Ziff Davis Inc (ZD) 2015 Q3 法說會逐字稿

Greetings and welcome to the J2 Global 2015 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator instructions) It is my pleasure to introduce your host, Mr. Scott Turricchi, President of J2 Global. Thank you, Mr. Turricchi, you may begin.

Thank you, [Manny], and good afternoon. And welcome to J2 Global's investor conference call for the third fiscal quarter of 2015. As Manny just mentioned, I'm Scott Turricchi, the President and CFO of J2 Global, and with me today is Hemi Zucker, our Chief Executive Officer.

We are extremely proud of the accomplishments of our teams during this outstanding quarter where a number of records where said, in fact beating the records we established just one quarter ago. And we believe this continues to validate our overall strategy.

The performance was exceptional in both our cloud and media segments. As a result, the Board has authorized an increase in the quarterly dividend to $0.315 cents a share. We will use a presentation 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 allow you to expand the slides.

Also, if you've not yet obtained 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 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 email us questions at investor@j2global.com.

Before we begin the formal presentations, allow me to read the Safe Harbor language. As you know, this call and webcast includes forward-looking statements. Such statements involve risks and uncertainties that may 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've disclosed in our various SEC filings including our 10-K filings, recent 10-Q filings, various proxy statements, and 8-K filings, as well as additional risk factors that we have included as part of the slide show for the webcast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements.

Now, if you would, please turn to slide 5. As I mentioned in my introductory remarks, Q3 set a number of records. For the Company as a whole, it was a quarterly achievement and record-setting by obtaining $179 million of revenue, or $25.5 million in growth in revenue versus Q3 of 2014, or a growth year over year of 17%. It was also record non-GAAP EPS performance of $1.04, up 25% versus the prior year.

We've completed nine acquisitions which were previously announced during the quarter, spending approximately $185 million on those nine acquisitions, covering a variety of spaces that we'll detail later in the presentation.

For our cloud business, it too achieved an all-time quarterly revenue of $125 million, up $16.4 million versus Q3 of 2014, or 15%, led by our other cloud services, meaning our backup, email, email marketing, and hosting businesses, up almost $15 million, or 70% versus the prior year.

As importantly, Q3 EBITDA was up $12.2 million, or 23% versus the prior year. And the margin expanded from 47% to 51%.

Our media business had also stellar performance with revenues up 21% year over year or slightly in excess of $9 million, and an EBITDA margin expansion of 10 percentage points from 29% to 39%.

Now if you turn to slide 6, this lays out in greater detail the actual results by segments. Just to remind you, our cloud segment consists of two pieces, the cloud services businesses, which are the actual subscribers, which have now crossed the 3 million mark, as well as our IP licensing business.

You'll notice that for the cloud subscription services, we had $125.3 million of revenue, $63.4 million in EBITDA, or 51% EBITDA margin. But what I would note is 74% of the incremental revenue year over year flowed through to EBITDA, and we had EBITDA margin expansion in each business unit within the cloud services segment.

Our IP licensing revenue was roughly flat at $1.1 million, a contribution of 57% in terms of EBITDA margin. I would note that as we've talked about in the past, we continue to make investments in some additional portfolios of intellectual property, which are now actually in the process of commencing their licensing program.

The cloud services business plus the IP licensing gives us total cloud, which had $126.4 million of revenue, and approximately $64 million of EBITDA, or 51% EBITDA margin.

Our media business, as I just mentioned, has slightly in excess of $52 million in revenue, $20.3 million in EBITDA, 39% margin, and an outstanding 84% flow-through of incremental revenue to EBITDA from Q3 of 2014 to Q3 of 2015.

Summing it all up, $178.7 of revs for J2 Global consolidated, $84.3 million of EBITDA, 47% consolidated EBITDA margin, up 5 percentage points versus Q3 of 2014, dropping $50.7 million of adjusted net income to the bottom line, or $1.04 in EPS.

At this time, I will now turn it over to Hemi to give you more detail into the various business units.

Thank you very much, Scott. Amazing quarter. There's not a lot to say. You said it all, Scott. But still, first of all, next month we are celebrating 20 years since we started as a small (inaudible) in a small apartment in New York. Very proud to be here to talk with you about our results.

Q3 was an amazing quarter as Scott said. We have done and achieved a lot. And let's go to page 8. Page 8. During the last five years, we have achieved over 20% CAGR as is measured here by the five Q3s on each year, 2011 through 2015.

