Ziff Davis Inc (ZD) 2016 Q4 法說會逐字稿

Greetings. Welcome to j2 Global's Q4 and year-end earnings call. Leading today's call will be Mr. Scott Turicchi, President and CFO; and Mr. Hemi Zucker, CEO.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Turicchi, President and CFO.

Thank you. Please begin.

Thank you, Roy. Good afternoon, and welcome to j2 Global's Q4 2016 conference call.

It was another strong and exciting quarter for us, as well as the whole FY16. As a result, we will be discussing both the quarterly and the annual revenues, EBITDA and non-GAAP earnings, all of which were strong and set records. Our Board also increased the quarterly dividend by $0.01 to $0.365 cents per share.

As you know, we will use a presentation for today's call, a copy of which is obtainable at our website. When you launch the webcast, there's a button on viewer on the right-hand side which will allow you to expand the slides. In addition, if you have not received a copy of the press release, you can access it through our corporate website at j2Global.com/press. That is also where you can access the webcast.

After we complete our formal remarks, we will conduct a Q&A session. Roy, 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 prepared remarks, I will read the Safe Harbor language statements. As you know, this call and webcast includes forward-looking statements. Such statements do 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 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 have been included as part of the slide show for the webcast. We refer you to discussions in those documents regarding the Safe Harbor language, as well as forward-looking statements.

I would now ask all of you to turn to slide 5, where I will give a high-level recap of the accomplishments for both the fourth-fiscal quarter and the full year. As I mentioned, there were a number of financial records set, both for the quarter and the year.

Revenues were $252 million for the quarter, EBITDA $117 million and free cash flow $83 million, and adjusted non-GAAP EPS of $1.49 per share, all quarterly records. Our fiscal year, we had $874 million of revenue, $396 million of EBITDA, $260 million of free cash flow, and adjusted EPS of $4.99 a share, also all records.

In 2016 for the full fiscal year, our revenue grew by $153 million, or 21% versus FY15. Our M&A strategy was critical to the overall success of this year. As you know, we completed 22 acquisitions in FY16, spent nearly $600 million, although the crown jewel of the M&A program this year was the acquisition of Everyday Health in December.

Our Business Cloud Services had revenues for the full fiscal year of $567 million, which was an increase of $62 million, or 12%, versus the prior year. Our cloud services, this would be exclusive of Cloud Connect, which are our fax and voice businesses, grew by $49 million, or 34%. Media had another strong year, aided in part by the acquisition of Everyday Health and its financial inclusions for approximately one month, ending revenue at $307 million, up $91 million, or 42% versus the prior year and an EBITDA margin at a healthy 37%.

I would draw your attention to slide 7, just to remind you how we disaggregate our overall consolidated financials. I will go through those very quickly. Our Cloud Connect had a nice quarter, with $93 million of revenue, $51 million of adjusted EBITDA, a 55% EBITDA margin, consistent with the EBITDA margin experienced in Q3 of 2016.

Our other cloud services, which include our backup business, email security, and email marketing, had just shy of $49 million in revenue, $24 million of EBITDA and 49% EBITDA margins. And finally, our IT licensing business, which is a rather small revenue stream, as we await revenue coming from patents that are currently under prosecution, was $1.1 million in revenues, $326,000 in EBITDA; so the total Cloud as a segment had $143 million in revenues, $75.5 million in EBITDA, or a 53% EBITDA margin.

As I mentioned, the Digital Media business had a strong quarter, aided in part by the inclusion of Everyday Health for slightly less than one month, having total revenues of $108.8 million, EBITDA of $44 million, or a 40% EBITDA margin. As you know, at the parent, j2 Global, Inc., we do not allocate those expenses.

There were about $3 million of non-GAAP, primarily cash expenses, at the parent in the quarter, which when we add that in with the results from the cloud and Digital Media, give us our consolidated results of the $252 million of revs, $116.5 million of EBITDA, and $72.2 million of adjusted net income on a non-GAAP basis. That's $1.49 per share on a GAAP basis, $0.89 per share.

A primary difference between the two are the exclusion of the amortization of intangibles, non-cash comp expense, and then particularly in this quarter, exit expenses related to Everyday Health. Now I will turn the call over to Hemi, who will talk about each of our business units in greater detail.

Thank you, Scott, and good afternoon, everybody. Before I start, I want to thank our entire team around the world.

With the latest acquisition of Everyday Health, we now have 2,500 dedicated employees, and I want to welcome all of you -- all our new employees. And I already saw on the switchbot for this call that we have some employees from Everyday Health listening. Welcome to you all.

Before I take you through the presentation I would like to recap our last five years. 2011 to 2016, our last five years we achieved approximately 20% compounded revenue growth, and in the Digital Media Division and combined, achieved 70% compounded EBITDA growth. We believe that this validates our strategy of focusing on EBITDA, EBITDA generation, utilizing our organic and M&A to build our business.

Now let me take you to page 9, where I will talk about our Cloud business, starting with Cloud Connect, which is the gift that keeps on giving. Q4 2016 revenue is up 5% versus Q4 2015. Fax and voice revenue grew $15 million in 2016 versus 2015.

Let me speak about fax as percentage of our total j2 revenue. In 2015 fax represented 42% of the total j2. In 2016 it represented 35% of j2 revenue, and we are planning for 2017 with the fax, while continuing to grow, slowly but growing, to represent 27% of our entire 2017 planned revenue.

We have a pipeline of acquisitions and we have completed three acquisitions in 2016 for the Cloud Connect. In 2017 revenue is expected to continue to grow to $371 million. We have an acquisition pipeline to 2017, and we continue to maintain EBITDA margins greater than 55%.

Page 10. Cloud backup. Q4 2016, our revenue is up 9% versus Q4 2015.

