Ziff Davis Inc (ZD) 2017 Q3 法說會逐字稿

Welcome to the j2 Global Q3 Earnings Conference 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 conference over to our host, Mr. Scott Turicchi. Thank you. You may begin.

Thank you. Good afternoon, and welcome to j2 Global's Investor Conference Call for the Third Fiscal Quarter of 2017. As the operator just mentioned, I'm Scott Turicchi, the President and CFO of j2 Global. And with me today is Hemi Zucker, our Chief Executive Officer, for his final earnings call, his 50th.

Q3 was another strong quarter producing record revenues, an all-time record, and a third fiscal quarter record of EBITDA and non-GAAP earnings. In addition, during the quarter, we sold our Web24 web hosting asset in Australia. And just after the quarter ended, disposed of Tea Leaves. Our board has increased the quarterly dividend by $0.01 to $0.395 per share.

We will use a presentation for today's call, a copy of which is available at our website. There's a new enhanced webcast facility, so when you launch the webcast, you will see that there is an icon, which is in the middle of the page. And when you press on it, it will enlarge, so the slides take up the full page, and you'll be able to read not only the contents of the slide but also the footnotes.

If you've not yet received a copy of the press release, you can access it through our corporate website at j2global.com/press. You can also access the website -- the webcast from this site.

After we complete our presentation, we'll conduct a Q&A session. At that time, the operator will instruct you as to the procedures regarding the asking of a question. However, at any time, you may e-mail questions to us at investor@j2global.com.

Before beginning the prepared remarks, I'll read the safe harbor language. As you know, this call and webcast includes forward-looking statements, such statements 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 we've disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that have been included as part of the slide show for this webcast. We refer you to the discussions in those documents regarding the safe harbor language as well as forward-looking statements.

I would now ask you to turn the presentation to Slide 5, and I will briefly go through the highlights for the third fiscal quarter. As I just mentioned, we reported an all-time record revenue of $274 million, resulting in EBITDA of $111 million, free cash flow of $57 million and adjusted EPS of $1.34 per share. Our revenue increased by $63 million versus Q3 2016 or approximately 30%. EBITDA was up by $16 million or 17%. Of course, a large portion of this came from a full quarter inclusion of Everyday Health. We ended the quarter with slightly in excess of $400 million in cash and cash equivalents, aided in part by the financing we did at the end of Q2, which gave us $150 million of excess proceeds. Specifically, for the Cloud segment, its revenues were $146 million were up $2 million or 1.7% versus Q3 of 2016. In constant currencies, the revenue growth was 2.3%. The EBITDA margin for the segment remains strong at 51.5%. Cancel rate improved slightly versus Q3 of 2016 and remained within the normalized range of 2% to 2.25%. Our Digital Media segment hit an all-time high of revenue of $128 million or up $67 million or 91% versus the prior year. EBITDA was up $16 million or 67% and showed a margin expansion from Q2 to Q3 as the integration of Everyday Health continues.

Now briefly on Slide 7. The cloud service -- the Cloud segment is broken down into Cloud Connect, which is our fax and voice business, doing slightly less than $97 million of revenue for the quarter. Other Cloud Services did about $48 million in revenues and IP Licensing, about $1.2 million, adding up to the $145.8 million, EBITDA coming in at just over $75 million for the total Cloud segment and the 51.5% margin I just referenced. The Media business did a $128 million of revenues and $40 million of EBITDA or 31% EBITDA margin. And then, finally, the parent had about $3.75 million of cash cost, up somewhat from Q3 of 2016. And this is usually a seasonally higher quarter for us as we incur additional accounting fees. Adding up our Cloud, Digital Media and the parent gives you the total consolidated financials of $274 million of revenues, $111 million of EBITDA, slightly in excess of $65 million of adjusted net income, $1.34 per share of adjusted non-GAAP earnings and $0.66 of GAAP earnings. The 2 primary differentials between the non-GAAP and GAAP are the additional amortization of intangibles, particularly the increase this year from Everyday Health and excess cost that we had related to the bond refinancing, resulting in both additional ongoing interest expense as we raised $650 million at 6% at the end of Q2. We also had a $5 million premium that was written off in Q3 when we retired the 8% notes.

Now I'll turn the call over to Hemi who will walk through some of the operational business segments.

Thank you, Scott, and good afternoon, everybody. This is symbolically my 50th earnings call. Let's enjoy it. Let's enjoy this last one the same way we enjoyed all the others. And I also want to say a special thank you for the analysts that have been following us for so many years getting used to my Israeli accent.

With that, let's go to Page 9 when I will discuss our third quarter Cloud Connect fax and voice highlights. Q3 had again an all-time high Cloud Connect revenue of $97 million, which is 5% year-over-year. I believe that in the next few quarters, we have a chance to cross the $100 million revenue based on our still-growing fax business and voice business. The fax revenue was $80 million and continues to grow versus last year. We also hit an all-time high in fax revenue in Q3 '17, up 3.5% versus prior year. Voice revenue of $17 million also grew 10% versus last year same quarter. Corporate fax revenue continued to grow, up 7% versus Q3 '16. And we have successfully completed the integration of Fax87. We're still working on the integration of Sfax. In the bottom here, we decided to do some demonstration of the growth of Corporate fax since 2013. Compounded annual growth rate since '13 was 9% on the revenue. Of that, 4% was organic. We are positioning our fax -- or API growth for fax. We see strong demand in compliance-oriented verticals like health, pharma, legal and finance.