We have here our three segments of the J2 business. And the story here, we saw, is very good in demonstrating what happened in the last five years. So let's start on the left. The blue one, which is fax and voice, which we call now Cloud Connect, in 2011, it was $80 million, and it was 95% of the total revenue. $80 million (inaudible) quarter.

And now it's $90 million per quarter, and it changed from 94% of the business to only 50%. Within eFax, it's only 42%. Very profitable, and the profitability is continuing to grow and increase, as Scott just said.

The next one, the little one, the tiny one is the gray for 6%, or $25 million in Q3 2011. Now it's $38 million per quarter, and it's 21%. And we call it the other cloud services, which are growing faster than anything else from 6% to 21%.

And then the media, the orange color. Media just started in 2013. It was 26% of our revenue as we started with $33 million revenue. Now it has grown to $52 million and 29% of our revenue.

All of those three segments are continually growing. Fax and voice are growing slower, but the rest are growing faster. Together, we delivered 20%. And by the way, when Scott talked about our revenue, if we eliminate the drag of the $6.8 million of FX, the year-over-year growth would be even 21%. But we are trying to stick to the real numbers. But for those of you that might ask me what the impact of the FX, this is the number that we could have achieved without it, which is 21%.

Next page, page 9. We have crossed -- three by the way, is the magic number of the third quarter here. So we crossed 3 million customers. Big achievement. I remember the days that we were talk about 3,000 here, [5,000] here. I'm rounding it up for you. We added 70,000 users in this quarter. And with even 3 million customers, I'm still very excited on this growth.

And the most amazing thing in Q3 is our churn. As usual, I'm very proud of it. It is the record for the third quarter, just under 2%, which is the all-time record for Q3. Needless to say, the bigger we are, the more importantly the churn. And this is an achievement that we attribute to every employee in J2.

Moving to page 10, I told you three's magic. We also got this quarter's three awards. I'll talk about them here. Here as you can see this, I'd say, brown logo, ORCCA is an award that we won for our customer support excellence award. O stands for Ottawa. Most of our customer support's in Ottawa. Excellent award, very important and very essential to our low churn an up-sell and cross-sell.

So our Cloud Connect premium fax/voice brands, the revenue continues to grow year over year, quarter three 2015 over quarter three 2014, 3%, and Q3 over Q2, 1%. eVoice/eReception (inaudible) City Number -- our voice products are growing even faster than the fax. They're growing -- they grew 7% year over year and 2% quarter over quarter.

Our corporate fax business grew 15% versus last year quarter, and 1% versus the previous quarter. International Cloud Connect revenue is up 3%. And this is despite the currency fluctuation, which I said before was over $7 million for the quarter.

We have completed the deployment of our mobile apps, both iOS and Android. And we are actually selling new customer via our eFax app. You can go try and buy on our mobile app. We are catching up with the trend, and I think that we are doing relatively very well in comparison to other industry.

Another magic number three, three fax/voice acquisition. Three of them have been done this year in France. We bought in the beginning of the year a company called RTE. And then in the end of Q3, two companies called Axiatel and Popfax. Their impact on the revenue -- to start with they're small. Then they were acquired by the end of the quarter.

But if you want, we have now between $11 million and $12 million of revenue out in France. Some of it we had with our organic. Some came now through the acquisition. The French market for us is the fourth after the US, UK, Canada. And now France, very important. And we are just starting to integrate it.

Next page, page 11, we're going to talk about the Cloud Backup. This is a great story, really great story of how J2 is actually operating. We have grown Q3 revenue 30% versus 2014, and 5% Q3 over Q2. EBITDA reached 44%. This is because the integration and execution is working fast. When we integrate fast, we get fast return on the EBITDA.

We have completed four acquisition in Q3. The largest one of them, I think, Scott, is the largest this year, and definitely the largest for the backup.

That's correct.

It's correct. It's a company that we bought from LiveVault. It was a subsidiary of Hewlett Packard. It's not an easy thing to do, carve out a subsidiary out of the large company like Hewlett Packard is not an easy thing. The J2 staff stood up to the task, and now we have a new LiveVault business, which blends well with our J2 offerings.

We opened already a Boston office with the LiveVault employees. And the revenue impact on Q3 zero because we acquired in the last day of the quarter. LiveVault, if and when it added in Q4 to the existing revenue, should increase our run rate to $105 million, and EBITDA margin will climb from the 44% that I talked to 50%, maybe even more. So amazing story that demonstrate J2.

