Ziff Davis Inc (ZD) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the j2 Global third-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 now begin.

Thank you very much.

Good afternoon and welcome to the j2 Global investor conference call for the third fiscal quarter of 2013.

As the operator just mentioned, I'm Scott Turicchi, President of j2 Global.

With me today is Hemi Zucker, our CEO, and Kathy Griggs, our CFO.

We will be discussing our Q3 financial results, provide you an update on our two business segments, Cloud and Media, reaffirm our financial guidance, as well as provide some additional financial information regarding our patent licensing program.

I would also alert you that our Board has increased the quarterly dividends from $0.2475 per share last quarter to $0.255 per share this quarter.

We will use a presentation for today's call.

A copy of this presentation is available at our website.

When you launched the webcast, there is a button on the viewer on the right-hand side, which will allow you to expand the slides.

If you have already been on the call for a while, please press refresh and the slides will appear.

Also a copy of our press release is accessible through our corporate website at j2global.com\press.

After completing the fall presentation, we will conduct a Q&A session.

The operator, at the time, will instruct you regarding the procedures for asking a question.

However, at any time you may e-mail questions to us at investor@j2global.com.

Before beginning the prepared remarks, I will read the Safe Harbor language.

As you know, this call and webcast include forward-looking statements.

Such statements involve risks and uncertainties that could cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements, and 8-K filings, as well as additional risk factors that we've included as part of the slide show for the webcast.

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

Before turning the presentation over to Kathy to review our financial results for the quarter, I would like to address the presentation format found on slide 5. As you know, we now report in two business segments, Cloud and Media.

With the introduction of the Media business, approximately one year ago, and the success of our IP licensing program, we believe that the breakout of our Business provided on slide 5 will be helpful in your analysis.

The Cloud segment consists of the Cloud Services Subscription business, which has the revenues from our fax, voice, e-mail, e-mail marketing, and online backup businesses, as well as some ancillary revenue such as advertising.

The IP licensing piece consists of the revenue generated from our patent licensing program.

For analytical purposes, changes in the revenue in our IP licensing piece of the business fall directly to the pretax income line and do influence reported EPS on a quarter-to-quarter basis.

Historic costs that are amortized into our G&A are borne by the Cloud Services piece of the business.

The Media segment consists of the assets acquired over the last year, specifically Ziff Davis, IGN and NetShelter.

I will now turn the presentation over to Kathy.

Thank you, Scott.

Good afternoon, ladies and gentlemen.

Our Q3 2013 GAAP revenues were $127.8 million, consisting of $93.4 million of Business Cloud Services revenues, $33.4 million in Digital Media revenues, and $1 million in IP licensing revenues.

Revenues from the Cloud subscriptions increased 4.2% to $93.3 million versus Q3 2012 at $89.6 million.

Media was $33.4 million versus zero last year.

IP licensing revenues were $1 million versus $3 million in last year's Q3.

As we have mentioned in the past, IP licensing revenues are highly volatile and difficult to predict as litigation is often involved.

EBITDA increased 5.6% from $50 million in Q3 2012 to $52.8 million in Q3 2013, despite a reduction of $2 million EBITDA from IP licensing over last year.

Please refer to slide 5 in our presentation for our Business Cloud Services segment financial results, as well as the Media and the IP.

For the Business Cloud Services for Q3 2013 that segment achieved the following -- total non-GAAP Cloud Services revenue growth versus Q3 2012 up 3.4% from $90.3 million to $93.4 million; non-GAAP gross margin of 81.5%; non-GAAP operating margin of 42.8%; non-GAAP operating income of $40 million; EBITDA margin of 49.7% and EBITDA of $46.4 million.

Our cancel rate improved over Q3 2012 and remains at near-record lows at 2.27%.

We added approximately 29,000 paid DIDs this quarter.

At quarter end, our paid DID base reached a record 2.22 million DIDs.

RPU was $12.87 per DID this quarter versus $13.27 in the same quarter last year.

The decrease is primarily due to a shift in product mix toward corporate and international users and $300,000 in unfavorable exchange rate fluctuations in Q3 2013.

Moving to our Digital Media segment, as you'll note on slide 5, that business achieved the following -- non-GAAP revenue of $32.6 million; non-GAAP gross margin of 86.5%; non-GAAP operating margin of 5.2% and non-GAAP operating income of $1.7 million; EBITDA margin of 17% and EBITDA of $5.4 million, which is the highest margin achieved thus far this year.

As a reminder, due to seasonality, we expect Q4 Digital Media revenues to represent approximately one-third the annual total for this segment.

Given the substantial fixed costs in the Digital Media segment, we expect Q4 to contribute an even greater percentage of full-year EBITDA and operating earnings.

