Ziff Davis Inc (ZD) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the J2 Global second-quarter earnings conference call.

It is my pleasure to introduce your host, Mr. Scott Turicchi, President of J2 Global.

Thank you, Mr. Turicchi.

You may begin.

Thank you very much.

Good afternoon, everyone and welcome to J2 Global's investor conference call for the second fiscal quarter of 2013.

As the operator just mentioned, I'm Scott Turicchi, the Company's President, and with me today is Hemi Zucker, our CEO, and Kathy Griggs, our CFO.

This continues to be a very exciting time for J2.

As you can see, a number of records were posted during the second fiscal quarter, which will be elaborated on, in greater detail, by both Kathy and Hemi.

This call will discuss our Q2 2013 results as well as provide an update on our two business segments, Cloud and Digital Media.

I would also note that our Board has increased the quarterly dividend to $0.2475 per share.

We will use the attached presentation for today's call, a copy of which is available at our website.

When you launch the webcast, there's a button on the viewer on the right hand side which will allow you to expand the size of the slides.

If you have not received a copy of the press release and/or the related financials, you may access it through our corporate website at investor.j2Global.com.

In addition, you will be able to access the webcast from this site as well.

After completing the presentation, we'll conduct a Q&A session.

At that time, the operator will instruct you regarding the procedures for asking a question.

However, you may e-mail questions to us at any time at investor@j2Global.com.

Before we begin our remarks, allow me to read the Safe Harbor language.

As you know, this call and the webcast does 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 the additional risk factors that we have included as part of the slideshow for the webcast.

We refer you to discussions in those documents regarding the Safe Harbor language as well as forward-looking statements.

At this time, I will turn the presentation over to Kathy to outline the financial results for the quarter.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

We are pleased to report that Q2 was our best quarter ever in terms of revenues, earnings, EBITDA, free cash flow, and our cancel rate.

These results provide us the best evidence to date that our significant efforts on investments to diversify our business are bearing significant fruit.

Moving on to specific numbers for the quarter, yet again, we achieved record quarterly revenues.

Our Q2 2013 revenues were $141.4 million, an increase of 24.5% over Q1 of 2013 and 58% over Q2 of 2012.

Q2 revenues include $12.6 million, or approximately [$0.17] per diluted share for past damages relating to a $27 million patent license agreement secured during the quarter.

The balance of the $27 million is recorded as revenue through June 2018, which is the remaining life of the patents.

Q2 revenues were at all-time quarterly record even without the contribution for this patent license, due to growth in our Cloud Services and Digital Media businesses, which I will now discuss.

Please refer to slide 5 in our presentation for our Business Cloud Services segment financial results.

For Q2 of 2013, that segment achieved the following -- revenue growth of 21.6% versus Q2 2012 to $108.8 million; exclusive of revenues associated with patent license, we grew 7.5%.

Non-GAAP gross margins of 83.7%; non-GAAP operating margin of 51.2%; non-GAAP operating income of $55.6 million and EBITDA margin of 56.7%, or $61.7 million.

Our cancel rate for the quarter was a record low of 2.21%, versus 2.3% for Q2 2012.

We added approximately 34,000 paid DIDs this quarter and at quarter end, our paid DID base had grown to 2.19 million.

ARPU was $13.16 per DID this quarter versus $12.98 last quarter.

Moving to slide 6, our Digital Media segment achieved the following -- non-GAAP revenue of $31.2 million; non-GAAP gross margin of 85%; non-GAAP operating margin of 4.1% and $1.3 million; and EBITDA margin of 15%, or $4.7 million.

Q2 Digital Media segment results also reflect our acquisition during the quarter of NetShelter and the amortization and integration costs associated with that transaction.

As a reminder, integration costs have been excluded for the non-GAAP numbers.

As a reminder, the latter part of the year is the most profitable for the Media segment due to seasonality, where Q4 revenues are expected to represent approximately 35% of the annual amount.

Given substantial fixed costs in the Digital Media segment, an even higher percentage of full-year EBITDA and operating earnings are attributable to Q4.

Before getting into the consolidated operating results for the Company as a whole, I want to point out to you that the seasonal strength in the Media segment's fourth quarter is expected to more than offset the seasonal slowness experienced by the Cloud Services segment during that period.

