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Operator
Good afternoon, ladies and gentlemen, and welcome to the 2013 fourth quarter and year-end conference call.
It is now my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global.
Thank you, Mr. Turicchi, you may now begin.
- President
Thank you very much.
Good afternoon, everyone, and welcome to j2 Global's investor conference call for the fourth fiscal quarter of 2013.
As the operator just mentioned, I'm Scott Turicchi, the President of j2 Global, and with me today is Hemi Zucker, our CEO; and Kathy Griggs, our CFO.
This continues to be a very exciting time for j2.
During the call, we will discuss our Q4 2013 and full-year financial results, provide you an update on our business segments, and introduce adjusted earnings and EPS, as well as provide 2014 financial guidance.
I will remind you that our Board has also increased the quarterly dividend to a payout ratio of $0.2625 per share.
We will use the presentation as a roadmap for today's call, a copy of which is available at our website.
When you launch the webcast, there is a button on the viewer on the right-hand side which will you allow you to expand the size of the slides.
If you have not yet received a copy of the press release, you may access it through our corporate website at j2Global.com/press.
In addition, you will be able to access the webcast from this site.
After we complete the formal presentation, we will conduct a Q&A session.
The operator will instruct you at that time regarding the procedures for asking a question.
However, at any time, you may e-mail us questions at investor@j2Global.com.
Before beginning our prepared remarks, I will read the Safe Harbor language.
As you know, this call and the webcast includes 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 the additional risk factors that we've included as part of the slideshow for the webcast.
We refer you to discussions in those documents regarding Safe Harbor language, as well as forward-looking statements.
Before turning the presentation over to Kathy, let me address adjusted diluted EPS.
Beginning now, in the fourth fiscal quarter of 2013, in order to provide better insight and clarity in our operations, we will be presenting adjusted diluted earnings and adjusted diluted earnings per share.
Adjusted diluted EPS is non-GAAP financial measure calculated by excluding from net income the impact of share-based compensation, amortization expense, and certain significant items that are non-operational or non-recurring in nature; in each case, net of tax.
We believe that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.
More specifically, if you would turn to slide 4, you will see adjusted EPS compared to non-GAAP EPS.
The main difference between the two is the amortization of intangibles related to our mergers and acquisition program.
As you can see, in fiscal year 2009, about 6% of our non-GAAP EPS included amortization related to historic M&A deals.
It was about $0.11 per share that year.
In the most recent fiscal year just concluded, that grew to 15% of our non-GAAP EPS or $0.42 a share.
We believe this percentage is likely to increase as we accelerate both the pace of our M&A program and the average size of the transactions.
I will now turn the presentation over to Kathy to discuss the financial results in further detail.
- CFO
Thank you, Scott.
Good afternoon, ladies and gentlemen.
Our Q4 2013 revenues were $138 million, consisting of $96.2 million in Business Cloud Services revenues and $41.8 million in Digital Media revenues.
Business Cloud revenues $1.6 million in IP Licensing revenues.
Business Cloud revenues, excluding IP Licensing revenues, increased 5% to $94.6 million versus Q4 2012 at $90.3 million.
Media revenues increased 332% to $41.8 million versus $9.7 million last year, and IP Licensing revenues decreased by $0.5 million to $1.6 million versus $2.1 million in last year's Q4.
As we have mentioned in the past, IP Licensing revenues are highly volatile and difficult to predict, as litigation is often involved.
EBITDA increased 27% from $51.7 million in Q4 2012 to $65.6 million in Q4 2013.
Please refer to slide 6 in our presentation for our Business Cloud Services segment financial results.
For Q4 2013, that segment achieved the following non-GAAP results.
Cloud Services revenue growth versus Q4 2012 of 4.3%, from $92.3 million to $96.2 million.
Gross margin of 81.6%, operating margin of 44.5%, operating income of $42.8 million, and EBITDA margin 51.4%, and EBITDA of $49.5 million.
On slide 6, we break out our IP-specific revenues so that you could assess the impact of those licensing revenues on the larger Business Cloud Services segment.
Our IP revenue for the quarter was $1.6 million.
Our cancel rate continued to improve to a new record low of 2.17% for Q4 2013; better than the same quarter last year.
We added approximately 17,000 paid DIDs this quarter, and at quarter-end our paid DID base reached a record 2.3 million.
ARPU is $12.75 per DID this quarter versus $12.87 last quarter.
The decrease is primarily due to the growth in corporate and international users.
Moving to our Digital Media segment, the business achieved the following non-GAAP results: revenue of $41.8 million, an increase of 28% from Q3; gross margin of 89.7%; operating margin of 27.4% and operating income of $11.6 million;, EBITDA margin of 38.5%, and EBITDA of $16.1 million, the highest margin achieved this year.