As we mentioned last quarter, the seasonal strength of the Digital Media segment's fourth quarter is expected to more than offset the fourth-quarter seasonal slowness typically experienced in the Cloud Services segment.

Please refer to slide 22 of the presentation for a recap of our Q3 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 their nearest GAAP equivalent.

On a consolidated, non-GAAP basis net income for the quarter was $29.9 million.

Consolidated non-GAAP gross and operating margins were 83% and 33.6% respectively.

For Q3 2013, we achieved non-GAAP EPS of $0.64 per diluted share, compared to $0.65 in Q3 2012, primarily due to $0.03 for lower IP licensing revenues, $0.03 of additional interest expense recognized in Q3 2013 and from a full quarter of interest on j2 senior notes, versus approximately nine weeks of such interest in Q3 2012.

For Q3 2013, amortization of intangibles, pretax, for the Cloud and Media segments were $4.8 million and $2.8 million respectively.

This represents 8.3% of revenues for the Digital Media segment and 5% of revenues for the Business Cloud Services segment.

Total amortization of intangibles represents approximately $0.13 per share of EPS.

Consolidated free cash flow for the quarter was $22.3 million, representing 17.5% of revenues.

Free cash flow was lower this quarter when compared to Q3 2012, primarily due to timing differences within the Company's working capital accounts of $11.5 million and an increase in capital expenditures of $4.2 million.

Our cash and investment balances were approximately $374 million at September 30.

During the quarter we disbursed $21.5 million in cash for interest payments and dividends.

Today we announced our 10th consecutive quarterly dividend and 9th consecutive dividend increase.

Specifically, our Board of Directors have approved a dividend payout of $0.255 per share payable on December 4 to shareholders of record as of November 18, Since starting our dividend program in 2011, we have increased our quarterly payout by 28% cumulatively.

Inclusive of our December 4 dividend, we have now returned to our shareholders $2.25 per share, or total of $98 million through cash dividend payments.

Gains or losses from fluctuations in foreign currencies were not material to either our Q3 2013 or Q3 2012 results.

Our estimated effective non-GAAP tax rate for Q3 2013 was 20.5% down from the 28.1% for Q3 2012 due to additional foreign tax credits.

We expect our normalized tax rate for 2013 to remain under 25%.

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 a non-GAAP to GAAP reconciliation 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.

Good afternoon, everybody.

Today, I will discuss the progress in the achievements year to date of both our Cloud and Media business.

Let's turn to page 7. Where I will discuss our business progress on our Cloud subscriptions.

As you know, we closed the quarter with approximately 2.2 million DID.

This is 140,000 additional DIDs from a year ago.

In 2012 our revenues were $327 million and lead towards 88% of our total revenue coming out of the DID-based services.

These November run rate is $343 million.

It's an increase of 5% and it is representing approximately 66% of our revenues, so from 88% last year to 66% this year.

Most of the growth came from our eFax and eVoice.

Now, let me talk a little bit about our non-DID services.

In 2012 our revenues for non-DID services were $25.6 million, and now November run rate is $34.3 million.

It's an increase of 33%.

KeepItSafe, leading the pack, with 234% year-over-year growth, revenue is now $12 million running rate and I will discuss in details in the next slide.

Our FuseMail business grew 24% and is now representing over $10 million running rate and is now M&A and integration ready with a new GM that was just appointed two quarters ago and is doing very well.

On Campaigner business also grow, organically only, $12 million now.

They are practicing integration of small grains and doing very well.

Next slide, I will highlight in page 2 of our KeepItSafe revenue online pickup.

As I said, November run rate was $12 million.

It is up 40% over last quarter and 234% over Q3 of 2012.

A year ago, in Q3 2012, it was only $3.6 million, now $12 million.

We are adding revenue and we are adding features.

KeepItSafe Mobile is soft launch with select corporate customers.

Those customers represent thousands of devices that are looking for the bring your own device solution.

In February or March next year we are going to be move into production, and the current customers testing represent a revenue of $0.5 million a year.

Recently we have expanded our KeepItSafe colocations, or infrastructures, into Canada and now we have five locations.

We have in Europe, Ireland and Netherlands.

We have US.

We have Canada and New Zealand.

This is really key for the would be nationals that are really careful and really worried about the data being under the law of each country standing on its own.

Netherlands was our largest acquisition that we have done for KeepItSafe.

It is now fully integrated and are operating under the brand of KeepItSafe.

Next slide, our cancel rate, which is what they call our thank you slide.

Share meets an all-times low and it's attribute to our success story and hard work our employee in providing desirable services to our consumers.

Next, let me go to page 10 when I will talk about our Digital Media.

Our Digital Media was, in Q2, $31.2 million and this quarter $32.6 million, almost 4.5% growth quarter over quarter.

