Scott Turicchi – President and Chief Financial Officer Hemi Zucker – Chief Executive Officer.

Greg Burns – Sidoti & Company Walter Pritchard – Citi Jonathan Tanwanteng – CJS Securities James Breen – William Blair Rishi Jaluria – JMP Securities Will Power – Robert W. Baird Shyam Patil – SIG.

Welcome to j2 Global’s Q2 earnings call. Leading today’s call will be Mr. Hemi Zucker, CEO; and Mr. Scott Turicchi, President and CFO. [Operator Instructions] As a reminder, this conference is being recorded. I will now like to turn the conference over to your host, Mr. Scott Turicchi, thank you Mr. Turicchi, you may begin..

Thank you. Good afternoon, and welcome to j2 Global’s investor conference call for the second fiscal quarter of 2017. As the operator just mentioned, I’m Scott Turicchi, the President and CFO of j2 Global; and Hemi Zucker, our CEO, is with me today as well.

Q2 of 2017 was another strong quarter, producing record revenues and for the second fiscal quarter, record EBITDA and non-GAAP earnings. In addition, at the end of the quarter, our Cloud division, j2 Cloud Services, successfully raised $650 million of 6% senior unsecured notes due August 2025.

And in July, we sold Cambridge Biomarketing, both of which we’ll discuss in greater detail later. Our board has increased the quarterly dividend by $0.01 to $0.385 per share. We will use a presentation for today’s call, a copy of which 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. You can also find a copy of our press release on our website at j2global.com/press. In addition, you can also access the webcast from this site.

After we complete our formal presentation, the operator will come on to instruct you on how to queue for the Q&A session. However, at any time, you’re free to send us questions to our e-mail address at investor@j2global.com. Before beginning our prepared remarks, I’ll read the safe harbor language, which is on Slide 2.

As you know, this call and the webcast includes forward-looking statements. These 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 have been included as part of the slide show for the webcast, which you’ll find on Slide 3.

We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements. If you turn to Slide 5, I’ll quickly go through some of the highlights from our second fiscal quarter, walk through the financial results and then hand the call over to Hemi for greater detail.

As I mentioned at the beginning, this was an all-time quarterly record revenue for j2 and its history of $273 million of consolidated revenue. EBITDA came in at $110 million, free cash flow, $71 million and adjusted EPS of $1.33.

Our Q1 2017 – Q2 2017 revenue was up $61 million or 29% versus to prior year, driven in large part by the full inclusion of a quarter of Everyday Health, which was acquired in December of last year. EBITDA was up $13 million or 13% versus the prior year.

As we stated at the beginning of the year, we continue to focus on our M&A program in the early part of the year, on our Cloud business, 4 small acquisitions were completed in the second fiscal quarter, 1 in the facts segment, 1 in Backup bringing us to Australia and 2 in the email security segment.

For our Cloud business, the second quarter revenues were $145 million or up 1.5% versus Q2 of 2016 with EBITDA up $1.6 million or 2.2%. As we’ve noted before, particularly in the first half of this year, the Cloud business in particular, experiences currency headwinds as approximately 40% of the cloud’s business is outside of the U.S.

We see that now abating as we’ve lapped the 1-year anniversary of Brexit. So revenue growth in constant currencies for Cloud business, was 2.5%. The EBITDA margin was up slightly on a year-over-year basis, to 53.2% versus 52.9% in Q2 2016. I would note that part of this was aided by a low cancel rate of 2.1%, the lowest we’ve had in a couple of years.

Our Digital Media segment did quite well, posting revenues of $128 million or up $59 million or 85% versus the prior year, and the EBITDA, up $11 million or 43%, coming in at a 29% EBITDA margin.

I’d remind you that’s an improvement over Q1 and gives us good acceleration as we move into the back half of the year, particularly Q4, which is seasonally positive. On Slide 7, this is how we, as you know, break out the revenues.

So the cloud is broken out in the Cloud Connect, which is fax and voice, posted slightly less than $96 million of revenue, despite some currency headwinds, almost $53 million of EBITDA, maintaining strong margins at 55-plus percent.

Our Cloud Services business, which includes the Backup, the email security and the email marketing, came in at $47.8 million. On a constant currency basis, it would be $48.8 million, $23.1 million of EBITDA and 48% consolidated EBITDA margins for those businesses. IP licensing remains small.

It was up year-over-year, $1.3 million in revs, a very high profit margin at almost $1 million-plus in EBITDA. Add those 3 together, gives you total cloud segment revenue of $144.7 million, $77 million of EBITDA or 53% EBITDA margin.

As I mentioned, our Digital Media business had a good quarter with $128.5 million of revenues, almost $37 million of EBITDA, 29% EBITDA margin, a several-point pickup in margin from Q1, in part driven by the continuing integration of Everyday Health.

Finally, j2 Global Inc., the parent had non-GAAP losses of about $3.7 million, consistent with Q2 of last year and consistent over the last several quarters.

Bringing us finally to consolidated results that I mentioned of $273.1 million of revenues, $110.2 million of EBITDA, an aggregated consolidated EBITDA margin of 40%, adjusted non-GAAP income of approximately $65 million, $1.33 in non-GAAP earnings and $0.63 in GAAP earnings.