Please refer to slide [24] of the presentation for a recap of our Q2 2013 non-GAAP consolidated operating results, and to the supplemental schedules at the end of the presentation for a reconciliation of all non-GAAP financial measures to the nearest GAAP equivalent.

For Q2, amortization of intangibles pre-tax for the Cloud and Media segment were $4.6 million and $2.7 million, respectively.

This represents 8.6% of revenue for the Digital Media segment versus only 4.2% for revenues of the Business Cloud Services segment.

Total amortization of intangibles represents approximately $0.11 per share of EPS.

On a consolidated non-GAAP basis, net income for the quarter was $38.7 million.

Consolidated non-GAAP gross and operating margins were 84% and 40.7%, respectively.

For Q2 2013, we achieved non-GAAP EPS of $0.83 per diluted share compared to $0.70 in Q2 2012.

Q2 2013 results reflect $0.08 in interest expense not present in Q2 2012; $0.03 in non-cash amortization expense associated with Digital Media acquisitions; and $0.02 in integration expenses such as J2's acquisition of IGN Entertainment, of which these integration expenses are already excluded from the foregoing non-GAAP results.

Consolidated EBITDA for the quarter was an all-time record of $66.4 million, and up 39.8% from $47.5 million for Q2 2012.

Consolidated free cash flow for the quarter was an all-time record of $66.2 million, representing 47% of revenues.

Our cash and investment balances were approximately $353 million at June 30, 2013.

During the quarter, we disbursed $29.5 million in cash for acquisitions and dividends.

Today, we announced our ninth consecutive dividend and eighth consecutive quarterly dividend increase.

Specifically, our Board of Directors has approved a dividend payout of $0.2475 per share, payable on September 3 to shareholders of record as of August 19.

Since starting our dividend program in 2011, we have increased our quarterly payout by 24% cumulatively.

Inclusive of our September 3 dividend, we have now distributed $2 per share, or a total of $92 million to cash dividend payments to our shareholders.

Fluctuations in foreign currencies were not material to either our Q2 2013 or Q2 2012 results.

Our estimated effective non-GAAP tax rate for Q2 2013 was 25.8%, up from the 24.1% rate for Q2 2012, due to an increased proportion of domestic income tax at a higher rate.

We expect our normalized tax rate for 2013 to be in the 25% to 27% range for this increasing domestic income.

In conclusion, let me remind you that the supplemental schedules at the end of the presentation will provide you with more information on our metrics as well as the non-GAAP to GAAP reconciliation schedules for all financial measures included in our remarks.

Now I'll turn the call over to Hemi, who will provide you with an overview of our business units.

Thank you, Kathy, and good afternoon, everybody.

If you remember, during Q3 last year, we raised $250 million in bonds.

In Q4, with the money, we entered the Media business and expanded J2 to both Cloud and Media.

We are very pleased with our outcome and I will present it today.

Today, Scott was unusually generous with me and he gave me six new slides.

Let's start with slide number 9. With the extension of the J2 business, Fax has moved from being 80%-plus of our business last year to approximately 54% of our run rate now.

Fax is still growing and we love it.

But with all the pipeline acquisition that we have now, I will not be surprised to see that our fax business run rate revenue will drop under 50% by the end of the year and this is due to the growth of the other elements of our business.

Our Fax engine now are mostly the corporate, which is the largest contributor in volume; and and Japan, which is the fastest-grower in percentage increase.

I would like to share with you some stats on our eFax corporate.

Year to date, the revenue is 9% versus prior year quarter.

We have now 625 DIDs serving the corporate segment, 8% versus prior year, approximately one-third of our DIDs -- Fax DIDs.

We have added 500 new accounts in Q2, 35% versus last year.

We have now 875 new accounts -- accounts, not DIDs.

34 enterprise contracts have been added, and those DIDs are now generating ARPA -- ARPA is our average revenue per account, which is north of $500 per month per account and low churn.

The chart below demonstrates an index that since 2006, our CAGR on Fax was 14.3% and it has increased 2.5 fold four times.

Slide number 10.

Slide number 10 is what I call my thank-you page.

This is the way I can thank to all of our employees for their dedication of their hard work.

To achieve this cancel rate of 2.21% -- it is a huge achievement.