As mentioned before, Q4 is certainly the strongest quarter for our Digital Media advertisers that are coming and looking for advertisers like our Ziff Davis.

Page 11.

As you know, Klout score, which is a third party, is ranking the Internet world every month.

For September 2013, we are number one in all of our spaces; tech, games, and men's lifestyle.

This is very exciting, especially as you know that the year ago we were nobody in this space and now we are representing top dog tech, games and men's lifestyle.

Let me go to page 12.

Here we will discuss our Media highlights.

IGN set a new profit record in September passing 156 million visits and 476 million pages.

This is up from 141 million visits in past.

Our partnership, IGN Youtube channel has now 3.5 million subscribers, nearly 0.5 million better than last quarter.

As you know, PlayStation4 announced IGN to be available as a content service on PlayStation4.

This is basically a new feature, a channel of content for the game players, so we will be now a featured partner on the PlayStation4 that is launched soon.

IGN AskMen is now available also in India and expanding into new territory over the next year.

As you know, Q4 the course makers are going to launch the new product and start shipping.

Then, following in Q1 and Q2 next year, the games are going to be launched, both are representing very big opportunity for IGN.

Next slide, page 13.

Now let us cover some of the product development in our Media business.

AskMen launched a new website in August, resulting in doubling of the time spent on the site.

PCMagazine mobile website redesigned in August and is now sevenfold increase in page view.

We have also launched new IGN for the new iOS 7 and the mobile up launch in September and $1.2 million already updated to the latest version.

Let me finish with M&A update.

Integration is complete for both IGN and NetShelter.

Our resources are available for additional targets.

Before I pass the call to Scott, I wanted to say that we are positioned well for M&A and integration in all our lines of businesses.

Scott?

Thank you, Hemi.

Before going to the guidance on slide 16, to follow up on slide 5, we provided you with an EBITDA margin contribution over the last seven quarters for the three pieces of the Business that Kathy discussed; the Cloud Services, the intellectual property licensing, and the Media.

Two things I would like to draw your attention to.

For the Cloud Services business, as you know, we've had a combination of organic growth and tuck in M&A that has driven that business over the last several years.

That combination produces a very stable range of EBITDA margin, generally between 49% and 52%.

Where we fall within that range in any given quarter will often times be a function of the marketing programs that are being conducted, as well as whether any testing is going on and the amount of money that is being spent for either launching new products or marketing of products, as well as money spent in foreign jurisdictions.

The IP licensing, by contract, has almost 100% flow through to EBITDA, but as you can see on the chart, has quite a range of revenue from a low of $300,000 in Q1 of 2012 to almost $15 million last quarter in Q2 of 2013.

We believe this presentation format is helpful for you when you look at revenue growth in each segment of our Business to then be able to apply an appropriate margin for generating things like pretax income, net income and EPS.

I would also note that for the Media business, as you know and as Kathy mentioned, the fourth fiscal quarter is the most important quarter.

What we have seen in each of the first three fiscal quarters of 2013, sequential improvement not only in revenue, but most importantly in its EBITDA margin.

Finally, as I mentioned at the beginning of the call, we reaffirm the guidance that was raised earlier this year.

That revenue range, to remind you, was between $510 million and $535 million of revenue.

Non-GAAP EPS, which excludes integration costs as well as non-cash comp expense, of between $2.78 and $2.98 a share.

Finally, as Kathy mentioned, the Board declared the dividend of $0.255 per share, payable on December 4 for shareholders of record as of November 18.

That is approximately $12 million a quarter of cash for the payment of the dividend, based on our current share count.

Finally, the supplemental schedules, on 18 and following, consist of a combination of a metrics with the Cloud, Media and consolidated business, as well as various reconciliation schedules between the non-GAAP measures used and their nearest GAAP equivalent.

At this time I would like to have the operator comeback in to instruct you how to queue for questions.

Thank you.

(Operator instructions)

Daniel Ives, FBR Capital Markets.

In Q4, with the media business, can you walk us through some of the puts and takes in terms of guidance, how you're thinking about that going to Q4?

Dan, you've got a lot of echo there.

Can you repeat the question?

Yes, in terms of the media business for Q4, can you talk about some of the puts and takes in terms of guidance for Q4, just given it's such a seasonally strong quarter?

Yes.

As you know, we've said throughout the year, and obviously we have acquired assets throughout the year that changes the mix a little bit, but it is a seasonally Q4-heavy quarter.

In earlier presentation we've talked about revenue being anywhere from 32% to 37%, falling in the fourth fiscal quarter relative to the year as a whole.

I would say we can refine that down now to probably 32% to 34% of revenue for the full fiscal year that will fall into Q4.

Part of the reason why it is at that portion of the range is that not all of the acquired assets have the same dynamic as Ziff Davis itself.

