Ziff Davis Inc (ZD) 2016 Q1 法說會逐字稿

Greetings, and welcome to the J2 Global first quarter 2016 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). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Scott Turicchi. Thank you, Mr. Turicchi. You may begin. He is the President of J2 Global.

Thank you, and good afternoon. Welcome to J2 Global's investor conference call for the first fiscal quarter of 2016. As Tim just mentioned, I'm Scott Turicchi, the President and CFO of J2 Global, and with me today is Hemi Zucker, our Chief Executive Officer.

Q1 2016 continued to provide outstanding operating results, which continues to validate our overall business strategy of operating in multiple business units while focusing on EBITDA and free cash flow generation and utilizing M&A to more rapidly build these businesses to scale. Many records were set for the first fiscal quarter, which we will detail in the presentation.

As a result, our Board has increased the quarterly dividend by one penny to $0.335 per share. We will use a 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 allow you to expand the slides. Also, if you've not received a copy of the press release, you may access it through our corporate website at j2global.com/press. In addition, you can access the webcast from this site.

After we complete the presentation, we will conduct a Q&A session. At that time, the operator will instruct you regarding the procedures for asking a question. However, at any time, you may email us questions at investor@jbglobal.com.

Before we begin our prepared remarks, I'll read the safe harbor language. As you know, this call and the webcast does include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we have included as part of the slide show for this webcast. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements, and those are outlined on pages 2 and 3 of the presentation.

If you'll now turn your attention to slide 5, I'd like to highlight the accomplishments in the first quarter of 2016 from a financial standpoint. On a consolidated basis, J2 Global had slightly in excess of $200 million of revenue, approximately $87 million of consolidated EBITDA, I think most importantly $60 million of free cash flow, and adjusted EPS of $1.05 per share.

The free cash flow in particular was up a healthy 39% year over year. Revenues and EBITDA were up approximately 25% each. The EBITDA margin for the Company expanded slightly to in excess of 43%.

During the quarter, as previously announced, we completed six acquisitions, all of which were in the cloud segment, most of which actually were in the backup segment. A few highlight for the cloud business -- its revenue was $138 million, or up 17% year over year. Its EBITDA grew by $11 million, or 19%.

Our Cloud Connect, or fax and voice, business was up $4 million, or 5% year over year. And our cloud services were up $16 million, or 50%. Those include the backup business, email security, email marketing and Web hosting. The EBITDA margin for the cloud segment was 51%, compared to 50% in Q1 of 2015. Digital media also had a stellar first quarter with revenues of $62 million, or up $19 million or 44% year over year, and an EBITDA expansion to 33% as compared to 32% in Q1 of 2015.

Now, I'd like you to turn to page 7, as we are introducing some additional information as part of this call, which you'll see on slide 8. So as you know, we account for our business in two segments -- the cloud segment and the media segment. We've now in this presentation taken the cloud segment and given you some additional information regarding various pieces of the cloud business.

Most notably, we've broken out Cloud Connect, which is the fax and voice business, then have the cloud services, which I just mentioned included backup, email security, email marketing and Web hosting, and then the patents. Those three elements together add up to the total cloud.

You'll see on slight 8, Q1 of 2015 and Q1 of 2016 are presented here, and in the appendix, we give you the full fiscal years of 2011 through 2015. In all cases, these are reported on an adjusted non-GAAP basis using the current definitions that we've used for some time now.

I would also note that there are certain historic shared personnel costs that are part of our Cloud Connect, or fax and voice, business that we have now broken out and allocated to the other cloud services to the extent they utilize certain marketing and finance services provided by Cloud Connect. We've also made various adjustments to the allocated personnel and corporate-related costs on a consistent basis for 2011 to 2015.

Finally, in the appendix you'll see also the amount of capital investment made in each of these business units, both cumulative through 12-31-10 and then for each fiscal year thereafter. And the capital investment specifically includes amount spent on M&A, property and equipment, and intangibles.

Now, turning to the quarter on slide 8, our Cloud Connect business had a growth of about $4 million in revenue to $90.2 million, had 53% EBITDA margins, or about $48 million in EBITDA. The slight decline in EBITDA margin from Q1 of 2015 to Q1 of 2016 has to do primarily with some increased marketing that we were able to do in Q1 of 2016, which Hemi will explain in greater detail as he goes through that segment, as well as certain transition services costs related to an M&A transaction.

Our other cloud services grew dramatically to $46.7 million of revenue, $21.3 million of EBITDA, a big increase in the EBITDA margin from the year-ago quarter, from 33% to 46%. Patents had $1.1 million in revenue, $400,000 in EBITDA, 35% EBITDA margin. Add it all up -- the total cloud business had $138 million of revs, approximately $70 million in EBITDA, or 51% EBITDA margin. It had an operating margin of 48.8%.

As I mentioned, the digital media business showed strong growth of 44% on the top line to $62.4 million, had 33% EBITDA margins to slightly in excess of $20 million of EBITDA, had an operating margin for the quarter of $28.7 million.