Next page, Page 10. I will discuss the Cloud Backup highlights. Q3 revenue was $28 million. International revenue grew 5%. We now have 40% approximately of the Cloud Backup outside the U.S. EBITDA continues to be at the 50% level. Cancel rate is favorable versus prior year, driven by KeepItSafe and Livedrive. Actually, the cancel rate of the Backup is lower than the average of the company. The Backup team is doing a very good job on maintaining its largest customers with periodical contracts from the U.S., a very good job there. We also acquired a very small company and we're integrating it, it's backupsonline in Europe. Let's summarize a little bit about the progress of the Cloud Backup. Since 2013, the revenue grew annual rate of 96%, and EBITDA margins have improved over the period from high 20s to approximately 50%.

Page 11, FuseMail and Campaigner email security and email marketing. FuseMail had strong organic growth, quarterly growth of 7.2%, driven by Europe. Third quarter of '17 revenue of $11.4 million, EBITDA of approximately $4 million, strong new business sales in Excel Micro. This is after the McAfee migration. Ongoing investment in the FuseMail product road map, features and packages, to place it in the leading edge of email security. The Nordics acquisition of WeCloud integration is on track. Campaigner, our email marketing business, Q3 revenue of $7.7 million. Year-to-date revenues, up 17% versus last year. Campaigner continued to enhance its digital marketing product suite. And ARPA is up 17% versus last year same time.

Digital Media, Page 13. Digital Media had another strong quarter with revenues of $128 million and adjusted EBITDA of $40 million. Margins were 31.4%, 2.6% improvement versus last quarter. Total multi-platform visits were at 1.4 billion.

Ookla. Ookla, app [production] and installed base continues to grow and reached an incredible new milestone of over 300 million total installs. Mobile platform test achieved a record high of 600 million in this quarter. Both figures are very significant business drivers. The larger our installed base, the deeper it is, and it enables our testing analytics and it is becoming very, very important.

Commerce. Commerce continued to be a significant grower. It's a growth engine for our company, up 34% year-over-year. We set a quarterly record in shopping clicks to our merchant partners with over 36 million clicks, that's 10 million clicks more than the same period last year.

Next, Page 14. IGN continues to grow its video programming and distribution. The IGN Show had a successful 30 episodes. This is our first season on Disney XD over the summer. We also extended its Facebook partnership, creating 6 original video series for the launch of Facebook Watch.

Everyday Health. Everyday Health consumer -- continues to bring new products and programs to the market. WhatToExpect brought some new products to the market as well. We launched a new Baby Products section in this site. WhatToExpect partnered with the International Medical Corps to raise awareness for maternal health care for the third annual #BumpDay. This day was a big success for the cause. Media coverage providing over 250 million impressions on social network, up 100% year-over-year.

Before I pass the call to Scott, I wanted to thank Scott, thank him in public for working with me over 20 years, so many years together. Scott is a true professional and a friend for the rest of my life. Thank you, Scott.

Thank you, Hemi. Thank you for the kind words. Before we turn it over to Q&A, I've got 2 more slides. One is on 16, which is reconfirming our guidance and to remind you that's a revenue range for 2017 of between $1,107,000,000 of revs and $1,147,000,000 of revenues; and adjusted non-GAAP EPS of between $5.60 a share and $6. Although this is not the point of the year in which we give fiscal 2018 guidance, I would remind everybody, particularly those that already are building models, that with the disposition of Cambridge earlier in the year, Tea Leaves and Web24, there's about $35 million in revenue in 2017 that will not be there in 2018 as we roll forward. We talked previously about the amount of revenue that we would lose in the balance of this year of $23 million but just remember that other chunk of revenue that doesn't roll forward into 2018.

And then finally, before we go to question-and-answers, a lot of times these calls, as they need to be, are very short-term focused. We're talking about the quarterly results. We're talking about our expectations for the not-too-distant future, 1 or 2 quarters in advance. But Hemi clearly has been a contributor for more than 20 years at j2. And so my own small tribute to him is on Slide 17, to give you a little bit of perspective of the contribution that he has made in the various roles over 21 years of service. He started in October of 1996 when -- to say JFAX, at the time, was a startup was probably even generous as the company was in New York and ultimately moved to Los Angeles and was really restarted in the summer of 1997. He served in almost every C-level capacity that we have had or ever had. At the time I joined, at the time of the IPO, he was the CFO. Then in 2001, he became the Chief Marketing Officer. We actually shared titles of Co-President for a while as he was also the Chief Operating Officer, and then he assumed the CEO role in 2008. I think, and I've said this to some of our employees internally, 21 years is a long time but there are defining moments within a career. And I think 2 of them that are worth highlighting is the leadership that Hemi provided through the dot-com bubble implosion, which is now very distant. But for those of us that were around at that time, it still remains very fresh in our memories. And through his steady hand, his leadership and his focus on cost, we were able to survive where many around us at the time did not.

Then we got, a second time, although we were clearly much more stable, which was the financial crisis of 2008 and 2009. There, it was a little bit different. It was really how do we take that crisis as an opportunity to improve our overall business. Some quick thinking allowed us to improve our cost structure, most of which actually survives to this day. We did do some things on the sales and marketing side that were temporary. And as the environment improved, we started to spend more on sales and marketing.

Diversification is big. When Hemi started, this was, to some extent, a unified messaging company. But really, it's core product at that time was really digital fax, very important to this very day. But as we've talked about over the last number of years, even though fax continues to grow, it's a smaller piece of our consolidated revenue, roughly 30% versus literally 100% back in the earlier days. And the diversification has occurred into 12 different business units across both Cloud Services for small businesses as well as Digital Media.