The beauty, though, is that a lot of the costs in that business remain fixed, so you'll notice just even in the first three fiscal quarters, there's an improvement in margin based upon more revenue coming in on a sequential basis.

Of course, really in the last couple of quarters, also the integration savings and synergies by particularly right sizing the cost structure of IGN.

As you look to last year, you'll see that, for the roughly 45 days that we owned just Ziff Davis, it produced about 40% EBITDA margin on $10 million of revenue.

Obviously, that is the best 45 days of the year you could own a digital publishing business.

So, the quarter as a whole, we would have an expectation to have a lower EBITDA margin than just those 45 days.

Got it, that is insightful.

Okay.

Thanks, guys.

Shyam Patil, Wedbush Securities

I missed part of Kathy's comments at the beginning.

When you look at the third quarter for the top line and for EPS, was there anything -- I guess how did it come in relative to your internal expectations?

It did come in a little below the street, but just curious how it came in below your expectations internally?

I think the street, quite frankly, got ahead of us.

Part of the reason that we have slides 5 and slide 15 is to help break out the influence of the patent revenue, which is pretty much pure margin.

You may recall, on the last quarter's call, I indicated that, when you take out the one-time effect from the settlement in April, we have a historic stream over the last several quarters of IP licensing revenue of between $1 million and $3.8 million.

Now, it is very, very hard to predict that revenue.

We happened to come in at the lower end of that range, but nevertheless within the range.

There's not a lot we can do about it, but those dollars off of somebody's model flow through to almost 100% EBITDA or pretax.

So, as Kathy mentioned in both her discussion and as mentioned in the press release, relative to a year ago, it is a $0.03 differential.

And I think, relative to some analysts' expectation, is as much as a $0.05 differential.

So, even though the revenues are rather small in that piece of the business, there is a very, very high degree of sensitivity in terms of its margin impact and its flow through to the bottom line.

That is really what we're trying to emphasize by breaking out those two slides.

As I say, I think the cloud subscription services business and the media business, I mean basically in line.

On the cloud side, I wish that over the course of the first nine months, we'd been able to do a little bit more M&A, particularly in the tuck-in areas, some of the smaller deals like in EPA that we just announced.

Quite frankly, we have focused on larger opportunities this year.

And, there's been some pressure, because of the valuations that exist, particularly in the United States for deals because of the Dow being at an all-time high.

As we've stated before, it is very important not to break that discipline.

I would rather pass on a deal then do a deal just to have a deal done and maybe make a quarter look a little bit better.

As you know, we sit on very ample access to capital cash balances as well as the ability to borrow more if we need it.

We're spending, quite frankly, a lot of our M&A focus right now in terms of larger transactions outside the United States.

That was very helpful.

Maybe in terms of the guidance -- I know you don't guide specific quarters, but given that we're talking about the fourth quarter -- how should we think about cloud subscriptions, licensing, and digital media for the fourth quarter?

Or, if you don't want to talk about the fourth quarter, maybe for the annual guidance relative to the midpoint and how you guys are thinking about it internally?

A lot of where you probably will end up in the range is a function of Q4 results for IP licensing.

I don't think there's a lot of mystery of the cloud services business.

As I say, if you look back over the breakout on slide 15 of the last seven quarters, and you can go back even farther in history, there's a very consistent heartbeat there of approximately 5%-ish growth in top-line revenue and around 50% EBITDA margins.

So, I do not think that piece of the business should be a big mystery.

Certainly, if we did something larger M&A wise, at this point in the year, it's probably not going to be terribly impactful for 2013, although it would for 2014.

Media, I think we have talked about, with the question Dan just asked, and how to think about media directionally, as well as margin wise, so really then the difference comes to IP licensing.

Now, I could be conservative.

I'd reaffirm my range of revenue I gave you last quarter, but clearly being at the $1 million mark in Q3, you know, you might want to stay closer to that number than some higher number.

Great, that's all very helpful.

And then --

It's very hard to predict, because some of these deals could close in late December and could change the answer to your question, based upon the size of the deal as well as the nature of the settlement entered into.

To paraphrase, it sounds like nothing has really changed in terms of your expectations, just in volatility in the licensing fees?

That is correct.

That's why I said we wanted to break it out to show you that just in the last six, seven quarters you've got a range of $300,000 of revenue to $15 million.

Granted, the $15 million, even if you wanted to throw that out as being unique, you've still got a range of $300,000 to $3 million.

That is a pretty wide band, when on the margin that delta goes right to pretax income, and it is blended in to our overall annual tax rate on an expected basis.

So, literally, $2.5 million is about $0.04 to $0.5 in earnings.

Got it.

Then, in terms of large M&A, you talked about it on the call, Scott, just recently.

