Ziff Davis Inc (ZD) 2018 Q3 法說會逐字稿

Good morning, and welcome to j2 Global's Third Quarter 2018 Earnings Call.

I'm Michelle, the operator who will be assisting you today.

(Operator Instructions)

On this call will be Vivek Shah, CEO of j2 Global; and Scott Turicchi, President of j2.

I will now turn the call over to Scott Turicchi, President and CFO of j2 Global.

Please go ahead.

Thank you.

Good morning, ladies and gentlemen, and welcome to the j2 Global Investor Conference Call for Q3 2018.

As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global.

Joining me today is our CEO, Vivek Shah.

We're very pleased with our third quarter results, most notably the strong free cash flow generation, margins and better-than-expected EPS.

The board has approved an increase in the quarterly dividend by $0.01 to $0.435 per share.

We will use the presentation as a road map for today's call.

A copy of the presentation is available at our website.

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

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

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

After completing the formal presentation, we'll be conducting a Q&A session.

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

However, you may e-mail us questions at any time at investor@j2global.com.

Before we begin our prepared remarks, allow me to read the safe harbor language.

As you know, this call and the webcast will include forward-looking statements.

Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to the risk factors that we've disclosed in our 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.

Now let me turn the call over to Vivek for his remarks.

Thank you, Scott.

We're pleased to once again report record revenues, adjusted EBITDA and EPS for the third quarter.

Today, I'd like to focus my remarks on j2's approach to acquisition, given how central they are to our strategy and growth plan.

Understanding our acquisition strategy has been the #1 question on the minds of investors since I assumed my position in January, so I felt a deeper discussion of our approach would be useful.

Over the past 10 years, j2 has completed 152 acquisitions, representing $2.2 billion of capital.

We have 3 central tenets governing our approach.

First, we believe that the societal and business shift to digital is nowhere near complete.

We seek opportunities in markets where we see continued reliance on analog solutions or struggle with digital transformation.

I've spent the better part of my career in the content business, where the shift to digital continues to roil many of its participants.

At j2, we've been very good at developing a successful digital media business model built on vertical focus, multiple monetization levers and discipline.

Similarly in our cloud services businesses, we've developed software to replace machines as well as protect consumer and business data and support digital marketing efforts.

Second, we believe in the power of a diversified portfolio.

Across our 40-plus brands, we have 2 central business models: advertising and subscription.

Some of you have heard me refer to advertising as our passing game and subscriptions as our running game.

Together, they form a powerful combination.

We also operate across 4 customer sets: consumers, SOHO customers, small and medium businesses and enterprises.

In addition, we operate across a number of verticals from tech, to health care, to retail, to entertainment.

Having diversification in model, customers and verticals, we believe, provides for optimal balancing of risk and reward.

Third, we behave like investors: disciplined, return on capital focused, patient, but with what we believe is a distinct operators' advantage.

We have platforms, including proprietary technology and systems, which we can leverage with acquired businesses.

We have over 3.7 million subscribers and over 1,100 advertisers to whom we can cross and up sell products and solutions.

And we have managers who are steeped in sourcing, evaluating, transacting, integrating and managing acquired companies.

We believe j2's approach has proven and will continue to prove to be our most important and sustainable competitive advantage.

And we believe our performance on capital allocation has been excellent over 20 years.

If you look at our cumulative net spend for acquisitions, which was about $2.2 billion through 2017 and our adjusted EBITDA of $463 million from last year, we're at an effective 4.7x net spend for acquisitions over adjusted EBITDA.

If you look at our return on invested capital, expressed as free cash flow divided by invested equity capital, we've ranged between 33% and 50% over the past 8 years.

We believe this is an extraordinary track record that has persisted over time across transactions large and small and involving many Internet information and services brands.

When we consider transactions, we look for fair businesses at great prices and great businesses at fair prices.

In the case of the former, fair businesses at great prices, we typically look to improve the company's margins through our shrink to grow program, where we identify products, initiatives and activities that are either money-losing or have little to no future profit potential.

Often, these are companies that start to spend $1 to make $0.75, believing that top line growth alone will create long-term enterprise value.

We generally either sunset or sell off those money-losing components.

Once we get a business to its most profitable core, we look to develop new monetization streams, consistent with what we've accomplished in our other businesses.

With great businesses at fair prices, we're focused on helping those businesses accelerate sales and product development, provide access to our capital for development and tuck-in acquisitions and we help them leverage our marketing assets and customer bases.

A great illustration of how we create value is the Everyday Health acquisition we made almost 2 years ago to the day.

We purchased the business for $465 million.

