Ziff Davis Inc (ZD) 2017 Q1 法說會逐字稿

Welcome to the j2 Global's Q1 earnings call.

Leading today's call will be Mr. Hemi Zucker, CEO; and Mr. Scott Turicchi, President and CFO.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call -- conference over to your host, Mr. Scott Turicchi.

Thank you, Mr. Turicchi, you may begin.

Thank you.

Good afternoon, and welcome to j2 Global's Investor Conference Call for the First Fiscal Quarter of 2017.

As the operator just mentioned, I'm Scott Turicchi, the President and CFO of all j2 Global, and with me today is Hemi Zucker, our Chief Executive Officer.

We're very pleased with our Q1 2017 results, producing another strong quarter of particularly EBITDA and non-GAAP net earnings both well exceeding our budget.

As a result, our board has increased the quarterly dividend by an incremental $0.01 to $0.3750 per share.

We will use the presentation for today's call, a copy of which is available at our website.

When you launch the webcast, there is a button on the viewer on the right-hand side which will allow you to expand the slides.

Also, if you've not received a copy of the press release, you can access it through our corporate website at j2global.com/press.

In addition, you will be able to access the webcast from this site.

After we complete our formal presentation, we'll conduct a Q&A session.

The operator will instruct you at that time regarding the procedures for asking a question.

However, at any time, you may email questions to us at investor@j2global.com.

Before beginning our prepared remarks, I will read the safe harbor language.

This call and the webcast includes 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've included as part of the slide-show for the webcast.

We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements.

If you'd now turn to the slide presentation on Slide 5, I will quickly highlight some of the Q1 accomplishments, go over the financial results and then turn the bulk of the call over to Hemi for greater detail.

Our revenue of $255 million for Q1 2017 is a record for us for any fiscal quarter in the company's history.

This generated approximately $100 million in EBITDA, free cash flow of $62 million and adjusted EPS of $1.19.

Q1 '17 revenues grew by $54 million or 27% versus Q1 2016, EBITDA was up $13 million or 15% versus the prior year.

Our Cloud division continued to execute, acquiring small 5 companies during the first fiscal quarter, most of which closed towards the end of the quarter and had very little impact, if any, on Q1 results.

The Cloud segment had revenue of $142 million, up $3 million or 2.5%.

Although in constant currency, that was up 4%, as we continue to experience currency headwinds, particularly from the GDP, and that will continue through Q2.

EBITDA was up $5.5 million or 8% versus Q1 2016.

Our EBITDA margin for the segment was 53% compared to 51% in the same quarter of the prior year.

Our Digital Media segment, aided by the inclusion of Everyday Health for a full quarter, had all-time high revenues of $113 million or up $51 million versus Q1 of 2016 and added $7 million to its EBITDA or 35% versus Q1 of 2016.

I'll now ask you to turn to Slide 7, where you will see how we, as we historically have done, present the aggregation of our various business units.

So on the top line, we have our Cloud segment, which includes Cloud Connect, which is fax and voice, had a very good quarter, at just under $94 million of revenues and $51.7 million of EBITDA or 55% EBITDA margins, a 2 percentage point pickup from Q1 of 2016.

The other -- Cloud Services suffered some FX headwinds, were roughly flat in revenues at $46.7 million in the aggregate, but showed an increase in EBITDA to $22.8 million, 49% EBITDA margin versus 46% in Q1 of 2016.

IP Licensing was flat on the top line at $1.2 million of revs, although a little bit better flow through to EBITDA, almost $800,000 or 66% EBITDA margin.

This combined for $141.5 million of total revs for the Cloud segment, $75.3 million of EBITDA or the 53% EBITDA margin I referenced earlier.

Dropping down to the next line, you have the total Cloud that we just discussed, added to the Digital Media segment, which had $113 million of revenues, $27.5 million of EBITDA, 24% EBITDA margin.

And then the parent, and I'll remind you these are costs that we do not allocate to the various business units, of $3.3 million in cost on a non-GAAP basis for the quarter versus $3.5 million in Q1 of 2016.

So all told, we sum those together for $254.7 million of revenues, $99.5 million of EBITDA or 39% total EBITDA margin for the company.

Adjusted net income of $57.8 million or $1.19 per share; on a GAAP basis, $0.52 per share.

The primary differences between the GAAP and the non-GAAP are the depreciation and amortization related to our various M&A as well as acquisition-related integration costs in this quarter, specifically related to Everyday Health.

Now Hemi, I'll turn it over to you for a greater depth of discussion on, first, our Cloud Services.

Thank you, Scott, and good afternoon everybody.

I'm very excited to be here today.

My presentation, as usual, is 2 parts: Cloud and Media.

I will start with the Cloud at page or Slide #9, and I'll start with Q1 Cloud Connect, which is our fax and voice.

During Q1 of '17, we have reached an all-time high Cloud Connect revenue of $94 million, which is 4% up versus Q1 '16.

Fax revenue of $77 million continued to grow versus Q1 '16, driven mainly by strength in our premium fax brand, which is eFax.

Fax revenue, while still growing, represents 30% of our Q1 revenue and represents roughly 43% of our consolidated EBITDA.

Our subscriber base reached 2.4 million DIDs, which is 1.1% versus Q1.

Growth in Q1 was organic only and does not include our latest acquisition that I will discuss in a moment.