The primary differential between the 2 is the amount of intangibles, which have gone up this year, in large part because of the size of the Everyday Health transaction. I’ll now turn the presentation over to Hemi on Slide 9, to walk you through the individual business units..

Thank you, Scott, and good afternoon, everybody. As Scott just said, our Q2 revenue was $273 million. This represents a run rate of over $1.1 billion. And as you know, our Media business is disproportionally stronger in Q4, and we should see – and which should bring us to new records for the end of the year.

I’ll start with the Cloud Connect, which is the fax and voice. Q2 2017 all-time Cloud Connect revenue high of $96 million, which is 3% versus last-year quarter. Q2 2017, the fax revenue, the fax alone was $79 million, continue to grow, driven by the strength in our premium eFax brand and the Sfax acquisition that was completed last quarter.

All-time high fax revenue represents 29% of our consolidated Q2, and this is versus 36% prior year. As I said again, fax continues to grow, it’s just the rest of the business is growing faster. Our subscriber base reached $2.4 million – 2.4 million DIDs, 1.4% versus last-year quarter. Corporate fax continues to grow, 11% up versus last year.

Voice revenue, $17 million, grew 6% versus second quarter of 2016. And we also acquired in the last day of the quarter, a company called MyPhoneFax. MyPhoneFax is known to the public by the breadth of Fax87 and online faxes.

We did not add the phone numbers or DID or the subscribers of this acquisition even though they are in the tens of the thousands, and they also have no impact on our revenue for this quarter. Moving back at – moving forward to Page 10.

When I talk about the Cloud Backup business, quarter 2 revenue of $28 million, flat versus prior year in constant currency and 4% down versus Q2, affected by foreign exchange. The international revenue of the Backup is 40%. This helps you to understand the FX impact. EBITDA continues to be above 50%.

We’ve also acquired a company called CloudRecover in Australia and by doing that, we expanded our services into Australia and we now have Backup operations in 10 countries. We also domestically, upgraded a – to new state-of-the-art, a data center to improve the backup performance and recovery time acceleration. Page 11.

Email security and email marketing. Email security at the current quarter of $10.6 million, almost $11 million, and EBITDA of $3.7 million, which is 35% EBITDA. Sequential quarterly growth of 6.5%, top line and 17% increase in the EBITDA. We are seeing in this business the renewed organic growth, increasing margins and M&A.

We also acquired this quarter, a Nordic-based company called WeCloud and Simitu and this increased the revenue in the Nordics by 40%. Email marketing, second quarter revenue of $7.7 million, 22% up versus Q2 2016. EBITDA margins remain above 50%.

Campaigner continues to focus on product development and sales efforts upstream to higher premium, mid-market customers. And to demonstrate, the usage is up by 14%. We have almost 10 billion e-mails in last quarter, in ARPA, which is EBIT revenue is up 22% from 260 and 317.

And also we are in the final stages in acquiring another company that will bring the email marketing revenue same quarter in full quarter 4 to something like $10 million. Next, Digital Media and I’ll take you all the way to Page 13. Our Digital Media had another very strong quarter with revenues of $128 million.

With adjusted EBITDA of $37 million and with margins of 29%. This is a 4-point improvement versus last quarter. Total multiplatform visits were up 17% year-over-year, up to 1.4 billion visits. The integration of Everyday Health and the execution of our strategy remains on target.

We are continuing to develop products and building capabilities across the 3 core businesses. Those core businesses are consumer, professional and pregnancy. New general distributions are very important, and we are seeing in Everyday Health, nice growth in the social followers, up 16% year-over-year.

We are also seeing nice growth on video and MedPage today saw a nice increase in video views, up 40%. Before moving from Everyday Health, as previously announced, we sold recently, the Cambridge Biomarketing. Cambridge is an orphan drug advertising agency that we just sold and had a release on that. Our Commerce business.

Commerce continues to be significantly, significant growth engine. Commerce is up 45% year-over-year. This is with the record shopping clicks to our merchant partners of over $34 million in the quarter. This is even higher than what generated – we generated during Q4 of 2016, it was peak buying holiday shopping season.

Our main commerce site, Offers.com and Tech Bargains performed very well. Also the commerce content of our editorial site performed very well, too. Congrats to all the team. Next, we go to Page 14. I’ll talk about IGN Ookla. With IGN, we have reached the point where it’s truly video first and text later, or text second.

We launched our first cable television show called IGN Show, which runs every day on the Disney XD channel. We were Twitter’s exclusive E3 expo partner, broadcasting live from the show for 30 hours. IGN is also becoming a go-to partner for TV, movie and video game premiers.

We now have over 10 billion, YouTube subscribers and we set record with over 1 billion minutes of viewed in IGN on YouTube. Ookla’s app. Induction and install base continue to grow at a remarkable clip, up 30% to 280 million. We saw over 800 million consumer initiated tests in the quarter.

Finally, with the acquisition of Everyday Health and the growth of the media business, have added four top executives across key business units. Jeff Blatt and Lisa Kennedy joined us in Everyday Health; Jeff to head the Professional business and Lisa to head the Consumer business.