Every year, this company has grown. Below is a little graph on the right. You can see from 2001, when he assumed the CMO role, the revenue growth and the adjusted EBITDA. Revenue up 24% compounded through the end of this fiscal quarter; stock price, up 29%; adjusted EBITDA, 46%. M&A, as everybody knows, is a big part of what we do. Hemi's been involved in all 158 acquisitions that we've done over a 17-year time frame, and the employee base has grown from less than 100 to 2,300 employees from literally one office in 1 country to now many offices in 14 countries.

So Hemi, it's been a pleasure to be at your side for these 50 calls that we've done but, more importantly, to be at your side for 17.5 years, in my case, as an employee, but over 20 years, both my tenure as a banker and then as an employee of j2.

So congratulations on your success here at j2, and we look forward to greater successes in the future.

Thank you, Scott, and thank you, everybody. I know that many of the employees are listening. I want to take this opportunity to thank everybody, and I'm continuing to be a big fan of the company [and watch you]. And I am going to help the next year, to Vivek in succeeding, and I'm looking forward for him to succeed even more than I did. And I think we can open it for the analysts.

Okay, questions now.

(Operator Instructions) Our first question is from Shyam Patil with Susquehanna.

Hemi, my congrats as well on all your accomplishments at j2 and the next gig, it's been a pleasure.

Thank you very much.

I have a few questions. I guess the first one, Scott, on the point you made on the revenue lost from acquisitions for next year. Can you talk about just how much the recent M&A, either that you've done in 3Q or that you're confident in doing in the 4Q, kind of how much of that $35 million you think you can offset? And then kind of as you go through next year, do you think you'll be able to offset that with the M&A you have planned for 2018?

Yes. First of all, the M&A in Q3 was rather light. A lot of our focus -- not that we weren't focused on M&A, but the divestitures of Web24 and Tea Leaves were very important. Even though Tea Leaves actually closed in the fourth fiscal quarter, a lot of the work was done in Q3. So the M&A transactions on the cloud side that were done in Q3 will offset, to a very modest way, some of that $35 million. I am optimistic that what we have in the pipeline now, and certainly as we look forward into Q1 of '18, we probably will be able to offset a big chunk, if not all, of that $35 million of revenue. I was just highlighting that for people to understand sort of where the pro forma or the correct starting point is as we go into 2018. And as you know, I'm always a little bit reticent to commit so much on the M&A side because things fall out sometimes at the 11th hour, other things come in to replace it. But our pipeline is healthy, and I am optimistic, as much as I ever can be in M&A that, yes, we will, through the end of this year and early next year, complete transactions that should substantially offset most of that $35 million, if not all of it.

Okay. And then just on the M&A, when you think about the Cloud business and the Media business, where do you see the most opportunity for midsize or larger deals from an M&A standpoint? I guess, specifically, when you look at Media, any particular verticals there? Is it health? Is it games? And then for Cloud, which service areas do you think you see the most opportunity for that size of -- for M&A?

Sure. I think that, in short, there's a desire to, particularly in our smaller business units and, quite frankly, most of them, whether you're talking Media or Cloud, we consider still to be not necessarily under scale from an economic standpoint, but smaller than we would like them to be. The one exception to that would be the digital fax space, which I think is of a size that is both scaled economically and, as a result, experiences the fullness of its margins, and it's also a material player within its space. So if we look at the rest of the businesses, voice; backups; email security; email marketing; the tech vertical, of which there are several different areas; the games vertical; even in health care, there's different subcomponents; and then there's an international piece, the answer would be we're looking at all of those. So I don't think that there's necessarily -- the units that are the smallest, if we had our choice, we would probably be most interested in doing transactions in those areas because they're going to give us more prominence within the respective space that we're operating in and also on the margin, more leverage from an operating cost standpoint. So that's where our preferences would be. But having said that, we are servicing all of the business units across both Cloud and Digital Media. And in terms of -- as you know, we're active across all the spaces and sectors. As I say, I think the goal is, first and foremost, to feed the existing business units as opposed to creating new business units, although sometimes those things happen. You run into a transaction that is very attractive, but it doesn't necessarily fit into one of the existing business units of j2, that prompts us then to start a new business unit. But all things being equal, the existing business units, of which there are 12 or 13, depending on how you count, would be the first priority and, as I say, feeding probably smaller ones where they can then bulk up in size more rapidly. We'll do the deals as they come. And sometimes, you don't always get your wish list in terms of the prioritization, so we are engaged in all segments and all sectors.

Got it. I just had one modeling one left. In terms of that $35 million number that you mentioned for next year, can you just help us understand how much of that was kind of in Media with Tea Leaves? And how much was in Cloud with the cloud asset just so we can get a sense of the breakout?

Yes. It's -- now remember, this is the [piece bit] is missing for this year, so it's not its annualized revenues. So of that $35 million you're talking about, just around $30 million in Media and approximately $5 million in Cloud. And the $5 million in Cloud, of course, only relates to one asset, Web24.

Our next question is from Jon Tanwanteng with CJS Securities.

Congratulations, Hemi, on the move. And I don't know if (inaudible) but on the promotion as well.

Thank you.

He's not. We'll pass it along to him.

Could you just talk about the investment rationale in OCV? Do you think you can get a better return there than you can otherwise get in your core M&A strategy? Just a little bit more about the decision to go that route.

