Ziff Davis Inc (ZD) 2014 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the J2 Global second earnings conference call. It is now my pleasure to introduce your host, Mr. Scott Turicchi, resident of J2 Global. Thank you, Mr. Turicchi. You may now begin.

Thank you and good afternoon ladies and gentlemen and welcome to the J2 Global investor conference call for the second fiscal quarter of 2014. As the operator just mention, I'm Scott Turicchi, the company's President and joining me today is Hemi Zucker, our CEO, and for one last time, Kathy Griggs, our CFO.

This was another great strong quarter for both our cloud and media businesses, which we will detail in much greater extent in a few slides. We will discuss those Q2 results, as well as provide you an update on our business segments, and I will also alert you that our board has increased the quarterly double and $27.3 per share.

We use a presentation for today's call, copy of this is available at our website. When you launch the webcast there's a button on the viewer on the right hand side which will allow you to expand the expand the slides. If you have not received a copy of the press release, you may access it through our corporate website J2Global.com/presss

In addition, you'll be able to access the webcast from this area. After completing 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 questions to us at Investor@j2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. This call and webcast will include forward-looking statements.

Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, proxy statements and 8-K filings, as well as additional risk factors that we have 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.

I'll now turn the presentation over to Kathy to discuss the financial results.

Thank you, Scott. Good afternoon, ladies and gentleman. This quarter, I will be presenting comparisons on a non-GAAP basis due to the large patent settlement in the second quarter of last year.

We think this is most helpful to provide an understanding of the trends in our business. Please see our press release and the accompanying exhibits, as well as supplemental schedules at the end of the presentation for reconciliation of all non-GAAP financial measures to their nearest GAAP equivalent.

Our consolidated adjusted revenues for the quarter were $145.7 million, an all-time quarter high an increase of 14.4% and $18.3 million versus the year ago quarter. Business Cloud Services adjusted revenues were $106.3 million, an increase of $12.3 million or 13.1% versus Q2 2013.

Digital media revenues were $38.2 million, an increase of $7 million, or 22.4% versus Q2 of last year. Intellectual property or IP licensing revenue decreased 45.5% to $1.2 million from $2.2 million for Q2 2013.

Our Business Cloud Services segments include both our Cloud Services revenue of $106.3 million and the IP licensing revenues of $1.2 million, for a total of $107.5 million for Q2 2014. Consolidated EBITDA increased 18.4%, or $94.9 million to $63.7 million compared to $53.8 million in Q2 of last year. This quarter we achieved approximately 50% flow through in our incremental cloud subscription and digital media revenue down to the EBITDA line.

Please refer to slide five in our presentation for our Business Cloud Services financial results. For Q2, 2014, business cloud services achieved the following results on an adjusted non-GAAP basis. Revenue growth versus Q2 of 2013 of 13.1% or $12.3 million from $94 million to $106.3 million. Gross margin of 81%, operating margin of 47.2%, operating income of $50.2 million, and an EBITDA margin of 49% and EBITDA at $51.6 million.

Our cancel rate was 2% for Q2 2014 an all-time low. We added 67,000 net paid cloud business customers this quarter bringing our total at quarter to a record 2.59 million. Average revenue per cloud services customer was $13.84 this quarter versus $14.07 for Q2 2013. This decrease is primarily due to the change in the product mix in our Cloud Business Services.

Moving to our digital media segment, the business achieved the following adjusted non-GAAP results. Revenue growth versus Q2 of 2013 of 22.4% or $7 million from $31.2 million to $38.2 million. Gross margin of 88.4%, operating margin of 25.6%, operating income of $9.8 million, EBITDA margin of 28.7, and EBITDA at $11 million. Please refer to slide 23 of the presentation for a recap of our Q2 2014 non-GAAP consolidated operating results.

On a Consolidated basis, adjusted net income for the quarter was $40.5 million, consolidated adjusted growth and operating margins were 82.1%, and 41.7% respectively.

For Q2 2014, we achieved adjusted diluted EPS of $0.84 compared to $0.76 in Q2 of 2013 an 11% increase driven by strong performance in both of our segments. With the issuance of convertible debt comes additional interest expense. We expect this to negatively impact our earnings per share by approximately $0.09 to $0.11 by the end of the year.

