Ziff Davis Inc (ZD) 2019 Q1 法說會逐字稿

Greetings, and welcome to j2 Global First Quarter 2019 Earnings Conference Call.

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

I would now like to turn the conference over to your host, Scott Turicchi, President and CFO.

Thank you.

Good morning, ladies and gentlemen, and welcome to the j2 Global Investor Conference Call for the first fiscal quarter of 2019.

As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global, and joining me today is our CEO, Vivek Shah.

We started the year in strong fashion with record first quarter performance in a number of areas.

Notably, we had record revenue, EBITDA, non-GAAP earnings and free cash flow for our first fiscal quarter.

The board has approved an increase in the quarterly dividend by $0.01 to $0.455 per share.

As noted in the press release, based on a significant pipeline of investment opportunities, the board has decided to suspend further dividend payments.

We will explain this in greater detail throughout the presentation.

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 slides.

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

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

After we complete the formal presentation, we will conduct 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 have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we have included as part of the slideshow 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, and good morning, everyone.

We're pleased to once again report record revenues, adjusted EBITDA, EPS and free cash flow for the first quarter of 2019.

The strength in the quarter, along with the acquisitions we've done this year contribute to the meaningful upward revision to our estimates for 2019, the earliest guidance raise in the company's history.

As many of you know, when I took on the CEO role last year, we established a business unit structure across the company.

The business units at j2 are led by General Managers who have full P&L responsibility for their units and oversee all aspects of their businesses from product to engineering to sales and marketing.

Today, we have 14 business units at the company, 6 of those are in the Cloud Services segment and 8 are in the Digital Media segment.

These business units are led by individuals whom I often describe as backable CEOs to borrow a term from private equity and represent an incredible lineup of management talent.

I can safely say that j2's management depth has never been stronger.

All 14 General Manager positions are filled, and each one of them is identifying meaningful growth and investment opportunities.

And they're in competition with each other for the company's capital, meaning while the GMs are responsible for generating earnings and cash from their operations, we hold all of the company's cash centrally and allocate it based on the most promising opportunities.

Our portfolio breadth allows us to consider a wide range of investment opportunities.

First, we have 2 main business models, advertising and subscriptions; second, we sell products and services to every type of customer, ranging from consumers to SOHO to SMBs and enterprises; third, we're in an expanding set of verticals, including tech, health, entertainment, marketing and security.

We've also enhanced our corporate development function through the hiring of several new members of the team, who are driving more deal flow and greater efficiency in how we assess, diligence and transact.

All of this is contributing to one of the most robust set of investment opportunities the company has ever seen, which gives us confidence that we can put ever larger amounts of capital to work that will still yield returns 2 to 3x our cost of capital.

Simply put, as stewards of the company's capital, we believe redirecting the dividend to these investment opportunities will yield better returns for our shareholders, which is why we are suspending the dividend after the June payment.

Let me take a moment to describe the 3 main investment thesis that are shaping our approach and generating these investment opportunities.

The first is our belief that vertical media audiences are valuable beyond traditional advertising.

This has been a long-held thesis of ours that now has even more components.

Historically, the execution of this thesis has been in layering performance marketing revenues onto our media assets.

Prime example of that is affiliate commerce, where our sites generate traffic for online retailers and where we receive a percentage of an ensuing transaction.

As more retail shifts online and there's plenty of room to grow, with e-commerce still only representing 10% of all commerce, we believe content can play a very important role in helping consumers discover, choose, buy and use products.

In the health space, this means our ability to generate prescription lift for pharma companies and drive transactions, including registries from expecting parents.

We've extended the vertical media audience thesis to include 2 more components, monetizing the data exhaust of digital audiences and leveraging media audiences for subscription acquisition.

On the data exhaust piece, our experience with Speedtest has been revealing.

What was originally an ad-based site and app, has become a business intelligence service, and we see opportunities to pursue that model at sites like Downdetector.

On the subscription front, we've had success in our gaming business by leveraging our free content site to the benefit of our gaming subscription service.

We recently acquired some privacy subscription businesses, which I will discuss in a moment that we believe can benefit from a number of our media brands.