Corporate fax revenue continued to grow, up 3.3% versus Q1 '16.

We acquired the assets of Scrypt fax, which specializes on the healthcare vertical.

And as I said, we closed the deal in the last day of the quarter and we didn't feel comfortable to announce how many DIDs they had because we have our methods of counting it.

But it's 20,000 -- out of 20,000 DIDs that will be added next quarter.

This further is expanding our corporate fax suite of products.

On our voice front, our voice quarterly revenue is $17 million, grew 25% versus Q1 '16, driven by international acquisition and organic growth of our primary brands.

Next, Page 10, where I will discuss the Cloud Backup of 2017 Q1.

Revenue of $28 million, up 1.5% versus Q1 '16.

This revenue could have been up 5% in constant currency or $29 million if we didn't have a big FX impact there.

We achieved EBITDA of $14 million dollars, which is up 4% versus last quarter '16.

Our KeepItSafe Europe revenue grew 18% versus Q1 '16.

We continue the integration of our acquired businesses.

We are investing in R&D to support and develop the platform.

We also successfully launched Disaster Recovery Service, and we have a strong M&A pipeline.

Next, Page 11, where I will discuss our Q1 e-mail security highlights.

Q1 revenue of $10 million versus $12.3 million in Q1, and I will explain the decline in the revenue.

During 2016 and 2017, we were very busy migrating to the FuseMail platform for other brands that we have acquired.

First is McAfee that ended its life in the U.S. Second is Stay Secure in Sweden, which we acquired in late '15.

Third is Comendo, a public company we bought in Denmark also in '15.

And fourth is CudaMail, a U.S. company that we recently acquired.

We have successfully migrated over 2.1 users and retained 80% of those customers.

The migration, when fully done, will increase our cost savings.

All these effort was preplanned.

And while revenue were down as planned, we are working -- and it's budgeted, of course, we are working on increasing the margins.

Once we finish migrating, we didn't waste any more time.

And during the end of Q3, we already acquired 3 new small companies.

One is SendInc, an e-mail encryption platform; then MXForce, small antispam/antivirus company; and Longscope, which is a small email encryption.

We have a healthy M&A pipeline and plan to close the year strong.

Page 12, when I will discuss on e-mail marketing or Campaigner.

Q1 '17 revenue $7.5 million, 33% up versus Q1 '16.

Our revenue run rate is $31 million.

We acquired marketing company, MailerMailer, a small rollup that is in progress now.

This was done in Q1.

Campaigner continues to focus on product development and sales effort upstream to higher premium mid-market customers with higher usage, as you can see, usage is up 13% Q1 '16; and ARPA, revenue per account, is up 20% versus Q1 '16.

These 2 are driving also higher EBITDA.

Campaigner won 3 awards, 3 Stevie Awards: the Gold Award for Sales Operations, Silver Award for Sales Distinction of the Year and Bronze Award for Sales Growth Achievement of the Year.

Next, I will discuss the Digital Media, and I'm guiding you to Page 14.

Our Digital Media business had a very strong Q1.

Total revenue were $113 million or up 81% year-over-year aided by the acquisition of Everyday Health.

EBITDA was $28 million, up 36% year-over-year.

Total multi-platform visits were up 28% year-over-year, reaching 1.4 billion visits.

At our [news] properties, Everyday Health, Media Page Today and WhatToExpect, we had a very reproductive quarter, with new products launches and features.

Focused on productivity and profitability, we continue the execution of our "shrink to grow" strategy.

This is done by eliminating negative margin activities and eliminating low-potential activities.

This will result higher EBITDA against reduced revenue.

On the product side, we improved our site navigation, and this is boosting our search engine optimization and also is improving the mobile experience.

This effort resulted a 33% lift in page views per visit.

WhatToExpect launched 2 new health offering, also leveraging the know-how and the platforms of Ziff Davis.

First health offering is Delivery Room, which is a branded content studio that sold over 30 campaigns to marketeers -- already sold.

The other offering is Mom Reach, which allows us to target mothers based on the age of the children.

This is a very unique offering of ours in the parenting space.

Next is our relationship with the Mayo Clinic.

The Mayo Clinic Diet subscription product.

According to the USA News & World Report, it just tied for the first place for the Best Diet Commercial.

Next is MedPage.

Historically, our MedPage Today received most of its traffic from search, direct and e-mail.

During Q1, we saw great success in using social media to drive traffic with referral being up 320%.

Finally, we migrated many of our site to the cloud.

This is resulting faster load times, cost saving and the ability to release new product and features faster.

Next, Page 15.

As you know, our strategy with IGN is to continue to build our video offering and platform.

Last month, we announced a very exciting partnership with Twitter, in which we will produce over 130 hours of live coverage of the annual E3 show here in Los Angeles.

E3 is the biggest event in video games, and IGN will exclusively carry -- be carried on Twitter.

We are very excited for this partnership.

And yet, this is another example of how we are leveraging social platforms for video distribution and monetization.

The partnership also represents our expansion into live video versus our historic trends which was video-on-demand.

Across all platforms, IGN generated 703 million views in the quarter, which is up 34% year-over-year.

Social followers grew 60% to over 22 million, YouTube subscription increased 25% to 9.8 million and app installs grew 10% to 15.4 million.

On the international front, we launched IGN China in Mandarin, making us available in one of the world's biggest gaming marketing in the world.