We also have Mike Finnerty joining us to run Ziff Davis stake and commerce business. And last but not least, Mitch Galbraith, joined us to run IGN. With that, I’m passing the call to Scott and we’ll talk about our outlook, a few-mile, outlook and open the call..

Thank you, Hemi. On Slide 16, as Hemi just mentioned, we reconfirmed the fiscal year 2017 guidance. I’d like to go give a little additional color in detail. First for those that are newer to remind people that even though we have during any given fiscal year, movements within the range, it is our policy.

We do not alter or change the range unless it is clear that there will be a violation of other – either the upper or lower bound of a given range, either for revenues or non-GAAP EPS.

So we reaffirmed the range of guidance, and I’ll want to now walk for the model how some of the things we’ve done at the end of the quarter or subject to the end of the quarter, affect your model. As Hemi mentioned, we sold Cambridge Biomarketing in early July. We received $30 million in cash.

It’s one of the reasons why you see a difference between the cash balance as of June 30, and the $380 million-plus that we have in real-time. We also have the ability to earn up to an additional $5 million based upon EBITDA performance over the next 12 months.

The impact to the model is that we will lose approximately $15 million of revenues in the back half of the year. Those revenues are profitable, so we’ll hit the bottom line by approximately $0.04. Then we did our refinancing.

When we originally budgeted the refinancing, we were looking to do a $500 million financing to take out the 8% notes and the $225 million bank line paid fees and expenses. The deal was well-received. It was oversubscribed, we felt that both the rate and the terms were good so we increased the size of the deal to $650 million.

Those are 6% unsecured notes at the cloud level only, with no guarantee from either the parent or the media business. However, the financial impact of taking the additional cash for the balance of the year is approximately $0.08 against our budget.

In actual dollars, the non-GAAP interest expense for the 6% notes and the converts is now $13.7 million per quarter. That will be the interest expense in each of Q3 and Q4. At this point, to have no other borrowings. Also, I would note that in order to call the 8% notes at $102 million, We waited until August 1.

Had we done so previous to at that, we would have paid $104 million. So the difference there, those 2 points was $5 million. However, because we did that, we would bear an additional month of interest expense for the month of July and also the last 3 days of June.

In our non-GAAP presentation, we are excluding we call the duplicative or overlapping interest expense. So hopefully, that will be helpful for you in your models. Obviously, on a GAAP basis, the full amount of interest expense from the 8% notes is included as well as the write-off of any unamortized fees.

And then finally, as is the case, the Slide 18 and following are the financial metrics and the various reconciliations to GAAP over the various non-GAAP statistics that we have used in this presentation. I would now ask the operator to come back online and instruct you how to queue for a calls – or further questions..

[Operator Instructions] And our first question comes from Shayam Patil from SIG..

Hello. Maybe he’s not there. Let me go to next question. He seems to be not available..

And our next question comes from the line of Greg Burns [Sidoti & Company]. Please go ahead..

[Audio dip] clearly that you now have. Can just give us an update on kind of the outlook for M&A, the pipeline there and maybe the size of the deals that you may be looking at.

Thank you?.

Sure. So as you know, as I’ve stated on the formal remarks, the focus – the first half of the year has really been on the Cloud business. We spent most of our time certainly, in execution mode on things that are at the smaller end of the spectrum. I think we spent about $35 million on the 4 transactions in Q2.

It was $24 million, $25 million on the 5 transactions in Q1, so you can see the average deal size is on the modest end of the range.

The largest reason for that is just what you see externally going on in the market in terms of certainly, major indices hitting all-time highs and also certain select transactions, some of the multiples being paid for larger situations.

If you look at a WebMD, for example, in the health care space that’s being purchased at 4 times revenue whereas we got into the healthcare space at 2 times revenue. So because of our discipline, while we will look at larger situations, I think the practical reality is we’re unlikely to execute against them, just given where valuations have risen to.

So the focus has been on that small to intermediate sized deal. And really, not much on the media, the first half of the year.

I think as we look at the back half of the year, probably not much changes in terms of the focus on the size of deals because at least, right now, we don’t see any abatement in terms of where the stock market is headed and expectation of valuations on things that are bigger.

I would say, generally, there’s a higher degree of correlation in what you see in the public markets with a larger-sized deal and that correlation goes down as the deal becomes smaller. So I think the focus will be very similar.

I think the changes, though that we have made substantial progress, in essence, we’ve done what we needed to do on in Everyday Health. So our media management team now has cycles to commit back to M&A, not from so much the process standpoint and acquisition, but having cycles now available to integrate.

So while there’s no guarantee that we will do a media deal, as you know, we didn’t budget any this year, I think as we look at the back of the year, that’s certainly a possibility and that’s something we have not planned as we enter this year..

And Greg, you have been there with us for a long time. You know if we are interested – in a negotiation with a company, we would not, on the call, say that we have them because it can put on us pressure that we don’t want to have by committing to it. So this is something you know because you’ve been with us for, I don’t know, how many years..

Yes. Got you. Okay. The improvement in the EBITDA margin on the Media business. I’m assuming, the majority of that is being driven by the integration of Everyday Health.