I would also note that these then added up to $200.5 million of total revenue for J2 Global, $86.7 million of EBITDA, and $51.4 million of adjusted non-GAAP earnings, or $1.05 per share. Embedded within that is $21 million of amortization of intangibles, of which $13.8 million is allocated to the cloud business and $7.2 million is allocated to the media business.

At this point, I will turn the presentation over to Hemi, who will walk you through in greater detail the performance of the various business units.

Thank you, Scott, and good afternoon, everybody. Q1 was an amazing, strong quarter for us. We started with a very strong momentum, and I'm very pleased to talk about it, and as usual, I have two chapters. One is cloud business, and one is media. Let's go to page 10, where we talk about our cancel rate.

Our cancel rate hold in the all-time historical low of 2.2%. To remind you, Q1 is usually our highest churn, historically, rate. I just looked before the earnings call into the numbers. Actually, fax and voice churn reduced, and what brought it to the 2.2% is the seasonality of some of our shoppers in the UK that buy gizmos or units or Christmas gifts, and when it comes to renewal, usually in January is the time that we have some cancel, but I'm very happy to say that the cancel rate holds at 2.2% and strong low churn in fax and voice.

Page 11, where I talk about Cloud Connect, which is our fax and voice business -- in our first quarter, our fax and voice revenue was $90 million, as Scott said, 5% quarter over quarter. Fax only out of it is $77 million, 5% versus last year's quarter. This is led by our premium brands and by our corporate fax and international faxes.

Fax revenue represented in Q1 38% of the consolidated revenue of the Company and presented 47% of the EBITDA. While fax revenue continued to our happiness to grow, its percentage of the business is becoming smaller. On the run rate, it's 37% and most likely will go to 36% as we go towards the end of the year.

Our subscriber base on the Cloud Connect is 2.4 million, which is 3.5% year over year, and we are very excited to finally be able not only to have mobile services present its role in the mobile apps out there, but actually we started to sell what we call in-app selling, in-app signups on our both eFax and MyFax.

Basically, the way it works is we started in Q1, you search on your app store the fax product, we present you -- here on the slide, you see the Android example, and you can sign up with your credit card or use your virtual wallet or email wallet or whatever wallet you have, and basically I'm very proud to say that now, in May, we came up from the beginning of the year 2000 units per week, and we are getting those units in great cost of acquisition, and we are going to look forward towards the growth of this segment or channel.

We have acquired a company called Callstream towards the end of Q1. This is a company that resides in Birmingham, where we have our City Numbers unit, so we are combining the offices to scale up the margins. This business is in the UK and, as I said, did not have a lot of impact in Q1 but will have more in Q2, and we are looking forward to continue to grow on this side of our voice business.

Next page, 12, backup business -- our quarterly revenue in the backup business was $28 million, so revenue grew 112% and our EBITDA grew 180% to $14 million. We are really scaling up here and are reaching EBITDA of 50%. And how did we do it? First of all, we completed four acquisitions in Q1. That includes VaultLogix in Boston and three other small acquisitions. Boston is now becoming the J2 capital of backup. We have LiveVault, and we have VaultLogix, so together they are $50 million of business focused on medium-sized companies and enterprises.

We have a healthy acquisition pipeline, and our run rate revenue is already $120 million, with 50% EBITDA, so I believe we can scale up even better than that.

The next page, page 13 -- email security, or as we call it here, FuseMail. The revenue of FuseMail was $12.3 million, up 16% versus last year. The run rate revenue is $60 million. EBITDA is $4.4 million, and J2's standard 36% EBITDA is absolutely not optimized. We are optimizing it, and how are you optimizing it? We are consolidating our acquired companies by migrating them to one consolidated system.

In the Nordics, we have bought in Sweden Stay Secure. Ninety-nine percent of the Stay Secure customers are already moved to the FuseMail platform. In Denmark, we are going to move most of the customers in Q2 to the FuseMail platform. And every time we move a customer from one platform to the other, we reduce the costs because we can shut the other platform and move to one platform where we are more effective.

Excel Micro is also a large division of our FuseMail entity or unit. Excel Micro offers solutions like McAfee and FuseMail and other email security solutions. I don't know if I talked about it in the last earnings call, but Intel decided to bring McAfee to its end of life by January 10 next year, so we are helping in migrating those customers to various services, including our own service, FuseMail, for McAfee. We are very happy with the progress we are doing it, and all those migrations result for us better margins and improved EBITDA down the road.

We also had M&A pipeline -- or the M&A pipeline for this business and for the backup business continues to be healthy, and we are looking forward to acquire more competitors or invest more in both.

The next page, I will talk about our Campaigner email marketing. This is page 14. Our revenue for the quarter was $6 million, which is 18% versus last quarter. Our run rate is $26 million. How does it happen that we are $6 million and we go to $26 million? We have acquired a small company called MailOut in January, and we acquired actually in April, so Q2, a company -- or an asset of the Company called WhatCounts, and together, with those two added assets, our run rate is now [26%]. The EBITDA of this unit is one of the highest in J2. Even though it's a small unit, it's very optimized, and the EBITDA is north of 50% and continues to improve.