International seems to be where you're focused, seems to be more in the non-DID areas.

Can you talk about just what potential areas you might be thinking about on the cloud side?

On the media side, are we looking at potentially new verticals or is there stuff on the tech side you could do as well?

Okay.

On the cloud side, I'd say first and foremost, we look for like kind of assets that we have already.

So, any of them in the five categories, obviously there's not a lot in the fax arena that is very large, even in foreign jurisdictions, although we do look for those deals as well -- voice, online backup, absolutely.

As Hemi mentioned, the Campaigner business is starting to get ready for prime time in terms of the ability to buy either like assets or related assets and integrate them in.

It's not quite there yet, we're doing some internal migration testing.

Hopefully, that will conclude by the end of this year and that will be another segment open for M&A.

EPA, which is an e-mail-based asset in Europe, fits into our overall e-mail profile.

First and foremost, we're going to look for assets that are already within the spectrum of what we do.

Having said that, though, we do look regularly, but I would say to the right or to the left or up and down, in terms of assets and services that are related to what we do that target small businesses.

I won't, at this point, be terribly specific other than to refer you back to -- it's some number of quarters ago -- when we had in one of our presentations a series of balls or baubles that had each of the j2 services, and behind it there were a lot of different space names -- things like digital signatures, document management services, hosting.

All these different names were, in our judgment, and I'd say with some evolution over eight or nine quarters, we would reaffirm that those categories, many of them as they are, make a lot of sense to varying degrees for the kinds of customers that we have.

What we do in the ordinary course is we do internal studies of those spaces, and sometimes it is also aided by actually being able to be involved in a transaction even if we don't win it, to look at what is going on in that space and how different companies are structured.

You can rest assured that we have been doing that.

So, there are spaces outside of the five existing cloud services that we have been investigating, all of which would be on that slide from about seven, eight quarters ago.

I'll let you figure that out which ones are the more likely.

You may recall those that were bigger type and closer to the core were, in our judgment at that time, a better fit than stuff that was on the periphery.

In terms of the media business, the goal over the last two quarters was to really integrate, particularly IGN.

NetShelter was a rather rapid and easy integration in that we extracted it out from a company, so we were able to take, basically, contracts and people.

But, IGN, as you recall, was a much larger organization.

It was actually larger in people count than Ziff Davis at the time of acquisition.

I had a lot of businesses that we felt were not core to its mission of games and men's lifestyle.

So, the first six months was really divesting, shutting down, giving away those assets to hone the business down back to its really historic core mission, which is to be the leader in games at IGN.com and the leader in men's lifestyle in AskMen.

I think that is been accomplished.

As Hemi mentioned, there's a new AskMen website.

IGN has regained its leadership as number one in terms comScore rankings for visitors in the month of September.

There's a very good, forward-looking several months for that business with the release of things like PlayStation4 and then all the attendant games that come out on a lag basis for those devices.

In terms of your direct question on M&A, we think there are still properties that make sense within the tech and games, specifically, verticals, and to some extent men's lifestyle, although it's a narrower category that, if the price is right and the circumstances are right, could be rolled into the existing Ziff Davis platform.

But, we also will start to look at other verticals.

Great.

Thank you.

I have one last question.

Yes.

One last question that I've been getting from some investors just on the free cash flow.

If you compare the trailing nine months of this year versus last year and you backed up the patent settlement, it looks like it is down a little bit.

I wondered if you could just talk about that a little bit?

I think the biggest difference is we have the bond expense in terms of our cash for the first nine months of this year versus basically nil for the first nine months of last year.

As you can see, the media business is a lower EBITDA margin business than the cloud services business, and it also has much longer cycles in terms of the collection of its cash.

So, we earn the money, but there is a 90-day lag to actually collecting it.

I think you've got to look at owning that business on a full 12-month basis, and probably then lag the quarter for the cash collections to come in, and then compare that on the prior 12 months in terms of being truly heads-up.

This will start to correct itself beginning really in Q1 of next year, because, on a comparison basis, there'll be the same amount of bonds outstanding.

There'll be the same interest expense, both accrued and paid, and we will have a media business where you have a strong Q4 with collections coming in Q1.

I think you'll start to see that normalize itself or reverse itself, but you are correct about the reality of the nine months for those two reasons.

Great.

Thank you.

Greg Burns, Sidoti & Company.

Just a question in terms of improving the monetization of the IGN assets.

Could you just give us an update on where that stands?

It looks like the traffic continues to improve nicely, but in terms of improving the monetization, how is that progressing?

It's Hemi.

If you listen to what I'm saying there are a lot properties or a lot of changes that we have done to increase the visitors and also to keep them longer on the website.

Everything is geared up towards that.

We're also doing a good job there in catering to the consoles that are supposed to come.