Our second main investment thesis is built on the belief that we've reached the privacy and security tipping point for consumers and businesses.

We believe that the growing awareness of the breadth of surveillance occurring in our digital lives along with increased hacking and other attacks will create opportunities for companies that offer solutions.

As I mentioned, we recently acquired a set of assets in the VPN space, including IPVanish, Encrypt.me and strong VPN that offered tools to protect users on unsecured WiFi as well as shield their Internet browsing activities.

We view that as a strong growth area that extends our current end point and e-mail security capabilities.

In addition, privacy plays an important role in our backup and storage business when ensuring files are not just stored and available for retrieval but are also kept private is important.

And of course, our cloud fax business rests largely on the secure nature of fax transmissions.

It's why healthcare, financial services and the legal industry view fax transmissions as inherently more secure than other forms of document transfer.

Between our various Cloud Services brands, we are building a strong value proposition in privacy and security for consumers and businesses.

Our third main investment thesis is that small and medium businesses are underserved when it comes to attracting, retaining and communicating with customers.

Many of the martech and communication solutions in the marketplace today are built for large enterprises.

We come at this with a strong lineup of brands such as iContact, which we acquired earlier in the year as well as Campaigner and Communicator Corp.

We believe we can leverage our installed base to sell additional services while helping our customers solve their marketing and customer touch point needs.

Many small businesses are getting priced out of search and social, and are looking for cost-effective sources of qualified website and app traffic.

In addition, they are highly cost-conscious, so they would rather enhance their free and earned media than pay for media.

No one has created a full suite of services that SMBs are seeking and that's an opportunity for us.

Before I hand the call back to Scott, let me point out that at j2 uninvested stock awards that are held by management and our Board of Directors either pay dividends or accumulate dividends which are then paid on vesting.

Many companies don't pay dividends on unvested stock but we have done that for many years.

That means that like our common shareholders, we will not receive dividends during the suspension period.

Personally, potential dividend income from my holdings is worth more than my annual salary.

But we believe that redirecting that capital to feed our growing set of investment opportunities will yield greater benefit than continuing the dividend at this time.

We come at this from a position of strength with our solid earnings, upward revision to our business outlook and a clear view into a strong pipeline of deals and opportunities to drive long-term shareholder value.

Capital allocators are always evaluating the optimal use of our capital, whether for acquisitions, dividends or buybacks.

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

Thanks, Vivek.

Q1 2019 set a number of financial records for j2, including revenue, EBITDA, non-GAAP earnings and free cash flow for our first fiscal quarter.

These results were driven by several areas of strength in our portfolio of businesses, notably, sustained improvement in the display advertising portion of our business as well as our continuing strong growth in our media subscriptions, security and martech businesses, coupled with a focus on operating margin.

We ended the quarter with approximately $320 million of cash and investments after spending $82 million in the quarter on acquisitions and dividends.

Now let's review the summary of quarterly financial results on Slide 4. For Q1 2019, j2 saw a 6.9% increase in revenue from Q1 2018 to $299.9 million.

We saw FX modestly affect our Q1 results by approximately $500,000 versus Q1 2018.

Gross profit margin, which is a function of the relative mix of our 13 business units remained healthy at 83.2% and improved slightly from Q1 2018.

We saw EBITDA grow by 10.9% to $113.9 million.

Finally, adjusted EPS grew 14.8% to $1.40 per share versus $1.22 per share for Q1 2018.

As you know, our core thesis for j2 is the conversion of our EBITDA to strong free cash flow.

Turning to Slide 5, you can see we had a 15% increase in our Q1 free cash flow to $104.3 million, a record for our first fiscal quarter.

On a trailing 12-month basis, we generated $358.5 million of free cash flow for 71.6 free cash flow conversion of our approximately $500 million of trailing 12-month EBITDA.

Now let's turn to the 2 businesses, Cloud and Digital Media, for Q1 as outlined on Slide 6. The Cloud business grew revenue approximately 2% to $152.2 million and was negatively impacted slightly by FX as well as the continuing declines in our backup business.

If you exclude our backup business, the Cloud business grew by approximately 4.8% versus Q1 2018.