Then we sold off 2 noncore and marginally profitable assets for $120 million.

Transaction costs and the price of a tuck-in, offset by the value of acquired NOLs, added about another $5 million in cost.

So our total net consideration for the business was about $350 million.

Based on our estimate of Everyday Health EBITDA this year,

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to an EBITDA multiple of about 6.6x after 2 years.

While we target a 5x multiple after 2 years, we will certainly extend that for our platform asset like Everyday Health, which allows us to first enter an entirely new vertical and a great one in health care; and second, allow for us to average down our multiple with future tuck-ins and bolt-ons.

And in fact, that's precisely what's happening with the acquisitions of Health eCareers and PRIME, and we're excited with the pipeline of prospective deals for the health business.

It's also worth pointing out that when we look at the other major platform deal we did, which was with Ziff Davis in 2012, we acquired it at 14x EBITDA and got it to 5.6x EBITDA after 2 years, which is very consistent with Everyday Health even with the recent cyclical headwinds in pharma advertising.

A key component of our acquisition program is the structure of the company and the multiple and competing demands internally for our capital.

We have 3 different sponsorship groups: corporate, divisional and business unit, which corresponds to the operating structure of the company.

We operate 13 business units, each led by a general manager.

We believe our GMs are what private equity would call backable CEOs.

They have full P&L responsibility and oversight of their business units and look for tuck-ins and bolt-ons.

Since 2000, about 65% of our capital has gone to business unit level deals.

At the divisional level, we have 3 presidents: Harmeet Singh, overseeing Cloud Services; Steve Horowitz, overseeing Ziff Davis; and Dan Stone, overseeing Everyday Health, who look for opportunities to acquire a new business unit such as an IGN or an Ookla.

A little more than 10% of our acquisition capital since 2000 has gone to divisional deals.

Finally, we have corporate deals which are designed to create an entirely new division.

These are larger and less frequent deals.

We've only done 2, Ziff Davis and Everyday Health, which represented about a 1/4 of our acquisition capital since 2000.

These are opportunities that the j2 corporate leadership group identifies and evaluates.

This is all to say that acquisition is part of our DNA and runs deep inside of the company.

It's not just me and Scott waving a magic M&A wand.

It's a -- it's fundamental to what we do and who we are, and we recruit talent that can succeed in our environment.

While we believe what we've built as an acquisition system is valuable, we're not alone.

The marketplace refers to companies like ours with different labels, but the term often used is a "serial acquirer." It's a group of public companies who are frequent buyers of companies and generally have a goodwill-to-asset ratio of over 50%.

Terrific companies like Constellation Software, Jack Henry & Associates, Tyler Technologies and many others.

We compare very favorably to these companies on a number of ROIC and similar metrics.

And while we focus our energy on putting capital to work and growing the EBITDA and free cash flow of our business, we do believe that over time, investors will gain a fuller appreciation for our company and our acquisition system.

With that, let me hand this call back to Scott.

Thanks, Vivek.

Q3 2018 set a variety of financial records for j2 including revenue, EBITDA and free cash flow for the third fiscal quarter.

These results were driven by several areas of strength in our portfolio of companies, notably the digital fax business, our media subscription businesses as well as sequential improvement in our EBITDA margins.

We ended the quarter with approximately $386 million of cash and investments.

Now let's review the summary financial results on Slide 4. For Q3 2018, j2 saw 7% increase in revenue from Q3 2017 to $292.7 million.

We saw FX make an effect on our revenues in Q3 by $1.5 million versus Q2 of 2018 and $1.1 million versus Q3 2017.

In addition, ASC 606 revenue recognition rules impacted revenues in the quarter by $2.9 million as well as the divestiture of assets later in 2017 that were present in Q3 of approximately $6.5 million.

Adjusting for these 3 items, revenue growth would have been 10.8%.

Gross profit margin, which is a function of the relative mix of our 12 business units, remained strong at 83.5%, consistent with the margins in Q2 2018.

We saw EBITDA grow by 6.9% to $119.1 million.

I would note that the ASC 606 impact of $2.9 million also reduces EBITDA dollar for dollar and penalizes our EBITDA margin by approximately 1 percentage point.

Finally, adjusted EPS grew 14.2% to $1.53 per share versus $1.34 per share for Q3 2017, positively impacted by increased operating earnings and lower domestic tax rates.

Let's take a closer look at EBITDA margin profile in Q3 2018.

The EBITDA margin expanded to 40.7% during the quarter from 39.4% in Q2 2018 and equivalent to our margin in Q3 2017, despite the ASC 606 which hurts EBITDA margins by almost 1 percentage point.