On a full-year basis, revenue of $150 million, up 56% versus prior year. EBITDA already also up 92% versus prior year. EBITDA margin improved to 53%.

2016 was a very, very busy year. We completed 11 acquisitions, including VaultLogix and Frontsafe. Frontsafe acquisition expanded KeepItSafe brand into Denmark, where we already have an office in Copenhagen, and now we're going to combine the KeepItSafe and the FuseMail organization under one roof.

2017 Outlook. Revenue is expected to go up in constant currencies. This is without significant M&A. We are continuing to invest in the following: leadership, R&D, marketing and advertising programs, achieving EBITDA margins of 50%, with healthy acquisition pipeline to 2017.

Next page, page 11. Email security. Email security also had a very interesting year. Q4 revenue was flat over Q3 and down 1% versus Q4 2015.

On a full-year basis, the 2016 revenue of $46 million was up 2% versus prior year. And a true and important achievement is that FuseMail product, or user base, grew from 200,000 users only, our legacy, secured email users in the beginning of 2016, to over 1.8 million users now in Q1 2017. This is a major achievement.

How did we do it? First of all, we completed the migration of the Nordics FuseMail product, a Comendo and Stay Secure brands. We moved them into our own FuseMail product. We migrated 90%-plus of the FuseMail -- of the old legacy Nordics systems customers into our FuseMail.

Secondly, when we got the -- sorry -- in the beginning of the year, we got a notice from Intel that they are ending the life of our McAfee product, which we were a big reseller of. We quickly developed a FuseMail product as a viable alternative to McAfee end-of-life consumers.

We increased the FuseMail basis as a result to 1.8 million users, and we will report to you in the next quarter about the end of the life of the McAfee. Then we move them to FuseMail, we also achieved a higher profit, because now we are selling a product that is made on our system versus reselling a third-party.

For 2017. With the new sizable base of 1.8 million users, we are going to future invest in the FuseMail platform. We will add features, pricing upgrades, and with the larger size users, we can also start to develop a product going more upper scale towards corporate and enterprise.

EBITDA margins improvement in 2017 over 2016 is a result of the fact that we now are selling a product versus reselling in the past a product of a third-party. We continue to grow through M&A. We have a good pipeline, and we continue to consolidate and optimize our global operations of the email security business.

Next page, page 12. Email marketing. Q4 2016 revenue was up 34% versus Q4 2015. On a full-year basis, our 2016 revenue of $27 million is up 27% versus prior year.

We have completed four acquisitions, including MailOut, WhatCounts, SMTP and Unified Email. We proved our ability to effectively integrate new acquisition, which is a very complex engineering task. We have virtually completed all the integrations of the acquisitions that I just mentioned. ARPU 2016 went up from $219 to $261 versus prior year.

2017 outlook. Without M&A, the revenue is expected to grow by 20% to be more than $32 million. EBITDA margins expect to grow to over 50%, and we have a healthy acquisition pipeline. We see a very bright future to our email marketing division for 2017.

Now let me go to the digital media. 2016 and 2017 were a giant leap year for the media business. Page 14.

The digital media business has a very strong Q4. Both the existing Ziff Davis business and Everyday Health exceeded our expectations. Total revenue grew 56% year over year, and EBITDA grew 37%. Total multi-platform visits grew 18%.

We saw significant growth in commerce revenue, which were up 171% year over year. Black Friday and Cyber Monday proved to be a particularly strong e-commerce weekend.

We also expanded into 200 new commerce categories through our best.offers.com. This business line is focused on the best product at the best prices. We participate in a diverse set of product sales all the way from baby monitors to snowblowers. As you know, we believe in [buying guide] and other commerce, and we are developing similar content now for both Everyday Health and WhatToExpect.

Ookla. Ookla continues to see very strong growth. As you know, the core revenue stream for Ookla now is licensing, where we sell data analytics and marketing rights to ISPs and carriers around the world.

So, more testing activities means broader and deeper data for us to monetize. Total test across the platform exceeded 600 million tests in Q4, almost 7 million tests per day. This is a new record. The Speedtest apps were installed on over 18 million new devices in Q4, an increase of 42% year over year, and this brings us now to 230 million apps installed.

Next page, number 15. Social platforms continue to increase the importance to our brand. As you know, there is a big shift in consumer behavior. More content is being consumed inside Facebook, SnapChat, and Instagram.

This is an opportunity for us to drive video, which is the most valuable format to very increasing -- to ever-increasing audience. All of our brands are delivering video content into social platforms, with significant increase year over year, including Everyday Health. Speaking of Everyday Health, we thought it would helpful to recap our acquisition rationale to those who did not make our December call.

Everyday Health operates in a high-value, decision-oriented verticals, where we can help our audience in making informed decisions. Needless to say, the decisions relating to health are among the most important and valuable decisions. Everyday Health is reaching not only consumers, but also through our MedPage, we are reaching doctors in their offices and on their phones and at their computers. The majority of the Everyday Health user base is mostly female, balancing our tech and [gain], where the majority is men.

In the near term, we apply our well-known strategy of [shrinking] to growth. What does it mean? By this, it means that by this we are eliminating negative margin revenues, as we did in the past. If we don't believe a certain revenue has good margin potential, we will just walk away from it and focus on the profitable parts of the business.

We have already reduced the combined workforce of Ziff Davis and Everyday Health by 7%. We have been steadily terminating or restructuring vendor agreement, which should add several points to the margin, already now in 2017. We are undertaking many positive and profit-enhancing changes and we will continue to talk them about in the next quarters.

Now page 16. Digital media results for 2016 and 2017 outlook. 2016 results -- revenue of $307 million, up $91 million, or 42% versus prior year. EBITDA margin greater than 37%.

And for 2017, revenue growth expected to be larger than 80%. EBITDA margin approximately 32%. Everyday Health's EBITDA margin will improve over time as we continue to integrate. Scott?