This marks our 28th international version of the site, of the IGN site.

Next, Page 16.

On the Ookla front, total tests exceeded 600 million tests in the quarter, up 10% year-over-year.

The growth is led by mobile tests, growing 22%.

What's impressive about our mobile growth is that it is all done from our Speedtest native app.

You cannot run tests via mobile browser as it's our belief that app-based testing yields the most accurate results.

Finally, as you know, we licensed our Speedtest app to ISPs who use them on their own sites and help us to generate more revenue and more tests to monetize.

With that, let me pass the call to Scott.

Thank you, Hemi.

The final slide before we go to Q&A is on Slide 18, which is the reconfirmation of our fiscal year 2017 guidance.

As a reminder, that's for revenues between $1.13 billion and $1.17 billion, and adjusted non-GAAP EPS of between $5.60 a share and $6 a share.

And I will remind you that it is not our policy to alter our guidance unless and until it becomes very clear that the current guidance that we have is no longer tenable So when we have raised guidance in the past, it's been much later in the year.

And then, finally, supplement information beginning on Slide 19, and really the numeric analysis on 20 and following, you'll see the metrics for the company, the Cloud business, the Media business and then a variety of reconciliation schedules that will give you the nearest GAAP equivalent to the various non-GAAP measures used in this presentation.

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

(Operator Instructions)

Okay.

Before we go to -- before you finish polling for the live questions, we have a couple of questions by e-mail, which I will address.

It primarily is around -- there's a variety of questions, but I'll try to homogenize them, they're around our various M&A strategy.

In short, the questions are, are we seeing that there's any resistance to sellers right now, given the uncertainty as to the taxes in the United States?

I would say the answer is no.

I don't think that's deterring sellers from selling.

I'd also remind people that we are looking on a global basis.

So while what is happening here in the U.S. or may happen is interesting, it certainly doesn't affect anything in the various other jurisdictions in which we do business.

In terms of how we finance these acquisitions, we've had a preference for a combination of free cash flow and debt.

Historically, in the high-yield market, we did issue a convert approximately 3 years ago.

That has tended to be, actually, a fairly expensive piece of capital for us given how the stock has performed from the issuance at the time, which was around $50 a share to currently $90.

It's one of the reasons also we don't use our common stock to acquire companies.

Having said that, though, we also are studying what the administration is saying about tax reform, and that may very well influence our views on a forward-looking basis depending upon the probability that the corporate tax rate is substantially lower from the current 35%.

And then in terms of our mix of M&A, it is correct.

The last few quarters, with the exception of Everyday Health, most of the businesses that we have bought have been very small.

Part of that, I'd say, in the last 5 or 6 months has been a function that larger transactions, which we've looked at outside of Everyday Health, have been too expensive.

And a lot of that has to do with the correlation to the stock markets either approaching or at all-time highs.

So we've tended to focus on smaller deals.

There continues to be a large number of them out there.

Although as we get bigger, it is our desire to focus on what I'll call intermediate-sized deals.

And then in terms of those acquisitions, the goal has been a 20% cash-on-cash return.

I'd say that, historically, we've been very good at, if not achieving, coming very close to achieving those kinds of returns.

Although we use different models for different parts of the business.

Generally, in the Cloud, it is the goal not to grow the revenues.

In fact, as Hemi will talk about or has talked about, there'll be cases where we'll actually shrink the revenues.

And we know there'll be revenue decline because of either expected customer attrition or customer attrition upon migration.

In the Digital Media business, it usually is the concept of taking the asset, initially shrinking it down to its core, and then from that point, growing its revenue.

So we have these different models for the different parts of our business.

And now I'll ask the operator to take the first live question.

Our first question comes from the line of Greg Burns with Sidoti & Company.

With the "shrink to grow" strategy on the -- with the Everyday Health assets, I was wondering if you could give us an update on your thoughts around Cambridge and Tea Leaves, how you see them fitting into the business?

Is that -- are those assets that you'd look to keep and grow?

And how much revenue are they currently generating?

So there are about $50 million, 5-0, of revenues combined.

And we have been exploring, to your point, that they are not in our judgment as strong a fit certainly for a digital media company as, say, the other assets such, as Everyday Health.com, MedPages, Mayo Clinic and WhatToExpect.

At this point, we don't have an update.

As we've said in the last couple of quarters, there have been parties that have been interested that have contacted us.

We've actually now moved to that into a more formal process to deal with those inquiries.

And I think that we'll be at a decision point probably in the next couple to 3 months as to whether those assets either individually or collectively are going to be kept or sold.

Okay.

And I missed what you were saying about the converts earlier.

But could you just give us an update on the, I guess, the broader refinancing or where you stand in that process?

Sure.

So as you know, we've talked about for at least a couple of quarters now a comprehensive refinancing that would take out the 8% notes at the Cloud level, retire the bank facility that was put in place at the time of the acquisition of Everyday Health in December of 2016, and possibly raise a little additional capital beyond that.

I think as I mentioned, it has been our preference and our bias to finance with -- in the debt markets, be it at a high-yield market or the bank market.

We are though studying, as I just mentioned, the contemplated proposed tax reform because, obviously, the lower the marginal tax rate goes, the less valuable those interest deductions are.

Having said that, the convert that we issued 3 years ago is rather expensive because the stock has performed very well.

And so when you look at the overall IRR of that instrument, we're still better off having done high-yield debt.