Have you gotten all the integration synergies you’re looking for? Or are there additional things to be add?.

I think from a cost perspective, the answer is yes. I think now, we’re in a mode of still, that shrink to grow, calling out some of the low or no margin revenue. We’re getting close to I think finding that level.

And then off of that base, I think which you’ll see is further margin expansion because the replacement revenues that will come in will come in at more of our traditional margin contribution. But in terms of, I think the way you’re asking the question, the strict cost synergies, yes, I’d say we are if not done, we are very, very close to being done..

Okay. And then in that the shrink to grow a vein, you still have Tea Leaves, how much revenue is that contributing and how much of a drag....

Yes. Tea Leaves is about $20-ish million annual revenue contributor, a little bit more that weighted at the back half of the year than the first half of the year, given the fact that it is in a hypergrowth mode. It is modestly EBITDA negative, but the drain is really immaterial in the context of $5 and $60 – to $6 in earnings.

We’re talking in the order of magnitude of a couple to $0.03 for an annual drag on the bottom line.

We are continuing to explore how to maximize the value of that asset whether that is within the j2 family or whether that’s selling it to a third-party, and I hope that we will have a decision on that, at least in terms of the path forward within the next few weeks..

Okay. Thank you..

Thank you..

Our next question is from Walter Pritchard from Citi. Please go ahead..

Scott, question on you on the guidance. You changed – or you left the guidance unchanged for the year, you’re taking out the $15 million. I looked at the quarter, seems fairly in mind, I’m wondering, what do you expect in the second half of the year to sort of fill the hole, the $15 million hole you’re talking about from the divestiture..

I think most of that will probably come from, what we’ll call, the unbudgeted M&A that is in the process of happening. So as you know, we budget – this year we budgeted no M&A for media and a modest amount for cloud. I think we are now at this point in the year, in real-time, complete with the M&A that is inclusive in the budget.

And so any M&A that goes beyond that would in your terminology, sort of fill that gap that’s being brought to the table by the loss of Cambridge..

And I also wanted to add that the fax and the Cloud connect business is growing faster than we thought. It’s doing a....

Yes, we’re getting more out of the Cloud business than against the budget..

There’s the organic side. We are finding that we can acquire fax and voice, mostly fax customers, in lower than planned cost per acquisition..

Just organically, on a marketing basis..

So we get more bang for the buck from the advertising budget..

I mean, basically, we’ve got more gross adds coming in that’s budgeted. As I mentioned, the cancel rates with – were at the lower end of the range the last couple of years, so that’s driving a positive wedge..

And so it’s all bread-and-butter, so we are very....

Don’t forget margin though..

Excellent mortgage and very good handle on the focus..

And then just on, you entered Australia in the Backup market. That market is, organically, not really growing.

As we think about sort of your confidence and it feels like you are buying more, maybe not at the rate you were a year ago there, but is that market a market you think can organically grow for the company? Or is – I guess to me, it doesn’t feel like it necessarily has the consolidation and economic at this point, the fax business.

So I’m wondering how you’re thinking about Backup from a growth potential versus profitability..

So on the M&A side, we had, I’m not sure, but 2 to 3 companies, each of them were $10 million revenue and they were bought by prices that we would never think are in our range. Those businesses are still out there and some will come back to reality and some not.

And we are ramping up our sales and product and we see organic growth, especially on certain segments of the business, actually in Europe, on one of our product, which we call KeepItSafe. And I believe it is a grower.

I believe that the market is stuff requirer and we have some companies in this space that are pure play that are paying dollars, that we’d rather keep and invest another side of the business, I think you should listen to some of the earnings calls of the pure plays and you will figure it out..

And I would just add one comment to that, that as you talked about before, one of the goals in each of that we call the Cloud Services businesses, which are bundled together from a reporting standpoint, is to bring those assets up to economic scale. And our view is that in the Cloud Backup business, we’re – it’s an art, not a science.

But $50 million to $60 million away and the view and the premise has been that, that will come from M&A. So there’s been less an emphasis on the organic growth potential of that business or of that space and a much heavier focus on M&A.

If you go back just a few quarters, I think from September of 2015 through probably Q3 of 2016, the Backup business had at least a dozen transactions around the world that acquired and then was in the process of integrating.

So I think that’s kind of – that’s really the focus and then once we get to that level of critical mass, then I think there is a conversation to be had as to what is the right mix going forward between organic growth and future M&A.

And particularly, as it relates to the smaller transactions because every deal that you do is a separate mapping of integration.

So as Hemi mentioned, we’ve – and we talked about this, I think, in either Q4 or Q1’s earnings call, there’s been a desire from an operational standpoint to try to get not large businesses from an M&A standpoint, but larger ones on average, than what we’ve done in the past, get more chunky revenue $5 million, $10 million, $15 million as opposed to $1 million to $3 million..

Got it. That’s helpful. Thank you..

Next question is from Jonathan Tanwanteng from CJS Securities. Please go ahead..

Good afternoon gentlemen, thanks for taking my question.

Average revenue per customer was down in the Cloud business, was that an FX thing, mix or something else that we should be thinking about?.