Thank you, Hemi. I'd now like to address the financial outlook for 2017. If you would go to slide 18, this will give you a series of our assumptions. I will walk you through each of them and then total that up for revenue expectation and non-GAAP earnings for this fiscal year.

Starting with our Cloud Services Business, we are expecting revenue growth there to be approximately 2% to 3%, with an EBITDA margin for the services combined to be in the range of 52%. As Hemi mentioned, this is despite the fact that we are making investments in the backup business and also working through end of life of McAfee in our email security business.

We expect our IP licensing revenue to continue to be between $3 million and $4 million in revenue. As I mentioned earlier, there are additional patents that are in the process of being asserted, but for 2017, we're not budgeting any revenue.

Our Media business is expected to grow north of 80%, largely because of the acquisition of Everyday Health; however, we are expecting to see high single-digit organic growth in the businesses that we have. Our EBITDA margin, as HEMI mentioned, should be around 32%.

And I would remind you of a few things regarding our meeting EBITDA margin. First of all, within Everyday Health, about 20% of that business are in two assets that contribute very little to EBITDA. So they contribute 20% of revenues, but very little in terms of EBITDA, which weights down the EBITDA margin.

The second piece that Hemi also just talked about, is that the integration will bleed in its benefits over time. So our largest -- or our smallest margin quarter for our media business will be in fiscal Q1, and our highest margin quarter we expect to be in fiscal Q4.

Also, as you know, the media revenues are not ratably distributed across the four quarters. So for this fiscal year, we expect that of our annual revenue expectation, approximately 20% will occur in Q1 and 32% will occur in Q4. For Everyday Health, it's even slightly more skewed, where it's less than 20% of revs in Q1, and approaching 35% in Q4.

Finally, some corporate assumptions. As you may recall from the last couple of years, we attempt to look at our foreign currency exposure. We do not hedge these foreign currencies, but approximately 25% of our revenue across all of our business units, but heavily skewed to cloud, are outside of the United States.

The bulk of that would be in Europe, so it would be affected by the GBP and the euro. It is our estimation that this year there will be headwinds of approximately $15 million from foreign currency translations, the vast majority of which will affect the cloud, but in the aggregate will affect j2 by about $0.10 per share.

Also, we are assuming that during the course of this year we will refinance the existing 8% senior notes that are outstanding at the cloud level, as well as the bank line that was put in place at the time we acquired Everyday Health in December. For our assumptions, we have assumed that we will issue $500 million of high-yield notes at an approximately 6% interest rate.

The use of proceeds would be to retire first the 8% notes, plus the associated call premium, and then retire whatever amount is outstanding under the bank line, currently $180 million. Any excess proceeds would be retained by the parent for future M&A.

If, in fact, that transaction occurs within the next 60 days, although the interest cost is lower on the bond because there is more debt outstanding, it would have a negative EPS impact of approximately $0.10. Although to be clear, the timing of any such refinancing, as well as the structure, remains uncertain.

We expect our tax rate to be between 28.5% and 30.5% on a non-GAAP basis. We are assuming the same tax structure globally that has existed for a number of years. At this point it is too early to tell what any tax reform in the United States may have, both regarding rates generally, as well as us, specifically. So as those greater details come out and plans come out, we will be happy to update you with our thoughts on it.

Our share-based comp expense is expected to be between $14 million and $16 million pre-taxed, and the effective share count for EPS purposes is 49 million shares. This excludes any dilution that would occur from our convertible notes, which at our current stock price are in the money. As a result, we expect our revenues to be between $1.13 billion and $1.17 billion for 2017, and our adjusted non-GAAP EPS of between $5.60 a share and $6.00.

And finally, as usual, on slides 21 and following, you have the metrics for both the consolidated entity for the cloud segment, as well as the media segment. And then on slide 23 in the same format you saw earlier, a breakdown of the full FY16 results.

I would draw your attention to slides 24 and 25. This is something that we released last year and have updated it for 2016, which also shows you the revenue and EBITDA productivity by our various business units, as well as the cumulative capital investment -- the investment made in 2016, as well as the cumulative capital investment. That is all there for your information, and then following that are a number of reconciliation tables from the non-GAAP measures we use to the nearest GAAP equivalent.

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

(Operator Instructions)

Our next question comes from the line of Shyam Patil with SIG. Please proceed.

Hey guys, good evening. Congrats on the quarter. I had a few questions. Hemi, on the cloud backup, given the investments you're making, can you just talk about how you see the continued run rate to add scale to that business through M&A? And when you look out, say three years from now, how big do you think this business can be versus where it is today?

Hi, Shyam, and thank you very much. First of all, this 2017, I want to divide into investment and to gross. In the investment, we are combining billing systems, backup systems, technologies we are investing to bring up to the new latest features into our system, the new and added features, including disaster recovery and all those things are new worlds for us. They add to existing customers, upsells, and help us to generate much higher ARPU from the existing customers.

Now, as far as M&A, we have a very big world of a lot of companies that are coming -- I hate to talk about our pipeline, but we definitely see opportunity. Now for the size of the space, I think it's huge. There is a big confusion between AWS, where you just buy a simple commodity.

To our services, it includes not only backup, not only compliance, also disaster recovery. Even more, the new trend now is cloud-to-cloud backup.

So I see the space growing to hundreds of millions of dollars, and I would not be surprised if with some acquisitions you can go even -- I mean big acquisitions can grow larger. It's huge. Scott, do you want to say anything?

I would just follow up on that. I think, certainly 2016, and arguably because of [liables] in 2015, were heavy years of M&A for backup. That has been the focus, both acquiring those companies, as well as integrating them.

In general, and our budget indicates that is the trend that we expect to continue. In terms of a financial goal, we would like to see this business double. We would like to see it in the $200 million range.