This was achieved by a focus on costs across the board, continued outperformance of Everyday Health and improving contribution from VIPRE.

As you know, a core tenet to our business model is the conversion of EBITDA to free cash flow.

Turning to Slide 5, you can see we had a record free cash flow for third fiscal quarter, producing $73.5 million, up 29.4% from Q3 2017.

While there can be influences on any given quarter due to timing of tax payments, collection of receivables, spend on CapEx and timing of payables, it is helpful to look at the trailing 12-month free cash flow, which was $326.5 million or a conversion in excess of 68% of the trailing 12-month EBITDA.

As we have discussed this year, it has been our focus to build up our subscription revenues, especially in our Digital Media business.

Our total subscription revenue, as detailed on Slide 6, hit an all-time quarterly high in Q3 at $184.7 million.

Of this amount, $34.8 million of subscription revenue was from our media group and is an approximate $140 million run rate.

Total subscription revenue represented in excess of 63% of j2's total revenue for the quarter.

Our Digital Media business saw a nearly doubling in subscription revenue from Q3 2017, despite the impact of ASC 606 on our Ookla subscription revenue.

Now let's focus on the 2 segments as outlined on Slide 7. The cloud business grew revenues 3% to $150.1 million.

We saw continued organic growth in the fax business, offset by declines in the backup business as well as FX headwinds of $930,000 versus Q3 2017.

EBITDA as reported was flat with last year at $75 million.

However, as we noted this year, we've done a reclassification of certain corporate expenses to conform with our audited financials for the cloud business, which we furnish to our 6% note holders.

The impact of these adjustments is $1.5 million in Q3 2018, resulting in a pro forma EBITDA of $76.5 million or an increase of $1.5 million.

Our media business grew revenue 11.6% to $142.6 million or 16.6% after taking into account the divestiture of Cambridge and Tea Leaves and produced $46.1 million of EBITDA, a 15.1% growth.

The EBITDA margin for the quarter was 32.3%, up from 31.3% in Q3 2017.

In addition, the Q3 2018 margin was impacted by approximately 2 percentage points for ASC 606 and slightly less than 1 percentage point for the reclassification from j2 of corporate expenses of $1.5 million.

Slide 8 presents our financial data in tabular format showing the year-over-year change for various results.

Finally, we reaffirm our annual guidance of revenues, EBITDA and our adjusted non-GAAP EPS.

As a reminder, we estimate our 2018 revenues to be between $1.2 billion and $1.25 billion, EBITDA between $480 million and $505 million and the increased adjusted non-GAAP EPS range that we gave last quarter of between $6.16 a share and $6.46 per share.

Following our guidance slide are various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent.

I would now ask our operator to rejoin us to instruct you on how to queue for questions.

(Operator Instructions) Our first question comes from the line of Daniel Ives with Wedbush Securities.

My question on the digital media side, could you maybe talk about what you're seeing on subscription strength versus some of the display headwinds, which maybe seem to be abating a bit going into the second half?

Dan, it's Vivek.

So on your question relating to the subscription side in Digital Media, based on our Q3 revenues, we're run rating at about $140 million a year.

So it's very strong and it continues to grow.

I think in the last call, last quarter's call, the run rate was $130 million.

So it seems some really great progress from that point of view.

On the display side, now I'll talk about advertising in totality first.

It's essentially flat year-over-year in Q3 with performance advertising up but display advertising down, sort of consistent with what we saw in Q2, though I will tell you display was stronger in Q3 than it was in Q2.

And we're also coming to the point where performance marketing will exceed our display in revenues across the Digital Media businesses.

And we're also nearing the point on display where the CPM impact of programmatic advertising that's kind of depressing pricing, I think we're actually reaching the floor.

We're going to get to a point where the delta between programmatic and direct sold CPMs isn't very high, and at which point I think you are essentially definitionally at a floor.

And the last thing I'll say just on the display piece is, as I pointed out in the last call, half of our display business is Everyday Health.

And we're now seeing some positive signs, for the first time in a while, in terms of the pharma ad market.

So we think the cycle that we've been going through may be nearing its way back, and that's probably more 2019 than Q4 at this point, given how much of the business is upfront.

But in our upfronts, where we're pitching today for 2019 business, we're seeing some very positive signs.

Got it.

So we're seeing some small turn going into second half there.

That's great.

Maybe if you talk about Humble Bundle in terms of what you're seeing there.

And then just in terms of the acquisition strategy, maybe just talk about -- you talked about assets, but really focusing on subscription-based businesses versus others, maybe you can hit on both those things?