So I would say that in the next couple -- within the next couple of months, we'll make those decisions and hopefully have a transaction done.

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

First question, on Everyday Health, Scott, can you talk about where you think you guys are in terms of the synergy realization road map?

Would you say that you're in line with your plans?

Would you say you're tracking ahead of plans?

Just kind of curious where you think you guys are.

I think if you talk about it on a formal basis, we would be in line or slightly ahead of our plans in terms of cost reduction.

But I think when you talk about synergies, there's 2 pieces to it.

There's rightsizing the cost structure, which is something that the team was very aggressive doing almost immediately upon acquiring Everyday Health back in December.

Then as a second piece, which is a little bit less tangible or less quantifiable, and that is evolving the understanding of how the business is going to operate on a going-forward basis.

And I'd say that's a process that takes time.

In some cases, it's correlative with also changing certain people out, introducing a new mentality as we've talked about before.

And as you know, we're very focused on profitable revenue, not just revenue for the sake of revenue.

Sometimes we call it, internally, empty-calorie revenue.

So it's getting into the business.

It's culling that -- those revenue streams or those situations out.

But it's also then reorienting the mentality on a forward-looking basis in terms of what constitutes revenue streams and deals that we really want to do within the context of the healthcare vertical.

So I'd say in the second -- or the second piece of it, we're probably tracking.

But it's something that takes -- it takes months.

Got it -- got it.

Next question, I guess, Hemi, I can direct this to you.

In terms of the Cloud Services business, can you talk about kind of the M&A pipeline there?

And then within that business, are there certain pockets where you're seeing profitable growth, and other areas where you're -- you have declining revenue streams?

Just kind of curious if you could talk about the various pieces in the Cloud Services business.

Yes.

So thank you.

So first of all, I want to add something to Scott's comments to Greg on the 2 assets that are for sale.

We are getting bids.

We have competition on it.

Be conservative and not to create any of this.

But we are making good progress there.

Now to your question on our businesses, and I'll go one by one.

So first of all on the Cloud Connect.

Cloud Connect actually is doing better than we thought.

We have surprised ourselves.

We've seen that we still have the fax asset to acquirer, and that's a very good one.

Also, in the last quarter, months, days, we are seeing much less expensive CPAs, especially in the largest market in the U.S., so that's very encouraging.

So we have only good expectations there.

On the backup, we have strong M&A pipeline and we are about to close several deals within the next few weeks, small, and one of them is kind of medium-size.

We're making good progress there.

Assets that we acquired and we thought that they will decline -- are declining much slower than we thought.

And as you can see, the EBITDA is maintained very high.

E-mail security, we have several M&A opportunities.

One of them is relatively to this is midsize.

We hope to close it in this month.

And as the revenue is only $14 million, if you do a deal of several millions, it's impactful on [this] side.

And if it is in a territory that we already are there, so we can do fast integration.

And then on Campaigner, we have opportunities.

It is a $31 million on run rate, and I believe that we can close the year in a run rate to $35 million, where most of it was just our regular run-of-mill M&A.

Did I answer you?

Yes.

I mean, that's helpful.

And I had one more question.

Scott, you addressed this a little bit in your prepared remarks.

But in terms of the language in the press release where you said you're currently ahead of EPS expectation.

Assuming -- I understand it's not in your nature to raise guidance this early in the year, but how should we interpret that comment?

Is that relative to the midpoint of the annual range?

Is that relative to the high end of the annual range?

I'm just trying to put it into context.

Well, yes -- the budget is the midpoint.

So it's $1,150 million and $5.80.

So it's in the context of our budget, which is the midpoint, obviously the range of guidance is just that it's a range around it.

And for reasons that are not entirely clear to me, we seem to have, in the first fiscal quarter, a very wide range of analyst dispersion even though within the full fiscal year, both individually and in the aggregate, all of our analysts tend to be within our revenue and EPS guidance range.

I'm not entirely clear why this is occurring.

But I know in this fiscal quarter, we had a couple of analysts that were, on the bottom line, fairly wide off the mark in terms of earnings, which caused the bias up in the average.

So we wanted to make the point that we're comfortably ahead of our own EPS and EBITDA budgetary numbers, which bodes very well for the full fiscal year.

And let me add, as you know, our Media business is now almost half of the total revenue.

Our Media business is biased strongly towards Q4.

We have also in Campaigner some other businesses of j2, a strong Q4.

So we have budgeted our EPS over the quarters to achieve the number.

But as Scott said, there are 2 analysts that, while totally are okay, they're ran ahead of us on the EPS.

So our budget is with most of them, that is -- but not with the few outliners and the comment that I made on them, I quote, "Is to get the shareholders comfortable that are, according to our budget, according to our numbers, with our 20-some years of meeting our numbers, we are still very comfortable with them."

Our next question comes from the line of Walter Pritchard with Citigroup.

It's Jim Fish on for Walter.

And sorry if you have answered them as I'm jumping between calls here.

Just kind of, first, we're still seeing a large amount of sort of small businesses using hardware-based fax.

How is the conversion of going from a -- of a customer from going from hardware to online working?

And sort of how do you categorize the opportunity there?

Jim, so I addressed it, but I would gladly talk about it a little bit more.

I just said that our sign-ups -- our sign-ups come from straight-to-site, average of free-to-paid and most of it is coming from search.