Everybody here in the Company helps and aids in achieving it.

Needless to say, it's extremely important; it is lowering our cost per customer; it is increasing our profit and EBITDA and everything else is great here.

This is down 33% to 2.21% since 2009, as demonstrated in this beautiful chart and thank you everybody.

And I will go to slide 11.

KeepItSafe.

KeepItSafe is our online backup that we have entered as we continues to extend our services.

The first I'm going to share are about growth -- we have 52% and 128%.

I'm very proud to see -- but obviously, very easy to have growth rates when the base is small.

But, why it is still growing, it is not -- it is growing organically, it is also growing with acquisition.

We have several deals that have due diligence and will close soon.

We have more deals of backup in the Cloud in LOIs.

We are approaching $10 million run rate and this is as is without any significant more acquisitions.

We have unique position in the backup.

We are business-focused; we have multiple locations, very important.

We have service available for these organizations.

They do care, unlike the consumer, about where and under what law is the data being kept -- the copy of the data is being kept.

We have service to offer in Europe, in New Zealand, in the US, and we're hoping to add soon in Canada, Australia, and the UK.

We have also a very unique offer with [KIS] corporate users.

We cover laptops, which is not as easy as desktop; mobile users can use us; and we do the full suite of services.

Last time I mentioned that the Miami Dolphins joined us as a customer.

We have now added Carolina Panthers.

If they're going to play against each other, I must go to the game.

I have to keep it safe and make sure that they're all safe with KeepItSafe.

All right, (laughter) Jeffrey is laughing; that's good.

(laughter)

Let's go to the Digital Media presentation, 12 and then immediately, page 13.

As I started my presentation, we grew from nothing to become a very significant player with the acquisition of Ziff Davis in less than three quarters.

We are leading in all the verticals.

And why is it so important when you lead in Digital Media?

When a large advertiser wants to join the campaign or product or anything, he or she or they cannot ignore the largest player in this space.

We are the number one in tech; we were number one and now number two -- close number two -- in games and in men's lifestyle.

All of these is measured according to the comScore of June 2013.

The comScore, for our new listeners, is an index similar to the one that you see -- the Nielsen one that you see on newspapers and TV -- comScore is measuring the visitors, the patrons, and everything else.

And we're very happy and very proud to be on top in all of those.

Page 14, I actually took it from the presentation of our Ziff Davis CEO.

When he presented it last month in New York together with Scott, Vivek was talking about the significant multi-layer growth opportunities.

Those are opportunities that we can grow without acquisition; these are the places that we are playing in and all of them have still terrific growth -- room for us.

For example, we can grow in the traffic by improving our SEOs.

Our SEO is free; we do not pay but we provide content that attracts customers.

Video advertising -- a lot of room to grow; mobile advertising -- monetizing it is easy; we just have to continue to work on it.

We have vertical extension if you want to go into other verticals, with finance, health, travel, auto, et cetera.

Ad targeting -- we're doing a very good job there, but of course, as you grow, you can do better.

And international expansion -- while we are players in the UK and in Australia and in Canada, there is still tremendous opportunity to grow in this space.

Next page, page 15.

Growing in this space is easy for us because we have played, but we have very defensible position.

There are many barriers to entry to come in and compete with us.

We have established brands; we have strong organic search position -- it's free, not paid.

We have strong social presence.

We have a unique ability to serve display advertising and we are leading number one or number two position in three verticals.

So any competitor that wants to show up to the game will have a hard time to compete with us.

The next slide is my slide 16, when I will talk about the Media highlights.

We acquired in May, NetShelter.

NetShelter's contribution to our quarterly revenue was only half of the capability, as Kathy mentioned; Ziff Davis, which acquisition is now the number one property in technology, with 29 million unique visitors.

NetShelter's community represents and includes over 150 consumer business and tech sites.

Some of the most known ones is MacRumors and Androidcentral.

Content is king.

Content is king.

We produce original content and our combined sites are generating 40,000 articles monthly.

This is very important and generates a lot of traffic, delivering 16 billion ad impressions yearly.

Now I will go with our Q2 achievements.

I want to remind you all that while these achievements are [approximating], Q4 is much stronger, as it's seasonally impacted.