It’s noise. It’s very, very – you’re talking about $0.03 year-over-year. It’s a combination of all of the above that you mentioned. And if you say, mix, you do have FX because the Cloud business has about $1.3 million of FX drag Q2 of 2016 to Q2 of 2017. So when you roll that through, that’s going to be a few pennies.

So on constant currency it will be up. Also though, you do you have, in any given quarter, there is sensitivity to the mix, not of the products or services, but across the various business units. So as certain business units on a relative basis say, gain a little bit of share against others, that has implications for the ARPU.

But in general I would say that $0.03 on the ARPU, it’s noise..

Got you. That’s helpful.

Anything special going into the reduced cancel rates? Is it a business confidence improvement on the macro side or something that you’re doing on your end?.

Several things, Jon. First of all, as you see, when corporate segment is growing, those customers tend to be much more stable. Many of them are sitting on long-term contracts and we rarely, really rarely lose one of those customers. And that’s number one.

Number two, we are all the time, trying to get better on our processing of credit card, all the things so we are getting better there. And just, this is a reflection of the hard work of everybody in the company in our customer support, product, outages that we don’t have, competition that is not doing great, but we were positively surprised.

We budgeted for hire..

General hire..

Okay, great. From a strategic standpoint, we all saw what WebMD sold for.

Do you ever see a situation, medium or longer-term, where you could flip or divest the everyday asset after you cleaned it up, if someone was willing to pay that much?.

That’s not our intention. I mean it’s an integral part to our overall Digital Media business as we think about it. So there’s no contemplation about hiving off assets or verticals within Digital Media. As we talked about, there are a couple of assets, one’s are now gone, we felt our noncore to being in the health care vertical.

But not in terms of hiving off a whole category. We’re just entering the space. We think there’s a lot of running room, there’s a lot of additional assets that can be acquired to be complementary to what we currently have with Everyday Health, so..

It’s not intentioned, but the board is very opportunistic. I think they....

They’ve got to be a much better multiple than the WebMD..

Right..

Okay. Fair enough. And then just....

Which is anyway twice our multiple?.

Right.

And just finally, the earn-out payment to Ookla, are there any more payments like that in the pipe from prior acquisitions, just to help us think of what’s out there?.

No. The biggest one that we’ve had in the last few years has been Ookla, which paid out the beginning of each of 2016 and 2017, and that is now concluded..

Okay, great. Thank you very much guys..

Our next question is from James Breen from William Blair. Please go ahead..

Just a couple on the cloud side. It seems that the marketing and Backup and fax and voice segment, all have EBITDA margins up north of 50% now, email security’s in the mid-30s. How do you think about that with run rate of $10 million, $10.6 million in revenues this quarter.

What’s scale there where you can get those margins up north of 50%? And then....

What do you mean in email security business?.

You’re talking about email security or general?.

Yes, no email security..

Oh securities. Excellent question. So email security, we have two flavors. We have when you resell others, then we have when we sell our own FuseMail. So for example, the Nordic-based company WeCloud and Simitu, they are on a platform that is soliciting on the border of Sweden and Denmark. We are planning to move all of those customers to the FuseMail.

This might take a quarter or two. When we are done, it definitely would increase the margin because we are moving from two platforms to one platform and the more we sell FuseMail, the more – FuseMail has an ability to scale as it become bigger.

So definitely, I would see there an improvement, definitely versus last year because if we remember last year, was heavily impacted by McAfee, it was the largest piece of their business, with its lower margin. So yes, yes, yes. I hope I answered your question..

Yes..

Maybe more – maybe numerically or analytically, I think that it’s a business that can get to 50% EBITDA margin, but I think in terms of if you look at the $42.5 million run rate we’re talking about scaling the business probably if not to $100 million, close to $100 million. Before, that’s a reasonable expectation.

Long ways to go there, but I think the key thing is that, and I want to reemphasize it, that the McAfee end-of-life is behind us. I think that was definitively seen by the sequential revenue growth from Q1 to Q2 from the $10 million to the $10.6 million.

It doesn’t sound like much but it’s I think, they put a stake in the ground that, that migration, which was a 7- to 8-month process is over. It did have a reset on the revenues to this level. We’re now growing off of it.

And I think maybe more importantly, as we said, it constrained us from doing M&A in that category for a number of months because of our internal people migrating customers internally. As you see, we just now acquired a couple of companies in the Nordics.

So the M&A activity or the ability to do M&A activity is now reopened in the email security business. So everything now looks much more positive on a going forward basis than it did over the last couple of quarters..

Okay. And then just relative to the guidance and the follow-up on the other questions. In the first half of the year, you guys spent I think around $60 million in M&A.

Is that correct?.

Correct..

All right. So I guess just thinking about it on the back half, if you spent another $60 million to buy, call it, $50 million to $60 million of revenue, that would more than make up for the Cambridge revenue loss and then add some additional revenue above and beyond the guidance range..

Well, let me maybe, slightly change what you said.

If we spent the same amount of revenue, same amount of dollars, $60 million, right? And let’s say we paid roughly 2 times revenue, we require $30 million of annual revenue and we would have, depending on the timing, somewhat less than a half-year contribution so somewhere between say, $10 million and $15 million of contribution of revenue to this calendar year.