As I said before, the consoles that originally -- when we bought IGN, we were thinking that the console, as the manufacturer said, will come earlier this year.

They are coming in Q4.

Q4 usually will be very few games, and then Q1 and Q2, all the publishers will come with the games.

We'll have, basically, a good spread between the quarters resulting of the manufacturers coming with the new and very competitive pricing on the consoles.

I think that's actually ends up being good news for us because the ability to improve the monetization of the visitors and page views takes time in terms of gathering and collecting the data.

That process, we never budgeted any for 2013.

We maintained the lack of expectation, if you will, for this year.

But, as we roll into 2014 and that data becomes more robust, it will also then begin to coincide with the release of the game cycle, which will actually be beneficial somewhere probably between the middle of Q1, the middle of Q2.

That had nothing to do with us, it more has to do with their own release cycle, but we may actually be able to have a very nice confluence of events.

Thanks.

And, in terms of how ad dollars are allocated within a space, obviously, having the number one position is beneficial in driving increased marketing dollars your way.

When you look at like a one versus two, say, Ziff versus CNET, in the technology space, how do you increase the allocation of ad dollars towards Ziff as opposed to CNET?

Or, is it just a function of you being able to drive higher TPMs than CNET to increase revenue?

I think there's two things.

Let's not get overly sensitive to the ordinal rankings on a month-by-month basis.

Because if you look -- if you chart it month by month, there will be months we may fall to number two.

I think what is important, if you go to slide 11, is the, really, orders of magnitude and differentiation that exists -- take the tech vertical -- between Ziff Davis, CNET, and IDG, and everybody else.

The advertisers, when you're in that top tier, certainly leadership helps, but if you are in that top tier and there is a relative closeness amongst the top players, then you start off with the expectation you are likely to get some marketing dollars from the various either device manufacturers or game providers.

Because they're not going to concentrate all their money with a single vendor.

Now, on the margin, the answer to your question is, yes.

If you can demonstrate better success in the return of those marketing dollars based on better targeting, we have a predisposed base of customers for tablets, PlayStation4s, this type of game, then the ad sales team can sell not only the ordinal ranking within the category as displayed by comScore but really the value proposition of spending those marginal marketing dollars with us versus somebody else.

Think of the comScore rankings as, without any effort, what gets people's attention.

If you have marketing dollars to spend, they say -- Hmm, these guys are in the top tier.

I've probably got to check them out and talk to them.

That invites the conversation then for our ad salespeople to say -- Let me show you what's been going on if you advertise on Ziff Davis or on IGN.

Let us show you how we are going to give you more bang for your buck for those marketing dollars you're willing to allocate to us.

Also, Greg, I think your question is about, do you get premium dollars for premium spot?

And, in advertising, yes.

When you are the leader in the space, you also get more money per the same agreement and exposure than the number two.

It's obvious.

Okay.

Thank you very much

James Breen, William Blair.

Just a couple of questions, one, on the media side.

As I look at the visits versus page views versus the revenue growth, it seems sequential growth in visits was a little over 7%.

Page views was at 5.5% and revenue growth was 4.5%.

Can you talk about maybe the relationship between those?

Then, any color you can give us into just about a little over 2,000 page views this quarter, how that splits maybe generally speaking between IGN and Ziff, the major properties?

At the latter question, the answer is, no.

We're not going to split it out.

The answer to your former question is, you have got to remember that on NetShelter, we are only getting approximately half of the revenue relative to the visits and the page views.

Whereas in Ziff Davis and in IGN -- owned and operated properties -- a visit comes in, a page view is consumed, advertising dollars are generated, we keep 100 cents of it.

So, we report, for the NetShelter piece of the business, only the net revenue received, which is roughly $0.50 on the dollar.

So, that will put downward pressure on the revenue growth relative to visits and page views.

Okay.

And then --?

If you recall, before we bought NetShelter, NetShelter -- now granted it was a monthly number, so there's probably some volatility in this, but it had a comScore ranking of two or three behind CNET.

It brought a lot of visits, and by implication page views, to the table, but not the same order of magnitude of dollars.

Okay.

That makes sense.

Then, you touched on this a little bit, when you look at the seasonality in the media business in the fourth quarter, implying that -- I think, did you say 39% of the revenue in media comes in the fourth quarter?

Is that the number you threw out there?

No, 32% to 34%.

No, that's fine.

So, if you look at that number, though, I think one of the things you talked about was that the cost side of the equation doesn't jump as much.

It's basically implying that EBITDA margins will jump up for the media business in the fourth quarter.

Correct.

We will get some blended number for the year that I think will probably be in the low 20% range, probably something like that.

As we think about growth, it seems like you're growing that business high teens, low 20%s on a year-over-year basis.