For Q2, 2014, amortization of intangibles on a pretax basis for the cloud and media segments were $7.5 million and $3.9 million respectively. This represents 7% percent of revenues for business cloud services segment and 10.3% of revenues for the digital media segment. Consolidated free cash flow for the quarter was $54.1 million representing 37% of revenues. Free cash flow for Q2 2013 was $39.2 million.

Our cash and investment balances were $709 million at June 30, 2014. During Q2, we issued $402.5 million of convertible bonds yielding approximately $391.4 million after issuance costs.

During the quarter, we deployed $40.6 million for acquisitions and returned nearly $13 million to our shareholders as dividends. Today we announce our 13th consecutive quarterly dividend and 12th consecutive dividend increase. Specifically, our Board of Directors has approved a dividend payout of 27.3 quarters per share, payable on September 2nd to shareholders of record as of August 18th.

Since starting our dividend program in 2011, we have increased our quarterly payout by 35%. Inclusive of our September 2nd dividend, we now have returned $143 million to our shareholders $3.06 per share to cash dividend payments. Gains or losses from fluctuations in foreign currencies were not material to either of our Q2 2014 or Q2 2013 results.

Our estimated effective adjusted non-GAAP tax rate for Q2 2014 was 27.1%. We anticipate our fiscal 2014 adjusted effective tax rate to remain between 27% and 29%.

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

Before turn a call over to Hemi, I would like to thank all of you. Our analyst, and investors, our employees and management, our Board of Directors.

I've enjoyed my time here at J2 and during the last plus seven years that I've been here all of us is created a lot of value in the corporation, your support, enthusiasm, and efforts resulted in the success of our company. It is an honor and a pleasure to work with such a fine organization. I'm certain you'll continue to grow and I will continue to follow up on your future success and stay in touch.

Thank you Kathy, very much. Few words about Kathy, I am getting emotional, but I'll try not to. 12 days ago, J2 celebrated 15 years as a public company. Of those 15 years, almost half of the time I [received from] Kathy, a wonderful job. I was the first CFO.

She's by far better than me. I'm not going to talk on behalf of Scott, and I want to thank Kathy from the bottom of my heart. We had a great time together, and we will stay friends forever.

Thank you, Hemi.

Thank you. So now let's go to business. Page 7. And I will talk about our second quarter achievements.

We had an amazing quarter. Probably one of the best ever that we have delivered in all aspects of the business. Let me start with consolidated numbers.

We set a quarterly revenue record of $146 million our current quarterly revenues up $18 million or 14% year over year, and the June revenue numbers for our June month have set a record of $53 million, divided roughly between $36 million for the Cloud and $70 million for media. During the last five weeks to the end of the quarter, we continue to do acquisition and to grow organically, and I am expecting a very strong second half for the year and expecting that the run rate for the month will grow $1 million or $2 million between now and the next earnings call.

We also raised $400 million in convertible debt. And I want to tell you I'm a little bit sentimental because of Kathy, but when we went public it was $18 million, then we raised the bond of $250 million, and now over $400 million of convertible debt. The terms are getting better and it is much easier to raise it, so I want to thank Scott here for leading everyone with these efforts.

Let me move onto the business. Our non-tax revenue is now 52% of the business where as tax continues to grow, it is now only 48% of the last quarter and based on June numbers tax is now $25 million, so 47% of our last month.

Again, continues to grow, but the rest is growing much faster. Talking about those things that are going faster, online back up business is nearing $60 million run rate revenue. I will a dedicated page to discuss that. Our business cloud subscription, revenues were $12 million Q over Q and digital media $7 million. 22% on the on the media and 13% on the cloud.

Let's go to page 8 and 9 where I will talk about our cloud business services. So on page 9, revenue grows by service, where I could I try to get you the best run rate, which is July, if it has any meaningful improvement or change. Our leading brand has always been and eFax and eInvoice those are the flagship premium brand of J2, the command higher prices and provide better features. In the last quarter we see they are starting again to be the best sellers and leading the pack, that is very good news to us because not only are they commanding the highest price they are also providing the best margins.

eFax quarter over quarter is 4% better, driven by US and international eInvoice and eReceptionist, eReceptionist is the eVoice of Europe, is up quarter over quarter, year over year at 17%. This is very, very good. Online back up, I said 600% and nearing $60 million of run rate revenue and important to say the EBITDA for the back up is on the high 30s and continues to improve as we scale up.