Yes. The investment in other types of transactions is something that j2 actually has looked at since about 2012. In fact, we actually approved and formed an entity called [j2 Ventures] sometime during 2012, but we never funded it. In a large part, we never were able to pursue it internally within j2 because of allocation of internal resource. And I don't mean money, I mean people's time, and who would really be the quarterback for that. And so as the whole process of management evolution began to unfold, there was an opportunity through this related entity called OCV for us to make an investment. And with Hemi moving over into that capacity, to also give us confidence of 2 things. That, one, there would be a focus, as I'm sure there would have been anyway, on delivering high returns and returns consistent with the returns that we are used to experiencing at j2 but giving us greater diversity in terms of the types of transactions that we invest in. j2 does wholly owned transactions, I think all 158 deals that I referenced over 17 years, we buy the companies and we drive our synergies according to a variety of playbooks to get our returns. What we don't do are minority investments. We don't do lending, we don't do early-stage, more venture capital-type investments, all of which are within the purview of an OCV. So we look at it as we have an opportunity to deploy yet additional capital. Think of it very similarly to buying into digital media. At the time people said, well, that's not what you do. You do cloud services. We said no, we really have a playbook, and it can be applied to another area to drive a return. So we have yet another means of driving those returns and of investing capital. And so that's how we looked at it. We think that there's going to be -- it will occur, of course, over time because their investments will have different maturity time frames. But I think, yes, we're going to get those kinds of similar returns, and we're going to get exposure to other types of transactions that j2 would not find appropriate to do within the j2 structure.

Great. That's very helpful. And then, can you talk about any kind of strategic changes or operational changes at all with the change in the driver's seat position with Vivek at the helm? Are you planning anything? Is there anything that might be on or off the table now that the management has changed?

No. I would say this, first of all, remember, Hemi is the CEO until the end of the year. So it's -- while we're sending him away today on the earnings calls because this is his last earnings calls, but he's still very much the CEO of j2 till 12/31. Having said that, and this was by design, we wanted there to be an overlap. He has an incredible wealth of knowledge because he's been here for 21 years, and we didn't want there to be just a handover. And so there have been numerous meetings with Hemi, Vivek, the existing GMs, presidents, department heads. They have different titles based on the kind of business unit they run. And I think one of the things we've been looking at, and I don't think we have an answer whether it -- what kind of incremental benefit it will produce, if any, but how do we look at j2 maybe differently than the way we've historically looked at it. And as you know, and there were variety of reasons why we did this, we always had Digital Media very distinct from the Cloud business. They're obviously in separate locations for the most part in terms of their management and their employees, but they were kept very much apart. And if you look at j2 from a different perspective and you lay out the individual business units, you can look at it as we are in a series of subscription-based businesses, most of which exist on the Cloud side, but not all, Ookla is a heavy subscription business these days on the media side. And we have advertising businesses, most of which exist in the Media side. Well, are there best practices that might be learned one from the other where there happens to be crossover. We've also taken a look at the various industry verticals that we are participatory in. We do a fair amount across both businesses in the health care vertical. I would say the Cloud business is more heavily weighted to finance than the media business is. We do a lot in retail, so -- and in technology. So there's also other areas where both Media and Cloud have points of intersection, in some cases, even common customers. So are there elements that can be learned? Are there incremental benefits that can drive either incremental top line revenue growth at very little incremental cost by sharing the best practices and ideas across those that are in a common industry vertical? So these are some of the things that we're looking at. I think that, as I mentioned in response to Shyam's question, we've got these businesses, we love these business units, we intend to continue to feed them from an M&A perspective and from an organic perspective. I think we will look, as I say, to see where there are additional opportunities, and are those worth exploring? But that is very much a work in process. I think by the time that we have the Q4 earnings call and the budget is done and we're releasing guidance for 2018, there will be a much more solid answer to where we might make some tweaks in the equation. But I think fundamentally, the answer at this point would be no. We continue to move forward, we continue to try to pursue every piece of both organic and acquired growth, provided that acquired growth is at a reasonable price.

Great, very helpful. And just one last quick one, just the rationale for the Web24 sale, are you getting out of web hosting? And did you get a good valuation for that?

Yes, we did. We made a little bit of money on it. We owned it for about 3 years, so we both collected EBITDA while we owned it and then we actually made a modest gain. I mean, it's not a big asset to begin with. It's very typical of j2 that we will enter a space, particularly when we entered the web hosting space several years ago, on a small basis, in part to get our feet wet and see whether we correctly understand a space. And can we both use the roll-up strategy to build a bigger presence in the space and also can it be multi-jurisdictional. I think what we learned over the time -- we picked Australia because it was a modestly competitive environment. At the time, we were looking to enter the space, we found valuations in Europe and North America to be very high. And also, there were fairly large players then and now that exist in the space. So I said let's go to a more limited competition environment and get our feet wet and buy an asset, and maybe we can do -- create a nice little business in Australia and New Zealand. And at some point, over an [in-year] period, there might be valuation corrections in another part of the world where we could then enter in a more serious way, and it could be more impactful to j2. Now a few things happened over that time frame. One, we got obviously much bigger, so the business shrunk as a percentage of j2's total revenues. Market conditions did not materially change in North America and Western Europe to be able to enter. And we found, even doing the roll-ups in Australia and New Zealand were somewhat more difficult because there were others that were looking to do the same. And in fact, we sold Web24 to one of the ones that we actually ran up against in a couple of situations Down Under. So we decided that, at some point, an asset just becomes too small. And if it doesn't have an opportunity to really be impactful to j2, there is a management drain that you just can't justify. And at a few million dollars in revenue a year and with limited opportunities in our larger core markets, we felt that if we could divest it, get a gain, do it at a successful price, it made sense. By the way, not dissimilar from the view we had when we bought Everyday Health as it related to Cambridge and Tea Leaves. That's not a criticism to any of these assets, it's a function though of their value and their fit within j2's respective business units and allocation of management time. And Web24, of those 3 assets was at the smallest end of the spectrum.