Depending upon the number of deals and the size of them, that may come sooner or later, but certainly within your three-year time horizon, while that may be an ambitious goal, it is a goal, that we want to get this business into the $200 million range. There are many pathways to do it, and I think it will be done primarily through companies that we acquire.

And, as you can see, we indicated in our presentation, this is the first year that we are going to invest in marketing and sales, focusing on the larger customers. And we see upside there, as well, versus the small decline that we have seen in (inaudible) the consumer base that, while very profitable, is not a place we are going to put the advertising dollars into.

Great. Maybe switching to Everyday Health. Scott, on the call in December, you guys talked about the three main pieces there.

Can you talk about your plans for the non-core pieces, what you think those might be worth if you were to sell those? In terms of the guidance for media for 2017, what are you assuming for Everyday Health in terms of revenue and EBITDA? And what did you guys see in the fourth quarter from that acquisition?

I will answer some of your questions. Some of your questions, I'm not going to answer. If I don't answer them, remind me and I'll tell you that I'm not answering them. I can't remember all the questions you just asked. But let's take them in reverse order.

Everyday Health contributed in the slightly less than a month that we owned it about $23 million of revs and about $7.5 million of EBITDA. In terms of the way we look at the business and the way we construct our guidance, all five business units are included in 2017 guidance. So that includes the consumer piece, which is Everyday Health and Mayo; the doctors piece, which is MedPages; the WhatToExpect piece, which is focusing on primarily pregnancy; and then Cambridge, which is for orphan drugs; and Tea Leaves, which is a SaaS CRM system for hospitals.

All five of those units that we bought are included in our guidance. As I mentioned, the latter two units are the ones that have 20% of total revenue, but not a lot of contribution in EBITDA, in large part due to Tea Leaves, which is really a almost a venture-capital type investment with a very strong growth profile, but currently not making any money. And, quite frankly, not likely to do so, because it needs to continue to be fed.

Now, as we mentioned on December and I think we mentioned it about a month or so ago when Vivek and I were presenting on the Needham conference in New York. Even prior to closing the acquisition, third parties approached us about acquiring certain of the portfolio of assets that we bought. And our view was, that might be of interest, but right now we've got to close the deal and we've got to take our initial steps. Once that settles down, then we'd be happy to see whether that makes sense.

We are approaching that phase of seeing whether those inbound inquiries would make sense for us, in terms of whether we would keep those assets or not. At this point, I think it's too early to tell or to make any determination as to whether any of these interested parties are real, or if the level of their potential offers would be acceptable to us. In terms of what they are worth, no, I'm not going to tell you that. We have our number, and that will come out in time, if either one or both of those assets were sold.

Okay. The only one left from the question was just, what does guidance assume for Everyday Health for revenue EBITDA?

Two things. We are not going to be breaking out Everyday Health, just as we don't break out IGN or the tech vertical, or Ookla. But what I will say is -- and remember, this is very important on the shrink to grow concept. It has nothing to do with Cambridge and Tea Leaves. So, if you looked at Everyday Health in its totality, it had a revenue guidance/expectation last year around $250 million. We will be shrinking that revenue base by up to about $20 million, based on some of the comments Hemi made earlier, where we are not finding that there is either any margin in some of those revenue streams, or margins consistent with our approach.

Or growth.

Yes -- or growth opportunity. Now, that will occur over time. But there will be that kind of an impact on a full fiscal-year basis. Notwithstanding that, we would expect that off of that, we set lower base to experience close to double digit growth with that set of assets.

And certainly, as we've said before, the core piece of the business, the 80% of Everyday Health that is consumer facing with the Everyday Health; Mayo; WhatToExpect; and the doctors' piece, MedPages; we would expect over time -- probably by the end of this year for it to have similar, or consistent EBITDA margins with what we experience in the rest of our digital media portfolio. The other two assets, Cambridge and Tea Leaves, are very different assets, and we would not expect them to be able to get to that level of EBITDA profitability.

Under us.

Or for right now, probably under anybody's ownership. They are just of a different nature.

Okay. And then just following up, I know you talk about the EBITDA margin being 32% for media for this year. Is there anything that we should keep in mind in terms of the distribution of that EBITDA throughout the year, given Everyday Health? Or can we look at revenue as a good proxy?

No, you're going to have to -- well, yes, it's going to be obviously in dollars, highly correlated to the distribution of the revenues over the four quarters. I think what you're going to see that is maybe somewhat different this year, given the timing of acquiring Everyday Health very late in 2016, is a range of EBITDA margins over the four quarters.

Where the first fiscal quarter, the quarter we're in now, will probably be around 20%, and the fourth fiscal quarter will be at or near 40%. Those two in the middle tend to be somewhere in between that, and they will blend down to the 32%.

I want to add, Vivek and [Esteem] already started to take the right steps, already have some victories. We will share a little bit more of them in the next quarter. But it will gradually move up, and hopefully sometimes toward the end of the year or next year, will come to the EBITDA that is very close to the EBITDA that we have demonstrated with Ziff Davis before the acquisition of Everyday Health. I can tell you already that they are moving impressively fast.

(inaudible) my last question, (inaudible). Free cash flow -- I know you don't officially guide to it -- but how do you guys generally think about free cash flow for this year?

A part of it, as you know, is highly sensitive to what goes on cash-tax wise. If you look historically, we generally have a free-cash-flow-to-EBITDA conversion in the roughly 65% range. That worked for last year, the $260 million against the $396 million, as well as the year before. And there may be a few points of differentiation higher or lower.

The conversion rate will be in a similar range this year, but under one very important assumption. And that is, both on an accrual and a cash tax basis, in 2017 taxes are how they have been. To the extent there are changes, and they either occur middle of the year or are retroactive, there may be a different answer to that question. Off of our $260 million last year, I would expect free cash flow to be in the neighborhood of $300 million this year.