I understand.

So yes, so on Humble Bundle, it's continuing to do really, really well.

We're actually starting to secure some high-powered -- really high-powered games in our bundle.

So in September for instance, those of you know gaming, we offered Overwatch as the feature title, which was a really big deal.

We continue to grow the subscriber base.

We ended the quarter at record subscriber levels.

And we're also seeing some interesting growth.

We often talk about Humble Bundle in the gaming context, but we actually offer book bundles and software bundles, and those are starting to do really, really well.

And in fact, I might have mentioned this in the past, but we've even started to offer j2 cloud service software in some of those bundles.

It's a nice synergy there.

Just generally speaking from an M&A point of view, we transacted -- we acquired 5 companies in Q3.

I'll just talk about one of them because I think it's illustrative to the M&A strategy and how we think.

So we acquired Downdetector.

And Downdetector is going to be part of -- ace part of our Ookla business unit.

And what Downdetector is?

It's the leading source for real-time outage information.

It's entirely crowdsourced, right?

So individuals and users are able to report outages.

It's just like Speedtest.

And that the speed testing is also done by the crowd.

And like Speedtest when we acquired it, Downdetector's primary business model is advertising, and we believe we can evolve it's model from ad based to a data-as-a-service-type offering as we have with Speedtest Intelligence.

So that's just -- I'm not going to go through all of them, but that's an example of how we're thinking about even taking a business that may not today be a subscription business and converting it into a subscription offer.

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

Just one on the cloud side, as you look at the growth rates and the impacts from some of the accounting changes, can you just talk about what the year-over-year growth rate is there?

And where are you seeing the growth from on cloud?

And then secondly in M&A, can you talk about how much you spent this quarter on the 5 acquisitions, and where you are year to date?

Just to give us an idea about what spending looks like.

Yes.

So just in terms of cloud services growth rates, what we're basically seeing is there's not a lot of M&A in there.

So the 3% basically reflects everything growing, except the backup business which is declining high single digits.

And so we continue to have backup eating into the organic growth at fax, which is still in the kind of low single digits, with the corporate piece of the business growing around 6% and the web piece of the business kind of flat.

The corporate's only about 37% of the business.

And so you get to an effective growth rate, call it, around 2% in the fax business.

The voice business is growing, the e-mail marketing business is growing and then our security business is growing.

So really what we're struggling with in terms of the overall piece is the continued effect of the backup business, which we've talked about in the past against the rest of the portfolio.

I'd make 2 comments on that.

One is you asked sort of the accounting question.

So if you look at last year, our cloud business between the divestiture of our hosting business in Australia and the patent licensing revenue, had a benefit of about $1.5 million, $1.6 million in Q3 of 2017 that's not there in Q3 of '18.

So the growth is, on a year-over-year basis, about 4.4%, although all the underlying math, that Vivek just gave you, holds up.

And then I would make one other comment about backup before I return to your other question, which is while it is true that it's been a drag, operated in a similar manner in Q3 as has been the case in Q1, Q2, you know that we did hire a new general manager for that business.

He started in July, took the first really 90 days, so it's operating as is, to really plant his feet, establish his view of the business.

And I'm pleased to say that we're finding some opportunities there, and they're coming in 2 areas.

I don't think they're going to be necessarily bearing fruit in the coming quarter we're in, but as we look out to '19, a few things that are -- positives in that business that we've not focused on before: one is the underlying growth of the data and how that is impacting positively the revenue of existing customers; two, I think he's correctly focused on being more attentive and more aggressive in customer retention; and the third is we're starting to see some evidence that at the smaller end of the spectrum on the M&A, deals can get done.

We haven't done one this year yet, but we are active right now in a couple of situations, and I think that they meet our valuation criteria.

So while it is true that, that remains a drag in the current quarter that just ended and is likely to be so to some degree in Q4.

I'm more optimistic as we look forward to 2019.

I think that's an important point, which is in this business which is unique, remember we can grow revenues without new customer acquisition, as existing customers have data growth.

And so data growth alone can offset some of the churn when you have customer loss.

And so where Tim, the new General Manager of the backup business, is very focused is on capturing as much of that data growth value as possible.

In addition, he has identified parts of the marketplace from an acquisition point of view that would work very nicely into ease integrations for us.

So we do think that there is an answer to some of the challenges that the backup business has experienced in recent history, and we think Tim's got a nice go-forward plan.

And to answer your second question, the 5 acquisitions in Q3 cost a little under $100 million.

I believe, it was about $93 million.

So for the 9 months, we spent just under $200 million on the acquisitions completed.