Five years ago, we met a small company called KeepItSafe. Their revenue was $1.5 million. We grew it after five years to $105 million, so 70x. And the EBITDA that was $600,000 grew to $52.5 million, which is 88x in five years. This is basically, I think, the way to view J2, how we do it.

Let's move to another story of success, which is page 12. Email security, or FuseMail as we call it internally, they had a great quarter. Why [is it] a great quarter? They have finally made a big improvement in the integration of our acquisition of Comendo/Stay Secure. And with this improvement and integration came the EBITDA that just went above 40%. Revenue year over year grew 220% quarter over quarter, and 2% over last quarter. It's all net organic. There was no significant acquisition for FuseMail in the last few quarters. As I said, the main achievement is the EBITDA of 40%. That should go better.

FuseMail also got an award. This is the second award. I promise you three. This award is called the Computing Security Award that we won in the UK. And the Company's continuing to focus on integration. Very hard work is done here. Excel Micro is well-positioned for organic growth in 2016.

And in the Nordics, as I said, we bought Stay Secure and Comendo. And we have our new J2 datacenters. And we have already hundreds of thousands of messages and customers that already have converted from the old brand to our FuseMail brand. And it's well-received and the migration is on its way to achieve more and improved EBITDA.

Next one is our email marketing update, Campaigner. Campaigner revenue is 64% up versus last year quarter, 2% year over year. Also only organic.

Customer support have won again, the third award. Stevie Award winner. This award, again, is for excellent customer support. They are focused on the M&A integration and are well underway on time. They have -- we have a major enhancement to our White Labeled Reseller Program, major new features. And we enhanced the capacity in the speed of our email delivery platform. I have high hopes for this business as well.

Next, we are talk about digital media. Digital media had an amazing quarter as well. Let me start with the fundamentals, very strong fundamentals here. Revenue of $52.3 million, 21% versus last Q3 2014. EBITDA of $20.3 million, up significantly 60% versus last year. EBITDA margin growth of 39% versus 29% of Q3. Those of you that know how the media business work, those are amazing numbers. I don't see that we have a lot of companies that are doing better in this EBITDA segment.

We have continued to measure our platform visits, and we have now over $1 billion visit for the quarter, and I think something like 2.7 page views in the last quarter. Our platform distribution is very important for us. First of all, we have new content partnership with Snapchat. IGN launched an exclusive partnership with Snapchat in August. And IGN daily edition already reached 16.8 million Snapchat users during the month of September. This is just started and growing very rapidly. Very important for us to reach to this segment of customers.

Next is Facebook. Facebook, IGN is 54 million video views in September only, up from 4.5 million in August. There was none of it to compare versus last year. AskMen, 11 million Facebook videos in September up from 5 million a month before.

And then let me talk about our apps in the media business. App installs continue to experience the rapid growth. Ookla, which is our Speedtest business, have seen app install increasing 47% to 157 million installs versus Q3 2014. IGN mobile app, 21% up, 5.3 million installs. And IGN over-the-top up 50%, 7.7 million installs versus Q3 of 2014.

Next page, (inaudible), our digital media highlight. We have several key product launches that hit in Q3. One is Audiences by Ziff Davis. It is basically a tool that enables advertiser to test their own programmatic campaigns on any other media. They pay to know how effective their campaign. And we give them this special tool, Audience by Ziff Davis.

Then we launch our -- as you know, we acquired last year Ookla at the end of the year, and now we are enhancing the revenue potential of this business. We are now doing reviews on Speedtest and fastest ISP and fastest network in the US. Similar to what we did with the PC Magazine, we will announced the winners by region. And those that want to use it as promotion to their product will be adding to our licensing revenue, and we will follow next with the rest of the world. The licensing revenue is extremely profitable, almost 100%.

Then we launch also another data version of Speedtest. Basically, we allow carriers to access our large database. They can query. They can decide where they want to expand, how they do it -- the end user, by device, by location, by time. There is no such service for them. If you are a carrier and you want to know how you're doing, there's only one way to know which is the end unit user that is (inaudible). So we're very excited about it, and we just started it. It's a beta. We're going to make good money.

Ziff Davis, a global extension is continuing. IGN was launched in Romania, finally. My father was born there. And re-launched in Turkey. PC Magazine launch in Portugal and AskMen launch in Latin America.