And j2 developed a strategy to be very profitable and have a small investment in capital assets, which was not the case on Web24. Also to say, I've calculated, we made, cash-on-cash, more than 20% a year on the Web24. So all in, it was a profitable test. Sometimes we might do tests that are not profitable, this one we were lucky. And we just -- as Scott said, the target company that we had in mind, and we had one large target company in Australia that we met several times, their price started to go high and they changed their model to become more kind of servicing the Australian government, so we decided it's the right thing to do, and we are very happy with it.

Our next question is from Greg Burns with Sidoti & Company.

In addition to the divestitures, you had in the past talked about walking away from some low-calorie revenue that Everyday Health was going after. Have you exited that business? How much was that revenue? And how much won't be recurring next year?

The answer is yes. We talked about that -- a few comments on Everyday Health. I think one is that you should understand that we are basically done and have been done with the integration of Everyday Health, the heavy lifting which, in part, includes the divestiture of the 2 assets previously discussed, the elimination of some nonprofitable revenue and the change of a significant portion of the senior management team at Everyday Health. So I give a lot of kudos to our media team. They spent solid 9, 10 months really working that. There were a lot of moving pieces. In answer -- a direct answer to your question, $20-some million, between $20 million and $25 million of revenues was expunged from, what I'll call, the core of Everyday Health. We believe over time that revenue will come back, albeit in a different form but, certainly, not in the immediacy of the next, say, quarter or so, but as we look forward to '18, we're obviously still deep in the budgeting, in terms of how much revenue we had expect to come back in 2018. And part of that will be a function of looking at the 3 business units, their opportunities. As Hemi mentioned, there's a number of changes that have been made. He highlighted what's going on, at WhatToExpect. But there's also been changes made at MedPage's, which is for the doctors and everydayhealth.com, which is consumer patient. So it does take a little while for those changes to bear total fruit. So I'd say this is a partial year of bearing the fruit. But the big things have been accomplished, and there's been substantial margin improvement in the business that we retained from Everyday Health.

Also, the landscape of pharma changed a little bit. All those things are things that we are catching up with and improving towards.

Okay. And when we look at the Backup business, it looks like growth stalled out a little bit here. I'm assuming it's not growing much organically. But what's your view on that business, its ability to grow organically or the things that you could do to maybe run it differently to generate some organic growth?

As you know, our -- and we've said this fairly consistently, the backup business -- really all of the smaller businesses in the cloud, but led by the backup, have been premised on and they've been cast with almost a purely M&A driven growth. And the idea behind that was to get to a degree of scale and critical mass, which we've targeted in the 1 75 range of revenues. And really not overly exert in the area of organic growth. Now a few things have occurred in that space. Over the last probably 9 to 12 months, that are mostly this year. Part of it was us. In the late '15 through probably most of '16 period, we did a lot of small transactions in the backup space. I want to say it was something like 12. Now that meant there were 12 integrations to do and generally speaking, 12 different technologies and platforms to integrate. So the team had asked -- actually at some point in '16, if instead of having x revenue across 12 deals, we could have x revenue across 1/3 of 12 deals, 4 deals, 3 deals. And do -- focus on somewhat larger deals, not gargantuan deals, but somewhat larger deals where there would be fewer integrations. So we tried to accommodate that this year. And, I guess, it was a good news and bad news. The good news is we found situations, but we also found some of those situations invited bidding competition, and we were not successful in acquiring those assets. So as a result, there's been very little M&A done for the cloud backup. So it's something we're reviewing now as we go into '18. Do we want to continue to pursue that more chunky strategy or go back to a strategy where we do smaller transactions, but it does require more integration. Also on the backup space, you have really -- it's a misnomer to call it the backup space. It's really a data protection with a series of underlying services that each have a different dynamic. For us, about 30% of our revenues would be -- I would term primarily B2C, B to consumer. That would be our Livedrive business in the U.K., almost all of that would be B2C and then a portion of our SugarSync business, which is predominantly in North America, but not limited to North America. I think in the B2C space, one should not expect much growth. I think those businesses you run for high margins, and they're very nice businesses to have. But if you can hold your revenue, that's good. 70% of our business would be a combination of server backup and Disaster Recovery as a Service and some additional flavors like file sync and share. Now, what we've observed, I'd say there's a tension here, is particularly in the faster growing areas like disaster recovery, you've got a lot of players out there that on an organic basis will live with very little, if any, margin. Now we've chosen to maintain 50% EBITDA margins in this space, which are quite frankly, unheard of. But that does come at the expense of being able to aggressively add new customers. So while I believe that, that B2B space in the jurisdictions in which we are operative probably can grow somewhere in the double-digit range, 10%, 12%, maybe 15%. If you want to do that in the current environment, you would do it at a much lower incremental margins. So that is one of the conversations that we are clearly having as we look to '18 and budgeting, which is we've got a business. It's got an M&A component. How do we want that to be going forward. And then, what do we want to do on the organic side, but I can tell you that for the higher growing pieces of that space, there are more than a handful of firms that are prepared to accept very, very little margin just to have the organic revenue growth.

Let me add something. Scott said it very well. We are doing strategical sessions and I was presented with the competitive landscape. More than 90%, maybe 95% of the companies that are active in the backup are smaller than j2. Our run rate is over $110 million. Those companies, we were trying to beat some of them. We couldn't, companies of $10 million, $20 million (inaudible). I strongly believe that they cannot exist on the long run. It's a space that is consolidating, will consolidate, a lot of development there. I think that we are positioned well and, you remember, we come from a background of patience and discipline. And I believe that those with patience and discipline will survive and capture the market. What we have developed is basically a very extended range of backup businesses that we can absorb. So I think it's a matter of time, it's a matter of discipline. I just cannot believe that 95% of the companies in this space can survive in the smallest scales. We've seen them, they're not profitable. I think it's just a matter of time, so I'm optimistic about it.