On our e-mail businesses, as you know, we have [fused a container] hosting, email services and email marketing. They grow together 42% from $20 million to $29 million hosted email or email services are critical in the UK with an acquisition that we had announced last quarter.

We also since have done another acquisition during last month, or actually this month in August, and next week an Irish company, with email security. And then on the e-mail marketing side, first time ever we have done an acquisition of a company called Contact Technology; it is out of North Carolina, it is our first acquisition which is very important, because now we gain the comfort and confidence to start to acquire also in the email marketing space, which as you know is very big. It's not easy, but I think we figured it out as well, and I'm looking forward to keep on reporting to you about the integration of this first acquisition.

Page 10, where I will talk about the online back up. KeepItSafe and LiveDrive our brands, current run rate is $60 million and Q2 actuals grew year over year 183% or from $2 million in Q2 last year to almost $12 million in the current quarter, and the growth of quarter over quarter, meaning from Q1 to Q2 was from $8 million to $12 million for the quarter. And as I said, August run rate is nearing $5 million and we have done several acquisitions that in July and already August, something small as well.

We are seeing very healthy, our ARPU in our business, as you know keep it safe, it's pure as can be, business only. The annual ARPU, annual revenue per user, is $1,000 per year approximately, and on the LiveDrive, which is mostly [folks on] individuals, we are seeing healthy ARPU annual ARPU of $100 per year.

KeepItSafe, the business service and added features, like business continuity, professional services, where we can help the company to set up the policy and meet compliance, compliance like (inaudible) SEC compliance, Fine Locking and special packages for financial institution. And we have their marquee customers, while I can not think of details of names, top shelf names in the financial world.

On the mobile side, we already sold more than 5,000 seeds. We have a pipeline of more than 10,000 seeds. Added features like eDiscovery and legal hold sometimes companies have to lock data in the back up as it goes through eDiscovery and all those other requirements; we have it and this helps us get top prices.

We have launched in LiveDrive, a new life cycle management, it pulls retention and activation rate and we have launched news packages and videos for families, et cetera.

Next page, our churn as you know we change the way we measure the churn from phone numbers only, in the box, to now to include all of our services. It is a record low of 2%, we are not reporting the DID's on the phone numbers anymore, but I just made the extra effort to calculate them for you and actually we have the record of 2%, and to remind you that it was 2.2% last year. So, again, improvement in the top leading brand of eFax and eInvoice help us to even further lower our churn. Everybody knows it is all going down to the bottom line.

Next, I will talk about the digital media, page 13. Here are the highlights of the media. As you remember, in 2012, we started with the media acquisition, we bought Ziff Davis, at the time before we bought the Ziff Davis revenue for Q2 2012 was only $10.8 million with an EBITDA of 2.4, so 20% EBITDA. The businesses is scaling and continues to scale in an amazingly way. Now the $10.8 million revenue grew to $38 million. EBITDA grew from 20% to 29% we are showing better modernization of the traffic and the cost management.

Actually in the last couple of quarters, the flow-through of additional revenue is even more than 50% down to the bottom line. We are very pleased with the media business of J2.

Some operational numbers, our video use grew 16% to $420 million per quarter, and our visits to our websites IGN, AskMen, PCMagazine group grew 9% to 607 million visits. And our page views grew to 2 billion visits per quarter.

Those are amazing numbers coupled with the fact that we became also a social media empire. We have 10 million social followers. For reference, 10 million followers position us in the top tier of our relevant space, and we're very, very proud of experience.

Next page, page14. I wanted to thank [ Indiscernible - heavy accent ] for inviting me to the E3 show, here downtown in LA. I took my son. He love me more than ever.

During the E3 conference, IGN was the major sponsor and was controlling the floor there. We had a record visits of sites 80 million, 68 million video sites, we delivered 96 million use. And we simultaneously, all-time 3,000 tunes, in anytime of the 12 hours of live coverage provided by IGN with the E3, which is a leading video game tradeshow.

Subscribers to IGN prime continues to grow to a record of 57,000 highest level since the acquisition. We continue with our global expansion. The PCMagazine now launched in the UK, Australia, and Benelux, and AskMen launched in the Middle East, India, Greece, Turkey, and Benelux, as well.

With that, I will pass the mic to Scott.

Thank you, Hemi. Before getting into the guidance, I like to turn your attention to slide 16, which is the legal structure.