Our team in Campaigner, which we are proud of, won two awards, Stevie Awards -- one gold Stevie Award for head of sales and one bronze Stevie award for the sales team. This is about our Campaigner.

And let me move now to the digital media. As Scott said, our digital media had a phenomenal quarter, $62 million of revenue, which is 40% over last year's quarter, EBITDA of $20 million, which is up 49% versus the same quarter last year. EBITDA margin also improved from 32% to 33%. And our total multi-platform visits have been this quarter 1.1 billion, which is 50% higher than last year.

A very important thing here is we are trying all the time and we are doing very well in the diversification of our revenue sources on the media business. As you know, our media business has three companies -- performance marketing, display and video, and licensing. On the side of the video and display were towards the beginning of this business. We know that the industry is suffering from headwinds as more and more -- and this is a universal issue as more and more customers want to have guaranteed results and are less happy with just buying display and video.

Despite the headwinds, this side of our business still succeeded to grow 8% year over year, but now it represents only 41% of our business, and it was 54% of our business. The other segments that are more profitable and growing faster are the performance marketing. That was up 95% versus last year. Now it represents over half of our business. It was only 36% last quarter, the same. And licensing, which is up now by 59% versus Q1, representing 11% of our revenue, was 10%. Licensing is one of the most profitable sides of our media business.

Licensing is growing in all the places, but I would like to focus on Ookla. If you remember, we bought Ookla last year, which is a speed test, and we continue to see very impressive adoption there. The app was installed on 50 million new devices in Q1, and all-time device installations are 186 million. We are by far the largest player in this market, and we are the largest crowd sourcer of data for IPS and wireless carriers to enable them to see their performance.

As a result, we sold 30 licensing of this in Q1, both of licenses where a customer can access our data or they are buying the rights to use the results as marketing and advertising. For instance, they can say that I am the strongest ISP in Houston based on Ookla's speed test. So again, this is a demonstration of how our Ziff Davis unit is able to buy business, improve it, scale it up, improve the profitability, and we are very proud of our performance with Ziff Davis.

Another M&A, which is totally new -- we didn't even have it last year -- is our distribution of videos through Facebook. Besides what I told you about the 1.1 billion displays, on Facebook we have -- where is the number? We have over 500 million videos, that are not even counted in the 1.1 billion, distributed through Facebook, and we have another 250 million videos for YouTube. Both are not counted in our 1.1 views.

So basically here again, Ziff Davis is demonstrating how they can find and reinvent itself to keep its game on the highest profitability and growth, and we are very happy with our Ziff Davis results.

Let's go to the next page, and I talked a little bit about the products. We have several product launches that we have done in Q1. PCMagazine launched a business software in it that's basically allowing business owners to find soft solutions. We have there 770 vendors that are showing their profiles in 85 categories. IGN passed 7 million -- actually, 7.8 million -- users subscribed on our networks, which is 20% growth over last year. IGN virtual reality is now premiered on our channel, and you can both see 360-degree movies and learn about virtual reality.

And last, but not least, we have launched a fully mobile responsive version of geek.com, which basically optimizes all those -- all this information for all screen ties and all this stuff in public, et cetera, et cetera.

And before I hand it to Scott, I want to thank all of our employees and everybody for this amazing Q1. Scott?

Thank you, Hemi. A couple of final comments before we turn it over to Q&A. On slide 19, we're reconfirming our 2016 guidance, which is for a range of revenues between $830 million and $860 million, non-GAAP EPS between $4.70 a share and $5.00 a share.

I would remind everybody that it is the Company's philosophy, long-standing philosophy, that when we provide the guidance, which we release in conjunction with the Q4 call on an annual basis, we have ranges that are wide enough such that they are intended to capture all kinds of effects that may occur throughout the year, such that we continue to reaffirm that guidance. So even though this is a quarter which has outperformed our budget, because we believe we will still operate within this range, we reconfirm the range.

There have been instances in some years where as we get later in the year, it becomes clearer that one end of the range -- historically it's been the top end -- is not going to be supported, and then at that time, we make adjustments. So that is our philosophy on guidance, hence our reconfirmation of the 2016 guidance.

Then finally, on slides 20 and following are the supplemental information, most of which is familiar to you because it includes the financial metrics of the Company, the cloud and media metrics, the various GAAP to non-GAAP reconciliations.

What I referenced at the beginning of the call, though, is slides 22 and -- or 23 and 24, which gives you for five fiscal years, 2011 through 2015, a breakout of the cloud business between Cloud Connect, which is fax and voice, the other cloud services and patents. The three of those combined constitute the cloud segment. And then for information purposes, you'll see how much capital has been invested cumulatively at the end of each fiscal year and how much capital was invested within each fiscal year. Those then all total up, so you can also see how much capital has been invested in J2 since inception, which is about $1.425 billion through 12-31-15.

So with that, I will ask Tim to come back and instruct you on how to queue for questions.

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Shyam Patil, SIG.

Thanks for the additional disclosure, and congrats on the quarter. First question, on M&A, Scott, if you could just talk a little bit about just how you guys think about kind of the deployment of cash towards M&A, what your hurdle rate is, and if you look kind of over the past five years, what's been your typical or average cash-on-cash returns for a transaction? And then I have some follow ups.