We have exceeded in the quarter, 700 million page views across our own properties.

IGN's YouTube channel saw past three million subscribers.

And as far as the integration -- the IGN integration is going very well.

We still want and will integrate our campaign management and our ad serving.

That means that we put them all in a single engine and will drive even more efficiencies and we generate better results out of combining them together.

Before I pass the presentation to Scott -- he's going to talk about the outlook -- I wanted to say that our outlook was raised from its original position in less than 90 days ago, and that we do not include and did not include various M&A deals that are in the pipeline.

We have some meaningful M&A opportunities when we are in process with bankers, which makes it slower.

We bid on several of them; we have a handful of additional in due diligence or LOIs, smaller but important.

But being a conservative Company, J2, unless we state it, we did not include any of those M&A opportunities.

With that, I'll pass the conversation to Scott.

Thank you, Hemi.

So on slide 18, we are reaffirming the guidance that, as Hemi mentioned, was raised last quarter.

So I'll remind you that revenue range for the full fiscal year is between $510 million of revenues and $535 million of revenues and the associated non-GAAP earnings per share is between $2.78 and $2.98 with the assumption that our tax rate for the year will be between 25% and 27%.

Finally, just the mechanics of the dividend on slide 19.

As Kathy mentioned, The $0.2475 is the quarterly dividend rate for the current payout for shareholders of record as of August 19, with the payment date on September 3. It will represent approximately $11 million of cash this quarter, and as usual, at that level, it does not impact, in any way, our operational or M&A activities.

Following slide 20 are a number of supplemental schedules and information which we will not go through in any great detail, although as a response to a question, we'd be happy to guide you to those tables.

But I would like to point out for the benefit of our bondholders -- on slide 26, that we continue to see an improvement in the various ratios governing our bonds.

So specifically, our leverage ratio, which is our total debt of $250 million, divided by our latest 12-month EBITDA of approximately 2.10 is now a ratio down to 1.19.

And our coverage ratio of interest, which is our fixed charge ratio, is now in excess of 10 times.

With that, I would ask the operator to come back and give you the instructions to poll for questions.

Thank you.

(Operator instructions)

Shyam Patil, Wedbush Securities.

Congratulations on the quarter.

The first question is just around the 2Q, the patent settlement benefits.

I think you said it was $12.6 million for revenue and then $0.17 for EPS; is that right?

That's correct.

Okay and how are you thinking about further contribution from that for the balance of the year?

So what I do is I guide you to slide 7 in the presentation, where at the top, we have three screens of revenue -- Cloud Subscription, Licensing and Media.

So you'll notice that there's $15 million of revenue booked for licensing in Q2.

$12.6 million of that relates to the $27 million settlement that was booked in the quarter for past damages.

$2.4 million though relates to other streams of predominantly patent licensing, but there's also some other licensing revenue that flows through there.

Now, if you look at that number and then compare it over the last, say, five to six quarters, you'll see a range of anywhere from below $1 million up to, I think the high-water mark was $3.8 million a quarter.

So the $2.4 million settles almost in between that range.

There's no magic to that because, as you know, the reason there is a range from quarter to quarter is it is a function not only of the historic settlements and how they are paying out, but also the number of new settlements that occur within a given period, which are very hard to predict.

But I would use those as a goalpost, $1 million on the low end and say $3 million and change on the high end.

It just so happens this quarter, ex the $12.6 million, kind of falls in the middle.

Got it; that's very helpful.

It's very hard even for us to predict.

So I'll tell you what we do, we go to the lower end of that range because we just -- it's very hard to know exactly the timing, the magnitude and exactly how such a settlement will be booked.

So certainly to be conservative, I would move to the lower end of that range but that's to each discretions, each one's discretion.

I want to add, Shyam, that with this, it became more predictable because some of the revenue is just recognizing revenue that we already collected but the new one is still something that has to do with settlements and things that have not happened yet.

So there is an element there it is just, say, for recognition of past settlements.

All right; that's very helpful.

And then on the free cash flow, you're very strong this quarter.

With the $12.6 million, was that included in the $66 million and a portion of that after tax?

What is the free cash flow number after you back that out, if it was included?

What I would do there is the answer is yes.

But the $12.6 million would be tax effective at a 40% tax rate.