And our search results are divided between people that come directly to our website and those that go on the mobile app.

We have developed a very expensive mobile app, and we are seeing more and more and more and more sign-ups coming through our mobile app.

Those sign-ups are much less expensive to us.

We have cases that their return is like less than 2 months of subscription.

We also are seeing -- actually surprised ourselves with the low CPA and the high organic growth, we kind of budgeted for flat this year, but we are seeing it being much better than that.

And yes, the continued conversion from hardware and a lot of it is coming from other competitors that are not providing the service levels, especially in the corporate world.

We just bought a company, as I said, that's specializing in the medical field, which you know there are very high demands there on HIPAA compliance and other things.

So we bought a company -- actually, we didn't know about its existence up to a few months ago.

They're bringing in more than 20,000 subscribers, which I did not include in our numbers because they count it a little bit different.

So we're actually very encouraged on the fact we surprised ourselves.

And I think I'll add to that, Jim, that when you look at the corporate, particularly on the larger scale deployments where we have be actual sales force that's out there, I'd say almost all of their wins are conversions from an incumbent hardware system to the outsourced as-a-service solution.

And I think that those -- what -- earlier on, a few years ago, there were some questions or resistance about of the whole idea of outsourcing -- security -- there were all kinds of questions.

I think that as the years have gone by, each of those concerns have fallen by the wayside.

And so that's been one of the areas that's been very productive for us, and the overall digital fax space has been that medium to larger enterprise customer.

And I just came back last week from Japan, which is, to our belief, is the second largest potential market in the world with 120 million citizens, heavily reliant on fax.

We are -- there only like 50-some thousand DIDs.

We love this market.

The churn is low, the commitment -- and one of the largest competitors of ours is actually giving us a sign that he's ready to move on.

And at point, I believe, that we will have an even easier way to continue to grow.

They are just late adopters, but they continue to use fax.

And so this is going to be the next wave.

I'm not announcing the wave.

But I can tell you every time I come back, I'm very excited to see the potential there.

Got it.

And going after another question that was asked I know of.

Backup looks like it's slowed as you guys have monetized and rationalized pricing.

It's been a few quarters since you did a larger online backup asset like SugarSync, for example.

What do you think of this market?

And do you really think you need to do a larger deal in this space to get this business sort of back on track and growing double digits again?

So first of all, we would love to make a larger deal if it comes by and if it's profitable.

SugarSync is example of a company that we bought and we paid very low price for a business that, in our plans, in our justification for the board, was to decline.

Actually, declined much lower.

We increase the prices, and it went well.

We have several M&A deals.

We don't want to jinx them.

We don't want to announce because we are still in negotiation.

None of them is huge.

None of them is very large.

But there are so plenty of them.

There are, I'd say, 3 to 4 companies with revenues between $10 million and $20 million, and they're all coming and they are knocking on our door.

We think they're too expensive.

We tell their BCs, go shop somewhere else.

None of them sold and none of them shut the door with us.

But because of the pricing and expectations, I'm not even including it.

It's not in our budget.

It's not going to be a part of our discussion.

We have the patience, we have the money, we have the capability and I'm optimistic.

Ladies and gentlemen, our next question comes from the line of Will Power with Robert W. Baird.

This is actually Charlie on for Will.

Thinking about the Digital Media business, and specifically your activity on social platforms like Facebook and Snapchat and with the Twitter deal this quarter, can you update us on where you are in terms of monetization related to those social platforms and how big of a revenue opportunity do you think that could be in the future?

Well, it's still small today.

So the answer is we're monetizing against all those platforms, but -- and this -- it's a little bit of an apple and an orange.

I think the last time we talked about this, we either didn't own Everyday Health or we owned it -- it was Q4 for a month.

And so at the time, the social media component, which really applied to everything exclusive of Everyday Health set of assets, was less than 5% of the Digital Media revenues.

Now that will be an increasing percentage on the tech and games over time.

As Hemi mentioned, there are some things that have been launched within Q1 within the Everyday Health portfolio that is also applicable to social media, but it's really at the starting line.

So it's going to take a while for that to bleed in and to become a meaningful percentage of revenues.

And of course, at least initially, the overall percentage of social media's impact on our overall Digital Media would be less because it's being diluted by the Everyday Health set of assets revenue that has close to 0 today.

But I think that in general, we've -- we're very bullish that this is an opportunity to extend our reach to build in additional demographics that we might not otherwise have access to.

But it's still very much in the early stages.

So I think it's hard to predict, say, 2 or 3 years out what is the right percentage of Ziff Davis' total media revenue that could be off of these social platforms.

But today, it's still a low single-digit number.

Right.

Makes sense.

And if I could squeeze one more in.

Would you be able provide us with a breakdown between performance marketing, display advertising and licensing revenue in the Digital Media business?

Ah, it's a great question.

Well, we've actually been talking about, with the inclusion of Everyday Health, what's the right way to look at the Digital Media business.

So we're not quite ready to go live with this, but I'll give you a little bit of a preview.

So if we look at the Q1 numbers, advertising, which would be all of our CPM inclusive of video, inclusive of display, is a little under 50%.

So this now includes the Everyday Health revenue, okay?

Performance-based marketing is about 35%.

The licensing and a little bit of subscriptions, about 10%.

And then the new piece is what we call services, and this would be predominantly Tea Leaves and Cambridge from Everyday Health, also at about 10%.