Now let me talk about our performance marketing, CPC, CPA, CPL, CPI. It's continuing to drive our growth, and it's up 24%. Why this metric is very important? It demonstrate the strengths of our Ziff Davis business. It's our ability to operate on a pay-per-performance environment when people want to pay for results. 24% more means that we can deliver results strong. And as you can see, it all translated to this increase in EBITDA.

And let me now talk about our PC Magazine that published 630 reviews and 155 editors' choice award, BRB, Web Monitoring, Network Security Software. All those are license and content-based revenues. AskMen launched a new Dating Hub. We are evaluating and making comparison between dating websites. We have already 110 reviews across 20 dating categories.

And lastly, the B2B division, which is not a part of Ziff Davis, it provides professional leads for the companies in the IT and other fields, bought a strong player called Salesify. Salesify was bought in the last five days on the quarter. So the impact on the revenue, the EBITDA is not demonstrated yet. It is the leading IT provider for leads, and we are very, very excited about it.

And now I'm going to pass it to Scott.

Thank you, Hemi. Before we open it up to questions, I would ask you to turn to slide 18 where we'll talk about our guidance for fiscal year 2015. We're reconfirming the increased guidance. As you know, at the end of Q3 in early October, we made an announcement of the nine acquisitions completed during the quarter.

And based upon both the operational results we had at the time as well as the contribution of those nine acquisitions, it was our belief that the higher end of our ranges that were originally announced when we first gave guidance back in February were no longer sustainable. And so as a result, we raised the high end of the revenue guidance from $710 million for the year to $724 million, and the high end of the adjusted non-GAAP EPS from $3.97 to $4.13. We reconfirm those today.

I would also note because some people have asked the question why we did not narrow the range of guidance, and as we've discussed in other calls, it is our philosophy ideally in creating guidance ranges throughout the year to have them wide enough to take into account unforeseen positives and negatives such that throughout the course of the year, we reconfirm our guidance.

However, there have been a few instances in our history where events have occurred to the upside that have caused us to revisit the high end of the range. And so our philosophy is, we will only affect that portion of the range which we no longer have confidence in.

At this point, I would now -- well, I would guide you to the fact that behind the reconfirmation slide and the guidance are the usual metric slides as well as the various GAAP to non-GAAP reconciliations for the various business units.

And so we'll be happy to, in the course of questions, address any of those, if you do have questions on them. And I would ask Manny now to come back and instruct you how to queue for questions.

Thank you. We will now be conducting a question and answer session. (Operator instructions)

James Breen, William Blair.

Thanks for taking the question. Scott, just wondered if you could talk about the advertising revenue on the digital media side, how that's broken up amongst the different types of revenue streams and (inaudible) how you expect that to trend going forward? Thanks.

Sure. So first of all, as you know, in our digital media business, one of the things that we premised when we first bought Ziff Davis and has continued subsequently is that we have multiple streams of revenue contributing to the overall revenue of Ziff Davis.

So about 45% of that revenue would be classic display advertising. Then we have performance-based market advertising, which is what Hemi just noted, showed some very strong growth in the last quarter, at say 30%-ish of total revenues. Then we have our B2B business and our licensing business that roughly are equal in contributing to the balance of the revenues. So that portfolio of mix, I think, is very important as we look forward.

I'm going to take implicit in your question, or I'm going to address a topic that certainly has come up within the broader digital media business probably over the last six to eight weeks, which is ad blocking technology. And that is made more prominent through what Apple did with their latest operating system release.

So what we are very happy about and I think we've seen very minimal effect from the ad blocking technology is, first and foremost, it can't even affect more than half of our business. It can only affect half of our business at most.

But more importantly, we've got very sophisticated users on the tech and game side. And so this is actually not something new for Ziff Davis. It's something that has been available in other browsers. And so it is something that the team has had to manage around, not just in the last two to three months, but for years.

One of the things that we've been doing to help mitigate any impact that could come from the ad blocking technology is to grow what we call the non-blockable traffic. Now, this takes the form of advertising that occurs within our own mobile apps where we control the environment, or a variety of social platforms like the Snapchat announcement we made last quarter or Facebook and Twitter. So we've seen a pretty strong growth in the amount of our total non-blockable traffic over the last 12 to 18 months.