Reported EBITDA increased by approximately 2% to $75.1 million compared to $73.8 million in Q1 2018.

The EBITDA margin is 49.4% after corporate allocations, similar to the margin in Q1 2018.

Our Media business grew revenues 12.6% to $147.6 million and produced $40.8 million of EBITDA for 30% growth.

EBITDA margin expanded from 24% in Q1 2018 to 27.6% in Q1 2019.

Vivek noted earlier our increased guidance for 2019.

Based on our Q1 results and the M&A that we have done so far this year, we are raising our guidance as shown on Page 8. The previous high end of our range of $1.33 billion of revenue, $540 million of EBITDA and $6.95 in non-GAAP earnings now becomes the low end of our new revised range of guidance.

We currently expect revenues to be between $1.33 billion and $1.37 billion of revenues for 2019, EBITDA to be between $540 million and $556 million and non-GAAP EPS to be between $6.95 and $7.15 per share.

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

I would now let the operator rejoin us to instruct you on how to queue for questions.

(Operator Instructions) Our first question comes from the line of Shyam Patil with SIG.

Congrats on the -- beaten raise.

Great to see.

Just in terms of, I know, Vivek and Scott, you guys talked about some of the reasons for the guidance raise.

Could you just elaborate a little more on the specific drivers behind the guidance raise?

And how we should think about digital media versus cloud expectations for the year?

Sure.

So I think the first thing is we're stringing some strong quarters together.

You'll recall Q4 was a very healthy quarter.

Q1, obviously, we feel really great about.

So we've got some momentum in the underlying businesses and assets.

And so, while the original guidance above the midpoint did contemplate additional M&A in 2019, the time and size of the transactions that we've done thus far this year is kind of driving this increase in outlook.

So we've acquired 5 assets this year for a total of $270 million.

Four of those happened after our original guidance.

So we're not going to break out each in terms of contribution and price but I can say that the VPN assets, IPVanish, et cetera, the ones that we carved out from a company called StackPath are the largest.

In terms of guidance, it's about 50-50, I would say, in revenue between Media and Cloud.

Yes.

And just, as Vivek has noted, all of the M&A done this year affects only the Cloud side of the business.

I would comment though in terms of as we look out over the remaining 3 quarters in Digital Media that as we talked about in the Q1 results, unlike some prior years, I think, we will see a continuing step function up in revenues over the 4 quarters.

I know in the past we've talked about Digital Media having a weak Q1, a strong Q4 and kind of 2 and 3 are equal.

I see this year more of -- on a revenue basis a stair step function over the 4 quarters from 1 to 4. And also some shifting of costs, which benefited Q1 on the Media side but particularly in the games area some investments we're making that will be impactful in Q2.

So you'll see a little different, I think, spread amongst the 4 quarters on Digital Media than in some historic periods.

On the Cloud side, pretty much everything is incremental.

I would just add that the acquisitions we've just done will be at a somewhat lower EBITDA margin contribution than the core business, which, before corporate allocation, is slightly north of 50%, post-corporate allocations about 49.5%.

Great.

Second question.

Just on the pipeline for M&A.

How would you characterize if -- the size of deals, the types of deals?

And last quarter, Vivek, we talked about the carnage in the digital media industry overall.

A potential opportunity there.

Can you just talk about how that's looking for you guys as well.

Yes, I'll take the second question first.

Look, I think there are a number of investable opportunities for us in the digital media space.

And we primarily look for companies that are display ad-dependent that have not developed the multiple monetization layers that we've developed in verticals where we think that's possible.

And so we see a number of these and it is a big part of our pipeline.

I think, in general, take a step back, what is driving the pipeline are these 14 General Managers.

And so definitionally, the opportunities that we're seeing are bolt-on and tuck-ins within our different business units.

So I think it would denote the size and impact consistent with what you've seen from the company over the last couple of years.

Having said that, at the same time, we're always looking at deals of all types of sizes.

And in the end, if they meet our hurdle requirements, we'll be in a position to transact.

But the pipeline that we're looking at now for the most part, are to the benefit of the 14 business units in ways in which they can accelerate their growth.

Okay.