Okay, so I'll give you some broad answers, and then if we refer to slides 23 and 24, you'll get some -- it's not exactly on point to your question, because these are sort of EBITDA to capital investments, so the tax component is not taken into account. Sometimes that is difficult to allocate, because we have different tax rates around the world.

But in terms of your broader-based question, the goal has been and continues to remain that we target 20% cash-on-cash returns. Technically, it's actually 1000 basis points over the free cash flow yield on our stock. So today, given the free cash flow generation, that would probably be in the 19% range. When the stock was higher, it would be a little bit less.

We have historically rounded that, both for internal as well as external purposes, to just tell people it's 20%. So we gear our modeling and our acquisition purchase prices and our operational synergies around that metric. Obviously, there are strategic and other considerations that come into play.

Now, the sort of exception to that, and you'll see this if you look at digital media, is when you go into a new space -- and a new space can be defined as, clearly in the case of digital media, a whole new category. It can also be a new country or a new product set. When you do that, whatever that initial entree deal is, that will generally have a lower return than the 20% because there are no synergies with deal number one. So the premise there is that by getting into a new category, getting a platform and a team and expertise, be it in country or with a product set, that the follow-on acquisitions will then drive you on the cumulative investment made within that business unit to 20% or better.

So you'll see we paid, if you remember, in digital media $172 million for about $12 million or $13 million of EBITDA pro forma in 2012. That was the full fiscal year of their EBITDA. So we paid about 13 times EBITDA. Even though there has been and continues to be good organic growth in that business, the real leverage has come from adding another $350 million of capital through other deals that then get synergized because the team and the platform are in place.

And so you'll see, even though it's a proxy, it starts at a non-meaningful rate of return on an EBITDA basis, and now, as of 12-31, we're up to 18%, and that's a little biased because we bought companies at the end of 2015 which had either no or little contribution to digital media, yet they're in the capital investment as of 12-31. So it's a biased high number on the capital investment, but not on the EBITDA, so it's probably better to roll the analysis forward a fiscal year to look at the EBITDA generative characteristics.

Clearly, you can see what digital media did in Q1, the kind of growth it had in EBITDA. You can extrapolate that out, adjust for the seasonality, and make your estimate of what that will look like for 2016.

So that remains the philosophy of the Company. The pipeline remains active on both the cloud side and the digital media side. I would say that over -- it's probably been the case for the last year, year and a half. We've started to see and we've acted on some deals that are somewhat larger in size than the traditional small, tuck-in deals that were the sort of historical bread and butter of primarily the cloud business, and that trend continues.

As we get bigger, we tend to see both larger situations -- generally not gargantuan, but things that have $10 million, $20 million, $30 million, $40 million, $50 million, sometimes $100 million or more in revenue, generally not much larger than that, that are of interest to us. So we have a -- we have active dialogues going on right now. I'm optimistic for Q1, and then as we enter July, we'll be putting out a press release on the acquisitions consummated during Q2.

Great. Thank you. And just a couple follow ups on the points you made. What would you say is the typical timeframe or at least has been the typical timeframe to fully synergize acquisitions in terms of getting them to the optimized margins? And you mentioned in your response just the difference between free cash flow and EBITDA from some of these acquisitions, the taxes being one of them. Can you maybe talk about just the difference we have seen in the EBITDA and free cash flow from M&A and just kind of how to think about that going forward?

Yes, tax rates are tricky because they are a consolidated element, and we have a variety of tax rates around the world, and there are certain deductions and things that affect your cash tax rate, which can be more volatile than either your GAAP or non-GAAP tax rate. Now, if you look both historically and at the current quarter, you'll see that about two-thirds to 70% of our EBITDA converts to free cash flow. With all of the ins and the outs and all the variation in tax rates and whether you get R&D credit deductions that are bigger or smaller in some periods or others, there's about a two-thirds to 70% conversion in the aggregate of our EBITDA to free cash flow, so I would start there.

And then you had asked a different question or another question. Could you repeat that one for me? Shyam? Did we lose him?

Sorry, I think you can hear me now. Just the typical timeframe it takes to --

Oh, right. Yes, it will vary. Now, the cloud side, I would say other than an entree acquisition into a new product set or geographic area, where there's going to be really no concept of synergy -- so take Web 24 web hosting in Australia that we bought 18 months ago or so.

If it is a follow-on transaction, depending upon the number of integrations that a business unit has and its own priorities, you're talking usually six months to nine months, and most of that integration, as Hemi mentioned on some of the deals done in Q1, deal with things like office consolidation, changing the sales and marketing strategy, maybe changing things in R&D because we've already got R&D teams.

So that can generally be done in six to nine months. There will be some variations. If it's in the Cloud Connect business, you're moving telephone numbers amongst carriers. If it's in the non-Cloud Connect or in the others, you're moving data, so there will be some differences measured generally within a few months.