Our next mentioned comes from the line of Jon Tanwanteng with CJS Securities.

I know you've said that the goal isn't to grow revenue in a number of your businesses, but could he explain what's driving the growth in fax this quarter especially on an organic basis?

And Hemi, I'm not sure did you give out any churn metrics at all this time?

Can you repeat?

Yes, the churn metrics are there.

Yes, the churn metrics are there.

They were slightly high.

21.

2.27%.

Page 21, not 21.

Page 21, you'll have the different metrics.

So you'll see it was 2.22% in Q1 of '16, 2.27% in Q1 of '17.

Obviously, creating some headwind in the first fiscal quarter of '17.

And all the things Hemi talked about as it related to the e-mail security business, particularly McAfee end of life.

And then we also had in the DID base business one corporate customer that did a cleanup, which is not uncommon.

Typically, the corporate customers will have a block of numbers.

And from time to time, they'll go through it based upon their actual employee base and they'll give back some numbers.

So there was...

This customer is almost 0 impact on our revenue because he was like a bulk customer that bought and paid -- here's my corporation, here is the amount.

And as the contract comes to renewal, they reduced DIDs, but it has almost 0 impact on the revenue.

But if you look at the 5 quarters presented there, I mean, it's been basically between 2.2% and 2.25% or 2.2% and 2.3%.

And there's all kinds of noise that will move it 10 or 20 basis points.

And it could've been lower if I included the acquisition of the fax bid, as I said 20, maybe even 30, that we bought in the end of the quarter.

But we didn't want to bother with it.

You had another question?

Yes, I was just wondering what was driving the strength in fax.

I don't know.

As I said, we surprised ourselves.

I think that more and more companies, as they are moving their telephone systems to SIPs and all those things, suddenly they discovered that they are naked, because when they moved to VoIP, fax is not supported by VoIP -- there are some that claim it does, but it does horrible work -- actually we have some VoIP providers out there that buy their fax lines from us.

So I think this push to VoIP and digitizing of the telephone switches is pushing corporation to find a reliable fax solution -- they come to us.

Actually, as I said -- and we're happy to see that it is still strong.

I think that people are -- more people are aware of the fact that fax can be digitized and saves them money.

At this point, they save for the -- I don't know, $100-to-some a year (inaudible) does not, and we are benefiting from it.

Got it.

That's helpful.

And then just on Everyday, it seems like you've made a lot of progress in launching and migrating platforms that are -- excuse me, practices that are the j2 best practices and new revenue streams.

Are those proving to be as material and profitable as you want them to be?

Or is it too early to tell at this point?

They are material because not only we have speed and everything, we can actually have less system, less people.

The people of Everyday Health, they want to be successful.

So every time we bring something that they see is an improvement, it increases their satisfaction with their jobs.

This is a company that was all the while trying to sell itself.

It's not a great position to be when you know that your company is being sold.

Now they see that the Ziff Davis guys are coming, in the same city -- other side of Manhattan -- it creates an excitement.

So it's all positive.

And as you know, Scott and I, over the years, have been very conservative.

But as I said before, we are ahead of our EPS.

Great.

And then just finally, on the refinancing or potential refinancing, Scott.

I'm sorry, did you mention the potential size of the additional debt that you would want to take on?

No.

We've talked about in the past that given that refinancing that we intend to do here as it relates to the bank line, the 8% notes, the call premium, it pretty much necessitates a transaction or a mixture of financing in at least the $500 million range.

Okay.

And the reasons to flex higher would be opportunities in M&A?

Correct.

Add a little bit more U.S. cash to our balance sheet.

But that could be done through a line of credit that's undrawn.

So as I say, you got to think about it more.

I think particularly in this fluid tax environment, more about there's different pieces and different ways to get to that equation.

So there's a minimum number we need to just do the plain refinancing.

Then if you think about accessing the additional capital, there might be ways, in addition to a single financing, how that might be achieved, like an undrawn bank line.

And then the only other wrinkle is where our marginal tax rate is likely to be.

Obviously, higher marginal tax rates make debt more appealing.

Lower marginal tax rates maybe make it less appealing relative to some other alternatives.

But right now, everybody's guessing in terms of what tax reform actually will happen, when it will happen and what form it will take.

Our next question comes from the line of Rishi Jaluria with JMP Securities.

A couple ones on Everyday Health.

What impact did the "shrink to grow" strategy within the quarter have on the Digital Media side of the business?

I'm not sure what you mean what impact did it have.

As in did that -- I mean, was that a headwind to Digital revenue within the quarter?

And I mean, maybe directionally, what size of (inaudible)?

Yes, but that was -- look, we -- the answer is yes, but that was also contemplated.

I think as we mentioned last year, if you bifurcate the Everyday Health business into sort of 2 components, there's about $200 million of advertising revenue and there's $50 million of what we're calling services revenue; that's the Tea Leaves and Cambridge.

And if you take a look at that $200 million, we're looking at about a 10% reduction in that revenue based upon our then estimates.

I think we talked about it in February during our Q4 call that those -- that $20 million was not -- either at all contributory in terms of earnings or very marginally contributory -- so that piece is being culled out.

And I'd say that that's reasonably ratable over the 4 quarters, but not necessarily perfectly so.

Rishi, when we bought Everyday Health, we knew about Tea Leaves, we knew about Cambridge.