Great.

And it's my last question.

Google talked yesterday about some changes that are coming to Chrome and third-party cookies.

Just curious to get your take on what kind of impact you expect to the ecosystem and to your Digital Media business, if any?

So all of the focus, whether it's Google or other platforms on privacy, really impact the larger ad platforms that rely on data to inform the placement of ads.

For us, little to none, I'd say, of our display ad business relies on third-party data.

It's all placement-based.

In other words, placing, advertising next to contextually relevant content.

And when we use data to fine-tune targeting it's our own first-party data.

So I'm not going to go so far as to say that this will be a help to publishers like us.

As some in our industry say, it will be.

But I certainly don't view it as a harm to us.

I also point out that it sort of dovetails nicely with our own thinking and move into the privacy business where we do believe consumers and businesses are demonstrating that they do care about privacy.

And so a lot of what this is about, social media tracking, surveillance and privacy violations, we think creates a real opportunity for providers of privacy solutions, which is why we moved into the VPN space and affiliated privacy businesses on the cloud side.

Our next question comes from the line of Dan Ives with Wedbush Securities.

Look, I don't remember you raising for the year after 1Q, have to go back to the Clinton administration.

So...

We were barely public back then.

I know.

I was going back a long time.

So look, obviously, you talked about on the M&A side.

Could you just talk more also just organically what's happening on Digital Media in terms of some of the underlying drivers that are really giving you increased confidence going into the year, even on the subscription side it seems.

Yes.

So we've got a few things going on.

So look, the display business is continuing to rebound.

So our Q1 year-over-year growth in display is between 6% to 7%, which is even better than what it was in Q4.

So having that in the mix is really important.

And is part of kind of the momentum we're feeling.

And the same time, the subscription business probably on the media side going to be north of $175 million.

And so it's a significant growth engine for media.

So across-the-board, we're pleased with what we're seeing, the quality of the portfolio has really improved with assets like Humble Bundle, Ookla, we've talked about, a fair amount.

We've got a great asset in Ekahau.

And then also on the Cloud side, the VPN businesses that we've acquired are growth businesses.

We really see lots of opportunities so that -- for it to grow organically as well as a space in which we can see a fair amount of acquisition.

We acquired an incredible team.

We're really excited for what they're going to bring to the company.

So really, it's kind of across-the-board we're feeling very good.

And then on the margin side, the margins are outstanding for the quarter.

And so we feel good about that.

Now to Scott's point, we are looking to make some investments in some game titles in Q2.

But that's the mode we're in.

We're in the mode of putting capital to work.

M&A within the business to drive top line and to drive future cash flow.

And I would just add to that.

While we talk about display as a category, we've seen continuing strength and firmness out of Everyday Health, which has a large chunk of display advertising in terms of its form of total monetization.

So grew mid-teens organically.

Everyday Health grew mid-teens organically in Q1.

So that was actually going to be my question, the follow up on Everyday Health.

I mean is that -- because obviously, you've seen the pipeline, you have a pretty good visibility there, call it, 3, 6 months ahead.

So that continues to just step up.

Yes.

Yes, we're feeling very good about the Everyday Health business and the components of it.

I think I mentioned this...

We know what's going on, yes.

Yes, I think I mentioned this in the last call.

The pipeline at the FDA is very robust, 59 new drugs got approved in 2018.

But to Scott's point, we've got in Dan Stone an incredible leader to that division and he's put in place a fantastic team.

And he's now beginning to put in place some M&A.

And we've had the additions of PRIME, which is a continuing education company, and getting into the CME space is very important for pharma.

And pharma are the driver of this business.

And then we bought a great brand called Castle Connolly.

You might know them, they do the top doctors, they do top hospitals.

And we love the whole rankings and ratings world as you know through a lot of the assets, particularly, on the tech and gaming side of the company.

So smaller asset but we think a lot of potential.

So we like the mix of the portfolio.

We like the management team, and the results have been very good.

Our next question comes from the line of Nick Jones with Citi.

I guess it's -- the first one on visit and views, this came down a little bit but revenue went up for the Media business.

Can you walk through the dynamics there that kind of created that situation?