And then finally, going back to that performance-based marketing component, we've got branded content that we sell that cannot be blocked because it's actually embedded within the content. So I feel very good that, while if you look forward, given the strength of what's going on with Ookla as Hemi mentioned, we have just launched in beta what I'll call the data portal. There's been, as we've talked about, and we bought them almost a year ago -- it's really a two-year project to fully take advantage of what Ookla can bring to the table. You're probably going to see a little bit more shift going forward of revenue going into the licensing sector, the B2B sector and performance-based marketing, and somewhat less in the display category.

Great, thanks.

Shyam Patil, SIG.

Thank you. Hey, guys. Great quarter. First question is around M&A. If you could just talk about the pipeline, kind of how you feel exiting 2015 and entering 2016. How do you feel about your pipeline for large deals, midsize deals, smaller deals? And then, Scott, in terms of capital deployment so far this year, how do you feel you guys have done? And just, I mean, have you guys hit your internal goals for the year? Just kind of curious how you guys have done versus what you may have expected to do this year.

Yes, okay. I'll try to remember all your sub-parts. If not, remind me of them. So I'm going to take your last one because that's actually what I remember. We, as you know, in the budget and the guidance, because we had a lot of M&A in Q4 and in Q1 at the time that we released guidance, we actually didn't bake a whole lot in for the balance of the year.

Now, having said that, if you look over the last three years or so, we're in the mode of spending $200 million to $300 million a year on M&A. We're at $265 million this year. I think we were just under $300 million last year. And a little north of $200 million the year before that. So irrespective of the budget, that's kind of an internal benchmark that I look at.

Now, as you know, certain situations you could spend all that money and more in one transaction. That's generally not been the case for us. It's been spread across many smaller deals. If you look at the 29 deals in the trailing four quarters, 27 of them would probably be considered small by anybody's definition. And the two that are quote-unquote larger are not large.

So I think that as we look forward in terms of the pipeline, there is always an evergreen amount of these small deals. And just to define it for people that might not be used to our terminology, the small deal is one that has $5 million or less in revenue. And those are heavily weighted with the cloud side of the business. Generally, the media looks for businesses that have $10 million and more in revenue. So our pipeline remains strong. It's always strong as it relates to the smaller transactions.

And then more and more we're starting to see as we've gotten bigger, we have access to more capital, some of these larger situations like a LiveVault. And we see things, by the way, that are even much bigger than that. Although, oftentimes, evaluation-wise or fit-wise, they're not as good.

So I think as we look out into 2016, I'm very optimistic because I believe that the trend that we've seen in the last 18 to 24 months for us is going to continue to show us medium- to large-size deal flow. I think that by doing a successful carve out from a company like HP has very good credibility on the street to do other carve-outs. Our media business has done that several times including the IGN transaction from News Corp.

I think, as we've talked about before, SugarSync's a very interesting transaction that came from the VC world. So there are new vistas opening up for us in terms of where we're looking for M&A targets or for assets that we can buy.

Great, great. And maybe just a follow up on the guidance. And you know, you talked about raising the high-end for revenue and for earnings. How much of the guidance raise would you say is from organic outperformance versus M&A?

And in terms of the M&A that you did in the third quarter, what kind of run rate should we expect from an annualized basis kind of heading into 2016? And what kind of growth rate do you think we should assume on that base of revenue just as we kind of set our models for next year?

I'm not going to go there with you because we're still in the budgeting process on 2016. Obviously, we haven't released 2016 guidance. But I will give you some maybe helpful hints here.

So in terms of the -- as Hemi mentioned, there's very little contribution from the M&A in Q3 itself. Literally, LiveVault closed on the last day of the month. Salesify closed a couple weeks earlier. And most of the other stuff was actually rather modest in size.

So the book of business that we bought in Q3 is a round number, about $70 million in revenue across all the nine transactions. So that will flow through roughly proportionally into Q4 in terms of incremental revenue that otherwise would not have existed.

So in answer to your first part of the question, the majority of the bump in both top and bottom line comes from the fact that we've got these additional revenue streams, all of which are profitable from day one, although some may be more profitable as we look out into the future than just into Q4.

So more than the majority of the raise comes from the acquired assets and their EBITDA productivity. However, as you've just seen in Q3, even against our own budgets internally, there's been an outperformance going on within the core businesses.

So it was a combination of both that moved us from -- I'd say we were not at the absolute high end of the range in revenue. We were somewhat above the midpoint. Our EPS was somewhat higher than that in terms of its range. It (inaudible) both of those well north of the high end.

Great, thank you. Congrats again.