As I've mentioned in the past, due to seasonality, Q4 Digital Media revenues generally represent approximately one-third of the annual total for this segment.
Given the late release of the new gaming consoles and the subsequent release of the games themselves, we expect a bit stronger than seasonally expected first quarter in 2014 for our IGN subsidiary.
2013 was a year to prove out j2's diversification strategy, both within the Cloud segment as well as into new segments with our Digital Media assets.
In the fourth quarter of 2013, we acquired the remaining shares of Ziff Davis, which j2 did not already own, from certain ZD owner employees.
In connection with this transaction, we recognized a one-time non-cash loss for book purposes of $14.4 million.
This remaining of Ziff Davis which j2 did not already own was previously carried on our balance sheet as debt under the header of mandatorily redeemable financial instruments.
This redemption to achieve 100% ownership is accounted for as an extinguishment of debt for book purposes, and the loss represents a difference between the carrying amount and the fair value at the time of the extinguishment.
With the exceptional growth we are seeing in Digital Media business, we're excited to now finally own 100% of the business.
Please refer to the 8-K j2 filed in early January in reference to this transaction.
Please refer to slide 25 of the presentation for a recap of our Q4 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, as well as our adjusted diluted EPS.
On a consolidated non-GAAP basis, net income for the quarter was $37.5 million; consolidated non-GAAP growth and operating margins 84.1% and 39.3%, respectively.
For Q4 2013, we achieved non-GAAP EPS of $0.80 per diluted share compared to $0.70 in Q4 2012, primarily due to strong seasonal performance in our Digital Media segments.
As we always have, we have acknowledged the amortization of intangibles in terms of EPS on an ongoing basis in the last four quarters.
For Q4 2013, amortization of intangibles on a pretax basis for the Cloud and Media segments are $5 million and $3.7 million, respectively; this represents 5.2% of revenues for the Business Cloud Services segment and 8.7% of revenues for the Digital Media segment.
Total amortization of intangibles represents approximately $0.11 per share of EPS.
As Scott mentioned previously, our adjusted EPS for the current period is reflected on slide 4. Our adjusted diluted EPS for the current period is $0.91 per diluted share, after adjusting for amortization of intangibles.
Please refer to slide 27 at the end of the presentation for a five-year reconciliation of all adjusted financial measures to their nearest GAAP equivalent.
Going forward, our non-GAAP EPS will be shown as adjusted diluted EPS and adjusted earnings.
Consolidated free cash flow for the quarter was $50.4 million, representing 37% of revenues.
Our cash and investment balances were approximately $346 million at December 31, 2013, up from $344 million at the end of 2012, despite returning $65 million to our shareholders and bond holders in the form of interest and dividends, and investing $136 million for acquisitions and additional patents.
Today, we announced our 11th consecutive quarterly dividend and 10th consecutive dividend increase.
Specifically, our Board of Directors has approved a dividend payout of $0.2625 per share payable on March 10 to shareholders of record as of February 24.
Since starting our dividend program in 2011, we have increased our quarterly payout by 31% on cumulative basis.
Inclusive of our March 10 dividend, we have now returned $117 million to our shareholders or $2.51 per share through cash dividend payments.
Gains or losses from fluctuations of foreign currencies are not material to either our Q4 2013 or Q4 2012 results.
Our estimated effective non-GAAP tax rate for Q4 2013 was 24.3%, up from the 19.8% rate for Q4 2012, due to additional domestic income which is taxed at a higher rate.
We anticipate our 2014 adjusted effective tax rate to be between 27% and 29%, due to additional 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 our non-GAAP to GAAP reconciliation and our adjusted earnings per share.
Now, I'll turn the call over to Hemi, who will provide you with an overview of our business units.
- CEO
Thank you, Kathy, and good afternoon, everybody.
2013 was an amazing year.
We grew our revenue to $520 million; this is an amazing 40% year-over-year growth.
Large companies like j2 do not grow 40% year-over-year.
j2 is already 18 years old, and 40% growth year-over-year is a rare achievement for a company in our stage.
More exciting is that with all this growth and all the acquisitions, and all the dividends and everything that we paid through 2013, we ended the year with nearly $350 million in the bank, which is actually more than we had when we started the year.
Now, for 2014, our revenue budget is calling for 14% year-over-year growth.
This is a result of any material acquisitions that are ahead of us from this point on, and again like 2013, we are increasing our profitability and are still extremely ambitious for further success and growth.
So with this excitement, let me move to page 9.