Yes.

So the -- it's all Snapchat.

So Snapchat made a significant change in its app experience, which caused publishers to see a huge drop in traffic.

But it really had no effect on our revenues since Snap is less than, I think, 1 half of 1% of our Digital Media revenues, which makes it even smaller across all of j2.

So adjusting for Snap, we'd be up.

There's also been some changes in the source of traffic data, we moved from armature in some instances to Google analytics.

And that's showing some declines.

And that is hard for us to entirely reconcile and it doesn't fit with actual ad impressions, which is the -- well, frankly, the statistic that matters for display.

So we're investigating that.

I would just add that -- I would add, Nick, that even from the beginning, when we acquired Ziff Davis back in '12, we have talked about sort of what are the right metrics by which to measure the business.

Back in the day, because it was 80-plus percent display advertising, visits and page views were reasonably correlative with the revenue productivity of the business.

That's evolved over the last 3 to 4 years in particular with the addition of performance-based marketing and subscription.

Where now about 2/3 of our revenue is either almost uncorrelated to traffic and visits or very lightly correlated.

So as Vivek mentioned, we are -- we continue to pursue what are the right metrics to give you insights into our Digital Media business.

But clearly, the correlation has weakened over the last 2 to 3 years, and will likely continue to weaken as we see display and video be 30-ish percent of the total of Media's revenues.

Yes.

And just one last dynamic, which is, when you're in the performance marketing transaction business, you're trying to move the user as quickly as possible to the retailer sites to get the transaction.

Dwelling on your site doesn't actually get you paid.

So there's also the inverse relationship where the quicker you get them out to transact the better.

Got it, got it, it makes sense.

And one quick follow up on backup.

We know there's kind of been a managed decline.

What's the rationale of the team to acquire that, is that part of the managed declined?

Should we expect to see more acquisitions in that vertical?

Yes.

Look, I think, were looking at some of the small tuck-ins that fit our ROI model.

So remember, we have been sort of on the sidelines in the backup space because valuations have been too high.

We're beginning to see that shift, at least for smaller assets.

So we're going to continue to be opportunistic.

And then additionally, we made some investments in the business that we think will help drive retention of our existing customers.

These are really high-value customers whose data continued to grow which drive revenue growth.

So just simply retaining customers has sort of an interesting financial value.

So we're doing those pieces but we're not -- look, it continues to be in sort of this managed decline.

We think we'll see some deceleration in that decline based on some of these small tuck-ins and investments in account management and infrastructure.

I would add to that, it actually had a pretty good Q1, in that it was pretty much flat with Q4 of last year in terms of its revenues.

So -- and the M&A did not really aid it since the 2 deals are both small and occurred late in Q1.

Our next question comes from the line of Charlie Erlikh with Robert W. Baird.

Congrats on the strong quarter.

I just wanted to ask a question about the fax business.

First, how did the corporate fax segment perform in the quarter?

And then also, just from an industry point of view, what percentage of the market would you say is cloud fax versus traditional hardware-based fax?

And is the cloud fax portion of the industry growing at all?

And within that, what do you think the market share or what do you think your market share is within the cloud fax business?

So we have an interesting perspective into the share of the market that we have, right?

Because we can see in fax situations, are we on the other side.

95% of the time, we're not, right?

So that tells you that at best -- and it's maybe a little more than 95%.

But at best, we had 5% of the volume.

Hard to tell you definitively how much of that volume is cloud versus server versus machine, putting server and machine together and just calling that analog.

But our own channel checks and understanding of the market will tell you it's a vast, vast majority.

Cloud probably is not more than 10 points, if even, of the overall market.

So we see the real opportunity on the corporate side for us to be able to really change the behaviors of those customers on the analog side of the equation.

In terms of the corporate business, we're continuing to see it grow.

It's becoming a larger share of our fax business and I think it was almost 40%.

Yes.

It's got to be of the fax -- of the revenue...

The total fax business.

Of the total fax business.

Which is increasing -- has been increasing.

Right.

And so...

And I would just add, going back to Vivek's earlier comment, when -- in the corporate space when we win business, almost always, the displacement of some physical hardware.