James Fish, Citi.

Hey, Hemi and Scott. Thanks for the questions here. Yes, it's all the James again. Scott, back in Q4, you guys gave us some values on the organic growth rates for the DID, non-DID and digital media businesses. Has anything changed here? Or should we assume that those rates have stayed the same?

I think in general, they are -- I think they're in general consistent. As you know, the Cloud Connect business, we don't model. Some people call it a GDP grower. We're not modeling anything higher than that. We did have a very good Q3. Sometimes you'll get some bumps higher than that. But I think that, to be realistic, it is a large cash generator. I think that's the right way to look at it.

Our non-bid-based or our non-Cloud Connect businesses in general are trending right around double-digit organic growth. Although, some of that is being masked this year. In fact, a good amount in the backup business because of the FX elements that we've talked about not only in this quarter but in previous quarters.

A large portion of that $6-plus million that we took within the quarter applies to our backup business because prior to LiveVault, the vast majority of that revenue was either in pounds or in euros because it was heavily European-based.

And then I think we've got a digital media business that is right around a double-digit organic grower. As I say, we're going to take the temperature of these elements that I just addressed like the ad blocking play on a going-forward basis. But we've got some very, very strong elements of that business that are, I mean, they're well into the double-digit growth rates.

And James, some of the growth, I talked about 70,000 or 68,000 to be exact net gross, half of it or almost half is actually from Livedrive, not LiveVault. LiveVault right away has large customers so impact on user base is very small because they have customers that are larger.

But LiveVault itself was doing very good in the UK. They have this back-to-school and all those things. Like, I think the number we saw is 31,000 came from the LiveVault --

Livedrive.

Livedrive, sorry -- Livedrive, which is a consumer product that ties into --

UL-based.

UK-based. It ties into shoppers that buy equipment, phones, PCs, things like this that have memory attached to it. So they were big impactor this quarter. And that's why you also will see if you're planning to ask, the little decline in the ARPU because they have lower ARPU typically but have zero marketing cost.

Got it. Hemi, you're always feeding me to my next question. But I'll ask another one instead. Over the last one to two months for eFax, it seems as though there's been an uptick in the advertising there. Why this additional investment instead of marketing into your faster growth areas?

First of all, I'm not sure that the increase is there.

I don't think that's correct.

Because we are actually getting more confidence in advertising on backup. Backup was dry. There was no advertising there. And recently, with some changes, we did some campaigns in Europe. I forgot the buzzword there, but basically we are seeing a 10,000, I don't know, euro, dollars, a week of new business that is coming so that they're advertising to midsized businesses.

In the eFax, I don't think we are increasing in the US, a little bit on voice, a little bit in other countries in Australia just where we're integrating and we're building new [teams]. The J2 [formula is] if you're a new team and you don't know what you're doing, don't advertise. First of all, get control on the organic. Once we have a team that we think that are able to spend money, analyze and then deploy more money, then we are actually opening the advertising for buckets.

But it's not eFax. It's a little bit eFax. But it's the other businesses that are now starting to see return on investment. Most of it is actually on the backup. Scott maybe can check as we talk.

Got it. Thanks, guys.

You're welcome, James.

Daniel Ives, FBR Capital.

Hey, guys. Great quarter again. So in terms of M&A, I mean, as we go into 2016, and obviously you guys humming on each part of your business, in terms of just M&A candidates on the private side, are you starting to see maybe some desperation or valuations come down a bit in certain areas that could make it more aggressive for you to be on M&A?

I think it's very transaction or deal specific. I mean, I think that certainly you can have systemic elements, be it major changes in the economy that are prolonged or stock market corrections. Certainly the latter, we're not seeing right now. If anything, it seems like the Dow's reaching back for new all-time highs.

However, I think this is part of the art of the teams that we have built is that whether the markets are strong or weak, or the economy is strong or weak, where to look to find the right kind of deals that will fit our model. And by the way, I'm sure you appreciate it, others may not, we have to look at scores of deals to find the 5 deals, the 10 deals that we do a quarter. So we're throwing a lot back because in any instances, it's not that we don't like the asset, but we don't like the price associated with the asset. It doesn't work for our model at least at this moment in time.

So educating the deal teams of where to look and how to find and create value in these deals is very important because we can't have our M&A program be subject to market conditions. Yes, they're going to be influenced by them on the margin, but that's all I want them to be influenced is on the margin.