So you'd end up with about $8 million of net benefit.

Okay.

The other $27 (multiple speakers) -- The larger $27 million, was that -- will that flow in future quarters to the cash flow or is that --?

No, not in your free cash flow, no.

So it will show up in your cash when it's received but not in your free cash flow.

(multiple speakers) Go ahead.

And the entire amount -- just the $12.6 million after-tax is included in that $66 million?

Right, yes.

That's correct.

And as you know, this is the first half, but the second half, with the Media being strongest in Q4, we expect to go to the higher level of the cash flow.

Got it, okay.

And then just a question about large M&A.

I was wondering if you could just talk about how you're thinking about a large acquisition by segment and geographically and maybe if you can comment also on what you're seeing in terms of valuations right now?

So first of all, the deals that we have are mostly in Cloud, and both internationally and locally.

One of them is also at the potential to expand our Cloud services into new spaces that we did not play into now.

But I'm not comfortable to discuss more being conservative.

I can just tell you that the deals are in all the fields.

Actually, everything we have some smaller deals, and some bigger deals.

From a quantity standpoint, many of them are international, not from quality, from quantity.

Did I answer you?

Yes, that's helpful.

How about the valuation?

Are they more reasonable in asking than they are, if that's the case?

So that's a -- that's an excellent question.

So when we go and we acquire business in the fields that we are already in, the valuations are low because we know the business.

We are not in need to buy our way in, to buy or enter [existing space], just a supplement to what we have.

When we go after deals that are in new fields, we are -- it is important for us to be significant with management team to have the know-how.

Then similar to Ziff Davis, if you remember the Ziff Davis, when we bought Ziff Davis, the multiples were much higher than the deals that we did later when we rolled in other assets.

So valuations are -- tend to be a bit higher when we enter a space and lower when we do roll up into an existing space.

James Breen, William Blair.

Just a couple questions.

One, can you talk about organic revenue growth for both Ziff and for the Cloud business in the quarter?

And then secondly, you also reported, last quarter, you talked about pay-per-view growth on the Media side?

I was wondering if you can give us that metric again?

I missed your last question, Jim.

I couldn't -- you faded out.

Page view growth on the Media side?

Yes, the page view growth, you will find in -- on slide 22.

You'll see that now -- you'll see it consolidated and just like in the Cloud, we don't intend to break out by various property other than what you can find from comScore in terms of either visitors or page views.

So you will see a jump in our reported metrics from Q1 to Q2 in part because we have a full quarter of IGN versus two months in Q1 and we have about a month-and-a-half of NetShelter in Q2 versus none in Q1.

So it actually makes your first question very hard to answer.

I have not looked at trying to peel back the organic versus non-organic because you all know our philosophy and view on the nature of that question, which is something we do not focus on.

I would say that on the Cloud side of the 7.5% is probably a somewhat greater bias to the M&As than the organic but we'd have to do the calculation.

And on the beat side on the Cloud side, we grew 34,000 DIDs net this quarter.

Those mostly came organic.

Many of them came organic from the acquisition of MetroFax so what do I mean, organic?

We bought MetroFax but we are maintaining very strong a [retail] sales line there and we are selling into MetroFax so we are sending the MetroFax brand with new accounts.

So excluding the brand, we just have a leverage defect.

They have attractive offer also from a dollar standpoint we have now MetroFax a full quarter, But the 34,000 and the gross adds, and the net, it's as if we have are mostly coming through the line of retail sales and corporate sales on fax and on voice, organic.

And obviously, your churn continued to get better this quarter.

Any color there and what you think is working with pushing that down?

Yes.

First of all, as I -- there was a reason I think everybody, our finance team has done further improvements to our ability to collect declined credit cards.

Our corporate customers have further continued to sign customers on longer-term contracts.

And also when we do less, I'd say, glitzy advertising, the people that come to buy from us are serious.

They need -- they meant it, so all of those together plus the improvements, and I mean, everywhere.

As I say, charity is the result of anything, everything, but I can say that the services that we are providing, this solid base are really needed.

We have still not replaced even 99% -- 1% of the total fax machines in the world.

And people that come now are later adopters in they stay to be -- as they tend to be more stable, more mature about it and a later adopters are usually more conservative so that impact our churn rates.