Great. Thank you guys. Congrats again.

Walter Pritchard with Citigroup.

(technical difficulty) Walter. Thanks for all the questions and all the [added templates] again, especially on Everyday Health there. I'll try not to (technical difficulty)

It's a little hard to hear you. Can you -- A) speak slowly, and B) speak louder?

It's very choppy.

Yes, you're choppy.

Is this better?

A little bit.

Is this better? Okay. It looks like the backup business has really slowed down in terms of growth for j2 and I get that. There were some price rationalizations, especially in the middle quarters, and some currency here in the last.

Is the portfolio growing the user account, like what we are seeing in email security that you guys actually disclosed? And going back to the first question, how are you thinking about this base competitively in 2017, especially as you are seeing some acquisitions in the space go to others?

Yes, we definitely see acquisitions, and we are talking with some of them already. I just wanted to tell you about the forecast without acquisitions. Because acquisitions are things that you need to time. And I don't want to get into commitments that are regarding acquisition and price expectation from the sellers.

The business itself, as you know, has two major business -- the consumer part and the business part. The consumer part is where we are suffering. It is concentrated around the British pound, which is painful. And by the way, the base of our consumer in the UK is growing. The base is growing, and it's growing in pounds, but it is not reflected well when we translate it to dollars.

Now on the other brand, SugarSync, we are slowly selling it through upsells and cross-sells to our existing base, including the e-fax base and other bases, but we are not comfortable. And by the way, we started to sell it in Japan. I just did not include it because we don't know where we are heading.

But we did not -- we have decided not to invest in advertising and research, because it's very competitive. And you are competing with very low APRU. And therefore, while the other part of the business, which is very profitable, is growing, this part of the business is pulling you down.

So also, you can say the ARPU for the backup business is going too. And as we are developing this year and adding the features like disaster recovery and all those things, we are seeing ourselves selling into an existing base, which is looking for those new solutions that are, by the way, much higher margin.

Hopefully, I answered you. But the potential of the business. The space is huge. There are a lot of players there that are pushing product with no profit. We're just waiting for the right time.

As you know, there are several large competitors that are between losing money or having very, very small margins, while we are talking about 50% EBITDA-plus. Obviously, we believe that those that make 50% will buy those that make 5%. It's just a matter of when.

That's an important follow-on, just because there are A, first of all, we can't acquire everybody that's out there. That's not realistic, particularly in such a fragmented space. But two, a number of the situations do not make it through our economic filter. So we're not disappointed if those assets end up trading to somebody else.

The key really to our business is that it works within our both financial and operational formula and philosophy. And if it doesn't, then it's not really relevant to us.

As I mentioned earlier, the key to this business-- and we might be understating it this year -- it does have about $3 million or $4 million of currency headwinds, because of what Hemi mentioned coming out of Europe, or at least that is our expectation. But our real premise and our real expectation is the growth in this business, as it was last year, will come through M&A. It is just not budgeted.

Got it. Thanks for that, and you guys did answer the question, Hemi. Switching sides of the house, it looked like it was a really strong monetization this quarter on the digital media side, especially compared to what looked like a weaker Q3 than normal. But with all the moving parts between the third-party platform, Everyday Health, and the core Ziff Davis, how should we expect these monetization rates to look like in 2017 and beyond?

I think you hit the nail on the head. Which is, there's a lot of moving pieces for a lot of different reasons. One is, obviously, the inclusion of a similar, but a business that does have different elements, some of which we talked about in response to the previous questions. Also, an evolution going on in the business where we are having more visits and views coming from social platforms or third-party platforms. And then businesses that really have a different DNA, if you will, such as Ookla, which is more of data monetization, and then our B2B business.

While I think that at the moment you see consistent metrics which focus around visits and page views -- so, if you do the math, you will come up with different forms of monetization. While I think that is, let's say, adequate at this point, one of the things that we have been discussing, but we do not have an answer yet to, is how to take our digital media metrics and evolve them so that they are more useful in the future, particularly since there are different pieces that have different dynamics to them.

For those that have been around at j2 a long time, that occurred with the cloud. It didn't happen in the day, but we used to have metrics that were solely around fax and voice. Then we started to include the other business units, then we started to financially break out pieces.

So, we have a very active discussion internally, and I'm not suggesting that by May when we renounce Q1, we will necessarily have this figured out. But I do think that additional insight, whether they be in the form of metrics or financial presentation, would be helpful and useful. We understand that issue. I agree -- it is somewhat limited with the information you have in front of you today.

To remind you, in 2016 the Ziff Davis group did phenomenal work in moving away from display that really, really became weaker, and into performance space. And they did it with an amazing result.

This is part of the ability of our team to respond to the ever-changing market moving from platform, moving to advertising, media, et cetera. The work is on and it's really reflected in our EBITDA forecast. We strongly believe that it will continue to be very good.

Got it. Thanks, I will give it up to everyone else for questions. Thanks, guys.

Will Power with Baird.

A couple of questions, really probably a couple of follow-ups. Scott, thanks for some of the color on Everyday Health. I think you said you expected double-digit growth off of the lower number. Any further framing -- ?

High single-digit growth. Just to be clear -- high single-digit.

(multiple speakers) Okay I'm sorry. High single-digit. Any way to parse apart the consumer piece versus the professional piece within Everyday Health? Is one growing significantly faster than the other?

Let me answer maybe slightly differently than the way you're asking the question, but I think the two are consistent. We have different views -- you can't put all the consumer into one bucket. We think that there is probably within the consumer piece of the business, although this will play out over time, Hemi mentioned or hinted at some of the things in a couple of the slides he discussed.