As some of you may know, in conjunction with issuing the convertible notes, the company went through a reorganization by which J2 Global Inc. is sometimes now referred to as Whole Cove. In the current structure it owns J2 Cloud services, which is the Business Cloud Service Unit, and it, in turn, owns Ziff Davis, LLC, our digital media subsidiary, and advanced messaging technology and its subsidiaries, which encompasses our IP.

Subsequent to another step, ultimately J2 Global, Inc. will hold the three subsidiaries directly as sister companies. The parent company, in red, is the issuer of the $402.5 million of senior unsecured convertible notes due 2029 with a 3.75% coupon and J2 Cloud services is the issuer of the $250 million of 8% senior unsecured notes.

As Kathy noted earlier, in conjunction with the issue of the new converts, we will have on a non-GAAP basis about $3.5 million a quarter of additional interest expense or $2.2 million after tax.

Under the assumption of those proceeds are not immediately invested, there will be a charge to earnings of about $0.045 per quarter or on average about $0.10 for this fiscal year since we did incur about 6/10 of a cent in the second fiscal quarter, specifically in the month of June.

I remind you to flow that through your various models. Notwithstanding that though, we are reaffirming our guidance for the fiscal year and to remind you that as revenue between $580 million and $600 million, and our adjusted non-GAAP EPS of between $3.23 a share and $3.47 a share with that estimated non-GAAP tax rate of between 27% and 29%.

Finally, behind the supplemental information slide are the various metrics for the Business Cloud Services and media entities, as well as a variety of reconciliation schedules of the various non-GAAP measures used in this presentation to the nearest GAAP equivalent.

At this time, I would ask the operator to come back on, and to instruct you to que for questions.

(Operator Instructions)

Shyam Patil, Wedbush Securities.

Thanks for breaking out the fact of growth run rate. On -- focus on that for a second, where would you say the growth is coming from for fax, and where is it growing and where would you say it is not growing right now?

Our fax is growing in Japan, in Asia-Pacific, Australia and New Zealand. We've made a few acquisitions in Q1, small, but growing.

Our corporate continues to grow and delivering these low cancel rates because those are multiyear contract, and also in the local, I mean it beats here, beats there, the drivers are Asia-Pacific and corporate.

And in the online backup space, that space -- that segment has been scaling pretty nicely for you over the past several quarters. How many targets do you think are out there that you'd be interested in that you could realistically scale that business? We know of carbonite, but when you look at the market, how many would you say are out there that you think you could scale across the backup business?

Let me divide it into two. There are companies that have their own technology, meaning they have a group of engineers that are retaining, developing, and continue to add features to their backup and there are companies that are using third-party software.

Of those that are running their own, I can think immediately about 10 with maybe one, maybe two, maybe one of $100 million and up, and then several on the 15 to -- and I'm only talking US, yes, and then there are probably a dozen companies that have $10 million to $15 million revenue with their own technology.

Then on the companies that are using -- we are now using for third-party software, we can acquire now this software, know hope to support it and do full integration, of those, there are hundreds, hundreds or thousands of companies that are starting -- as you know, large companies can be $10 million to $12 million, leading their country, and can be as small as $500,000, can be resellers, number 55 in the UK.

It's a very -- there are many of them, and I hope I answered your question.

And the convert -- can you talk about just how you want to -- are you are thinking about using it -- these proceeds? Obviously, we just talked about online backup, but if you could talk at a high level in areas that are interesting and maybe areas that you are in right now that are not as interesting, that would be very helpful.

Two things, first of all, as we noted, there is excess of $700 million of cash and investments available. About $550 million of that is now US domicile and it is highly liquid.

All the convert proceeds were obviously US cash, so we had -- we can export that money if transactions are large enough in foreign jurisdictions. We feel very good about the fact that we've got ample amount of US cash, as well as worldwide cash.

First and foremost, we will look to the two existing segments of the business, meaning the cloud services and the media for further deployment of capital, but we will also look for other segments that could be complementary to those two under the umbrella of J2 Global being an owner of digital assets I'm a digital/Internet orient assets.

I would say that obviously with this amount of cash, we -- we're are looking for the deals that to be at the larger and the spectrum, although we feel no receive up with the cast work. The timing of that convert was one that we felt was somewhat opportunistic given the market conditions. We think we have an attractive coupon and all in financing cost for it, but we would like to put the capital to work and large chucks that we have done historically.