(multiple speakers) I'd like to -- go ahead.

I just was going to say that, just lastly, I was wondering about growth geographically?

You saw any particular areas of strength?

Yes, so Japan is our, percentage-wise, a faster grower internationally and all the other countries are growing a bit faster than the US, but not significantly and by size, it is corporate and it is US.

And we have launched recently in Europe also corporate sales by having our salespeople on the ground plus we started to generate leads, some with Ziff Davis, some of our own leads for corporate potential sales.

It's a start but it is very encouraging.

Now I think that Kathy wants to --

Yes, ladies and gentlemen, let me correct the previous statement I made.

I indicated that the free cash flow did not include the balance of the $27 million; in fact, it does.

Net cash provided by operating entities includes any changes in your assets and liabilities, of which deferred revenue has a significant change in the period which accounts for the additional deferred revenue associated with those patent licenses.

So all $27 million of them.

So we collected the settlement, but what you're saying is the recognition of it, past versus future, than --

In two different buckets.

So to clarify on that, so it's $27 million, tax effective at 40%.

So if you do the math on that, maybe $15 million or so is in that number?

So if we're looking apples to apples on a year-over-year basis, we'd [vet] $15 million out of the $66 million?

If you tax the whole (multiple speakers), we'll need to tax effect the whole $66 million.

It's very tax effective.

No, no, you said $27 million minus 40% tax affected.

No, right now, there would be no tax (multiple speakers) on a cash-cash basis.

No, if it's cash-cash, in the P&L, there is a recognition of the tax provision for that portion that was recognized.

There is a provision in the P&L but the tax was not paid yet, I guess.

That's correct.

Okay.

So my question is (multiple speakers) the dollar for dollar from free cash flow?

I'm very sorry but because we entered the Media business, all of those things, it makes it harder to predict because we have higher accounts receivable in the Media business.

We have the patent that came off, but altogether, the answer is that we did collect the settlement.

Okay.

So that just begs the question of, if you take the $27 million out of there, free cash flow is basically similar to what it was last quarter or a little bit ahead of what it was last quarter and that's just mainly because the Media business is using some capital right now on a year-over-year basis?

Well, both, actually (multiple speakers).

You'll see that our sequentially CapEx is up from $2 million in Q1 to over $4 million in Q2.

Yes, I didn't mention this even though the guys at the business asked me to, we have now consolidated our -- or we are consolidating our colos to improve the deliverables.

So in the past, if we had a colo in New York and the New York carrier was down, the fax or the voice business was down.

Now, we are using sync technology that basically enables us, even if the connection to our colo is down, it enables us to move numbers and calls to other colocations, meaning keeping a higher reliability of the service.

This requires us to invest in larger but less colos, which once done, will improve our profitability further so -- more, but more -- most importantly, it will increase the reliability because we will be able to move through sync technology calls from place to place and all of the calls are big enough to basically take significant volumes from another site.

Greg Burns, Sidoti and Company.

On the Media business, the EBITDA margin was roughly 15% this quarter and last quarter, despite the uptick in revenues we would expect to see, I think, a little bit more leverage.

Is that just a function of NetShelter and that being a lower margin business?

That's generally correct.

Okay.

And then --

Also remember, too, it depends on whether you're looking at earnings or EBITDA.

The whole group has significant amort expenses of about $0.035 for the quarter.

So the Media contribution was about $0.02 for the quarter on a non-GAAP basis but that's inclusive of $0.035 of non-cash amort expense.

And those expenses will continue given the nature of how we got into the business, which were three M&A transactions.

Okay, so if you --

To your point, NetShelter is not as high margin a business in part because it's not owned and operated on the content side.

It is the management of third-party content so the plus side of that is, we don't have any of the direct costs of the creation of the content.

On the other hand, we don't fully control that content and then as advertising revenue is generated, there is a split down between us who are -- is facilitating that and the actual content providers.

Okay, so --

Probably a different model but it gives us additional inventory within the technology vertical.

Okay, and on the fax side of the business, obviously, the -- you're highlighting the growth in the corporate side.

In terms of the consumer end of the business, is there any color you can give us there; is that still growing?

Yes.

Flat and declining?