On the expense side, over the course of the next 12 months, will the expenses grow at a rate slower than that?

So, we'll continue to see leverage there on the EBITDA line?

The answer is, yes.

A, obviously, we don't have 2014 guidance out.

B, we're still in budgeting.

So, you're drawing certain inferences from the data, which I won't challenge you on at this point, but we have not refined it to the level of saying revenue growth from media, without any further M&A, is between blank and blank.

Using your logic and your assumptions, the answer is, yes, the expenses should grow more slowly.

Now, having said that, remember, just like in the cloud segment, you have a range of EBITDA contribution of media revenues that go from probably 10% on the low end to almost 100% on the high end.

So, the mix of those incremental revenue dollars are influential in terms of what will be the ultimate EBITDA margin for 2014 relative to 2013.

Mix does matter.

Once again, $1 of NetShelter revenue is not as valuable as a $1 of Ziff Davis or IGN revenue.

$1 of licensing revenue is more valuable than $1 of display revenue.

You have to take those mixes into account.

Quite frankly, what we will, in the budgeting process, drill down on is owning these assets approximately a year, at least the major ones, is where do we think the incremental amount of revenue falls into each bucket?

So that we can put an appropriate margin on it and then come up with an appropriate range of margin expectation, and then ultimately feed that to you as guidance.

That will all be done in anticipation of and then released concurrent with the Q4 call, which my guess will be roughly in mid-February, as it traditionally is.

Okay, that makes sense.

And then, just lastly on the free cash flow, and you touched upon it in the last question a little bit.

Obviously, some of the step down this period, you mentioned that there was some timing around the receivables there.

I think, just to clarify, did you also mention this is the first period when you paid the interest expense on the debt, so that is in that number?

No, for the nine months.

The other question was the nine-month free cash flow, which is what's reported, say, in the Q, or in the financials today, you can segment it out by quarter.

But if you look at the nine months of 2013, we've actually made two interest payments from a cash-cash basis, one in February and one in August.

Those are our payment dates.

On a gross basis, that's $20 million of cash.

Of course, in the year-ago nine-month period, we made no such payments.

We had accrued, within that nine-month period, two months of interest, August and September, but made no cash payments.

So, you have a timing issue that, as I say, will begin to self correct once we get to Q1 of 2014.

Because when you compare it to Q1 of 2013, for the most part, if we don't buy anymore media assets or any more cloud assets, it's the same book of assets in the same quarters, same bonds outstanding, same interest rate.

There may be differential in taxes, and there could still be differentials in working capital, but those should start to narrow down because the media is the one that tends to have longer data receivables versus the cloud business.

Okay.

The cloud business really has not changed in its dynamics.

Obviously, a good portion is billed by credit card, collected in three days.

The corporate piece, which is growing, is billed in arrears.

Those things blend down and they have not changed very much in the days outstanding.

Was there any dilution to the cash flow, just from the integration of the cloud assets -- I mean, sorry, the media assets in the beginning of this year that goes away in the beginning of next year?

Yes, you will notice in the press release that we have about $8 million of pretax exit cost expenses incurred this year, I'd say primarily related to IGN.

Now, we will get a tax benefit on those, so there's probably a net $5 million after cash tax -- after-tax expense out the door in this year related to those activities.

Obviously, we would not see those repeat themselves next year.

Having said that, as you know, we don't stand still in terms of our acquisition of assets.

I would be more than very disappointed if we came back in a year and we had no integration costs on future deals.

Either there was nothing to integrate or we did not do any deals.

And, I don't think that is realistic.

Probably the better question is -- and I don't know that we have got enough historical data given that one segment is new -- is there an ongoing annual range of exit costs we could kind of budget for?

It is very hard at this point because the media is still relatively new with only three transactions.

Cloud, I think, is probably the easier to answer that question on.

Okay.

Great.

Thank you.

Mark Murphy, Piper Jaffray.

This is Benjamin on behalf of Mark.

Could you talk about, since we were talking about NetShelter a minute ago, could you talk about the traction that you have seen in NetShelter?

How much was the contribution in the quarter?

Yes, we're actually seeing very good traction with NetShelter.

As you may recall, when we bought it, roughly in mid-May of this year, there was a small piece of the Ziff Davis business called BuyerBase.

We have integrated the two together.

They were very similar businesses.

We have seen, in Q3 -- the first full fiscal quarter we have owned it -- a strong receptivity.

There was a little bit of cannibalization between BuyerBase and NetShelter, but once those two were put together, a strong receptivity for the NetShelter product going forward.

In terms of breaking it out, as I answered in the earlier question, no.

It is an amalgamated whole.

We're not breaking out the pieces, just like we don't break out, usually other than revenue, the pieces of the cloud business.

Okay, fair enough.