Here I would like to talk about our 2013 accomplishments, which was a year of diversification.
During 2013, we proved to ourselves and the world that we can successfully acquire and, most importantly, integrate and diversify the j2 business.
We now have successfully diversified j2 into three distinct categories: the Cloud business, the Media business, and the IP Licensing.
Since Q4 of 2012, we have acquired four of our largest acquisitions ever.
If you remember, our largest acquisition revenue-wise was when we bought Protus several years ago.
At the end of 2012 we bought Ziff Davis, and early in the beginning of 2013, we acquired IGN, then, in the second half of the year, NetShelter, and last week, LiveDrive.
All those acquisitions are, in the order of the largest, from two to fifth largest acquisition that we did.
In all, we made seven significant acquisitions during 2013, and we are proud with the large variety of these acquisitions.
For example, we bought DID and non-DID based revenues, we bought companies that are small and large, from under $100,000 annual revenue to over $50 million in revenue, and we bought in many countries, in Ireland, Australia, UK, Iceland, Netherlands, Canada, US, all over the map, very successfully in already integrating them.
Our M&A strategy is portable and proved themselves to be amazing, and we are continuing to go across spaces in geography.
Now, let me talk little bit about our Cloud and Media business.
Our Cloud business, in 2013, grew $28 million, 8% versus prior year, and in 2013, we have achieved, or we have reached, IP Licensing revenue of $19 million, which is 107% versus prior year.
Our non-DID base revenue grew to $29 million, which is 23% versus the previous year.
In our Media business, we have created a leading digital public share in tech, in games, and in men's lifestyle.
All this was done during the period of one year; really amazing.
We added, in 2013, the brands of IGN, the business of AskMen, NetShelter, and TechBargains; we continue to expand our geography footprint on the Media business, and we expect to launch up to a dozen new version of IGN, PC Magazine, and AskMen, globally.
Page 10, where we talk about Business Cloud Services, so let's go to page 11.
Here I would like to discuss our revenue growth by service.
Our non-fax business of total revenue back in 2011 was only 16%, 17%, so 80% of our business in 2011 was fax.
Now, in 2014, fax is going to be a little bit less than 50% and non-fax is going to be bigger than 50%.
It is very, very important to state that while our fax business is still growing, our other non-fax businesses are growing even faster.
Let me talk now about our run rate.
I'm going to compare the last quarter of 2012 versus the first quarter that we are currently at in 2014.
So our current annualized run rate versus Q4 2012, our fax and voice, which we call the DID business or the telephone number based business, is continuing to grow 5% year-over-year or quarter-over-quarter.
Growth areas are Japan, Australia, the UK, and of course, our corporate fax business, which continues to grow.
We are predicting to reach up to $350 million by year end for this segment of the non-DID revenue.
Our online backup business grew at the same criteria 900% year-over-year.
High growth organically [tended within this requisition].
Excluding our LiveDrive, this segment of our business, online backup, grew 272%.
Total backup is predicted to be approximately $50 million by year-end.
Then our hosted e-mail business, 25%, same criteria.
We entered the UK and deserved our growth, and lastly our e-mail marketing is organic only growth, and they are growing 9% year-over-year.
Page 12, I'd like to talk to you on the online backup.
This is an amazing story, it's a new growth driver for j2.
We entered this business in October 2010 with the acquisition of KeepItSafe.
KeepItSafe was a start-up owned by two college friends from Trinity College in Dublin, [Al and Jonathan], with an annualized run rate of $1.7 million, focused in Ireland only; now the current annual revenue run rate is $40 million.
Our data storage centers are now in seven countries and in three continents: US, Canada, Ireland, United Kingdom, New Zealand, the Netherlands, and Iceland.
Last week, we acquired the very highly profitable UK-based company called LiveDrive.
I'm sitting here planning to go and see them next week, and very excited about it.
This addition is expanding our j2 data backup storage into two brands and two spaces.
KeepItSafe for business, backup for desktop, laptops, and servers, disaster recovery, and everything that business needs.
LiveDrive focuses more on the professionals and the individuals, with added features like file sharing, syncing, et cetera.
We expect year-end 2014 revenue to come to a run rate of $55 million on this segment.
We expect the revenue growth to come chiefly from business-focused KeepItSafe segment of the business.
Page 13, this is my last slide, I love it.
This is again a great achievement of the lowest ever [channel] rate, 2.17.
This is all-time annual record for j2 and again, this achievement belongs to everybody of the j2 employees and it is extremely important, both to our revenue and our bottom line.
Page 14, I'd like to talk about the Digital Media.
In November 2012 we bought Ziff Davis, and during 2013 we took it up to almost $130 million of revenue.