Other few members of the team spent the last month traveling around the world trying to discover new areas that we can expand into. We found something interesting potentials, but none of them is big enough for me to talk about or disclose, but we are definitely spending time, energy, and everything we have to expand to extend our reach to new spaces that are either on the media side or in the cloud businesses, or maybe a third one.

And just a follow-up on that, and just honing in on media, how should we think about the roadmap to continue to scale that business from an M&A standpoint, and then when you look at the margins, it seems like they've been a little bit stronger than we've been expecting. How are you thinking about the long-term margin targets for that business and how have those change given the recent out performance.

I think on the media side we have three areas from M&A perspective in which to enhance and further scale that business. One is to acquire additional like assets in tech and games domestically or in US and Canada where we are have strong leadership position.

The second would be to acquire assets in those spaces into foreign first -- foreign jurisdictions, and we have in fact been looking outside the United States, and then the third piece would be to add additional verticals beyond tech and games but staying consistent with the philosophy that we want constant driven digital media where it is leading to some form of a buy or purchase decision. So there's actually a lot of room to go within the digital media space given that we have these three different angles.

In terms of longer term margin profile, you're correct. Were running ahead of budget this year in terms of both the aggregate EBITDA, as well as the margin.

I think we said so far throughout this year at it would be unlikely that the media business would produce a 30% EBITDA margin for the full fiscal year. I think that assumption is likely to be challenged given that we've had strong margins that are up about 15% points versus the comparable quarter in the prior year, and that's true for both Q1 and Q2.

The answer to your question, in part a function of how large the business gets and what is the mix of those incremental revenues beyond the current book of business? Because there's a much wider range of margins in the digital media business then risen the cloud business.

When we get into a cloud space, the ones that we are in, it is not uncommon as we start to get the scale that incremental revenue flows through initially say 30% EBITDA, and then once we start to get to even modest scale, 40%, and then ultimately 50%, and there's not a lot of variation in the types of customers on the margin for producing that incremental flow through to EBITDA.

The media business though, however, has a very wide range of marginal margins. They can be as low as 10% to is high in excess of 90%.

The mix of your revenues and certainly your incremental revenues on top of the base would influence where your margin ultimately settles out. I'm a believer that as this business scales and adds a next hundred some million dollars of revenue, clearly will be in the 30% plus EBITDA range. At like to believe it will be trending towards the rental or maybe even a higher end of that range, but I which is, yet it is just going to be very sensitive to the mix of that incremental hundred or so of million dollars of revenue.

And my last questions just on the shares outstanding, how should we think about the diluted share count going forward with convert?

They won't be affected until there are in the money, so the stocks are about $70 a share. We have a net sure settlement, so you only be looking at the Delta above that amount, so will settled the first $402.5 million in cash, but you can calculate what it is based on a future stock price. You can see the incremental solution.

Greg Burns, Sidoti.

Just a question about LiveDrive. Have you considered taking that model to other geographies or maybe extending the retail distribution you have in the UK?

Yes and yes. We are talking about taking it to the US with a major retailer. We're taking it to other countries, so, yes.

And in terms of the growth of the -- the mix of the -- of your revenue, guess at the beginning of year it was just -- little less than 50%. Obviously you're ahead of that now. As the growth outside of fax been stronger than expected has fax been lower, just give us a little color on that?

Yes, Greg. Fax is just the other elements are growing faster than we planned, so faxes continuing to grow and so far exceed our expectations.

And it looks like given the run rate revenues that you were discussing, for June maybe July that would kind of apply that you're going to be above the top end of your guidance range. This is not enough to raise range, how should we think about that?

Be careful. Run rate revenues are going forward.

You've got the first six months of the year, they are there, and then you can take the current heart beat of business, and remember in the digital media business, the third month of each fiscal quarter is usually the best month of the quarter. You can't take $53 million in June and multiply it by 6 necessarily, or by 12, and if in fact if you did it for digital media you probably understate the residents because Q4 tends to be seasonally better, but also remember that Q4 for Cloud is somewhat seasonally weaker.

Right now we do not see ourselves exceeding the top end of the revenue guidance. Now, that may change between now and the end of the year, but now we don't, and hence is no change in the range.

We took a conservative approach, and as you know, as Scott just said, using Q4 media is strong and you can see last year numbers, how much stronger they were the previous quarter. We thought about it, and as I said, we took a conservative approach, but your thoughts are things that we had in mind, as well.