Obviously, if we spend more, where you were headed, if we spend $120 million roughly and acquire $60 million, we would get somewhere between $15 million and $30 million, depending upon the timing and the size of each individual deal..

And as you know, we have ample cash and a lot of enthusiasm to buy more companies. So $60 million was just an outcome of the disciplined approach. When we see bigger targets, we pay more money and everything goes faster. And as I said, we do have builds in the pipeline..

Okay. And then along those lines, just, Scott, can you just go through sort of what the pro forma balance sheet looks like with the cash and debt post this most recent financing..

Sure. With now, let’s do a kind of real-time, the key element. So first of all, when we say cash, we literally have it all in cash. Now it is distributed around the world, but we’ve got cash North of $380 million on asset side. On the liability side, we have the 3.25% converts, that’s $402.5 million, and they have a final maturity of June 2029.

They’re in the money, but not yet convertible into equity. And then we have a newly issued $650 million of 6% notes at the cloud level. I think I said earlier, due August, it’s due July 15, 2025, so a little under 8 years from today. So we have gross debt of $952.5 million, and the 8% notes, by the way, were retired in August 1. They’re gone.

Even through you see in the June 30, a balance sheet, the notes and you’ll see cash offsetting it, that’s gone. So you got $952.5 million of debt and you’ve got $380 million of cash. So our net debt is $470 million..

And the $380 million cash? Sorry, the $380 million in cash, how much is that held in the U.S.

versus outside U.S?.

I’d say it’s roughly, $150 million would be in the U.S., unless he’s telling me I’m wrong..

Well, 60-40 foreign..

60-40 foreign..

60% foreign....

Couple hundred million in the U.S. and a little bit – $180 million in the U.S., $200 million overseas..

And then if we sell Everyday Health we’ll have more local....

No, no. If we sell Tea Leaves..

Tea Leaves, sorry, sorry. Tea Leaves. I’m sorry..

Tea Leaves, right. I guess, just lastly, does that 60-40 split roughly reflect the M&A that you’re doing? Are you doing kind of 60% your M&A outside the U.S.

and 40% in, excluding, obviously, Everyday Health?.

We are, but it’s not because of that. I think it’s more coincidental. I think it’s more driven by the fact that we’re finding in general, better valuations outside the United States than inside the United States. So but it’s not the case that all of our deals are outside of the U.S.

but I think if you look at the 9 deals this year and probably roll back even into Q4 of last year that yes, more than a majority of the deals certainly, a number are outside of the U.S. obviously, people back to Q4 of last year in dollar base, it’s going to be heavily weighted to the U.S. because of Everyday Health..

The cloud is buying more outside – versus the media. And the cloud is also because of the pays lower taxes, which actual impacts the accumulation of cash..

Well, that also affects the valuations, so our ability to pay..

If I tell you that x percent of the revenue’s international, the cash accumulated is not driven by revenue only but also by tax rates. So you understand. The Q1 is faster because we paid less taxes there..

Okay, perfect. Thank you very much..

Our next question is from Rishi Jaluria from JMP Securities. Please go ahead..

Hey guys, thanks for taking my questions. On Cambridge, if my math is right, the change in – or the granularity that you gave us implies that they have somewhere around 6% to 7% net margins, which is obviously well below where you’re on Digital Media and cloud.

And was Cambridge an asset that didn’t have room for margin leverage or was it just too different and too high distraction relative to the other businesses that justified the investments to get that leverage?.

The second one..

It’s primarily, the second one. But I think also the niche that it is in. We look at it as being a range-bound asset from revenue standpoint with some degree of volatility. I’d say at $30-ish million level of revenue today, it’s probably roughly in the mid-point of that range of revenue.

It’s clearly highly dependent upon what’s going on in the orphan drug community and the pipeline of those drugs being released. So the fact it was an agency business, which is something we don’t do in Digital Media. The fact that it was involved in this niche where there wasn’t an opportunity to take it to the next level revenue-wise.

And as a result, that had implications to its ultimate margin. And of course, there is management time exerted just to manage that business. For all of those reasons, we viewed it as noncore and therefore, appropriate to sell subject to getting what we thought was a fair or reasonable price..

And we couldn’t scale it. The only one who can scale it somewhat is the ad agency business..

Because it’s not an area that we are in or intend to be in, so..

Okay. That makes sense.

And with the new hires within the Everyday Health on both the professional and consumer side, can you give us an idea for what the plans with Everyday Health are going to be under the new hires and if there’s any change relative to when you first announced the acquisition?.

Well, I think, as you know, as Hemi commented in the slide, and there’s several bullet points that granted, they took effect before these new General Manager showed up. But the key really to bring in general managers with a consistent vision and understanding of how to optimize the traffic within this space.

And so as we noted, at the time of the acquisition, I think, in subsequent calls, we found that there were areas within Everyday Health that were not being, either they didn’t exist at all or they were not being fully optimized. To take just one example, affiliate commerce is very big for us in our other verticals within Digital Media.