Scott said $30 million of revenue -- $50 million of revenue, sorry.

And we budgeted it, and they are meeting the budget.

But they are an asset that we want to diversify out.

And the only thing we don't know is when.

And they actually are not dragging us down.

They're executing per their plan.

They are making their numbers.

So just the only that is still up in the air is the timing.

Okay, got it.

That's helpful.

And staying on that topic with Cambridge and Tea Leaves, what -- I know we expect the Digital Media EBITDA margins to ramp as the year goes on.

But how would Digital Media EBITDA margins in the quarter look today excluding those 2 assets?

If you exclude Tea Leaves and Cambridge?

Correct.

It's going to be probably a couple of points higher.

Maybe a little bit much, about a point higher.

Okay, got it.

And just 2 quick housekeeping questions.

First, what was the overall impact -- and then I'm sorry if I'm making you repeat yourself, to revenue from FX headwinds in the quarter?

Almost $3 million for the company as a whole.

About $2.2 million of that is the Cloud and a little under $800,000 is Media.

Got it.

And Scott, on the -- in the Investor deck when you talked about free cash flow, I see there's the $20 million for contingent compensation.

And then, I guess, can you explain the rationale behind that and how we should be thinking about that number on our fee cash flow models going forward?

Yes.

Actually, the free cash flow is understated by probably another at least $10 million, and I'll explain why.

So when we bought Everyday Health, Tea Leaves have been purchased in 2015 and part of the consideration was an earn-out.

Obviously, we closed Everyday Health in December.

So it was known to us at the time that it was highly likely that Tea Leaves would make its earn-out criteria in 2016 payable in 2017.

So the way I've always looked at that is that's just part of the purchase price of Everyday Health, that $20 million.

Now accounting-wise, because we owned the asset, it goes out of our cash flow as a payment in Q1.

So we've added that back to normalize the free cash flow, because I really look at it as we paid $20 million more for the Everyday Health asset because that was a known entity at the time of closing.

In addition to that, though, we've had probably $10 million of free cash flow hits in Q1 from Everyday Health that relate to, primarily, things like severance, cleaning up some of these contracts that we are getting out of, there were certain exit payments to be made.

And although those are non-GAAP-ed from a P&L standpoint, they are not non-GAAP-ed from a free cash flow standpoint.

So I think that the free cash flow productivity of the business is probably $10 million higher than what we're reporting for Q1.

But we felt that the easiest and the most definitive and quantifiable is the Tea Leaves payment because, as I say, it was known at the time of closing and it really was part of the overall purchase price, albeit deferred by about 90 days pursuant to the terms of that earn-out.

Okay, got it.

So we shouldn't expect any more major contingent compensation going forward?

No.

No, there's none.

There's none.

In fact, we're basically done within all of j2 in terms of the earn-outs that were on the table.

We did pay the last Ookla earn-out.

Also in '16 -- calendar year '16, they earned it.

That's been paid.

That's behind us.

So no, unless we do a new transaction that has an earn-out, and obviously then we'll have to give you the details of that if that were to occur.

But no.

Our next question comes from the line of James Breen with William Blair.

Just I want to clarify a couple things.

Scott, you talked about sort of the "shrink to grow" strategy in the Digital Media side.

Of the $200 million, you said about 10%.

So does that sort of mean there was about $3 million to $4 million impact this quarter, and you'll see that sort of build throughout the year?

That's correct.

Okay.

And then from a margin perspective, with Cambridge and the Tea Leaves in there, you're 24%, maybe it's a point higher without them.

But where do you guys see the margins in that division going as you work through the remainder of the synergies and get to sort of a more run rate level?

Yes.

Well, as you know, the Q1 is a low watermark for all of our Digital Media properties and Q4 is the high water mark.

Obviously, there's further complexity this year because you do have things going on in Everyday Health that are rolling out over the 4 quarters, which I think makes the analysis a little bit more complex than usual.

But the goal is that by the end of the year, if not for the full fiscal year, if you take Tea Leaves and Cambridge out of the equation, just because they have their own dynamic, that, that $200 million of revenue we should be getting into certainly on a run rate basis, if not an actual basis, around mid-30s EBITDA.

Now that's where we see it moving towards as we build additional revenue and get leverage off of the current cost structure.

And that leverage will be most [comparable] in Q4 because that's where you have the biggest jump sequentially in revenue, would be from 3 to 4 just like we have in the tech and the games piece of the business on the other side of Ziff Davis' business.

Okay.

And that sort of leads to my next question.

I think prior to Everyday Health, you talked about revenue within that Media segment sort of 20% in the first quarter, maybe mid-20s in the second and third quarter, and then low 30% of revenue in the fourth, is that still sort of applicable here even with Everyday Health on top?

Yes.

Okay.

And then on the FX number, the $3 million you talked about.

Is that year-over-year?

Or is that sequentially from the fourth?

No, year-over-year, Q1 of '16 to Q1 of '17.

And that -- the biggest component there, and you'll see it again in Q2, is the weakness in the GDP that occurred post the Brexit vote in June of 2016.

So the toughest comparisons, currency-wise, are Q1 and Q2.

Then the presumption is it becomes more normalized in 3 and 4 against where it was last year because most of that GDP had -- the GDP essentially reset against the dollar.

Okay.