We did complete an acquisition already in Q4.

So I think that it's very likely that for the year, our spend will be within the normal bands of what we have spent historically, albeit spread over a fewer number of transactions.

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

This is Brendan on for Shyam.

We just have a couple.

First, just in terms of how you guys are kind of thinking about M&A versus organic growth, you spoke a bit about this for the thesis of cloud.

But how are you kind of thinking about organic growth within the 2 business segments versus growth from M&A?

And then just on M&A more specifically, what areas of the business within cloud and digital media are you seeing sort of the most opportunities right now?

So I'll start with the -- I'll start with your second question first.

So in the cloud segment, we like security.

As we've described in the past, we have endpoint with VIPRE.

We have e-mail security with FuseMail.

The piece that is missing for us within SMB security services is web security.

So that is something that we're looking to address.

The e-mail marketing business and that area is very interesting to us, but it's beyond that.

We see ourselves as trying to provide software to action marketing for SMBs, whether that's e-mail marketing or other forms of marketing.

And we think in Campaigner, we have a nice platform from which to build.

As you think -- we mentioned in the last call, softphone and second line voice with the Line2 acquisition now opens up that entire space.

And then health care, health care compliance for cloud services, critical driver of our cloud fax business and anything we can do to enhance our position within that vertical we're interested in.

On the digital media side, subscriptions, recurring revenue businesses, that is the primary focus in the verticals in which we operate, sometimes in the verticals in which we're not presently operating.

We love intent-driven businesses that can drive commerce.

So that is a big part.

Obviously, when we say commerce, that's really the performance marketing business, where we can drive transactions.

All of the trends favor this business.

And so being in the discovery of product versus just the transaction of product, we think is very interesting and the pipeline is pretty strong.

I mean, I think -- again, remember that when we talk about these dozen business unit general managers, many of them are new.

And so there is a settling-in period and there's a period in time in which they're developing their perspectives and areas of focus.

And I think you're going to start to see that pay off in the next 12 months.

So I'll take the other question, which if -- what I got is on the cloud business, I think we see similar -- in fact on both sides of the business, similar trends what we've been talking about.

So from an organic perspective, a low single-digit organic growth, meaning that the cloud's top line revenue growth is going to be heavily driven by its M&A program.

Although I do think there may be mitigation on the top line from an organic perspective of backup in '19 versus what we've experienced in '18.

On the digital media side, it's historically been more balanced.

I think that's still likely to be the case with organic growth once we get through this period where we have got the shrink to grow on some of the assets of mid-single digits.

And then I think probably in equal or maybe somewhat greater amount, but on the margin of M&A for the Digital Media business.

But as you know, a lot of those growth rates as it relates to M&A is really a function of the timing of deals and in which side of the 2 businesses they fall.

So I think if you looked more holistically at j2 as a whole, we'd be looking at a sort of 3-ish percent organic growth combined and then the rest driven by M&A, which would clearly be more than that.

And then I would just add, while we often talk about organic growth in revenue terms, internally we talk about organic earnings growth.

And our organic earnings growth on the Digital Media side is double digits, right?

So given the number of assets and I went through the illustration on Everyday Health, Mashable's another illustration where we're acquiring this business to optimize them for earnings first and foremost, we're really focused there.

And so it's not about necessarily in those instances top line growth, it's about earnings growth.

Got it, got it.

That's very helpful.

And then just quickly, Scott, how are you kind of thinking about the optimal leverage level for the company?

And then what are you seeing, just in terms of trends in borrowing costs over the past couple of months?

So we remain, I think, somewhat lightly levered, about a little over 2x total debt to trailing 12-month EBITDA.

That counts the converts at a full debt value, full $402.5 million, not bifurcated as you would see on our financial statements, and the $650 million of high-yield notes of the cloud are also at full par.

Interestingly enough in the 1.5 years roughly since we've issued the 6% notes, they still trade right around or a little bit north of par.

So we could actually access more capital at the cloud level in the high-yield market, probably right around 6% on a good day, maybe even a little bit lower than that.

Certainly moving into the bank debt market, we can do better than that, even though there's been a rising interest rate environment.

What we've seen on the high-yield side is not perfectly offsetting but is a compression in spreads, notwithstanding the fact that rates have moved up.

So I think that we clearly have the capacity to do almost another turn of leverage.

We've talked about maintaining 3x or under total debt to EBITDA.

So that gives us capacity for, call it, another $400-and-some million if necessary.

And I think that given how we're structured, we've got several pockets that if we needed to access that capital, we could put it.

We can put certainly some of that downstairs at cloud.