It could be if it's a large entity, a server or servers or a server farm, if it's a smaller entity it might be a physical device that has some telephony input.

But it's usually not taking share from another cloud fax provider.

So all of that gives us sort of indirect evidence that the overall penetration of the very vast fax market is still modest from a cloud perspective.

And then there's been some studies done or surveys.

And I treat them with a grain of salt because I've looked at these over the past 15 to 20 years.

They're generally done by surveying techniques in terms of trying to size the market.

We obviously know, particularly in the markets that we are directly participatory in, like North America, Western Europe, A and Z, what's going on there.

They're extrapolating out to other parts of the world, we have either no penetration or very light share, like China, Russia, Africa.

So these studies for what they're worth, will tell you that the cloud fax business in its entirety.

So leaving aside servers, leaving aside machines, it's probably between $1 billion and $2 billion of annual revenue globally.

And our shares would be higher in about 15 countries where we have local presence.

Although we have telephone numbers in over 50 countries but we don't necessarily have people on the ground.

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

Let me start with some of the announcements around the VPN side of the business.

I think to start off with -- what do you see as the potential synergies with the other security offerings you have, like a VIPRE or the other kind of core e-mail security side.

And then one more follow-up on the VPN.

Yes.

It's a great question, Rishi.

So we think that privacy and security are essentially becoming the same thing.

So adding VPN to our roster of assets in the space, SUGARSYNC and VIPRE to use 2 examples.

We believe forms a nice foundation for a broader solution for consumers, small and medium businesses where we can solve all of their privacy and security needs in a suite.

And so we are looking at ways of bundling, we are looking at ways of cross-selling, we are looking at ways to attach multiple of these things to one another.

We have interesting channels where in some of our backup businesses we have some channels that were not available to VPN, the same in our endpoint and VIPRE.

And so exploring the way to leverage these channels together was part of this thesis.

So we see these things as working well together but also independently, right?

So you've got customers who just want each one of these point solutions, and were not going to lose our focus there.

But we do see them as being highly synergistic.

I'll also say that we do see some marketing opportunities on the Digital Media side, given the nature of our audience and that we have many advertisers who are VPNs.

And so we can advertise our own product, and you've seen us do that in other areas, as part of what I mentioned in our -- my prepared remarks, which is how do you leverage media assets and how do you leverage inventory -- marketing inventory to the benefit of your own products.

Got it.

Okay.

That's helpful.

And then just kind of following up on the VPN side of the business.

Look, if I go to your own property at PC Magazine, it seems like some of the leading motivators for VPN usage, and obviously some of this is going to be free versus paid.

Because it looks like some of the leading motivators tend to be more entertainment or social media-driven.

How do you think about just your VPN offerings and SMB angle versus the consumer angle?

Yes.

So look, I think there are multiple uses of VPN and there's VPN for security, there's VPN for privacy and there's VPN for remote access and connect, right?

Which is the classic VPN when we think in the business world of VPN.

We think this asset is actually positioned to do all of it.

So the Encrypt.me piece of it, for instance, is VPN for teams.

This is a proposition that says, look, if you are a small, medium business and you have your employees are traveling the world and accessing the Internet over unsecured WiFi, which they're doing, they're doing it on the plane, they're doing it at the airport and they're doing at the hotel.

We have a product that allows all of those endpoints to simply have our VPN on it to protect their connection.

And that is becoming an increasing use case.

So that is a business argument.

On the consumer side, I do.

I think there's enough of surveillance activity, and I don't want them to know what I'm doing, regardless of what I'm doing, whatever category that activity may fit in the ability to make that private, I think, is also a driver.

There is a part of the market that's looking to get access to content not in their territory.

That's certainly a part of the market.

But I think the brands we've got kind of hit on each one of those and the reputation scores of these brands are very strong.

There are a number of players in the VPN space.

You really need to -- trust is the biggest piece that drives the success of a VPN brand and service.

And they earn very high trust marks.

Got it.

And then last one for me and I'll jump off.

I wanted to maybe dive a little bit deeper into one of your more recent acquisitions which is Ekahau.

Maybe talk a little bit about some of the earlier traction you're seeing with that.