But there are numerous opportunities with the WhatToExpect website and app, which is a small portion of the overall consumer piece of the business. On the MedPages side, once again, there are different elements of it, but in the aggregate, if we had to pick one single business unit within Everyday Health, that's what we would expect to see the biggest upside.

Okay. That helps. And just thinking on the digital media side, maybe a follow-up to a previous question, as you look at the social platform strength of some of the metrics, whether it is Facebook, Snapchat, et cetera, can you update us where you are actually on the monetization of that? Is there line of sight on some sort of inflection point of really starting to drive revenue from those views that you are referencing?

It is increasing. It is still a very small part of our overall revenue productivity. And for that matter, it's -- as we have talked about in previous calls -- because of the way the relationships work, there is essentially a sharing of the revenue. So it is somewhat detrimental to the overall margin profile, but it's not been significant at this point, because we're talking about still less than 10% of our revenue is generated from those third-party platforms.

Let me add. It's a volume game. We have our videos and all our assets that are basically delivered through those platforms at no cost to us.

Then we have an agreement to share revenue, so the cost to us is zero, because we already have those videos done for our sites for our properties. So now we go through those platform, the end distribution, and they send us money. So it's profitable. They're both -- those organizations, especially some of them, are really trying to figure out ways to monetize.

The more they monetize, the more we get money. It is a profitable business. We are very happy that we are in the game early on, because it is significantly important. Because we follow our customers, they spend time there and with our properties. So, it's profitable, it's growing and definitely, it's the future, and video of all the media, is the most valuable one.

Also, too, they help in diversifying our demographics, or at least on the margin, shifting them. A lot of our properties owned and operated properties prior to Everyday Health are heavily male-oriented.

And older than the guys who go to SnapChat.

A lot of the social platforms bring us a female demographic that we have not historically experienced. At this point we think it is additive, even though that stream of revenue comes in at a lower margin because we do have to share the revenue that is generated.

Last question. Looking at email marketing, strong growth in Q4 and the full year, maybe help us understand the key drivers of that acquisitions versus organic or any key pieces there.

First of all, this division is growing organically at 10% and up every year. They are basically targeting one by one with a team that is setting up meetings over the phone. And the success rates once they engage the other party is very high.

We are shooting higher and higher from the standpoint of ARPU or ARPA. We are shooting to go past $300 per user per month in 2017. When we acquired those companies, we always integrate into one platform.

We keep only one platform, which is a challenge for other buyers, but not a challenge for us, because this is exactly how we built our muscle around incubating and bringing everything to our platform. Therefore, once you take this effort and you bring them cost, the structure cost is very low.

We are building a name of a reputable cost company that goes after reputable customers that are not so much into finding the lowest cost provider, but the highest cost provider. And to remind you, this business also is built around reputation. When you send emails, you want it to be delivered.

So if you keep customers that are reputable and by nature are larger, and customers that you met -- I mean talked with and vetted out, all the entire base is happy and so and so. So it's a quality play, if I can call it like that. Do I make sense to you, Will?

Yes. No, that's helpful. Thank you.

Greg Burns, Sidoti & Company.

Just a follow-up on that email marketing line of questioning. Margins at over 50% on only $32 million of revenue seems pretty impressive. Do you have a view on what that could be if you really begin to scale up that business?

For now, all the acquisitions were of relatively smaller companies, when we eliminated the number one cause, which is the platform and the engineers. Therefore, we are generating high margins. Also, we had our services very fully featured, so most of the time when we acquire a company, they are exposed to the new features, and once they take them, the marginal cost to us is not very high.

There are other players in the market. The last peer play was Constant Contact. They were focusing mostly on a much lower consumer type, a customer with much larger churn and with significant marketing efforts.

Our marketing spend on this business is less than 10%. If I remember well, it's like 6%, 5%, and most of the investment is in lead generation. We have a team of -- we have a small group of people that call potential buyers, and because we are small in a big space, it is very easy for us to target other customers.

I believe that the margins can continue to be above 50% for the foreseeable future, unless we go into a consumerish-type business. Also, when we saw other potential acquisitions -- those are the large -- and they're private -- but those are the large. And large, I mean $40 million, $30 million and above. They have very high margins. This is a phenomena in the space.

There are many -- I cannot name them -- but there are many competitors of $40 million, $50 million, $60 million. I've seen EBITDA of 60% and even 70%. It's just a very profitable space.

The difficulty here is to grow and to get the customers, so we found a way to do it in our own way. But if you can continue and focus on this high margin, because the buyers are very sensitive to the quality of the delivery. And price is not everything, so you can basically focus on excellence, and command a good price.

Okay, thanks. The McAfee product, how much revenue does that represent, and do you expect to convert the majority of that over to -- ?

Excellent question. We had altogether 1.3 million end users. We converted them in three ways. One, they just left and they went nowhere. One, they went to our FuseMail product, which is the vast majority, 700,050 and growing because it's not over yet. And then some of them we migrated to third parties that we were reselling.

So the outcome is, because the vast majority of them moved to our FuseMail platform that is already sharing its cost with the Norwegian and Scandinavian and mostly Danish and Swedish space, we are able to get much lower cost. And when we did the FuseMail, we built a product of FuseMail that is extremely similar to the McAfee product, so it was a no-brainer for the user to take it.

Did you ask anything else that I didn't answer?

No, that was all. And then -- .

What I would expect is in Q2, it will not impact our revenue because it's already baked in, but we probably will have the last stragglers of customers. We have now a few hundred thousand end-users, which we are already reporting it in the account, so it's not apples to apples. They have not told us what they do. They continue with our service, but they might have also went to another service.

The way McAfee works, we don't even know usage, we just know that the customer is on McAfee. So as we continue and tell them that they need to continue to pay, we might discover that even though there is no impact on revenue, we will have to report that we lost customers.