Our next question is from James Breen with William Blair.

One, just on the modeling side, Scott, you're talking about the divestitures. You said there's about $23 million in the back half of revenue that won't be realized. Is it fair to say that, that revenue mainly falls in the fourth quarter. There's maybe a couple of million there, but essentially, there's a sort of a $21 million change between third and fourth quarter in terms of the jumping off point?

You're a little bit heavy. You're directionally correct, but you're a little bit heavy. Because remember, we did sell Cambridge during early Q3. So we actually lost Cambridge revenue in Q3. We'll lose roughly $7 million, $8 million in Q4 from Cambridge alone. You're a little -- you're biased a little high, but you're directionally correct.

Okay. And then just on the margin side there, when you add up all 3 of those and the combined revenue of what you've recognized and what you haven't is, what, $57 million, what was the EBITDA [assigned] with that? Was it pretty much flat?

No, Cambridge was profitable, Web24 was profitable, Tea Leaves was not on an EBITDA basis. So if you take that $57 million combined, we're talking about, oh, probably $7.5 million, $8 million of EBITDA.

Okay, all right. Perfect. And then, just on the cloud side, as you look at the email security business, getting through the McAfee transition. What will happen now? Can you think you continue to grow in that business? Obviously, you want some scale there as well to get those margins from the 30s up into the 50s.

Yes and yes. In fact, I'm very happy with what's happened to that business. As you know, Q1, we bore the brunt of the McAfee end-of-life and the quarterly revenues for email security was $10 million. And now we're back to almost $11.5 million, 2 quarters later and that was a pretty strong growth sequentially from Q2 to Q3 as well as some growth Q3 of '17 versus Q3 of '16. And I'd say that in Q3 of '16, we were at the very early stages of some customers recognizing they needed to do something vis-à-vis McAfee end-of-life. So that business actually, while it took a hit in Q1, has rebounded very nicely in the 2 succeeding quarters on both an organic basis and, then also, the people's time has been freed up for us to be able to do M&As so that they have time to integrate.

Yes, so you see, j2, people ask me now that I'm about to leave, what made you so successful? And I think what made j2 so successful is, we tried to have in every piece of the business an edge, an advantage, that nobody else had. This advantage makes us so profitable and makes us -- helps us to win the game. And in the game of FuseMail, we buy companies and we migrate them successfully to our FuseMail brand. That's not something you see. People buy brands, they stick them [on the brand that is featured]. We migrate them to our platform. Not only the brand, the platform, which basically generates the profitability. Because you see, at the end of the day, the platform is built on certain elements that size matters. So I'm very optimistic like the WeCloud company that we bought. It's a Sweden company. Think about the language, the market and everything, we are integrating them into FuseMail. We are doing it very successful. The conversion rate is very high. Some of those are also -- we are adding features, so we are updating the prices. So we end up buying a company and a, migrating it; b, adding features, increasing the prices. It's a very, very good game to play and we can go into endpoint and web base, a very similar space. The same decision-makers, the same buyers also buying the web security, ability to control what the employees of the companies are doing online, and all those kinds of things. So I'm very, very bullish about this. And, of course, on Campaigner as well. It's Campaigner is a market that are too many small players that are not being integrated because the competition there when you're trying to acquire companies is lesser because not too many companies are capable to integrate. So this is the special edge that j2 developed over the year, and I'm very bullish on those -- both spaces, very bullish.

Great. Then lastly, good luck, Hemi, in the next stage. Vivek has got some big shoes to fill. And, hopefully, you'll bring good companies for j2 to invest in, in the future.

Absolutely. And stay in touch, thank you very much.

Thank you, Jim.

To all the analysts that cover us, if you come to L.A. I'm known to buy good lunches and good dinners. Stay in touch.

Our next question is with Charlie Erlikh with Robert W. Baird.

I wanted to ask about the sequential growth expectations in the Digital Media business from Q3 to Q4. I know it's typically a seasonally strong quarter, and now you've got Everyday Health as well and made a number of divestitures. So just wanted to know how we should be thinking about that sequential growth in the segment.

You're right. It's the best fiscal quarter of the 4. I would point you back to the guidance we gave on the Q4 call, although you need to make various adjustments for the divestitures that we talked about. We don't guide quarterly, so I'm not going to actually directly answer your question. But I think you can interpolate from both the history and what we said in February of this year, where it's fairly typical that the fourth fiscal quarter for media represents somewhat in excess of 30% of their annual revenue. And I believe that will continue to be true this year.

The same blend goes also to Everyday Health. They're also heavy -- heavier too, in Q4. And as you know, we have announced that we acquired a company called Humble Bundle, which also should come into play. So I think if you gather all the facts, you can come to the right conclusions.

Did you guys disclose what the revenue contribution from Humble Bundle would be?

No.

No.

Okay. No. Fair enough. And then just one more question on the Digital Media business. Could you talk a little bit about your expectations for EBITDA margin expansion? Is it your expectation to get back to that pre-Everyday Health margin level? And if so, is that a multi-year endeavor? Or could that happen a little sooner?

No. I think, look. As I mentioned, we've done the heavy lifting on the integration of Everyday Health. We got rid of 2 lower margin businesses through divestiture. We pruned out revenue that was nonproductive. So I think as we enter 2018, as we talked about when we bought Everyday Health, there was a shrink-to-grow strategy, which had several different components and elements to it. I think that we have successfully pruned Everyday Health down to its core where now it has an opportunity to both organically grow, but also perform at EBITDA margins consistent with our Digital Media business. Now we are, as I mentioned, in budgeting. We're going to refine exactly what that means, but I think that when we have looked at our Digital Media business, we have felt that somewhere in the mid-30s EBITDA margin is the right normalized margin for that mix of assets. I'm talking about all of the Digital Media assets combined. So clearly, this year, because there's been some drag of the Everyday Health as its margin has been catching up to that margin, will be somewhat lower than the 35. I think that as we look forward to '18, we are very confident that, that is an asset then that should be roughly consistent with where the rest of our digital media assets are at.