What about, talking longer term -- I don't know if you would give this, but talking longer term in terms of margin -- EBITDA margin for the media business, where do you see it going?

Is there any color that you can give there?

Well, look, I have a dream for it, but a lot of it is premised on the answer I gave to the earlier question, which is if the business can double in size.

I believe that it is not on a fully scaled basis right now.

Meaning that there are G&A costs, there are administrative costs.

There are a lot of costs that are being spread over a business that could probably double in size with only some modest increase in those costs.

Yes, you have additional content costs, creation costs, and, yes, you have additional ad sales costs, but there's a lot of the G&A of the business that can be levered on a revenue basis.

We had the media day on July 9. I talked about a business that would be approaching $250 million in revenue at some point in the future through a combination of organic growth as well as additional M&A.

My dream is that business is somewhere in the 30%s, and maybe if you get lucky, approaching the 40% EBITDA margin.

Now, it's a very wide range because, like I'd mentioned on the previous question, where that incremental $120 million some of revenue come from really matters.

The mix of that incremental revenue will be influential in the ultimate EBITDA margin that is attainable.

I do not want to create a false expectation or one that, you know, is unrealistic.

But I think clearly from somewhere in the low to mid-20%s, which is what you would be observing on a trailing basis, we have got lift that should be getting us into the 30%s.

Benjamin, as soon as we come with our guidance for next year, it will be easier for us to tell you where it is actually on our planning.

I don't expect, by the way, the business, necessarily to double by next year.

Certainly, if you take the earlier comment of mid to high teens organic growth off of the existing base, you would not get anywhere near a $250 million revenue business.

As I also said, I don't think we will stand still.

I think we will have other assets to acquire.

I'm putting no immediate time frame on when that is possible or likely, other than to say it certainly would not be something we would expect to have happen next year.

Got it.

All right.

Thanks a lot.

Greg Burns, Sidoti & Company.

I just have a question about year-on-year EBITDA declines in the cloud business on slide 15.

Could you please reconcile that again?

The M&A you've done in the space over the course of the last year or so, and what that implies about the growth rates of the rest of the business.

I do not think, actually, if you're referring to slide 15, as you point out, the EBITDA margins are anywhere from 49% to 53%.

The high watermark in those last seven quarters being Q2 of 2012.

My recollection is that you have a couple of things going on there.

One is you have a higher amount of other, also very high margin revenue in Q1 and Q2 such as advertising that is much less, almost nil, in 2013.

So, that is giving some aid to the margin in 2012 that we are not seeing in 2013.

If you recall, we still maintained a free base of customers, but most of that inventory we reallocated to ourselves for things like cross sell.

So we do not generate, these days, a lot of external advertising revenue.

The other piece is, you may recall earlier this year we talked about programs designed predominantly targeting display advertising for our cloud business, initially focused on fax and voice, and how that program could be upwards of $5 million in expense this year.

I think we mentioned on last quarter's call, and we reaffirm it, we won't spend all of that money, but that money is creating -- over the last couple, I'd say, all three quarters of this year -- some upward bias in sales and marketing as a percentage of revs for cloud versus the same nine months of last year.

Also, a little bit more spend in our international jurisdictions.

And to add, the lower the churn rate, the more excited are we to spend money on acquiring customers via advertisements.

Okay.

Thank you.

I'd also make one other comment.

Our Australia and New Zealand assets, which are voice oriented, do not operate -- never have, they don't, they were two acquisitions -- they do not operate at the same level of EBITDA margin as the other cloud services.

They are somewhat lower

It was reflected in our acquisition price that we paid for those assets.

Yes.

Also, although the online backup, which Hemi mentioned, is growing very fast and actually has very good EBITDA margins for a $12-million run-rate business, it too is not yet at 50% EBITDA margins.

We have some of these smaller businesses, some in foreign jurisdictions, some scattered throughout the world that, because of either the nature of the assets or because of the size of them, are not fully scaled and have some downward pressure on the aggregate of EBITDA margin.

As you can see, not a whole lot because you are talking about $90 million some a quarter in revenue, but there is some downward bias from them on the margin.

Okay, thank you.

Thank you.

At this time we have no further questions.

I would like to turn the call back over to Mr. Turicchi for closing comments.

We thank you all for joining us today.

We will put out releases over the next several months, since it will be a while since we talk again, for the fourth-quarter results.

In terms of any conferences that we've participating at and I know that we have some coming up before the end of this year as well as in early 2014.

Look for the releases for those, if you happen to be in the various locations to attend.

Obviously, we will also be conducting non-deal road shows between now and our Q4 earnings call.

We expect that, that call will be sometime in mid-February.

On that call, obviously, discuss the fourth-quarter results as well as release 2014 guidance.

Thank you.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.