No, it is growing and as I said, our activity in Japan is consumer only; our activity in Europe is mostly consumer.

I mean -- sorry, we don't like to call it consumer.

They're not consumer, you know.

People don't use fax to talk; they're smaller businesses.

Consumer is not really -- fax is all about business, so it's smaller -- it's smaller businesses.

Okay, sorry.

When was the last time you faxed your girlfriend?

(laughter)

Thank you.

Mark Murphy, Piper Jaffray.

Thank you, Scott.

Any thoughts on Jeff Bezos' purchase of The Washington Post, just in terms of the transfer of print advertising to digital?

What do you suspect you're going to do with it?

(multiple speakers) Jeff beat me.

(laughter)

He has the resources.

He's a J2 catch.

(multiple speakers) The news business in terms of physical print media.

We actually are not competing on low EBITDA with him.

Thanks for the laugh, but in all seriousness, what do you think he's going to do with it?

And what do you think it signifies for the industry?

So I didn't think about this too much but I can tell you what I was reading and I see it in other places in smaller countries.

Multi-billionaires buy to impact the readers, either politicians and other.

Amazon is so big that if they can write the right news an impact the right decision-makers, maybe it makes sense for them.

But when somebody is so wealthy, they do things for love, not only for profit.

I don't think it has any impact, good or bad, positive or negative, on what we're doing in our Digital Media space, which, as you know, is really technology, games and men's lifestyle oriented.

So it has no overlap with things like The Washington Post or The New York Times or The Boston Globe.

And if you notice, when we look at vertical extensions within the media on the slide in the deck and it's also available on the Media Day on July 9, what I call broad news and politics is actually one area that is explicitly missing, from our view, of other areas that might be of interest in terms of expanding beyond the technology vertical.

Okay, great.

That makes a lot of sense.

And I wanted to ask as well, just how are you feeling about the data management platform that is powering the Media side of your business?

Did you -- do you feel that, that is something that's fully feature-complete or is it still evolving?

And also, just in terms of the targeting logic, do you think that, that's something that's advancing and enabling some better performing ads for you?

Yes, yes.

There's a reason I mentioned on page 14, the potential of growth in our business without additional acquisitions.

This is an excellent question.

When you buy assets like NetShare there (inaudible) they might come with lower EBITDA.

They add significantly to your ability to recognize visitors when they come to any of your assets.

So advertising basically is based on the ability to serve the visitor relevant advertising.

The more viewers -- the more assets that you have, the better you can manage your database against who is coming and what to present and when you are becoming more relevant, you can also ask and get more money per each exposure.

So definitely, this element of our business is critical and as I said in the integration of IGN, everything is on the way to be consolidated to one platform, one database.

And as we implement it, I'm definitely focused on better efficiency on our ability to collect more money, ability to be more relevant, ability to find for all -- every advertiser the kinds of viewers that they're looking for.

Okay, thank you.

Thank you, Hemi.

You're welcome.

Scott, I had a couple of financial questions.

Is there any way you can ballpark the purchase price and their revenue run rate for NetShelter Or I'm sorry, Scott, that may not be for you --

(multiple speakers) To ballpark the purchase price in that, as Kathy mentioned, we expanded $29.5 million of cash during the second fiscal quarter.

A little over $10 million of that went for the dividend and the only other expenditure in the quarter was the purchase of NetShelter, at least of any significance.

So you can infer from that, that we paid less than $20 million and from our other comments, which are inclusive of IGN but also meant independently, we've been buying assets subsequent to Ziff Davis at less than 1 times revenue.

Right.

That will give you a sense.

And so just to clarify, was the NetShelter was already factored into the full-year guidance that you had raised fairly recently?

We knew about it.

Yes, we did know about it.

With -- so we raised the guidance -- I can't remember which day in May.

We closed in NetShelter deal a few days later.

Yes, so it was known.

Okay, got it.

So and then, my final question is, you do have here in Q2 a pretty substantial revenue upside versus consensus in what was being modeled and you're reaffirming the full-year guidance rather than increasing it.

I do understand you had increased it materially fairly recently, but did you look at this and say that we now have an extra $10 million worth of cushion or upside potential relative to this year?

Or do you really look at this and say that the Street had underforecasted Q2 and overforecasted the back half of the year a bit in terms of revenue?