Our next question is from Walter Pritchard from Citi.

On geographic ambitions, you're coming out of Australia. I guess -- is that a sign that we have some things going on over Europe with privacy? I'm wondering how you're thinking about just geographic expansion at this time.

To be clear, we're not exiting Australia. We exited a business in Australia.

Just a pullback, just a pullback from Australia. I'm wondering what that signals.

The same year that we exited Web24, we bought larger assets in Australia. So net-net, Australia grew for us. And about Europe, the privacy, we are dealing with it for the last 6 months, it's a compliance issue. The company has spent all the time, and we have all the experts and then we're in full compliance. GDPR I think it's called or something like this. We are in full compliance. All our -- you have to remember, we have a very strong management team in Ireland. I've been there for the last 3 quarters. We're talking about it. It's happening, not a problem at all. Actually, I hope that it will scare some of our American competitors not to acquire there, while we are acquiring there with high confidence.

We think it actually can become a competitive advantage for us.

Yes. It's not an easy thing for a small company to do. You have to remember, we have lawyers, we have accountants, we have -- we have a full set in Europe. They're good; they're strong there.

Got it. Sorry, I'll let you finish.

No, no, go ahead. Go ahead, Walter.

Okay. And then just on -- on the, Scott, on the low end of the backup business, I recall you had been kind of letting some of the lower quality subscribers churn off. Is that done at this point?

Correct.

Okay. Go ahead.

Yes. The answer is yes.

Okay. And then the last one, just on -- you mentioned in, I think the deck, this idea of the fax API. Can you talk about if that potentially -- and there's -- you could have a voice API, and there's lots of enablement from a technology perspective across the BCS portfolio. I'm wondering how big of an investment that is. If that potentially changes the trajectory in any of those businesses as you look to participate in that way?

Yes. So we have strong API in our business of Campaigner and very strong in fax. So the fax API is actually something that we were, I would admit here, surprised to see how big it is. And we were late to the game a little bit, but as we entered it, we discovered how big it is and how much is the market looking for large providers like us. And so far, we have bought some companies with API that were small. So immediately after acquiring them, we added to the API the coverage and the other features of j2 plus. The customers of API (inaudible) the nature, a big organization. There was a lot of compliance demand. They want to audit, they want to count, they want to see the [view on] compliance. So actually, we are very, very bullish about it, and we have API features that we are adding. We just bought a company called Sfax and we bought another company, and we are talking with some other players in the space. Definitely, API is the stickiest part of fax. It gets involved and integrated into all the systems and actually that's why I made a comment in the beginning that I think that fax can and the Cloud Connect could shortly become to over $100 million per quarter because of the API. I hope I answered you, Walter.

Yes, you did. And then just maybe a question for Scott around Hemi's next activity here. For a capital commitment on the venture fund, was that contemplating the recent debt raise? And how are you thinking about that as it relates to your own capital structure and demands on that capital?

The answer as it relates to the debt raise is no. In terms of the allocation, as you know, it's going to be funded as OCV finds transactions and makes capital calls. So although it's an 8-year fund, we have assumed the more front-end loaded amount of funding -- on the tune of $50 million to $60 million a year on average over the next, call it, 4 to 5 years that would exhaust the $200 million commitment. So we look at our estimated free cash flows -- obviously looking out a couple of years, the dividend, and feel comfortable that, that, given the cash balance as we already have will be sufficient to make those capital calls and still do our M&A program. There's also something that we've been investigating, which is -- it's very fluid right now because of what was proposed today in terms of tax reform, but there was also a fairly good likelihood whether actually tax reform passes or not that we are agnostic as to where the cash comes from for making the OCV investment. And certainly, if there's repatriation that's demanded or required under tax reform, we will be bringing cash back to the United States and paying the appropriate tax, depending on whether it's cash or unrepatriated earnings. But we'll see how that whole tax reform plays out over the next 60 days.

Our next question is with Rishi Jaluria with JMP Securities.

First, I'll start off by echoing the others. Hemi, it's been a pleasure. Wish you all the best at the next gig.

Thank you, Rishi. It's been a pleasure to work with you, too.

Great. Hemi, since you brought up the Humble Bundle acquisition, can you help us, I guess, understand kind of the rationale and plan here, especially since it appears to be more of a commerce-driven asset? And I know you have properties in that area, but most of the Digital Media side, and, especially on the gaming vertical, tends to be very much traffic and advertising driven.

Rishi, I promised Vivek that I would allow him to celebrate this acquisition. So I'll let him do most of the talking. But I can tell you, it is a very exciting business with a very nice upside that integrates very well into IGN. It's a really good deal. Vivek is coming in 90 days, and he will be going into the detail. I do know them, but I want to keep it for him.

I just want to add one thing though, and I think it is not the correct perception to think of our Digital Media business as only being advertising driven. If anything, we would like to find opportunities to have more subscription-based businesses within Digital Media. Right now, Ookla has been the primary asset or business unit within Digital Media that has become, over the years, really more of subscription-based business than an advertising-based business. It happens to be a hybrid. It does both. And as I noted earlier, everything on the Cloud side is subscription-based, there's very little advertising, although there's technically still is some in terms of monetization of some of the [free bases] of customers. So I would say that it's more of an affirmative strategy as we look forward on Digital Media to find, where appropriate, subscription-based businesses to knit-in and not have it be purely traditional advertising.