And it was not as significant upstream within Everyday Health. That’s beginning to change. That’s primarily at the What to Expect site. The 2 new GMs that will come in at the MedPages area where the professional video views and having video content, which generally is a better monetizer, is a big deal. That’s now starting to take trends.

And then we think there’s a – or actually, a vast array of things we can do on the consumer side. Visualizing go check it out, is 1 product that we’ve launched, which is sort of a new way of presenting health information and conditions. So you can look at multiple sclerosis as one of the first ones that we’ve rolled out.

But it’s really how do you engage the audience so that you’re going to get better maximization or optimization of the revenue potential of that traffic.

And these are people that we believe and we know from some prior experience, having consistent their reputation, the history in the space, at a consistent philosophy with what we do on the Digital Media side. So you will hear more over the succeeding quarters as they become more integrated and really take control of these business units..

Okay. Got it. Got it. And last one from my end. But just going back to EBITDA margins and the Digital Media business, we saw some nice margin expansion and Scott, I know you said the cost structure with respect to Everyday Health is mostly in place.

Just how should we think about a path for EBITDA margins from here within Digital Media?.

Well, I think you should see continuing improvement – and by the way, just let me say that in general, it is not the case that there is necessarily an improvement in both revenue and EBITDA margins sequentially, from Q1 to Q4.

Clearly, Q1 is the low watermark no matter what the mix of assets are in Q4 because of the seasonal bias is the high watermark. Two and three sometimes can be equal in revenue productivity. Sometimes 1 is higher than the other.

I think in this case, this year though, because of dynamics of what’s going on with Everyday Health, we would expect to see some margin improvement in Q3 versus Q2. Just remember, on the revenue side, we’re going to lose call it, $7.5 million to $8 million from Cambridge. So when you look out on a sequential basis, keep that in mind.

And then obviously, we’re expecting more of a pop in Q4 where as we exit this year, and we’re going to 2018, we would expect the Digital Media business as a whole and Everyday Health as a contributor to that, to be within the same margin structure, which is mid-30’s EBITDA on an annual basis.

Obviously, with some variability across quarters, generally low-20s in Q1 and approaching 40% in Q4..

Got it. That’s helpful. Thank you so much guys..

Our next question is from Will Power from Robert W. Baird. Please go ahead..

I wonder first if you could give us any flavor for what the organic trends are looking like within the Digital Media business. And I guess, within Digital Media, there has been discussions in the past about working with the big, I guess, internet platform companies, Facebook, Snap, et cetera.

Maybe any update there as to the building to monetize or is that still working in progress in early?.

Sure. So I think let’s break the Ziff Davis business into 2 pieces. We’re seeing right around double digit growth in that tech gains and shopping, obviously, with some variability across the properties.

The Everyday Health business, as you know, is in sort of in a shrink to grow mode so the numbers are really not comparable because you’d have to go back and pro forma into Q2 of 2016 revenue streams that we’ve now eliminated. So I’d say it’s down a little bit on an actual year-over-year basis, but on a pro forma basis, would be up.

And I think that once we finished the shrink to grow there and we get it down to the core, then we view it as being a consistent grower with the rest of Ziff Davis..

Okay. That’s helpful..

Okay.

And you have one other question?.

And then second question was really just an update on trying to monetize some of the advertising you’d been working on with the app through Snap and Facebook and some of those big platforms..

We are monetizing. To be clear, we are monetizing. Probably, most notably with Snap that’s going on a couple of years now, the relationship. As you see, we were with Twitter on E3, 30 hours of coverage of that. And so there is monetization. It’s still a very small piece of our overall media revenue.

And I think it’s still a work in process in terms of where is sort of the optimal full balance and expectation of financial relationships and margin profile from those third-party providers. And it’s really not them as a group, it’s really case-by-case..

Okay. Thank you..

Our next question is from Jack Rosenberg from SIT. Please go ahead..

This is Shyam. Thanks for taking my question, congrats on quarter.

On Everyday Health, what’s next after that deal in the health care space? And when you look at the landscape of what you want to acquire, does everyone look, when the people that you want, do they look distressed like EVDY was, like WebMD and how confident are you that you’re going to be able to kind of acquire the assets that you want in that space?.

It’s a range of that. I mean, what comes next after WebMD, I don’t know. That’s more of an industry question of who’s likely to be in play next. Obviously, we’ve seen both from a capital raising and a transaction standpoint, a couple of data points, that for larger situations point to very strong robust valuations.

Obviously, for our model, we’re going be looking for smaller assets, maybe think of it more as a tuck-in that’s complementary to the core mothership of Everyday Health or MedPages. Some of them may be distressed or have some level of distress. As you know, we’re not afraid of wading into that.

I think, as I mentioned earlier, the good news is that the seven , now eight months in real-time effort by the Digital Media team to focus on Everyday Health and to make certain changes in the GM is in place and done. And that frees up the senior management time of Ziff to go tackle another situation, and that situation be not pristine.

I won’t prognosticate or guesstimate, but I can tell you that even in the 8 or nine months – well, in the 10 months we’ve been involved with Everyday Health, including the pre-the acquisition, I mean, we’ve seen a number of situations that fit into the health care arena.

And if you think about what we’re doing right now, we’re kind of at the high-level categories and you’ve got a whole variety of niche conditions or areas that some of which may make sense to add to the portfolio..