The biggest distinction, though, is between the cloud business and its program of integration in the media business. Most of the media business's acquisitions play out over a longer timeframe, because the real opportunity there is in expanding the revenue streams, getting more out of the traffic that we are buying when we buy that Web property, and much less of the benefit comes from cost synergies.

There are exceptions to that, like when we bought IGN a couple of years ago. It was a combination of cost synergies and revenue enhancements. But most of the properties, of the deals that we have done, that one probably had the most cost synergies in it. All of the other ones, the real value creation comes out of revenue expansion.

Take Ookla, for example. When we bought Ookla, it was predominantly an advertising-based model where -- as we're being served while the test is being conducted, and that's very good business. We get paid for that. We maintain that to this day.

However, we really saw the upside in that business not in just tweaking the advertising model and getting more out of it, as good as that would be, but in invigorating a whole licensing stream around the data so that we knew that there would be entities interested in the data itself. We also knew the data would lend itself to providing the best of categories either in certain regions or geographies.

So as Hemi mentioned, in Q1 there were 30 licenses signed up out of Ookla because we have enough test data that we can award the best of, and if somebody wants to use that in their marketing, they pay us a license fee.

So in Q1 of 2016 -- so we're talking now about five quarters after we bought Ookla -- while the display advertising revenue has grown, the licensing revenue has now surpassed it, and that trend is likely to continue.

So if we do it right on the media side, these things sometimes play out over a two-year timeframe, and hopefully they never fully play themselves out, but this is continued opportunity, either in more advertising revenue as that piece evolves or licensing revenue.

Great. Thank you, and congrats again.

Thank you.

Thank you.

James Breen, William Blair.

Thanks for taking the question. Can you just talk about you saw some pretty significant margin expansion year over year in the cloud services side and where you feel that can go to from the 46% level now? And conversely to that, margins were down a little -- EBITDA margins were down a little bit year over year in the cloud business. I think you said there were some costs that got pulled forward there, but could you give us a little bit of color on that?

Sure, a couple things. So the cloud service is being driven by the backup business, which, as Hemi noted in the more detailed presentation on that business, has had both big growth in revenue and big growth in EBITDA. So the big driver was the backup business, but it was supplement by also improvements -- albeit because of the proportionality to a lesser extent -- of the email security business.

So those are the two big drivers that caused the 13-point jump year over year in terms of the EBITDA margin. I think it's illustrative, because as you know, one of the things that we've talked about is these businesses and the cloud that we are in we believe, at scale, should be 50% EBITDA margin businesses or better, like Cloud Connect is. The issue becomes that when we enter the space, oftentimes because of the asset or the assets we initially buy are small, they're nowhere near scale. So it's building the business up to a scale where you can spread those costs over a larger revenue stream to get to those 50% EBITDA margins.

I would say that if you fractured apart the other cloud services, the backup business is basically there, the email security business is still about 10 points behind, the email marketing is a few points behind, and then the Web hosting is very tiny, so it actually has a whole different margin structure. It's closer to a 25% EBITDA margin.

You want to add something, Hemi?

Yes. So usually our backup business is something that is typically different. We don't do a lot of work in the back end of the customer. The customers that we have, they are backing up their systems to a certain infrastructure, which we don't touch. We focus only on the front end, so therefore, when you have to touch only the front end, it's faster, and then we improve the efficiencies through the way we manage costs and the way we manage people, so it's much faster.

On other places, sometimes we have to touch both the front and the back end. It takes more time, and therefore you see -- for instance, you asked about the Cloud Connect. Cloud Connect basically is -- in the last year, we made a lot of acquisitions in France, so those are a little bit slower to bring to the full effect, but other than that, the business is doing extremely well.

And is that -- you gave some of these new metrics on the cumulative investment and EBITDA over cumulative investment. On the Cloud Connect side, that ratio is very consistent in this sort of low to mid 40% range. On the cloud services side, it's been coming down, but it's a little bit more volatile. Is that the reasoning there?

Well, it's -- in the very early years, almost at the beginning, when you look at 2011, see, there's really not enough investment there, so it looks, I'd say, abnormally good. And then as we have accelerated the investment, yes, it will come down because we've done both of what I said earlier. There's been extension into different product areas through acquisitions, but also different geographies. Then it starts to build back up over time, and that's why cutting it off at any end point doesn't give you the full picture.

So for example, the full expense last year of LiveVault and SugarSync is in the cumulative investment both for the year and cumulatively for cloud services, but we only have three months of benefit of revenue and EBITDA from LiveVault and about nine months of revenue and benefit from SugarSync, so you've really got to roll forward another fiscal year to get the full benefit of that EBITDA both from a timing standpoint and also from an integration and synergy standpoint.

Okay. And then -- sorry.

And then I want to go back to -- you asked about Cloud Connect. So as I mentioned in the earlier comment -- a couple of points. One is Cloud Connect usually has its lowest EBITDA margin in Q1, but in terms of the decline in margin year over year, the two big pieces were we were able -- and I don't know if -- I don't think Hemi did address it, but there are -- there were sales and marketing programs that met our criteria in Q1 that we allowed, as a result, the Cloud Connect business to go over its budget, because our philosophy is if you can find marketing programs that are within our CPA parameters, you could spend that incremental money.