Lastly, it looks like modernization of the media assets is improving. I know IGN in terms -- work to do in terms of getting the dataset and infrastructure in place to better monetize that. Can just give us an update on that where you stand with the IGN integration and revenue control for that asset?

I think which is in the first two quarters of this year is really bearing out. Primarily work that has been done -- IGN, as you recall, we bought Ziff Davis. We told everybody this was a well-optimized asset.

So integration was virtually done in a day because we absorbed both the technological platform, the brands, and the people, but then really wanted to leverage that infrastructure and that team for much larger base of revenue. So we're now triple roughly the revenue we acquired in 2012, to your point of acquisitions we've done, in the digital media space, IGN was not a the largest in terms of revenue, probably the most complicated in that we had to first exit certain business units that we could not justify given their financial profile.

We refocus that business back to its core games and lifestyle orientation, and then three, and probably most importantly, take advantage of the very large amount of traffic, really not focused on growing the traffic, but better monetizing that traffic, and effectively go into the metrics a calculate sort of the value we are generating per visit, granted is for the digital publishing business as a whole, but a lot of that has been driven by the improvements that have come from the modernization of the IGN traffic.

So we're done with the integration. We have exactly what we want with that business. We are now going through, and I think started to prove out the success of the business model that, in fact, there is a way to drive more value by going to multi-pronged approach from each of those visits that show up at the IGN website.

So I don't think we're done, but there so it's not so much as a technological effort at this point or an integration effort. It's what you earlier said. Getting more and more data, refining approach of how we can slice the data up for ad sales, but clearly we are very pleased with the results in the 15 months that we've owned IGN.

The biggest change is the small video and we make more money for each video that we run, and IGN is a leading channel in PlayStation and all those kind of things. All the technology integration is working very, very well in our favor.

Daniel Ives, FBR.

I'm just curious, did Hemi and Scott give you an eFax account for life?

No, actually they didn't. They made me pay for it.

In terms of acquisitions, how do you see domestic versus international opportunities relative to your product cash?

To some extent, I guess your agnostic in terms of where the acquisitions take place. Obviously, as you know in our model, we are looking to buy assets that can yield a certain return based upon how we intend to manage them going forward, so you've heard me say for the last probably two or three earnings calls that we spent a lot of time outside of the US, given the fact that the various stock market in the seasons were at or trending at all-time highs.

We've obviously seen a lot more volatility for the downside in the US markets in the last couple of weeks, which is not enough to make a whole story, but as Hemi mentioned, we took international trips to various parts of the world, but if, in fact, there is a significant crack in the US stock market and or a major correction, I think that vote very well for us putting the capital to work in the US, which to some extent, would be, I guess, on the margin preferable because in both the media business and the cloud business, the majority of our employees are US domiciled, so it is easier to deploy management teams for integration purposes, but as you know, we've done deals in part on places like Australia and New Zealand.

Danny, we getting more certain with countries and when we get comfortable with the country or region we recently have developed a good trusted and compatibility in the Northwick, Scandinavia, and all those countries have very good businesses, they represent a very good opportunity with public companies that are trade in better, much more attractive than here in the US, and we have position to and we're looking all over.

Our M&A is actually leads is European cut, but we are not committed to anything. Obviously, with the last capital we are no longer limited. Before we had so much available in the US and so much international, now also the money is available in both.

Ryan MacDonald, Northland Capital Markets.

This is Josh in for Ryan. I was wondering what your latest opinion on your carbonite decision? Is any update there? And then you've already talked about M&A quite a bit, but can you nail down any specific verticals that are attractive at this point?

First off all on carbonite, I'm going to disappoint you give you the same answer as I gave last quarter and the quarter before and the quarter before. We are almost 10% shareholders.

We wish they would perform a little bit better so we get better interest -- return on our investment, and we are waiting for development, but nothing to report on acquisitions around the world and other spaces, so I cannot talk about public companies because of the sensitive nature of it, but definitely we see small and midsized companies, including midsized public companies, nothing came to the level that we are comfortable disclosing.

I think in terms of within the cloud space, you might have been thinking more of sweeps of services or types of services. We're taking very broadly. Obviously, anything that we are currently engaged in doing and even one or two degrees removed, so the big base set of services, the e-mail services, and the online backup, all of those categories we continue to be aggressive and looking for acquisitions around the world, but then we also look for new sets of services -- I would say we pretty much excluded nothing.