I think we know the rate structure there very well, given the fact we have existing trading debt.

And we have historically had bank debt at what essentially is the cloud level, albeit not in a while.

We have completely unlevered media business.

And then of course, we've got the parent.

So I don't see that our costs of capital have gone up in any material way, notwithstanding the fact that you see interest rate movements throughout the whole yield curve.

So that is -- it's not my concern right now.

I think that we've got a very -- the way our discipline works, a very good spread between the expected rate of return on M&A.

And what we really look at is not the marginal cost of capital, which is a fair way to look at it, but what is our weighted average cost of capital.

So that's being biased up by the equity.

So our WACC is close to 10%.

We want to earn a spread over that WACC when we invest money, hence the roughly 20% returns that we look for in M&A.

But our marginal borrowing costs would probably be pretax 6% or under.

And then when you tax effect it, you're getting into probably high 4s to 5% range, depending on the volume of additional capital required and its purpose.

Our next question comes from the line of Matthew Wells with Citi.

Scott, this is probably for both you and Vivek.

I was just curious how Mashable performed this quarter relative to expectations?

I understand there's been some remixing of the business model away from traditional display advertising.

Yes.

So look, it's been almost a year.

I think it's exactly a year.

December.

We're coming up on a year in real time.

We're coming up on a year.

And I think the first thing is there's been a fair amount of shrink to grow, which we talked about, our process of simplifying the business and getting to its profitable core which has been successful and largely done.

We're building the performance marketing revenues for the business.

And so you'll see a lot of review content.

You'll see buying guide content.

You'll see the kinds of things that fit into that category of affiliate commerce and performance marketing.

And the advantage that Mashable has, possibly more than any other of our properties, is it has an incredibly high domain authority, which is a statistic used by search engines to really determine where you should place in natural search results.

And so having such a large demand authority, DA as it's called, is something that we could leverage against our affiliate commerce.

So we're happy with where we are with affiliate commerce.

We're happy with how we have organized the cost base on a going-forward basis.

And we've done some international expansion, I believe we announced 2 versions of Mashable outside the United States in licensing partnerships, which has been something we've done very successfully at IGN and PCMag and AskMen and starting to do with some of our health properties as well.

That's helpful.

And I had a follow-up, just on the $2.4 million, the timing in the revenue recognition, but what line of business did that impact?

And do you have any sense of when the matter could be resolved?

Yes, I think the matter's going to be resolved very quickly.

Just to give you a little bit of background on it, it's -- that $2.4 million comes out of Digital Media, specifically out of an area the B2B business that generates we call them high-qualified leads.

When we came into the close of the quarter, there was some questions about some of the timing of delivery.

And we decided it was both expedient and prudent to not book any of that $2.4 million of revenue.

I will tell you, I think that some of it probably does belong in Q3.

But in terms of just getting everything done and getting to a close, the view was be conservative.

We'll probably see, I hope, all of it, but at least some of it appear in Q4.

So we'll, I think, be at the conclusion of that within the next few days.

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

Could you just talk about your managers and your comp structure relative to M&A, how that's factored into your total compensation package?

Yes.

So the way the general managers are compensated is there's a significant equity component, which typically involves half of the shares being performance based in the terms of vesting where you have to achieve hurdles in the stock price, very consistent if you've seen mine with how my performance share vesting works.

Additionally, when we look at annual incentives, if a transaction happens within the calendar year that was not budgeted or exceeds the budgeted amount of M&A, then the results from that business will count, but we assess a capital charge to approximate what the cost of that capital is.

And therefore, the contribution from that nonbudgeted M&A has to exceed that capital cost for it to be a benefit for the calculation of their annual incentive.

And just to be clear, that capital charge is our weighted average cost of capital.

So it's -- that higher number that I gave in response to the earlier answer, not the marginal cost, but it might be for us from either free cash flow or incremental borrowings.

And so we organized it that way to create the appropriate incentives around M&A that the near-term results need to be there, and that they will count as long as they exceed our cost of capital right from the beginning.

Even though we know that in some instances there's optimization that takes 12 to 24 months, we expect to see it to be immediately positive against our cost of capital.

Great.

And then in terms of the display business, it sounds like you're seeing some green shoots there.

Obviously, the fourth quarter is the big quarter for the year.

So is there anything you could give us by way of the fourth quarter, how it's shaping up, maybe bookings quarter to date versus where we were last year?

Just what's your sense for the fourth quarter at this point in the quarter?

Yes.

Look, it's hard.

I will tell you outside of the pharma business, a lot of these bookings are now week to week.