I just cannot tell you, because the end-of-life date of January 23 was extended, especially to those that are on quarterly and the annual contract, so we don't have clarity. But as far as revenue, we are done with conversion of the revenue. Okay?

Okay. Thank you on that. Just a question about the capital investment and Cloud Connect, it looks around $50 million this year. But EBITDA was only up by $1 million. Why wasn't there stronger conversion there?

I don't know. Where do you see this?

Was it on 24?

Right, page 24. Cumulative CapEx for Cloud Connect, $48 million. EBITDA was only up about $1 million year over year.

You've got some -- I can't remember -- probably about $10 million of FX headwinds, which would translate into about $5 million or $6 million of EBITDA that isn't there in 2016, primarily because of Brexit in the middle of the year and the hit on the pound.

Okay, thank you.

And then, of course, you have the timing of that investment. What we report there is the aggregate amount we have spent in the year. A transaction like MaxEmail occurred in the middle of the year, so there's only slightly less than one-half year benefit.

We're not giving a weighted average. We're giving you the actual capital investment. You're looking at the actual EBITDA. But for any of the M&A, they're contributing less than one full year.

Also, even though we didn't get the question, if you see the base was growing -- the Cloud Service customer base was growing very, very -- almost didn't. The reason is, in our European and some of MaxEmail and some other places, we acquired customers that had very low monthly payments, $2, EUR2, EUR 3, all those.

As we migrated them, we started to increase prices. The total effect of revenue was positive, but we lost customers that were not profitable to us. And that's the cleanup that happened through the end of the year.

We continue to always take customers. Once we migrate them and we believe that they see that our service is same or better, we then come and have them to come to market prices. Some we succeed, some we don't, but usually because the price has jumped times four- or five-folds, it's still okay to lose some customers.

Okay. Thank you.

Jon Tanwantent, CJS Securities.

Hi, gentlemen. Thank you for taking my questions, and a very nice quarter. What is your read on the health of small businesses in your core markets, and how are they spending or churning exiting 2016 and heading to 2017?

Actually, generally it's been extremely strong. If this is a reflection, we have seen a surprisingly strong January -- I want to say that every year, January is strong.

Then you see what comes next.

We are budgeting and I tell my team, come on, let's see, because are measuring things on a daily basis. So January is very strong.

We also see increased activity on our mobile customers that come on mobile. They're definitely of smaller ilk. We have to study them.

I think that what we will see is a lot of customers coming on our Cloud Connect on mobile, signing up quick, very low cost of acquisition, but shorter life. It's a different kind of people. But definitely, we are not seeing any weakness in the spend, to say so. Also, our credit card acceptance rates are good, so we are not seeing any change, actually.

Maybe some firming.

Actually, it's positive.

Got it. That's helpful. And then, just switching to the Media business. If I understood you correctly, you would be at the digital media average, similar to 2016 in the everyday pieces that you want to keep by year-end. Is that your long-term target margin for the business, and if not, how long does it take you to get there? And do you need to layer on any additional M&A to reach that target in the future?

Long-term margin is an interesting issue. We've had this conversation over the last year, which is, what is the objective? Is it maximal margins or maximal growth or some combination? Our team has chosen a prudent, balanced approach.

As you heard in the earlier conversation, and it is a very small piece of our business today, but to the extent that the social platforms were to become a larger piece of our business and were net additive, that would help drive more revenue growth, but it would tamp down our margins. Certainly, if it became one-third of the business, and you were giving up roughly one-half of the revenue, and each deal is different, that is going to have an impact on your margins. But you're going to be much bigger in terms of total revenue, have more revenue growth, and have more aggregate EBITDA dollars.

Right now, our view is, we are still in the early phases of seeing how this plays out. We've started by putting our little toe in the water. We've now got our foot in the water, but we haven't waded all the way in. So it's going to be an evolving question that in part will be dependent upon the mix of our revenues.

And then it will also be dependent upon other assets that we acquire down the road. And what are the EBITDA profiles of those assets? If you could freeze the world and if you were to freeze the proportionality of our revenues, and this is a highly unrealistic and simplistic assumption, I think the answer to your question would be yes.

If we are in the high 30%s EBITDA margin for a digital media business that consists of monetization of traffic, primarily through performance-based marketing, video and licensing, then, yes, we are somewhere between the mid-30%s to high-30%s. But I think it is too dynamic a business, and the decisions, both that we have made historically and are likely to make in the future, will have a big impact on that ultimate answer.

Got it. And trying to pin you down a little bit, ex-Everyday in 2017, did you actually expect digital media margins to increase or flatten or decrease a little bit?

Probably the same. If you take what we'll call the historic Ziff Davis set of businesses, so the tech vertical, IGN, AskMen, then we would expect the margins to be very similar to 2016.

Got you. And that's because of the addition of social media?

Yes. Actually, that's retarding our margins a little bit or making it up in other areas, so net-net, the margins are going to be fairly stable.

The commerce aided where other places, and especially I mentioned before, the display revenue continues to weaken around the entire media, we were able to do more performance-based advertising, and because we are a content provider, it gives us a leg up, because content is king.

Great, that's helpful. One more modeling question. What is the ballpark amortization per quarter you're adding as a result of the Everyday acquisition? You mean on a GAAP basis?

To get to your adjusted EPS, or get down to GAAP from your adjusted.

Hold on a second. I don't have that at my fingertips. We'll see if we -- . A, I'm not sure that we've locked down all of the pieces, but we'll give you at least a range. Give us a minute, we will give it to you before the call is over.

We can follow up. That's very helpful, and congrats again.

Rishi Jaluria, JMP Securities.

Thanks for taking my questions. Appreciate the granular detail in your 2017 guidance. A couple of quick questions for you.