The problem is, when you do that, what happens if you've spent the money and expensed it in a given quarter, but the revenue benefit comes really one quarter later, particularly if what is being sold is a 30-day-free product.

So that was one element, and the other element had to do with a drag from Callstream that we bought during Q1. We had about one month of revenue and costs, and that is an acquisition in the voice business, Cloud Connect side, that is under a transition services agreement. So it is somewhat of a lower-margin business to begin with than the rest of Cloud Connect, but it also has a drag from the TSA until integration is complete.

So I guess that would imply to some extent that your organic growth within Cloud Connect would improve into the second and third quarter because of the marketing success you had in the first quarter?

Yes.

Yes.

And also the TSA will be over and --

It'll help on the margin side.

And we will finish the integration of the three French assets that we did. We are still optimizing that, so all these optimization is moving to the right direction.

Okay. And then just, lastly, on the digital media traffic side -- pretty good jump year over year in visits, a pretty significant jump year over year on page views. You didn't do a lot of M&A in 2015 in that space. I'm just sort of wondering what's driving that.

The shift from (inaudible) is dependent on views, but are more dependent on performance. We have a business that is delivering B2B services. They are not so much tied to visits, and they are more tied to delivery of (inaudible).

And you have two other things going on -- one counted and one not. You have an increase -- and this is even more weighted to IGN -- of video views that are part of our owned and operated and would count as both visits and page views, but then, as Hemi referenced earlier, you have video views in particular that are actually not part of our metrics. Now, in the case of Facebook, they're also historically not monetized.

Now, something that is interesting and that we're excited about is that beginning now, in Q2, Facebook is permitting monetization. So we have 500 million video views that are not in the visit or page view counts, and they generated no revenue in historic periods, but as we go forward, those become now monetizable revenue opportunities.

Now, I don't want to -- we don't know the magnitude of that revenue stream. That will be things that we need to discover over the next two to three quarters. But these other environments where we can display our content become incremental monetization opportunities for us.

Yes, Facebook, for instance, the beginning of what we did in the last quarter or two is basically to get more likes. If you get more likes, you get more visitors, and now you can monetize it, so we are very pleased with it. And to answer the other part, the views and the visits, while very important, are not -- no longer the entire business. So I hope I answered your question.

And it becomes an issue, by the way, when you look at third-party metrics, is not all of the areas in which we're able to monetize traffic are able to be picked up or included by these third-party traffic monitoring sites -- the comScores of the world, the Alexas of the world. They all have their own algorithms by which they try to measure traffic, but they are imperfect, and we know that some of these areas like the Snapchats, where we are starting to monetize -- that's a program we began in the third quarter of last year. They're now being picked up.

Or Sensify, which is a sizable business, has nothing to do with use.

On our lead generation.

On the lead generation, yes.

Okay. And then I just have one more last one. Performance marketing was up a lot year over year, to 49% of revenue from 36%. What's your target there? What would you like to get that to? Is 49% the right number, or are you trying to get that higher?

We are focused on profitability, so we will do -- I believe that we can continue to get better in it, but there's no real -- the real target is to make more money. I know it sounds kind of --

Capitalist?

Yes. I want to be politically correct.

Well, I think what you're going to see over time -- not necessarily in the next two to three quarters, but I think if you look out a couple of years, given both the focus of our media management team and the assets that we have -- and this assumes we don't do any further M&A, so it doesn't change the mix -- I think you're going to see more licensing revenue as a percent of the total, because it's got higher growth. There are some additional opportunities and monetization efforts within the core properties that we have today.

I think, clearly, performance-based marketing has and will continue to be a focus, and there are additional opportunities there both on the B2B side and the B2C side. And I think you've got a display business that is not small in our tech and games area, display and video, that with a certain level of visits and page views, will have a level of revenue that should be consistent with some growth in it, but it will probably go down somewhat as a percentage of the total because of performance-based marketing and licensing growing faster.

Let me say it another way. So we have a very strong content business, and this content business basically is helping people to decide what they want to buy. People today, every time they buy, they go around and they do some research. Now, with this research, we can point them to places that then they click, and now we are being paid for performance because we brought to them an interested buyer that's already researched and ready to buy and clicking directly into their selling site of those vendors.

So all this combination of being strong in content and being -- in certain aspects of the market, we are the leaders, like we talked about Ookla or PCMagazine -- all this combination of leadership and content plus the ability to deliver interested, relevant, ready to buy customers into their selling website, with the combination of offers that rewarded, also offered a coupon that makes you -- not only what you want to buy, but we can also offer it to you now that you've said that you like it with the right discount -- all this is a very powerful position, and this is why we have very strong media business with very high EBITDA.

Great. Thank you.

You're welcome.

Greg Burns, Sidoti & Company.

In the digital media business, the EBITDA margins are up year over year, but if I look relative to like the second quarter or the third quarter, it's down somewhat there from last year relative to the revenue scale for this quarter, so I was wondering if there was something that changed in the mix or why that -- we saw the margins contract a little bit here.