This is a great achievement that we all are very proud of.
Page 15, Q4 media highlights.
Our traffic, or measured by page view, peaked in Q4 to a new record.
During Q4, we had 2.2 billion total page views on our owner-operated properties, IGN, AskMen PC Magazine Group et cetera; this is representing 10% growth versus the previous quarter, Q3 2013.
We also had record page views in December for both AskMen, 155 million and PC Magazine, 148 million.
Now let me talk about the IGN highlight, which is the asset that we acquired from News Corp in the beginning of 2013.
Needless to say, it is fully integrated now.
There's a new general manager.
In December, we surpassed 4 million subscribers on our YouTube channel, we launched video apps for Sony PlayStation.
As you know, the new PlayStation of Sony not also has games, it also has a TV channel or a video channel that is provided by us.
4.3 million videos have been viewed from the app in December, and this is just the beginning.
People just go to the stations toward the end of the month.
We have seen 48% increase in December of page views versus December of last year.
We have launched IGN India, IGN Africa, IGN Turkey in partnership with local providers, and we now have coverage in 60 countries.
We are reaching it through 17 versions of IGN.
With this exciting development, let me pass the microphone to Scott.
- President
Thank you, Hemi.
We'll address now the 2014 outlook.
If you would turn to slide 17, I'll give you some of the underlying drivers and assumptions before actually getting into the financial estimates.
If we look at our Cloud Services business, the revenue growth is coming primarily from our very profitable non-DID base business, specifically the online backup portion, as Hemi just mentioned.
However, these businesses are still in a mode of scaling up.
So while they're very profitable, they operate at an EBITDA margin that is approaching 40%; not quite yet to the level of the Cloud Services business as a whole, which is between 49% and 52%.
We expect depreciation and amortization to increase this year by $13 million to $14 million, for those that wish to calculate a GAAP net earnings.
Our IP Licensing revenue streams we estimate at between $4.5 million and $6.5 million; that is basically taking out what was the one-time past damages from the settlement in April of last year of about $12.5 million and resetting that to the sort of the normalized expected run rate, plus some modest increment beyond that.
As Kathy and I have noted, both on this call and in previous calls, that revenue stream can be very volatile, and oftentimes, revenues are subject to the outcomes of litigation, the timing of which is also uncertain.
In the Media business we expect a more even distribution of the revenues in 2014 versus what you observed in 2013.
For example, in Q1, we expect that of the total annual revenue, 20% to 22% to come into the first fiscal quarter versus last year's 18%; and as a result, for the fourth fiscal quarter, 28% to 30% of the annual revenue versus 33%.
Finally, as a series of corporate matters, we expect our tax rate to be between 27% and 29% versus 24.3% last year.
We have share-based compensation of between $10 million and $12 million, and an effective share count, for calculation of EPS purposes, of $48 million.
Utilizing those assumptions, that then produces a revenue range for 2014 between $580 million and $600 million, and adjusted EPS of between $3.27 and $3.47.
The following slides on 20 and following are supplemental, to give you some of our metrics, as well as a variety of reconciliations from the various non-GAAP measures to the nearest GAAP equivalent.
One final note before turning it over to the operator for questions is, as I announced at the beginning of the call, the dividend was raised to $0.2625 per share for shareholders of record as of February 24, with a payment date on March 10.
That will be about $12 million of our cash paid in dividends.
The Board also extended the outstanding repurchase program through February 20, 2015, covering 2.9 million shares.
At this point, I would ask the Operator to come back and to instruct you to poll for questions.
Operator
(Operator Instructions) Shyam Patil, Wedbush Securities.
- Analyst
Good quarter.
First question is when you look at the 2014 guidance, particularly for revenue, how much of that is organic versus either acquired from 2013 -- either acquired from 2013 or expected to be acquired in 2014?
- President
As you know, Shyam, we don't differentiate between the two.
I don't have the numbers in front of me.
As we've said in the past, generally when we give that, there's a balance between the organic and the acquired.
I say that because LiveDrive is a little bit larger than the traditional deal, there's probably a greater weighting this year to the acquired versus the organic.
I would note that the Media assumes no acquisitions this year.
It does assume, of course, the full-year impact of the three deals we did last year.
- CEO
For 2014 from today and on, we don't have a lot of baked in acquisitions.
With the largest of them, we'll have a contribution of $5 million for the revenues this year, maybe $6 million, not more than that.
- Analyst
Great.
In terms of the EBITDA outlook for 2014, I know you don't guide by segment, but can you maybe help us understand, at least from a high level, how you expect EBITDA margins to trend for Cloud Services, Media, and Media?