First, to be clear on guidance, I want to make sure my understanding is correct, your 2% to 3% on the cloud services side -- that's purely organic, so assuming no M&A, is that a fair understanding?

No, it does include some M&A that we have in the pipeline. A couple of deals have actually closed already that are rather small.

You are talking about like 1% or less in the business, small.

But it does include some M&A.

Got it. So the entire cloud service is about that, 2% to 3% is inclusive of M&A?

Yes, a small amount.

Okay. I guess I'm just trying to understand why -- are you going to be less inquisitive than normal? Why is it slowing down?

No, Rishi. What we did is we felt it is wrong not to include M&A that we are advanced on, like we know. Some of them we already did, some of them are LOI, some would close in February or March.

So we said, okay, those are in. But all the rest are extremely active. We just decided not to include them.

We developed -- this has always been a challenge in terms of how you model the business. So we developed a philosophy probably three years ago, that effectively, we would budget transactions that either obviously had already closed, got to put those in because we own them. Or are in a deep enough process that they are going to close pretty much within the first fiscal quarter.

Sometimes those lag and they may drift into Q2, but the idea is, it is something that is very tangible to us, highly likely to occur. So they go in, and everything beyond that is excluded, but that doesn't mean we are pursuing and not likely to acquire.

The only caveat on this is this year -- although it's always been the case -- we generally do not budget any M&A for the Media business. We do that for two reasons. First of all, the way that their model works and the assets that they look for are such that historically, they have only acquired between one and three companies per year, so it is a whole different model.

Secondly, we obviously have Everyday Health. We recently acquired very large [bits] -- the key focus for the media team for this year. Personally, I believe that when we get to the latter half of this year, the management team will have available cycles, and maybe there will be some M&A in media, but we are budgeting zero. All of the M&A that we budget is for cloud, and certainly in the near term, I would say that most, if not all of the M&A, is likely to be for the Cloud business.

If you take our total revenue as j2 Global, it's above $1.1 billion, the total M&A that we did budget is 1.25%, 1.5%, something like this, very small.

Okay. That makes sense. That's helpful. Hemi, earlier you talked about with Everyday Health restructuring or terminating vendor agreements to lead to margin expansion in 2017. Can you expand a little bit on that strategy and help me understand how that works?

You buy a company and you are first of four vendors that compete with the relationship of vendors, if you go on the other side. That's easy. You either renegotiate yours, or say bye-bye to the vendor that is more expensive.

Then we have certain things that were duplications. We don't need two CFOs, two COOs, two everything. Then we have some vendors of the business that we believe are not generating any profit.

We have real estate consolidation that saves us money. Both Everyday Health and Ziff Davis are in Manhattan. We need less space that we have, so all those together with the improvement and the negotiating power and comparing notes on vendors generate immediate savings.

Got it. No, that makes sense. Appreciate that. Scott, again, going back to the guidance, if I square away the different components of the business, the revenue growth and EBITDA margins, it sounds like we are going to see a little bit of EBITDA margin contraction, even in the outside of the media business, if my math's correct, and possibility it's not. I'm just trying to understand, is that all currency, or are there other factors that's baked into that?

I think you see in the Cloud business very consistent EBITDA margins. We're seeing around 52% for 2017. Compared again -- 52% for 2015 and 2016, so consistent margins. The answer to your question is, yes.

The currencies, which I say are primarily punitive to the cloud business, will hurt them by approximately a little less than 1 percentage point in margin because there will be $12 million of revenue, roughly. So you will lose about $6 million in EBITDA on a little under $600 million in revenues, it will be about 1%. In terms of the margin, we are not expanding the margin this year or budgeting it, you could argue, because of what we are seeing or expecting to see in the currency.

By the way, some of the currency assumptions, such as the pound, are basically historical fact. It is a fact that the GBP was at $1.35 last year for the full year, but really in the first half of the year, it was north of $1.40. Now it is in the $1.25 range, so even if you want to use a spot estimate and not look at what economists are saying about where the pound-dollar relationship might be and you just wanted to stick it at $1.25, we'd still be losing a big chunk of the GBP FX year to year. That is our biggest hit.

Okay. That's helpful. Thanks a lot, Hemi.

(multiple speakers) Some economists believe the Euro is going to get the parity, that's creating some friction. You can debate whether that's going to happen or not. But the biggest delta will be the GBP, and unless the GBP bounces back dramatically against the US dollar, it's pretty much a historic fact.

All those also aid us in acquiring foreign assets.

Right. That's a good point.

If you look at the company in its totality and you say, well I run the math, margins will be down relative to 2016. I'm not convinced that the aggregate margins necessarily mean a whole lot, because we have different things going on, certainly between the two segments and then even within the cloud segment amongst different business units.

But if you wanted to look at it that way, you would say cloud, basically flat margins, notwithstanding currencies. Media margin contracting from 37% to 32%, but the contraction is really due, in large part, to Everyday Health, because it has 20% of its revenues at close to no EBITDA margin and has 80% of its revenues whose margins are growing into the historic Ziff Davis margins, but they won't be there for the full fiscal year.

Okay got it, thank you, guys.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Just one follow-up on the question earlier about the amortization related to Everyday Health. We have the actual numbers that relates to the month of December for the period in which we owned it. It was about $2.4 million. We don't immediately have available the amount for 2017, but A, you can probably extrapolate it and B, I would be happy to answer that question more fully in a short period of time.

Thank you everybody, and we are very excited. We closed this year with a $1.1 billion revenue, albeit in outlook, what we are comfortable with that and continue to grow. And looking forward, and very exciting.

One final note is, we will have a press release out probably in the next week or so announcing upcoming conference participation. There are several in the month of March. And then we will target our Q1 earnings call for sometime the first week of May, the first full week of May. Thank you very much, look forward to seeing you or talking to you then.

Thank you. Bye-bye.

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