Because you have a different mix in revenue, particularly as you move from Q4 to Q1. So in Q4 to Q1, you have in Q4 incremental display and video advertising revenue that comes in at very high marginal margins. That drops off as you enter Q1.

Yes, Greg, if you can realize or visualize this business, it's a business that has almost fixed costs, so once you pass a certain threshold, it goes all the way to the bottom line. So we passed the revenue, and usually Q4 is very high while costs maintain the same, so it drops all to the bottom line.

But your mix of revenues changes from quarter to quarter.

Yes.

Okay.

That's why you have to look at the margin in the same fiscal quarter, so Q1 to Q1, and not compare it to a different quarter even though there might have been the same level of revenue, because it's likely that the mix of revenue is different.

See, we are catering to technology, PCs and everything strong in the last quarter. Everybody wants to buy towards the end of the year. Games -- the same, men's lifestyle. Everything that we do is geared towards the end of the year, when we have even the carriers that want to do this year's special, so everything is geared towards the end of the year, when we basically have much stronger -- and that's one of the challenges of forecasting how our year is going to end up, because our first quarter -- how much was the first quarter last year, a percentage of total year, Scott?

About 30% of revenue and 40%-some of EBITDA.

Right, so instead of 25%, 30%, so that's the challenge. It's also the upside of this business.

Okay. So if I look at last year as a measure against this year, the first quarter is typically the lowest-margin quarter for media and then it builds up from there?

Yes.

Yes.

Okay. And then in terms of -- again, in terms of the revenue, it came in much stronger than I was looking for in the quarter on the media side. Is that a good baseline to base the balance of the year off of?

Look, it was a strong quarter. I will tell you that it beat -- it beat both our internal budgets, it beat our own organic growth rate sort of expectation. Yes, I understand you have a different issue than I do. So I've got a range for the year, and as I said, we're not changing the range even though we might be shifting within the range. I think it would be -- I think if you took the Q1 results, where everything went almost perfectly, and extrapolated that out, that could lead you to a conclusion that is somewhat aggressive.

Okay. Okay, fair enough. And then I know this isn't the way you look at the business, but I think it's something investors care about. Could you just talk to the organic growth rate for 2015 for the business, maybe, and then what you view the organic growth rate of the business segments to be?

Well, I can give it to you for Q1 of 2016 versus Q1 of 2015.

Okay.

The media business was a low double-digit organic growth rate, which is also where it was in Q4. The Cloud Connect business was about 1%, and the cloud services was also about 1%. Going back to 2015, I only remember it -- and by the way, that's in US dollars, so we have -- it's not a huge issue, but we have about a 1-point currency headwind in Q1 of 2016 versus Q1 of 2015.

Two million dollars, yes.

Yes, it was about $2.5 million, so it's a little over 1%. In 2015, I know that there were some analysts who did some work on the various pro formas and disclosure in the K's and came up with an aggregate growth rate in 2015, in US dollars, of about 2% to 3%, and then in 2015 we had a 2% FX headwind that you would add to it if you wanted to look at it in constant dollars. And it would be a little bit higher growth rate for the media and lower for the cloud business.

Yes, and I also tried to predict this question and the answer. The smaller units are growing faster organically than the larger ones, and the reason is because they have less churn to cover for, but all of them are growing organically.

Okay. And then, lastly, maybe I'll give you a chance to publicly comment on the patent expiration, how you view your patent portfolio and relative to your Connect business.

Excellent question.

Well, I'd say a few things about the patents. First of all, we have a very robust portfolio, so we've got about 200 patents, of which about 130 are in the US. They relate predominantly to the cloud business, and most of them have applicability to the Cloud Connect business, including the fax business.

Historically, for the portfolio we own, including patents that have already expired, we have about 125 companies that have taken a license. We have patents that extend out to 2032, most specifically in the fax space, and I think they're interesting ones because they cover the outbound portion of fax to email.

And some of those patents have been actually recently asserted against some of the outstanding litigants that we have, because as you know, these patent cases tend to go on for years, so you'll find in our K and our Q a few cases that have been around for a while, so we have now added additional claims to those cases and specifically on some of the patents I'm referencing now that have elongated expirations and deal with the outbound sending.

But I would also say this -- and I know that people have commented and they've put undue emphasis on the patents -- we are big believers in intellectual property. You can see in the chart here we invested $70 million over the year in acquiring IP, developing it internally, et cetera. It's important. We think it's an important element to our business, but we also don't believe it is a seminal piece or the seminal piece.

Obviously, the SaaS and cloud space is not like a drug company, so others are in all the spaces that we are in today. As I mentioned, a number of companies have a license from us, but there are others who don't, hence the reason for pursuing them either with litigation or trying to reach a settlement through a licensing program.

And what I would say is that when you compete in a space, it's nice to have the patents, and it might marginally change the cost of doing business for someone because either they take a license and they've got to pay you a fee or they litigate with you and they've got those costs, but the real day in and day out benefit and ability to compete against third parties is about your operational focus and excellence.