And then just on the Cloud business, you saw some shrinking in the e-mail segment there as you sort of rationalizing things, I think the total Cloud segment has been -- was down sequentially, obviously.

How do you think about that going forward?

Will it be sort of flat to down, maybe up a little bit, over the course of the next couple of quarters?

We are thinking it's going up, not to let you down, of course.

We have, as I said, this onetime $2.3 million that we budgeted for, which was the migration from a 3 or 4 platforms into 1 platform owned by us.

And we have M&A pipeline and we have other strong demand on the fax, on the voice.

So we're optimistic about it.

Yes, I think the key thing on the e-mail piece is that the McAfee end of life has, in fact, occurred.

And that occurred during Q1.

I think we have borne the brunt of that impact.

So that business is, in essence, with the combination of FX and the McAfee end of life, has reset to this $10 million a quarter level.

Now it has the ability to grow off of that base.

It also -- and I think more importantly than whatever its organic growth may be off that base, is cycles are now freed up to do M&A.

And those were basically shut down for the last 9 months.

If you go back and you'll see, we didn't talk about any M&A for the e-mail security business, and that was primarily because those internal resources were...

Occupied.

Yes, they were occupied with not just the McAfee end-of-life migration, but also the other migrations that Hemi talked about in the presentation.

With those behind us now, those teams are available for taking on additional M&A and doing the migrations that will be necessary.

And they started, we did 3 small acquisitions.

Yes, we did 3 -- they're weren't very big.

We did 3 small ones in Q1.

So it shows you they're back.

They're back open for business in terms of additional...

And they started to grow organically also.

Especially in the U.S., I see weekly reports, they're going organically now.

Okay.

And that actually leads into my last question, which is around the M&A side.

Can you tell us how much you spent in the first quarter for those 5 transactions?

Yes, about $25 million.

About $25 million.

And last year was a little bit of a strange year from an M&A perspective, obviously, because you had the auction midyear and then you had Everyday Health at the end, which sort of came right on the heels of the auction.

Are we getting back to sort of a more normal cycle for you guys in terms of more equal spending throughout the year to get to that sort of $200 million, $300 million, $100 million range on an M&A side?

Well, it's very -- look, it's very tricky because...

We're opportunistic.

If it comes, and it's good.

Yes.

And also, because we have spent the energy -- and you noted 2 of the examples, Gawker on the Media side, which we didn't ultimately win; and then of course everyday Health, which we did.

But there's a lot more lumpiness, if you will, when you look at deals of that size because, a, they will generally attract some degree of competition, even if it's limited as in the case of the Gawker, all it takes is one who's willing to pay more.

So I think that you've got kind of 2 things going on here, maybe 3. A number of small to maybe low and midsize deals the Cloud can execute against that are not terribly influenced by the market conditions, meaning where the stock markets at, things like tax reform or any of these other exogenous variables.

And that's what we saw in Q4 of last year, it's what you saw in Q1 of this year for the Cloud.

I think on Digital Media, by design, there's been somewhat of a hiatus, although we still look, because we're in that important phase right now of the integration of Everyday Health.

As Hemi noted in the presentation, a number of new ideas being pushed through the different Everyday Health properties making the decisions that we need to about Cambridge and Tea Leaves, whatever those may be.

So we've not been terribly aggressive on the Media front.

And I believe, as we get into the latter portion of this year, the Ziff Davis management time necessary for executing against Everyday Health will lessen, and as a result, cycles will open up for M&A.

But of course, we budgeted none.

I don't know what will be available as we get into Q3 and Q4.

And then you have a third bucket, which are medium to larger-sized deals for either the Cloud business or the Media business.

Where I would say right now, we're very enthusiastic, particularly on the Cloud side because the management teams are available for the integration, it really comes down to one of pricing.

And in some of those cases, we've seen it.

We've been involved in situations over the last few months, where, in fact, larger assets, (inaudible) Everyday Health size, traded away to other companies who were willing to pay a much bigger premium than we were for those same assets.

So those I put into a bucket of very hard to predict.

Obviously, if we pull one off, it changes the dynamics and it changes the spread of how we're spending our capital over the 4 quarters.

I think if you limit yourself to only bucket one, which are basically small deals, the answer is yes, you spend $25 million to $75 million a quarter.

And over 4 quarters, because it's not perfectly linear, you'll probably spend a couple hundred million in a year.

Okay.

Great.

But a medium or a larger-sized deal can tip that scale pretty quickly and pretty easily in favor of a specific quarter.

Obviously, that was not the case in Q1.

We have the appetite for a larger deal.

We tried several times last year outside of Everyday Health.

We are now raising capital.

We're getting ready.

Last year, we missed 2 very large deals, and the buyers are not doing very well.

And we are continuing to look, and hope to tell you once we find something.

And actually, the Media deal happened when we raised capital as some of the sellers -- we got attention of some people, and this deal actually happened.

So maybe it will be the same again.

Ladies and gentlemen, that's all the time we have for questions today.

I'd like to turn the floor back over to management for closing comments.

All right.

We thank you all for participating in our Q1 earnings call.

We will be making a presentation at a conference on Wednesday, which would be the Jefferies conference.

So stay tuned for that presentation, which will be webcast as well as a release for the upcoming investor conferences that we'll be at in the month of June.

And we would expect to have our Q2 earnings call the first week of August.

Look in mid-July time frame for the release that gives you the specific date and time and mode for participating.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.