And even when they are advance bookings, there are so many changes within how these schedules ultimately unfold that sometimes bookings isn't that helpful?

I have seen times where bookings would suggest significant final results and then the other way around.

Also remember, more and more of our business is going programmatically.

And that is day in and day out.

It's literally what did you generate programmatically in the day.

I would say that look, I think that the -- I don't think Q4 will necessarily be very different than the other quarters of the year.

When I think about kind of getting to sort of the other side of some of the challenges, I'm really thinking about 2019, the comps get a little bit better, the programmatic ratio gets a little bit better, performance marketing in general will likely pass, surpass Digital Media and become the driver of the overall advertising business.

So it's still hard to really predict.

And of course, November, this Black Friday season is going to be very important.

And then the retail shopping season, if strong would be good for us.

And so that's again hard to predict.

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

First off, can you talk about the expected contribution from -- I think it was $93 million in acquisitions you did, both from a revenue and earnings perspective and kind of how far you can get to those target margins that you like to have in acquired businesses?

So that -- what I'll give you is what they contributed in the quarter just ended, so Q3, which is probably representative for Q4 as well with some growth.

About 6 million of revs came from those deals in the quarter.

They are all profitable, to your points.

Not all of them, at this point, will be fully synergized.

But I would say, they are a little bit below the corporate margin of 40.7% EBITDA, but not a whole lot.

So certainly, they're on a path that as we look at their contribution next year, they should be, for the full year, at those target margins.

Great.

And then can you talk a little bit more about what you're seeing in fax and voice?

It looks like your DID revenue grew by about 2% quarter-over-quarter.

How does that line up with your efforts to penetrate health care?

And what you're seeing in overall business trends?

Yes.

So I think what we're seeing in fact is, again, the corporate business grew 6% year-over-year.

That represents about 37% of revenues.

And I wouldn't say all of it, but nearly all of it is health care and the initiatives we have on the health care side.

John Nebergall has joined us, who is the General Manager of our cloud fax business.

He has health care IT background, understands fully the challenges of health care interoperability, understands that health care sends about 9 billion faxes a year.

Our services represent maybe 3% to 4% of that share.

So we believe there's a lot of share for us to go grab.

The balance of what people use are still machines and fax servers.

We think the move to the cloud is happening across health care and will advantage us.

We're organizing ourselves.

We've done an excellent job through the inside call group that we have, the inside sales group that we have, where we're still operationalizing and we've just hired a new head of field sales is a field force.

So most of the benefit that we've been seeing in health care and picking up customers has been through our inside sales group.

It has done an amazing job, but it actually hasn't been boots on the ground.

And so that's something that we think will add to the growth coming into 2019.

And so that really is the story in fax, whereas on the web fax side, that's basically a flat business.

And we've done -- I'll point out, we've done very little M&A in this space against historic levels.

Our next question comes from the line of Patrick Walravens with JMP Securities.

It's Pete Lowry, a quick question.

The midpoint of your implied guidance in Q4 is above The Street, and it's a pretty wide range.

Can you just maybe tell us how we should think about that?

Sure.

I think let's take the pieces because I think there's different answer for each of the pieces.

So first, particularly for those that are not as familiar with j2, we have a practice of putting out ranges in this year and going forward of revenues, EBITDA and non-GAAP earnings.

To your point, they're fairly wide.

We don't give quarterly guidance.

And generally throughout the course of the year, we reaffirm, notwithstanding the fact we move within the range, positively or negatively for whatever reasons that maybe, M&A is often a driver of where we move within the range.

So we're now -- at end of the year, you got 9 months booked.

So if we drill down, I would say that given what we've experienced on the digital media side in display and the fact that we're unwilling to take a bet that there will be a dramatic change in Q4, we'll extrapolate maybe not quite the same degree but those trends through Q4, I would say we're near the low end of the range in terms of revenues for the year.

However, we're going to be probably right around, maybe slightly under the midpoint for EBITDA, but above the midpoint for non-GAAP earnings.

And I would just remind people that the non-GAAP earnings had an upward adjustment last quarter, largely due to the fact that we had some additional work done at Tax Reform Act.

And we saw that our tax rate would be about 2.5 percentage points lower than previously anticipated.

Our next question comes from the line of Rishi Jaluria with D.A. Davidson.

I wanted to start with the security business.

Vivek, you mentioned that you're thinking about the possibility of expanding this business.

And you mentioned web security as one area where you don't have an offering right now.

Can you expand by what specifically do you mean within web security?

And maybe how we should be thinking about the general kind of cloud security business for you going forward?

And then I've got a follow-up.

Yes.