So in the Cloud Connect business, it's the fact we've been doing it for the better part of 20 years. It's the fact that we have very strong brands both regionally and globally. It's the fact we have millions of telephone numbers around the world on a very cost-effective basis, which is hard to come by. It's the fact that we have specific programs to target customer acquisition on a discipline basis in terms of cost per acquisition for each sub-segment of the market.

That's the real benefit. The patents are nice. They're an added increment, but if you don't have those other things, the patents are not going to save you or protect you.

Yes, and to add to it, every large player that we are aware of or mentioned in any of those lists is already licensed with us, one of those 125 companies that did, and anybody new that wants to enter this space, it is not very expensive to license it, so that's not a barrier.

But we'd like to. You saw our patent license revenue. It was only $1 million a quarter in the last quarter, so we're open for more licenses for those that are out there.

So Greg, if you want to start to compete with us, I'll get you a plan. It's not so expensive.

All right. All right, thanks.

Okay.

Rishi Jaluria, JMP Securities.

Most of my questions have been answered, but just a couple quick ones. On the Cloud Connect side of the business, you discussed on the call about the mobile signups you've seen. Just what sort of revenue contribution do you think you can see for mobile, maybe not in the near term but in the medium term?

So we are selling the product for the same price of the website, $16.95 for eFax, and I believe it's $10 --

$9.95 for MyFax.

Yes, around $10 for MyFax, and so we are selling it at the same prices. We are giving very similar -- one month free or not. Usually, actually there's a free trial and then -- so pricing is the same. Long story short, pricing is the same. Deliverability is a little bit different. People that use it only on the mobile are more exposed to the ability to sign the documents and to -- there are some interesting features that are easier to use on the mobile, but basically the pricing is the same. Did I answer you, Rishi?

Yes. No, that's helpful.

Oh, yes, I mean, in terms of the revenue contribution, again, and all the signups we do in digital fax, it's small, but it's encouraging both in terms of in the last probably six, seven months since we launched it, the last --

We launched it --

In December.

Right. We tried last year that we had free, but paid just in the beginning of this year, and it is growing.

Yes, it's ramping sequentially week to week.

Right.

That's what's encouraging.

And then we started only with the Android, and now we've brought in the IOS, and we can go into other brands, other countries. It's US only.

And I think the other thing that's interesting about it, even though the revenue is de minimis today against the base of the digital fax business, I'm sure it's counterintuitive to a lot of people thinking, well, if I've got a mobile device, why would I either be having fax as a service or certainly engaging and signing up through a mobile device, but that's exactly what we're seeing happening.

So I think it'll be a while before it would be millions of dollars in incremental revenue to eFax, but if it's keeps accumulating each week over the remaining portion of this year, it will start to have some impact.

Okay, great. And then on the email security side of things, you talked about the consolidation of data centers just to kind of get a little bit of future cost savings. If my math is correct, I mean, year over year you saw something like 1300 bp increase in EBITDA margins. If you're talking about future cost savings, where could margins in this segment go from here?

Very good question.

You mean, for cloud as a whole?

No, only for email security.

Or email security?

Yes, email security.

Yes.

Email security, okay.

So FuseMail is a business that has several elements. We have in the Nordics Comendo and Stay Secure, which are -- Comendo is a public company that we acquired in Demark in the end of 2014, I think, and we paid -- there was a question before about how time it takes to integrate. Usually we try -- if the integration is slow, we are very careful that it would be reflected in the lower price of the acquisition. So this was an example of a company we didn't pay a lot knowing that the integration would take a longer time.

So that's one part of the business. The largest part of the business is Excel Micro, which is 20 -- I think $5 million out of the $40 million, which is basically -- am I right, Scott?

Yes, that's about right.

Right, which is basically licensing of various providers of cloud backup. The largest would be McAfee. Second largest probably is ourselves, our own product.

Cloud security. You said cloud backup.

Oh, sorry. Sorry. Email security (inaudible) anti-virus. So basically the more we migrate from foreign and different systems into ours, the higher is the EBITDA. The cost of us providing the service from our own system is like less than half with what we would pay McAfee. So if McAfee is announcing end of life, there are less choices in the market. People are buying from us, and the EBITDA increases.

I think that we should have Q4 at over 40%, and it depends on the next acquisition, but if we don't acquire, it should go organically, naturally, to 45%. You have to remember also in the migration, you have to keep resources to serve the old and the new system, and you have stuff that is busy in migration. Once it's stabilized, there is a lot of synergy out of that, so 45% I think is easy to achieve, unless we will do acquisitions that will throw us again into additional work of integration. Did I answer you, Rishi?

Yes, absolutely. Thanks a lot, guys, and congrats on the quarter.

Thank you.

All the best.

There are no further questions at this time. I would like to turn the floor back to Management for closing remarks.

Okay. Thank you very much for your time and attention today for listening in on the Q1 2016 earnings call. We will have a press release out shortly announcing a series of conferences that we will be presenting at over the next several weeks, primarily on the East Coast and the Midwest, although there's also one here in California. I believe there are four of them. So look for that. If you happen to be in one of those regions and would like a follow up in the form of a one-on-one, let us know. And then we look forward to speaking to you again to report Q2 results in early August. Thank you.

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