- President
Yes, you should expect fairly stable Cloud margins exclusive of the patents.
Basically, within the range that we've talked about, the 49% to 52%.
The patents will be, if you look at it on a marginal basis, pure profit.
In one of the slides in the back, we have allocated costs to it so that you can look at its is operating income impact.
Most of its charges are, at this point, non-cash amortization into expense of previously paid legal costs.
Its still a very high EBITDA margin business of about 90%, but a much lower operating income business.
That's in one of the reconciliation slides.
Where we are going to see the most lift this year in margin is in the Media business.
Because if you look at what occurred between Q3 and Q4, you had very dramatic flow-through of the incremental revenue to EBITDA.
In fact, I think it was actually more than 100% in the incremental revenue.
Part of that is because in 2013, we're getting a full quarter's benefit of the synergies of NetShelter and IGN in the fourth fiscal quarter.
We not expect, usually, more than 100% flow-through of revenue on sequential basis.
But when you look at it year-over-year, the incremental revenue flowing to EBITDA in Media will be in the order of magnitude between 40% and 45% flow-through.
That's going to take that 23% EBITDA margin and I don't think it'll get to 30%, but it will trend it a lot closer to 30%.
- Analyst
Great.
On that M&A comment around Media, I know you're not assuming anything in guidance for 2014, but is the M&A pipeline still active in Media?
To the extent that you can talk about it, are there any particular areas that you would call out?
In general, when you look at your M&A pipeline, how do you feel about the large-deal pipeline and potential to close something in 2014?
- President
I think the pipeline -- hard to say whether it's ever been more robust than it is now.
We are clearly firing on all cylinders, including in the intellectual property area.
We bought a portfolio of patents at the end of last year.
We look for additional portfolios to put into that business.
It takes a while to season those.
Generally, assets that we acquire in the intellectual property forum do not produce revenue for 12 to 18 months out.
I think that we've got, on the operational side of the business, in terms of Cloud and Media, we have a number of situations we're looking at now.
Clearly, as we've always stated, it is much easier to predict the probability of closing deals that are smaller, intermediate in size versus the larger deals, but we have been, within the last year, in the deal flow of looking at larger deals.
I remain, as a matter of guidance and prognostication, always bearish in terms of being able to close a large deal, because the opportunity set is smaller and there are a lot of elements between finding a deal and closing that can cause it not to happen.
We had, actually, a couple of situations last year that were in the larger category that did not close.
- CEO
So Scott, two or three, maybe even four people dedicated to acquisitions only and they have lists.
They have lists of companies they would like to acquire.
They have a list -- and this is big, including everything.
Then we have a list of companies that we approach and they showed interest in selling themselves to us.
Then we move to our next list, that it is a list of companies that we gave them an offer, and then the last list is companies that are in LOI.
All those lists are active, but we have nothing in the LOI section that is huge.
- President
Right.
The other key thing to remind people of, and particularly if there are those that are new to the Company or new to the call, the most important thing about our M&A program is not to break the discipline by which we do our M&A.
The pipeline can be more or less full at any moment in time, but we have certain economic parameters by which we do the deals and beyond those economic parameters, our interest wanes or disappears completely.
That is very important.
If you look at 2013, we did, probably both in size and dollar amounts spent, we did, as a matter of historical fact, more on Media than Cloud.
The primary reason for that is that's where we found the best opportunities to deploy our capital and make a return.
We found pricing in the United States, particularly on cloud-based businesses, to be somewhat out of our reach.
About half-way to two-thirds of the way through the year, we focused our orientation outside of the US and you started to see, beginning -- a lot of it had been announced and closed this year, such as LiveDrive and Faxmate, but you're starting to see that coming to fruition, where our deals are being done in the UK and Australia.
- CEO
Yes, and to finish here.
We have seen, in the last quarter of 2013, the company with revenue north of $100 million.
We've seen last week or two weeks ago, a company with revenue approaching $100 million, it was just the wrong company for us with the wrong valuations, and we walked away.
We owned 9.9% of Carbonite.
Again, the valuation is what counts here.
We are definitely ready.
If we will not do an acquisition, we will end up this year with $0.5 billion in cash or something like that.
We are all eager to do deals, but you have nothing that we were comfortable to talk about.
- Analyst
That's very helpful.
Scott, I'm also getting asked about 2014 adjusted EPS versus 2013, how you guys are looking at the growth rate there?
I think it also might be helpful if there's any way you could maybe help us understand what the EPS would be if you backed out licensing revenue or licensing EPS from both years?
- President
Okay.
The change in licensing revenue, we did $19 million of revenues in 2013 and at the midpoint, we're projecting $5.5 million.