And since Ekahau kind of falls under the Ookla side, if I'm not mistaken, maybe talk a little bit about how you can bring together some of the core functionality of Ookla into what Ekahau does and maybe make it a stronger offering.

Yes.

It's a great question.

So Ekahau primarily works with businesses and workspaces to design, deploy WiFi within those spaces.

So that can be office building, that can be hotels, that can be stadiums, that can be coffee shops, right?

National chain.

Because WiFi is critical.

As we often say, it's like electricity for all businesses.

And when it goes down, bad things happen.

So having a solution that ensures the proper deployment and the proper management of those networks is super important.

So I think just as a business on its own it's a great business to be in and complements what is largely a consumer-install base that we have on the Speedtest side.

Where we start to get really excited is ways in which we can put Speedtest monitoring inside of Ekahau and the way we can put Ekahau inside of Speedtest.

An example of that would be how do you turn Speedtest into essentially an app that allows you to figure out how to set up your home network.

That would be a very interesting use case leveraging Ekahau inside of Speedtest to allow Speedtest to be not just a tool that tests how your broadband is at home, right?

How your WiFi is at home.

But how to possibly place the router, how to configure the router, add repeaters, et cetera, based on the configuration of your home.

That would be a great use case, would drive usage for the Speedtest business.

There are multiple examples like that.

I won't go through the list.

But you can start to see how what we do for consumers can apply to business and vice versa.

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

Regarding the dividend suspension and the firepower it gives you, how much capacity do you actually have for investments in M&A right now?

So there's a couple of different elements to that.

There's obviously the cash we have on our balance sheet, the cash we generate and the ability to take on additional leverage.

So we maintain a fair amount of cash, but I'd say most of that, that we have to date post the acquisition of the assets from stack path would be working capital-oriented.

So there's some small amount there, maybe $50 million, $75 million that would be available for future deployment, depending upon the jurisdiction of a potential acquired asset because some of that money still remains overseas.

In terms of leverage capabilities, we still remain moderately leveraged, not even taking into account the raised guidance or the pro forma contribution from the M&A we've done this year.

And I think we can very easily, within our structure, move to 3x debt-to-EBITDA even if you assume no contribution from either potential acquired assets.

You don't give credit for the pro forma EBITDA acquired, which means another close to $500 million of borrowing capacity.

And then of course, we have free cash flow generation.

We generated $104 million of free cash flow in Q1.

I would say that with our raised guidance, we're probably in the 360 range -- 360-plus range for the year.

We do intend to make some capital investments we talked about in Q4, which were very light in Q1 but will accelerate 2 through 4. So we've got another $256 million to $260 million of free cash flow that we will generate over the course of the year.

We will pay the last dividend this quarter, that's about $22 million.

So you should take that out of your calculations.

But if you add all that up, you're around $750 million, $800 million, without really stretching the balance sheet.

Now clearly, if demand warrants it, we could temporarily go north of 3x leverage and take that up even beyond that $750 million, $800 million.

So I think we're in very good shape right now.

And -- but the dividend -- the suspension of the dividend does give us relief.

Just to give you a sense of order of magnitude.

We have expanded through the June payment coming up about $475 million on dividend payments since it was initiated in August of '11.

And clearly, the circumstances are very different today than they were back then.

Some of you will recall, some of you have covered us for that duration.

We were essentially a digital fax company with close to 90% of our revenue in digital fax and probably 95% of our EBITDA.

And we had -- where we were very -- in the very early stages of going into those other Cloud Services like backup what is now martech and security.

And so we thought the dividend was a prudent thing to do to return capital to shareholders, not knowing what the M&A landscape would be in those other areas to do 2 things.

To preserve the existing shareholder base that we had built at a time but also to try to seek new investors, ideally those seeking yield.

And somewhat ironically, almost 8 years later, we have less than 2%, probably closer to 1% of our shares that are actually held by funds that needed dividend or ownership.

So the landscape has changed dramatically in that 8-year timeframe.

We've now got 14 businesses, not 1. We've got an evolution in the management structure and the demands for capital were quite robust.