It has a special stickiness to it. People that play games, like to play more and more games, and we're very happy to cater into it. It has -- again, I'm not going to steal the thunder from Vivek, but it integrates very well, the crowd of IGN and Humble Bundle are the same people, subscription basis, growing. It's very nice.

Got it. That's helpful. Scott, could you help walk us a little bit through the Tea Leaves divestment? Was this a competitive process and any sense of size? And maybe just alongside that, I mean, Tea Leaves did sound like an interesting asset. Was there ever the possibility of keeping maybe a stub of it within the OCV venture?

We never thought of the latter, but it was very important to us to have some going forward participation. So in answer to your question, yes, we ran a competitive process. And the difficulty in selling Tea Leaves is that we saw great value in that asset. The question was what was the best way in which way to realize it? We did look at running it ourselves as more of a venture capital investment in the health IT space. Decided that if we had to do it, we would do that, but that was not our preference because it's not really what j2 does. There's no demonstrated track record of j2 -- funding a business that's going to grow 40% to 60% a year, but have EBITDA losses along the way, with the hope of some exit down the road or some form of monetization. So...

Massive sales force did go to enterprises, very long cycle to more kind of government (inaudible) and other kind of things. It wasn't our (inaudible).

It wasn't our DNA. Wasn't our DNA. But otherwise, we said "Look, we want good value for that asset. We believe in this asset. We believe in this space, but that was our bottom line. So we were not prepared to give the asset away. So we knew in certain scenarios, we'd run it. Then, yes, it was competitive and, yes, there were multiple bids. But some wanted to give us all cash. That's nice. We can always use cash and redeploy it, but that would give us basically limit -- well, in one case, I think there was a little bit of upside in a much larger company. Another case, it was pure cash. So we had virtually no upside in the asset. Well, what was, to us, very fascinating about Welltok is that they have a suite of health IT services. And Tea Leaves actually fit very nicely into their portfolio. So it makes them stronger. They have a great leader in Jeff Margolis who's already taken a company public and done very well with it. So when they emerged as one of the bidders, then we started to think real hard about, all right, can we end up with sort of a couple of benefits? Really 3. Put the asset in a better set of hands who's likely to get the full value out of it. In this case, move into a diversified portfolio. So our upside isn't limited to just what Tea Leaves does, but it's against the whole portfolio of Welltok. And also, have a great senior management team who -- this is what they do because this is their DNA. So from a structural standpoint, Welltok met all those criteria. Now in terms of the price, it's about $90 million. And the reason it's about is because we've got some amount in cash. I'm not allowed to go into the exact terms, but a minority of that $90 million is in cash. We've already collected it. And the remainder is in a couple of different tranches of securities that we receive, which can be converted into equity. And so that's where our upside comes in terms of the future. We looked at the deal. We thought that the -- certainly the total purchase price was fair and good. We like the fact that we have a fairly meaningful back-end upside in what we think is a very powerful, exciting company in the health IT space. So we'll keep those securities. Those are j2 to be clear. Those are j2 wholly owned securities. So they're ours and at various points over the next several years, based upon what Welltok does, I think there'll be various opportunities for monetization of some or all those securities.

Got it. And just to fully understand. So, j2 has a minority position in Welltok as a result of the divestment?

Right. That's correct.

Okay. Got it. Got it.

Not in Tea Leaves, but in Welltok, in the whole entity. And you can go to Welltok's website, and you can see the various services that they are involved in, in the health IT space. As I say, it's robust. I think Tea Leaves was a very nice fit for them in terms of their whole suite of services. And so we thought it made a lot of sense. As I say, we think they've got a great management team. We're very excited about it, but obviously, at this point, we're just -- we're an investor.

Okay, got it. And just last one from my end. On the topic of divestment, I mean, are there other assets that may be worthwhile considering divesting, if not now, then down the line?

I would in general say no. But I always leave the caveat. We have these 12 business units. We are not affirmatively going out, right now, to do anything with those. However, if interest comes in on a business unit, then we have to deal with that seriously. So as I mentioned in response to an earlier question, I think our goal right now is to look at these business units. Many of them are below their full potential in terms of size and scale. So I think the question we're more focused on is how do we drive to that scaled size and what is the organic path to doing that and what is the M&A path to doing that. And, of course, for j2, it's really a combination of both. But to take it business unit by business unit. But we do retain a certain amount of flexibility and I'll never say never. But I think right now, the goal would be to take our assets and increase them in aggregate size through both organic and M&A efforts.

Got it. And Hemi, congrats again.

Thank you, Rishi.

This concludes today's question-and-answer session. Thank you for your time. I would now like to turn the call back over to Scott Turicchi for closing statements.

Well, thank you very much. Hemi? A final goodbye, but not a farewell, for these 50 quarterly calls that we've sat next to each other. All the best as you move on over time to OCV. And we'll be hounding you because we're looking -- you heard -- they want great returns.

They will. They will. I promised my wife. And you know when I promise my wife, I always deliver. So I hope to listen to your next earnings calls and I hope that you will hear good news from the lines of OCV, and thank you very much, everybody. Bye bye.

And then finally, there are several conferences that we will be participating in between now and the end of the year. There'll be press releases out in terms of the specific times, dates and ways to participate, but next week will be the RBC conference in New York. Then in December, the NASDAQ conference in London, followed by the Barclays conference in San Francisco. For our high-yield holders out there, I will be at the Merrill Lynch conference in Boca Raton at the end of November. Those are the ones that come to mind. There may be a couple of others. So look to our website and to our press releases for the specific details. And then we will look forward to talking to you again, roughly in mid-February to report Q4 results and also to talk about 2018. Thank you.

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