I know it's probably been a couple years since we talked about the range of these cloud-based services. I would say most of them would be ways in which small businesses are further automating are moving processes to the cloud. That's really where I think we see the opportunities as more those things that used to be software-based or even done manually move themselves to the cloud.

Those are the things we are exploring. When we do an exploration, the first thing we have to do is to comfortable at what stage is that process of movement. Some things a very interesting but they are very early stages. There's not much industry.

There's not a lot of players, there's not a lot of revenue, so it's not clear if it will shake out as a legitimate category of service. Others tend to be a little or mature.

You can actually look at a range of players in the space in a region of the world, get a sense of that aggregate kind of revenue, the type of growth rates that are going on, a better sense of the overall margin structure, so we're sort of doing an end to end analysis and looking at where can we enter a space that has some degree of maturity, meaning that it has players in the space, and has revenue. I think the spaces that we have entered of the last several years are representative, meaning that they're not sort of these brand-new start of kind of ideas, but they are with real customers, real revenue.

You can see how people are valuing the proposition for whatever service that is, then the issue for us is to we think that's going to be a large enough space that will be meaningful to J2. Can we enter with rate assets? And then probably as importantly, can we buy into the space at the right price?

Obviously, we said yes to online backup, we have said yes to email, yes to email marketing. Some of the other ones are still under exploration. There are many of them.

Greg Burns, Sidoti.

Question on the digital media expanding globally. You had a couple announcements moving into new geographies. Can you just explain how that works?

You just licensing like the IGN or PC meg brand to them? Are you licensing content are your providing -- how does that work?

All your questions today were yes, yes, yes, yes. We are licensing, sometimes we take it on ourselves to translate, sometimes in those locations most of them are of the licensing nature.

The brand and the content and the third parties create their own version of the website and translate or transliterate the content, and then build their own model and terms of modernization around it,

And they can run their own local competition, interviews, but we provide the channel and the frame and most of the brand.

Okay. So you -- you are not selling ads to those platforms or data to be collected by you or [montage]?

We don't but let's say PlayStation or one of those was to come and say hey, I would like to advertise including in those countries, yes, we will organize it.

Okay.

Jim Breen, William Blair.

Just a couple of questions just on the cash flow site, cash flow quarter was particularly strong, I think its $54 million. Is there anything there in terms of -- run rate going forward or does that fluctuate more the back half?

It can fluctuate, typically when you have certain payments due in certain periods, such as income taxes, so I wouldn't necessarily say it's property use it for run rates. Typically we pay in Q3 estimated taxes, Q1 as well, and then of course you have capital investments throughout the world that occur while they are not large, oftentimes they will occur around the budging timeframe, which is typically Q4 or Q1. Let's just keep that in my.

You'll notice last year in Q3 was highest of the free cash flow, leaving aside the CapEx timing just a net cash provided by operating activity was the lowest because of the timing of certain payments. I would not take 54 -- I wish you could take $54 million and annualize it, and run rate it, but I think that would probably be a bit too aggressive.

Yes.

Last quarter at it was around 39 or so, so that 39 to 50 sort of the range on a quarterly basis and it will fluctuate based on where the payments come in?

Yes.

Besides the payment.

You can't say that 39 is the absolute minimum because the size and the timing of the payment in Q3 as it did last year could cause it to go less than that quote, unquote lower in threshold that you just mentioned.

But our forecast is little bit too short of 200 we just did the convert and things move right and left but basically those are the rages.

And a follow-up to the previous question, you were asked on the announcement you made this morning to -- have any capital deployment there or is it basically just a name that --

Our expenditure is really small. We get excited when we spend $1 million, it's like a big deal.

Thank you. I'll now turn the call back over to Mr. Turicchi for closing comments.

Good. Thank you very much. We appreciate everyone joining us for our Q2 earnings call. We put out our press release a few days ago.

Tomorrow, myself and Vikek Shaw of our media group, will be at the [Needham] Conference in New York City. We have a presentation at 9 AM Eastern, so either listen over the webcast or if you're in town, join us live, and then there will be other conferences between now and the next earnings call, which will be the first week of November, so please look for press releases announcing those. And then finally I'd like to give my own congratulations to Kathy and my own sign off to her for the last time. It's been great.

It's been fun.

Thank you very much.

Thank you. This does concluded today's teleconference. You may disconnect your lines at this time. Thank you for your participation.