And Daniel, it's a good question. And I would like to answer you. And in (inaudible) let's say, use, for example the carve-out with Hewlett Packard. And I think they would not care because it's not material for them. It's material to us.

They came to us, and we were (inaudible) there with a strong M&A team. And they say, you know, we came to you not thinking that you will be the highest bidder. You say you're serious, you will execute, you'll be fast, you have a cash, and you have very high close rate. Those things matter when somebody wants to sell.

So we are basically with our discipline and our reputation are getting deals that I can tell you, so many times when I get involved in the deals, and I usually get involved in the deals of either larger size or are new to us. And I want to make sure that we are comfortable with geography with the people in the business. And I then I meet the sellers, all the bankers, and together. And they basically want us because they know that we can execute well. They know that we are serious. And we know that they will get it closed.

So I think those in the new environment, those attributes of our will help us a lot because there are many people that just go kick the tires, take a round around the block, and then you buy new car with 1,000 miles. All are testing miles. But they're not buying.

And we saw that same phenomenon a couple years ago when News Corp wanted to sell IGN. We were definitely not the highest bidder. But we were able to execute on about a 60-day timeframe.

We did a very small deal, small deal already in this quarter. It was a company out of bankruptcy. We were able --

It was in bankruptcy.

In bankruptcy. We just knew the business so well that we asked two questions, we gave them the money, and we were shocked how well the deal was. I mean, we paid half time revenue, Scott, right?

Yep.

Was amazing. Not big. But it just shows you execution is very important. And we definitely have the experience of doing it. So thank you for your question, Daniel.

Yes. And just -- no, it's a good answer. When I think about cloud and digital media going into 2016 -- obviously you're not giving guidance -- but can you maybe just go through in each of them the biggest opportunity, but also maybe the biggest challenge?

And obviously touching the ad blocking. I think that was good that you hit that. But maybe on each of those businesses going to 2016, just sort of like the biggest positive and biggest potential, maybe even challenge or negative. Thanks.

Yes, so media -- I'll start. Media has big, big targets. Usually they buy companies with large -- sorry?

Core business, I think.

Core business, okay. So I just touch on media. So the core business, obviously on the fax we are big player. Not a lot to do. But actually we still have some deals, and I am comfortable that we can continue to maintain this slow growth, but growth, still growing on the voice side and in other territories. So I'm very comfortable saying that the fax will continue in the same -- and the voice, the [Cloud Connect] in the same trajectory.

Backup, a story of acceleration. You know we were making an attempt of Carbonite. We are still a large shareholder there. There is no discussion, nothing. But there are companies like that. They are being the largest ones. So I see us absolutely making deal on the backup. And why we don't have any significant large size deal on the pipeline, they will come, I know. We know them, they know us. We can execute. Not a lot of competition in this space.

On the next one which is our email or FuseMail, many large companies like Google deal a few years ago, Symantec, and now Intel are exiting. They think it's too small for them. They think that they are going to focus on their main business because it's not core to them. And we are just sitting there and proving great service.

And therefore, I think they -- and I said to 2016, I (inaudible) organic. And this year, we didn't even look at assets because we were like the snake that ate a big cow and is digesting it. Cannot eat for a year. So this is our (inaudible), the business. I know, Daniel, that you (inaudible). I'm not so good with trains, but I'm good with snakes.

But the next one is the Campaigner. We just heard about -- and congratulations on the both side of the Constant Contact. I don't know if it's a closed deal, but it's an interesting deal. In this space, there are still many opportunities for us. We are in discussion. And it's a small business for us. So a business of $25 million, to double it, it doesn't mean a lot of J2, but it's a lot for them.

So basically, I think that this is the way we see it. And we have the money, we have the execution power, we have the appetite, we have the energy. What we don't know is how the markets will be. But we are ready for both good and bad markets.

And you know, we will lay out the budget. We didn't start work on our budget. We will start now next month. And hopefully when we come with the numbers sometimes in the early February, we'll be able to provide you a better picture. But I can tell you, we are all very optimistic. As you can hear from our voices, we are very optimistic.

I think on the media side to supplement what Hemi said, the licensing portion of the business, the performance-based marketing and the B2B, I think, is where there's upside. I think the area to watch is on the display side for some of the reasons that I already mentioned.

But I think given our proportionality of revenue, I feel very good about the fact that we've got some strong dynamics in the non-display piece of our digital media business, and it's up-size.

Got it. Great.