So that's a $14.5 million change.
Now, most of the costs they say are already embedded in the P&L because they are prior cash costs for litigation that are being amortized into expense.
That's not going to change.
So pretty much, I'd say 90% to 95% of that $14.5 million goes to EBITDA and then you can tax effect it.
Now, for ease of simplicity, you can use a full US tax rate of 40%, because most, not all, but most of our intellectual property licensing revenues are from domestic companies and as a result, they're domestically taxed.
When you run that math through, you're going to get about, I'll round it, probably $0.18, $0.19 attributed to the patents that was in 2013 that will not be, at least according to our current budget and guidance, in 2014.
Now, very much like M&A, the timing of those things are very uncertain.
So we took a position this year to move to the low end of our range of expectations, based upon what we know is already licensed and the pace at which those licenses are producing revenues.
You can see in the fourth fiscal quarter, the $1.6 million, if you annualize it, it's about $6.25 million of revenues.
We basically try to stay within that zip code from a guidance standpoint and a budget standpoint.
- Analyst
Great.
Very helpful.
Thank you, guys.
Operator
Michael Latimore, Northland Capital.
- Analyst
This is Ryan MacDonald on for Mike.
You mentioned Carbonite before.
How does the acquisition of LiveDrive effect, if at all, your stance on Carbonite?
What are your thoughts on that going forward?
- CEO
Actually they're not the same business, but they are teaching us more about what Carbonite is and those two deals are really separate.
There is nothing -- Scott maybe you want to elaborate.
- President
I think the key thing to understand about our online backup strategy, and we said it, but I don't think people necessarily believed it, is we have a strategy for building an online backup business that is targeting professionals and small businesses.
That strategy is independent of Carbonite, because we can't control the decisions they will make, their stock price, their valuation expectations.
We continue to move forward on that path of building out our on line backup business and LiveDrive is an important element, currently, of that.
We have a program to continue to grow that business both organically and through additional M&A on a global basis.
If, at some point in this intervening time frame, Carbonite becomes realistic, that would be something we have to evaluate.
But right now, as you know, their stock price is hovering where we made the bid roughly 16, 17 months ago.
- CEO
And in this business for only years only and we already plan to finish the year in the revenue that is nearly half of what Carbonite is.
They're moving along.
We're in the passing lane.
- Analyst
Okay.
In talking about your guidance, what's the thought there between revenue and mix between the Cloud Business and the Media and as well, IP.
- President
The IP we gave you, the $4.5 million and $6.5 million, you can see that in the slide in the back there on 17.
It's obviously relatively small piece of almost an $590 million midpoint.
So, if we take a look at the two remaining businesses and understand that the way we build our guidance is we are targeting the midpoint of the range of both revenues and EPS, and then we put an expansion around that for the purposes of creating guidance.
But from a budgetary standpoint, we're really looking to go right down the middle.
What we're looking at is a Media business that was slightly under $130 million in 2013, growing to approximately in the mid-$150 millions to possibly upper $150 million range for 2014 and that leaves you a cloud-based services or subscription business that will be in about the $420 million to $425 million range.
- Analyst
Okay.
On the fax business, are there any verticals that are showing improvements in the economy as it relates to that business?
- CEO
More corporate business, more corporations are not replacing servers, old, aging servers with additional new servers, they're moving into the cloud.
That's the trend.
More and more of the corporate America, corporate worldwide, is moving their fax infrastructure into the cloud.
- President
But it's not specific to a given industry.
It's more systemic.
It's probably self-selecting.
We have a bias towards the service sector of the economy, so that's where we spend most of our time in terms of orienting the sales force.
But it's not unique to a specific industry vertical.
- CEO
Yes.
- Analyst
All right.
Thank you very much.
Operator
James Breen, William Blair.
- Analyst
One housekeeping question, when you add back the amortization, is it taxed or not taxed when you add it back to figure out the EPS numbers?
- President
Fully taxed.
- Analyst
Fully taxed.
Okay.
A little bit on the growth rate, I'm looking at slide 17, basically you're targeting Media growth somewhere in, it looks like, about the mid-20%s range.
Does that sound about right?
- President
Sounds about right.
There's a range around it, but yes, if you're at the midpoint, yes.
- Analyst
You talked a little bit about, on one of the prior questions about guidance around, you gave a little bit of clarity around the margins in that business.
You obviously saw a good jump up in EBITDA margins in the fourth quarter, up to 39%.
How do we think about that seasonally moving through the next year?
I think you talked about it going up, the consolidated number being towards 30% for 2014.
Is the fourth quarter to be similar and we just sort of build up to that?