Is it a safe assumption to make that you wouldn't have suspended the dividend if you were able to do what you wanted to do without the -- without doing it via debt or other finance -- financing?

I think if we had lesser demand -- I'd say it this way, if we had lesser demands in our capital, in other words, if the dividend and our M&A were funded out of free cash flow.

We probably would have maintained the dividend.

Although there's an argument that from a pure capital allocation standpoint you've always got to have that discussion.

But the reality has been, in the last 5 years, in 3 of those years, we have had more M&As than the free cash flow we generated whether we paid the dividend or not.

So in essence, you could argue we've been funding the dividend through borrowings, which, I think, is not a good idea.

And I see those demands from the BUs only increasing, I mean, to be at a 270 spend rate in the first 4 months of the year.

And let's say that I'm right and we're in the 360 to 370 range of free cash flow, I don't think it would be that hard this year to spend another $100 million.

Got it.

And then just in terms of where you're seeing the most opportunity over your 14 BUs, can you give us a relative peek at the size and timing of where you're going to see the most impact?

Well, the great news is we got I think 10 -- actually we got all 14 in some participating, but 10 that are very active.

So it really is across-the-board.

I think you've heard us talk about how to build the martech business.

Obviously iContact early in the year was a piece of that puzzle.

But that puzzle is far from complete.

We've talked a lot about security.

The privacy assets are a key piece to that.

We've got some interesting things going on the healthcare space in each of our 3 business units there that could change, in some cases even transform some of those business units.

So it really is, I think, probably the only one that is digesting right now would be the broadband business unit.

Yes, look, the only thing I'd just underscore, I mentioned this in my remarks at the beginning.

But again, one of the advantages, we think in our structure is why the BUs are generating deal flow.

The capital allocation decisions happen centrally.

And so all of the cash that they're generating from their operations and we at corporate are looking at all of it and we can really make we think the best choices that generate the most returns for j2 not just making the choice that this is what one BU wants to do in the context of its business.

So we are seeing just a larger volume of really quality deals.

And I would also just say that the quality of the portfolio is better than it's ever been.

And when you look at the assets that we've been acquiring in recent memory, the Humble Bundles, the IPVanishs, Ekahau, PRIME, just continuing medical education business, Line2 on the voice side, these are quality growth-oriented businesses that want to be fed.

And they're doing 2 things.

A lot of times, we talk about the 3 types of M&A we do.

All the deals Vivek just mentioned contribute in all cases, at least 2 of the 3. Not only are they scaling an existing business unit but they're also extending the product content and service reach of what those business did prior to the acquisition.

So we're getting sort of a double on a given deal.

Now a small tuck-in deal generally only fits into one of those categories.

It's either going to bring us customers or traffic.

It's going to bring us a new service set or it's going to bring us a new geography.

But these are deals that are not large in size but larger than a tuck-in.

And we're often getting a double.

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

This is Joey on for Pat.

Congrats, again.

Just on the competitive front, do you see anything changing specifically?

Yes.

I mean, look, I think, that the great thing is in all of our businesses we actually have competition which speaks to the quality of those businesses, right?

It just -- I often say we want to be in spaces where other smart people are trying to get a share of that market.

And you even see it in our cloud fax arena, there's competition.

Trying to solve secure document transfer in industries like healthcare, even financial services and legal is not without competition.

We feel we've got good assets in each one of the market segments in which we operate.

From that point of view, there is competition but we feel we have great assets to compete.

In the M&A marketplace, there's always competition.

Now where we have an advantage is we have value creation opportunities or at least the deals we do have to have value creation opportunities that are unique to us.

That by virtue of us owning the business we can create value in ways that others can't and that's how we're able to compete on deals.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back to Scott for closing remarks.

Great.

Thank you very much, Dana, and thank you all for joining us today for the first quarter 2019 earnings call of j2 Global.

As usual, we will be out on the road over the next coming weeks, specifically at some conferences.

You'll see a press release probably in the next week or so announcing those that are coming up.

I believe they start in early June.

And there's a flurry of them, the first week of June.

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

The date has not been scheduled yet, but you'll see a press release a little later in the summer announcing that.

Thank you very much.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.