So I'll start with the VIPRE integration because it's sort of key to this business and it's been really -- it's been a real positive.

We've seen really nice cross-selling initiatives between e-mail security and VIPRE, which is endpoint.

So both product lines are now available for all customers and resellers on both.

We have also seen some -- on the endpoint side, a cloud version versus the on-device version from VIPRE, and that's grown solid double digits year-over-year.

And also, what I would tell you is that when we think about -- so what e-mail security does is obviously protect the device from e-mails that come in and filtering out spam and viruses.

Endpoint, the degree to which that hasn't worked or viruses end up on the device is where endpoint sits in.

What we're missing when I mentioned web security is browsing activities, where somebody clicks on a malicious link, visits a malicious website, somehow gets through their web browsing activity, get a virus.

That's where web security would fit in.

And that's probably a space that we would acquire into versus building into.

I think it would just accelerate our path.

And so when you can go to a small or medium sized business and say, "Look, we can protect you really from all threats.

We can protect you at the device level.

We can protect you at the browsing level and we can protect you at the e-mail level," which are really the 3 threat entry points, than I think we become far more, I think, meaningful.

Right now, what happens is we say to customers, "Look, we can do e-mail.

We can do endpoint.

We can't do web, so you're going to have to go somewhere else for that." And so it's -- sort of think of it as the triple play.

You got to almost offer all 3 pieces for it to be both financially and practically, I think, compelling to the customer bases that we're talking to.

Got it.

That's helpful.

And then on the health care business, I know there's still kind of the ongoing headwinds from pharma drug pricing.

But I just wanted to get a sense for outside of that.

Is the business kind of back on track?

Or is there still more to be done from an execution perspective to really optimize that asset and optimize that business?

Yes, it's a great question because the way I look at this and you know what I walked through in the prepared remarks, our experience with Everyday Health because I thought it was important because I was beginning to get a sense from some shareholders and prospective shareholders that it was a feeling that Everyday Health wasn't working out well.

And I couldn't disagree more.

We're at 6.6x EBITDA for a great asset in a great vertical, and we've done it with some real cyclical pressures.

So from my point of view, the business has performed very, very well.

And as I said, it's very consistent with where Ziff Davis was 2 years into its proposition.

What excites me going forward is few things: number one, we've got a terrific leader in Dan Stone running the business, who has a great background in health care and in media.

We have 2 acquisitions: one was Health eCareers we did last year, which has done nicely for us; and then PRIME, which gets us into the continuum of medical education space, which we haven't talked about, but that is, I think, very important for us on our pro side and was a missing piece to our business.

So getting into CME with very strong asset, I think it was important for us.

And then I would say that we've got general managers now in place.

We've got leadership on the consumer side, on the pregnancy side.

We've had leadership on the pro side.

So the combination of all of those things makes me very bullish for next year.

And I'll just say one last thing about this year's performance, and we're talking about 20-plus percent EBITDA growth.

Well I was going to say, yes, it's almost 25%.

Year-over-year, 25%.

If we look at the 9 months, I think this is an important comment that there are conditions that exist in certain businesses from time to time.

You've got to manage around those.

And I think that the business unit has done an excellent job to grow its EBITDA almost 25%.

This is the 9-month period, although it was about 20% just in Q3.

And the other thing I would add to this and Vivek and I debate this back and forth when you look at sort of what is our net investment in Everyday Health, was not including in his analysis, but I think it's relevant is the amount of cash that we've earned in the almost 24 months that we've owned it.

It has been definitely cash generative.

So I'm at a lower multiple than 6.6.

But you can look at it a couple of different ways.

His is more of a pro forma approach.

Mine's more a after owning it for a couple of years, where are we in real time.

So there's no doubt that to be in this space, I would argue under 6x EBITDA.

But whether you're at closer to 5 or closer to 6.5, I think it's somewhat irrelevant.

That's a very attractive price to be in with these assets and this management team for the opportunity in this space.

There are no further questions at this time.

I would like to turn the call back over to Mr. Turicchi for any closing remarks.

Great.

Thank you, Michelle.

And we appreciate all of you for joining us today for the Q3 earnings call.

You will see a couple of releases over the next probably 3 to 4 weeks announcing various conferences that we will be at between now and our next reported earnings.

I know there's one coming up in November.

There's a couple in December and then one shortly after the beginning of the year in January.

As usual, we would look to report our Q4 results some time in that early to mid-February time frame.

And just to remind everybody, that's the time at which we would also not only provide Q4 results, but also give you 2019 guidance.

So thank you all for your participation.

If you've got any further questions, feel free to reach out to us.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.