I also can tell you, is the size of Ziff Davis, every deal that is happening is definitely showing itself on our doorstep, and you can even sometimes read some press releases about companies that say, hey, Ziff Davis is looking into us.

But as soon as – it’s not, it’s their problem but definitely, we are seeing a lot more, much more, we are now much more visible..

Yes. We – I don’t – before, we were very rarely seen something in the health care space. And as I mentioned, it started really after it became publicly known that we had been in negotiations and awarded the acquisition of Everyday Health. Obviously, we still have to go through since they were a public company, the tender offer process.

But inquiries started to come in even before that deal closed. But obviously, at the time, the view was look, a, we’ve got to get the deal closed, b, there is a fair amount of work that we see, that needs to be done over the ensuing months, that’s our number one priority. And some of those happen to still be around.

Then we can circle back to them some may have had a change of heart in the intervening months..

Got it. Maybe just a follow-up on that, in terms of kind of pulling the trigger on sizable deals, kind of in the health care space, how much time do you think you need to digest Everyday Health before you do that? And then do you feel....

I never said that it’d be sizable, that’s your word..

Yes, I know my word....

My definition of sizable is – no, I think the answer to your question is that we’re coming to the end of the line of the senior management time of Ziff Davis that needs to be invested in the integration of Everyday Health.

Doesn’t mean everything is done, but the seeds have all been planted, as I mentioned, to an earlier question, the integration elements are completed with the right people in place. We made the cuts that we needed to early on. So I mean, those are the things that the senior management has to be intimately involved in.

And now, they are becoming freed up to look to other opportunities. By the way, they need not be in the health care space. Remember, we’re in several verticals. So it doesn’t mean we’re only looking in health care, just because it’s the latest category we’ve entered..

Right. And I remember, I don’t know if it was a slide that we show to the public, but when we were considering to buy Everyday Health, it was a chart of all the players. WebMD was number one, we were down there....

Number two..

Number two And then there were a lot of like – a lot of 8 that were....

There’s hundreds..

No, but eight, with that made it to the chart, that they were between like $10 million and $150 million of revenues. And those probably are looking for an exit, but we have not seen something specific. And as Scott said, we are not looking only in Everyday Health. We have other areas that we are very interested in increasing our dominance.

In the media, it’s very important to be sizable. That’s why I said, the others might – if you’re not sizable, you’re not number one, two or three, very tough. So we are happy to know, we are number one or two in all the elements, right? And besides us, managing small, everywhere else we are between number one and number two.

So everything we can do to become affirmative number one or stronger number two, definitely are going to do it. Also WebMD was offered to us, but we didn’t think it was going to drive places..

And I guess, one last one. Just on the Cloud business, it seems like you guys have done a great job of identifying areas like Cloud Backup and building up scale, relatively short time period.

Have you ever thought about or considered kind of potentially monetizing assets of scale within cloud? Just kind of curious, how you guys are thinking about that?.

I’m assuming when you mean monetizing, you mean sale of assets..

Sell IPO, reverse IPO..

Okay. That’s not what I said yes to..

You better clarify what you said yes to..

Have you thought about it, that’s all I asked..

Sorry?.

Have you thought about it?.

No, we actually thought about buying largest asset in the cloud. In the last year, we saw two of size that we would be a very qualified leader, but the offer that was, it was two public companies, the offer came 50% above us. And in those cases, the buyer are really suffering, really suffering.

So it’s obviously, was not a good call of their side to offer 50% what the j2 did, and maybe eventually, something happens. So..

I think while we’re opportunistic, and so sometimes that means things that present themselves to you, you have to then make decisions about. I think if you look at the Cloud business, the idea of the way you asked the question, taking any of them public, they’d be very small public companies.

And I just think that there is a detraction on valuation, if you’re out there as a small public company, and we’ve seen enough of them. What we were there at one back in our day, we’ve seen others that have come out, that end up sometimes becoming orphans. So to me, that’s not the likely path.

Now, it’s possible someone shows up and says, I want this piece of your business, here’s the price I’m willing to pay for it. And it is the case that our business units in cloud are setup as distinct business unit. That might be a different question, and that might be a different question, but it’s not something that we are looking to do..

We’re still our largest product business is the fact, the $320 million, very profitable.

So, what $79 million last quarter?.

Yes. Yes..

And how about the other companies? So it is $320 million. The first time I’m collecting score. So it’s $320 million. And this is an amazing business, so..

Hemi deals in run rate. I deal in trailing 12..

Correct. Futuristic view..

Got it. Thank you guys..

Thanks, Shyam..

Thank you. This does conclude the question-and-answer session. I’d like to turn the floor back over to management for any closing comment..

All right. We appreciate your time to listen to our Q2 earnings call. We look forward in the coming weeks to a press release, announcing the various conferences that we will be at. I think they are all after Labor Day in September and then through the next earnings call, which is likely to be in early November.

There’ll be, as I mentioned, several conferences that we’ll be at in September, October. And then we will set the date in October for the Q3 earnings call. And clearly, if you have any further questions, feel free to call or email us. Thank you..

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