic alternatives. I think, also, the businesses that have liquidity issues and whether or not the right answer for them is to seek more financing or maybe see a transaction. And then I think we're hearing from a lot of companies that have -- they have similar businesses as ours, feel like it needs to be scaled and put in combination with something of equal size and then access to future capital to continue to invest against the business through M&A and CapEx, we're having those conversations. I think people have taken a note of our balance sheet position, and it's encouraged them to say, "Look, you're better positioned to help drive our businesses in combination to a higher level. Let's talk about that." So really, all of those situations are presenting themselves.

Got it. And the size of the pipeline itself.

Sorry. Come again, Jon.

The size of the pipeline itself, has it shrunk? Or is it relatively the same?

No. I mean, I think it's as strong as it's been. I mean, I think you can -- if you measure it in deal value, it's probably as strong as it's ever been. In a number of deals, I'd have to look at that and check that, but it's strong.

We have reached the end of our question-and-answer session. I'd like to turn the conference back over to Mr. Turicchi for any closing remarks.

Thank you, Michelle, and we appreciate all of you joining us today for our Q2 call. It did run a little bit long, but I think it was important to take everybody's questions. We did have a release put out. In this environment, we have some virtual conferences and virtual non-deal roadshows actually beginning tomorrow. Then there'll be a bit of a break and then they reengage post Labor Day. So look for the release coming out a little later this month to announce our September conference slate. And then we will expect to have another quarterly call in November to discuss Q3 results. Thank you very much.

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