Before we go to the -- are you finished, Dan?

Yes, I'm good.

Before we go to the next question, I want to just go back to Jim's question about the marketing. I don't know if this is exactly what he was referring to. But we've got some data for the third fiscal quarter of 2015 versus 2014. First of all, on the cloud side, in the aggregate, the spend was almost exactly the same. The difference was about $150,000 more in Q3 of 2015 versus Q3 of 2014.

However, as Hemi noted, there's a shift that has gone on in that mix where several hundred thousand dollars moved from the Cloud Connect piece of the business to online backup. So the aggregate stayed the same Q3 of 2014 to Q3 of 2015. But a slight shift in mix from Cloud Connect, which is fax and voice to online backup.

it's funny that the same guys, [Erick] that used to spend the money on Cloud Connect that moved back to the US [are spending] the money.

Any other questions?

Any other?

Greg Burns, Sidoti & Company.

Yes, just a question on the cloud margins, the highest they've been in over two years. Didn't sound like any of the new acquisitions would be dilutive. In some cases, sounded like could potentially be accretive to margin. So how should we think about the margin profile of the cloud business prospectively?

You are correct. The largest two deals are adding -- they are very profitable. I think that the numbers will stabilize at the 50% level. It depends on the business. The more mature one, the fax, is higher. The younger one, lower. But I think, Scott, you're better than me in this, but I think -- (multiple speakers)

Yes, I think, look, as we've stated before, the goal in how we run our businesses on the cloud side in particular, although you're also seeing some applicability to the media side, is that when these businesses get to scale, they should produce 50% or better EBITDA margins. Cloud Connect's at scale, and it produces somewhat north of 50% EBITDA margins.

Backup isn't there yet on a historic basis. But on a prospective basis with the addition of LiveVault, the answer is yes. Even though it's actually not at a revenue level that we would consider fully scaled. I think we've talked about before $150 million to $175 million really being a scaled business. We're just tipping $100 million, but honing in on a 50% EBITDA margin.

Email security, I think, has -- it needs more revenue and scale to move from the low-40%s to 50%. But it's moving in the right direction. And then email marketing, even off its small base, is already there.

So what you're seeing, I think, in the quarter is the effect of the integration of a number of, primarily small deals that have occurred over the prior nine months, some of which were a drag on the margins at the time of acquisition. But as we have integrated them and gotten the synergies, they've now been accretive to the margins of each individual business segment.

So I'm always reticent to talk about margins going north of 50% even though I think that it's possible. In our Cloud Connect business, which is the fax and the voice, I've been a believer for a while that given the sheer size of that business, there's probably some additional margin that can be obtained. And because it's a large base of revenue, even small movements in margin can be very nice accretion to the bottom line.

So it's a little bit too early to prognosticate. But assuming we have generally stable economic conditions, and these businesses continue to scale in the revenue book organically and with M&A, I would expect to see some EBITDA margin improvement from where we sit today versus the future.

And Greg, you know, I have very high appetite for growth in revenue because I am very confident that J2 over the years has developed very strong capability to drive very high EBITDA out of companies. We just have to be disciplined, selective, find the right ones, and sky is the limit.

Okay, thanks. And then cash flow last year in the fourth quarter was flat sequentially. Is that how we should be thinking about it this year?

Well, I think had we not done the M&A deals that will contribute in Q4 but not in Q3, I would say probably that's a good way of looking at it. Because all of the media business will do larger EBITDAs in Q4. Because of the timing of collecting on the receivables, their cash comes in generally in Q1 because a lot of their EBITDA is generated from middle of November through late December.

However, we have the wrinkle this year of these nine transactions contributing revenue, EBITDA, and cash flow in Q4. So I would expect, assuming taxes stay stable, no major change in CapEx, that maybe there'd be some upward bias in free cash flow generation in Q4 relative to Q3.

Okay, thank you.

Thank you. At this time, I would like to turn the conference back over to management for any additional comments.

Good, thank you. Well, we appreciate your joining us on the call today to review the Q3 results and talk about the balance of the year. Next Tuesday in New York, I will be presenting at the Mizuho Conference. That'll be on Tuesday, November the 10th. And then in January, Vivek and I will be presenting at the Needham Conference, also in New York.

We do not have a date yet set for the Q4 earnings call. But based on past precedent, that's likely to be the second week of February, at which time we'll have the Q4 results and also release 2016 guidance. Thank you.

Thank you very much.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.