Thanks.
- President
Yes.
The fourth quarter, because it is more revenue-weighted, even though not as much in 2014 expectation versus 2013 actual, but because it's still the largest revenue quarter, it will have the highest EBITDA margin.
If you look at it year-over-year, for each quarter, we would expect improvement in the EBITDA margin.
Probably most notable, though, will be in Q1, because as Kathy mentioned earlier, based on actually the timing of when the consoles were released, which is applicable to IGN, we're getting into the season now where there's mass release of games, which creates content opportunity and additional advertising opportunity.
We'll have a better Q1 than you would, quote, unquote, seasonally expect.
That would be true on revenue side, but that incremental revenue above the norm have a high flow-through to EBITDA.
You'll see some better EBITDA margins than you would have, say, in Q1 of 2013.
- Analyst
Do you still feel like that Media business, say, it does $150 million, $155 million in 2014.
If you get -- grow toward $200 million-plus, that EBITDA margins there could be in those 40% plus ranges?
- President
The next goal is to crack through 30%.
Goal number is to give scale and crack through 30%.
As we stated before, I believe that scale is still north of $200 million.
It is in the $250 million, $260 million range.
So it's even above the $200 million that you're quoting.
The real question's going to be the mix of that revenue to take us from, say, $155 million to $255 million, that next 100 million.
Because what occurs in the Media business is a whole series of range of revenues that go from zero margin, which we try to avoid, and in fact, you'll notice in our historical financials, there is non-GAAP revenue and there was revenue that was part of IGN's business that we got out of.
It was about $2.5 million and we non-GAAPed it.
That was actually break-even or in some cases, was losing money.
Then you have a very high margin business, which comes through CPM expansion for existing inventory and things like licensing revenue.
Where your margins settled out in that business in terms of at scale, will be a function of the mix of revenues you have, because you've got a fairly wide range of EBITDA margins associated with different streams.
I think that somewhere in the 30%'s would clearly at scale be a target.
I think there's certainly a case to be made it could get to 40%, but I think that would be on a very good day, with basically a disproportionate amount of the incremental $100 million coming from very high margin streams ahead of revenue.
- Analyst
Okay.
On the cash flow, I know one of the things people were a little bit concerned about last quarter was that the free cash flow metric had dropped from $66 million to $22 million.
It's back up at $50 million, so it seems like your free cash flow yield coming from here would be that much stronger than last quarter, back to where it was in the second quarter.
Anything in particular there?
Is it just sort of timing and is that sort of a quarterly run rate revenue we can think about of generating $200 million-plus a year in free cash flow now?
- President
You've got two things going on.
I think it's a little bit aggressive to annualize it, because the Media business outperforms in Q4.
The good news is, only a portion of that EBITDA is collected in Q4 because of the timing of the receivables.
The other portion is collected in Q1.
But to annualize the $50 million is probably on the aggressive side.
Countervailing that, though, is we had a heavy CapEx quarter of about $7 million and we're not expecting a $28 million or $30 million run rate of CapEx.
You have some things that are going in two different directions.
I would put the 2014 free cash flow at under $200 million, but probably trending towards it.
- Analyst
Okay.
Perfect.
Thank you very much.
- President
According to the range of guidance.
- Analyst
Sure.
Great.
Thank you.
Operator
Daniel Ives, FBR.
- Analyst
So, longer term, I know you don't give out guidance after 2014, but just longer term, how should we think about the fax, non-fax mix?
Almost like a longer term target, obviously 50% now, but in terms of fax.
How should we sort of think about that high level?
- CEO
You should think about that fax is still growing, but slowing down and extremely profitable.
The slower it grows, the most profitable it is.
We are very positive about the odds of still reflecting many fax machines.
And as I said before, we are growing very nicely in countries when we have no penetration of other technologies, Daniel, like Japan and other markets.
In the corporate world, it is between us and the server guys.
There are still those companies that decide to buy servers.
They're comfortable that way, they buy a machine, they install it, and they plug into it the DIDs.
- President
From analytical standpoint, you will see fax as percentage of total revenues continue to be less and less.
One, because you've got these strong organic growth rates in Media.
I believe Media will acquire other assets.
I don't know if it will be in 2014 or 2015, but to the earlier question's point, that business is not fully scaled yet.
Part of the way to get to scale is to buy additional assets.
We're very bullish on looking for additional assets in Media, that will dilute the fax as a percentage as a whole.
You'll see what's going on with the online backup business and expectations for growth there, both organically and acquired.
I think that we're not likely to acquire anything of any size in the fax business.
- CEO
Yes.