Well, I think that's -- it's, first of all, you have the comment, analysts by analysts, and then by the aggregates.

I'll tell you what our logic was.

When we raised the guidance a quarter ago, we had knowledge of NetShelter and at the time, we had a belief that the amount of past damages relating to the settlement was $10 million.

So we mathematically raised our then range of revenues by $10 million and by an equal amount on a tax effective basis at the bottom line.

Now, it turns out that $10 million is $12.6 million, so there's -- $2.6 million of additional revenue than what was anticipated the quarter ago from the settlement.

And that probably translates into $0.03 and bottom line earnings.

That is not material enough for us to cause us to change the range, because our philosophy on range is, in an ideal world, we would never raise the range once we put a range out at the beginning of the year.

However, there are circumstances, the settlement of the patent was one of them that caused us in evaluating, at the time, the revenues and EPS to say that we are highly likely to exceed the top end of the previous range of revenues and EPS.

Therefore, we should adjust the range accordingly.

So as we review the balance of the year, we believe we will, subject to what Hemi said about some M&A that is not factored in, we believe we will operate within that range of both revenues and EPS.

And hence, don't change the range and don't intend to change the range unless some clear evidence comes forward that would cause us to believe that not to be true.

And also, we are very conservative.

The Media business is new to us and it is supposed to be significantly larger in Q4.

We just don't know what we don't know.

So we kept at all within our range and the range is wide enough so and the Company is big enough to not necessitate an increase of the range, but as we get closer to more comfortable with the Media business and its unique spike in Q4, then we will do a better job later on.

Okay, thank you for taking my questions and congrats on the result.

Thank you.

Before we go to the next live question, we had a few questions come in by e-mail so the operator, if you could hold any live questions for just a minute.

One of them has to do with our ARPU which was on the DID-based business of fax and voice, up sequentially from Q1 to Q2.

The reason for that is that Q2, as you do know, is a seasonally strong quarter for the DID-based business; it's usually the seasonally strongest.

But there also is some mechanical elements in the way that the ARPU is calculated for the ease of having third-party be able to calculate it on their own, such as yourself.

So when we acquired MetroFax, which was approximately mid-March, if DIDs effectively in all of Q1 and are biasing down the ARPU because there's only 15 days of revenues but there's, on average, 45 days of the DIDs --

You mean Q2, not Q1.

In Q2, we have a full 90 days of benefit of revenue but we also have 90 days of the DIDs.

So that tends to happen when we acquired DID-based businesses depending on the timing of acquisition because our denominator for, let's say, purposes of all of you being able to calculate it as well, is average of the ending base of the prior quarter and the ending base of the current quarter.

So depending on when companies that are acquired that are DID-based, it may, on the margin, influence the ARPU in the current quarter that the company is acquired and the subsequent quarter.

So that is also occurring with respect to the ARPU.

I think at the end of the day, the whole magnitude of this is relatively small.

We're talking about a change in ARPU of about $0.20.

One last thing on these before we go to any other live questions.

There's a series of questions that have come in on the patent settlement.

So let me try to go through this again.

Hopefully, this will clarify the situation.

For the purposes of our financial statements, GAAP and non-GAAP, $12.6 million is recognized for past damages and there's an associated tax accrual which flows through to the $0.83 of non-GAAP earnings.

As a result of the deferral on the balance sheet of the remainder, which would be $14.4 million.

From a cash flow standpoint, those taxes have not yet been paid, so $27 million float in during the quarter are in both our cash coffers and in our free cash flow calculation.

Obviously, the cash portion on the taxes will go out and we make our estimated tax payments which will be a Q3 event.

And then we will recognize on a GAAP basis the remaining $14.4 million over approximately the next 19 quarters.

Okay, any other further live questions?

There are no further questions at this time.

Okay.

Well, we thank you all for joining us on the Q2 call.

And we will be, particularly in the month of September, at a couple of investor conferences in New York.

You will see a press release probably in early September to announce the specific dates and times of those engagements.

And then, depending on the nature of any other announcements, if we do not have a reason to have a call prior, we will then expect to speak to you in early November to report the Q3 results.

Thank you.

Thank you, everybody.

Thank you.

Bye-bye.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.