- President
What is out there tends to be small and while some of those small deals could be very important strategically in foreign jurisdictions, generally, I'd say they're going to be too much work to do in the US.
- CEO
Right.
If they are simple, we'll take them.
We are not shy of small acquisitions, but if they're simple.
If they're not simple, it's just not worth it.
Daniel, you remember we met many years ago, fax is extremely profitable because j2 has perfected this to a degree that we have very high margins.
We will still continue to fight for every organic fax account that is available, but we are at the stage that the growth of fax slowed down or the growth of the backup and the Media and the others are just faster.
- Analyst
Got it.
With Q4 being such a big quarter for Ziff, I'm just curious, were there any surprises -- obviously, more on the positive, but seeing this last month or two of the year in terms of them under the hood, that you saw?
I'm interested to see that.
- CEO
(Multiple speakers), because originally, when we planned the budget for 2013, we were acting under the impression that the consoles would come, and by Q4, we were have the full quarter of consoles and already early-stage games.
It all was delayed.
Q4 was still very strong and Q1, as we just guided, is going to be even stronger than initially planned, and through the year, because the games are following the consoles.
We were thinking last time when we budgeted for 2013 that the consoles and the games would come earlier.
- President
But I don't know that it was a surprise.
From an analytical standpoint, we expected and we budgeted and we saw it last year, even though we did not own Ziff Davis for a full fiscal quarter.
But we saw the ramp in revenue from Q3 to Q4 and the amount of that incremental revenue that flows through to EBITDA.
We expected, on a much larger base of revenue, a similar phenomenon this year and that's exactly what played out.
I know the first time you see it, it's a little counter-intuitive to look at a $10 million jump in revenue and have all of it or almost all of it go to EBITDA.
But it does show you and demonstrate the leverage that exists in that business.
- Analyst
Got it.
Congratulations.
Phenomenal year, the whole team.
Operator
Greg Burns, Sidoti & Company.
- Analyst
A question on the online backup market: it looks like Carbonite is becoming more business focused and moving more towards a channelled customer acquisition strategy.
What is your primary means of customer acquisition in that market?
Is it more traditional j2, or is that channel focused and does LiveDrive and KeepItSafe have different models?
- CEO
We have yet to lose even one deal to Carbonite, and I think that even though they are moving up rightfully to the business segment, the offer is different and I'm not sure, because I don't spend too much time analyzing something that small.
But their [commission] is still a very small part of the business.
We believe that we serve larger customers that have different needs.
I used to read every day how many phone numbers we have the DIDs.
Now, as a CEO, I don't start my day with focussing on the DIDs.
It's no longer my focus.
Now, my focus is on those kinds of businesses, the names and the deals that we are losing and who we are losing it for.
I have yet to seen us losing even one single deal to Carbonite, either directly or through our -- I think we have 700 or 800 direct resellers.
They are moving into something that we have not yet encountered.
I don't know more about it and I wish I would.
- President
He wants to know about LiveDrive, as well.
- CEO
It's totally different.
LiveDrive is deriving its revenue mostly from the UK and it is being sold as a bundle with people that are purchasing desktop, laptops, and tablets.
When they buy it, they pay a year up front and it's included with the purchase of their device, and there we are trying to renew in the second year, et cetera, et cetera, the extra drive, a drive on your computer that you can either back up the entire machine or parts of it.
There is some similarity there into the growth books.
Most of it is just back up of your entire device with ability to retrieve, save, share.
It's a different type of business focused mostly on the individual and the channel is through retail.
Retailers that sell equipment, it is growing very fast.
It has revenue for employee higher than anything else we have seen in j2 and extremely profitable and we have many good ideas to add services through this channel.
But it's not included in our forecast.
Also, we are in baked already and probably will have press release next month or even earlier on our mobile online backup services, that are in testing.
We believe we are one or two companies around the world that provide it.
Basically, as you know, it's a big headache of the network corporations manager, administrators, and companies when they try to secure their entire network, but then the tablets and smartphones are inside without any security.
So we are going to provide a solution that I believe is amazing solution, but again, we didn't bake it into the numbers because we are conservative and we want to see how it will be accepted.
- Analyst
Thank you.
Operator
Thank you.
At this time, I will turn the call back over to our speakers for closing comments.
- President
All right.
Thank you very much.
We appreciate your time to listen to the fourth quarter conference call and to hear our plans for 2014.
We will be issuing some press releases regarding upcoming conferences that we will be speaking at and then we will have our regular quarterly earnings call in early May.
Thank you very much.
- CEO
Thank you.
Operator
Thank you.
This does conclude today's teleconference.
You may disconnect your lines at this time.
Thank you.