Scott Turicchi - j2 Global, Inc. Vivek Shah - j2 Global, Inc..

Shyam Patil - Susquehanna International Group, LLP (SIG) Walter H. Pritchard - Citigroup Global Markets, Inc. James D. Breen - William Blair & Co. LLC Rishi N. Jaluria - D. A. Davidson & Co. Greg J. Burns - Sidoti & Co. LLC Jonathan Tanwanteng - CJS Securities, Inc. Charles Erlikh - Robert W. Baird & Co., Inc. Matthew Wells - Citigroup Global Markets, Inc..

Welcome to j2 Global's Q1 2018 Earnings Call. Leading the call today will be Vivek Shah, CEO; and Scott Turicchi, President and CFO..

Thank you. Good morning, ladies and gentlemen, and welcome to the j2 Global investor conference call for fiscal Q1 2018. As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah.

This year started off well for j2 with Q1 posting another strong quarter, producing a variety of record financial results, which I will detail later. The board has increased the quarterly dividend by $0.01 to $0.415 per share. We will use the presentation as a roadmap for today's call. A copy of the presentation is available at our website.

When you launch the webcast there is a button on the viewer on the right-hand side, which will allow you to expand the slides. If you have not received a copy of the press release, you may access it through our corporate website at www.j2global.com/press. In addition, you'll be able to access the webcast from this site.

After completing the presentation, we will conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. In addition, you may email questions to investor@j2global.com at any time. 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 slide show over 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 the Vivek for his remarks..

Thanks, Scott. Good morning, everyone. We are off to a strong start, with revenues adjusted EBITDA and EPS all exceeding our outlook for Q1. Before we dive deeper into the quarter's results, there are three topics I'd like to cover. First, I'll share some insight into how we're building our subscription business in Digital Media.

Second, I'll provide an update on our initiatives to grow our cloud fax business and the healthcare vertical. And finally, I'd like to reflect on the topic of privacy with the General Data Protection Regulation, GDPR, and the recent U.S. congressional hearings on Facebook.

As you've heard me say, one of the key strategic objectives at j2 has been to build out subscription businesses in our Digital Media segment. To begin with, we have a ton of relevant capabilities and experience with subscription businesses at Cloud Services where we have over 3 million subscribers.

We have strong customer acquisition and marketing skills, pricing and retention knowhow and deep customer service experience. We have worked over the past six months to leverage as much of that knowledge in the pursuit of subscription-based products at Digital Media.

In Q4, 2017, we acquired Humble Bundle, which started as a digital storefront for games and now has a very robust subscription service where our customers receive a curated bundle of games every month. Not only do we leverage j2 best practices but we're also able to leverage our worldwide audience of over 170 million gamers at IGN.

At the end of Q1, 2018, we reached 500,000 paying subscribers to our subscription offering at Humble Bundle, which runs about $120 per year, representing 85% year-over-year subscriber growth. It is a fast growing and exciting business for us.

As we look forward, we're particularly excited by our Humble Publishing business in which we are funding and supporting indie game developers to bring their games to market. We are able to identify games we believe will succeed given our vantage point and provide meaningful marketing support for these games.

Most importantly, we are able to feature these games in our subscription service. In Q1 2018, we launched three new games, Staxel, Aegis Defenders, and Them's Fightin' Herds, with another 19 titles in development. Another key part of our effort to build the subscription revenues at Digital Media involves our Speedtest Intelligence service.

This is a data as a service, DaaS, offering which we developed a few years ago. Our customers range from mobile carriers to ISPs to device makers, all who receive real time analytics from us relating to the performance of fixed and wireless broadband services around the world.

In Q1 2018, we recorded 875 million consumer initiated tests in 30 terabytes of data, which formed the basis of the DaaS service. At the end of the quarter, we had over 200 contracts for data and marketing rights. And the total addressable market for Speedtest Intelligence is significant.

There are thousands of mobile operators and ISPs around the world, not to mention new device manufacturers and wireless infrastructure companies. In addition, our offering is expanding as we develop and add new analytics. Today, we primarily offer data relating to the performance and availability of networks.

We are now expanding into data about Internet applications such as video streaming, which we think will increase the universe of potential customers. From an M&A perspective, we view subscription businesses as playing a major role alongside our historical focus on content assets that lend themselves well to performance marketing and video.

Now let's shift to our cloud fax business and specifically our efforts in the healthcare market. As many of you know fax is fully embedded into healthcare as a secure and ubiquitous means of moving documents in a HIPAA-compliant fashion.

However, estimates indicate that more than 70% of the healthcare market still uses hardware, such as fax machines and multifunction devices and fax servers to send and receive faxes. In fact 95% of the faxes that our healthcare customers send are to non-eFax customers. We view them all as prospects.

We believe our cloud fax service, particularly our API offering, is the natural successor to these analog solutions. Machines and servers are expensive, they take up space, require maintenance and many are approaching end of life. Over the past few months we have been focused on ways to accelerate what we believe is the inevitable move to cloud fax.

First we have made a series of product enhancements tailored to the needs of our healthcare clients, which are primarily hospital systems, clinics, home care providers, insurance companies, SaaS players such as EHRs, and pharmacy and pharmacy benefit managers.

These new features should take our already strong set of healthcare offerings to a new level. We've also increased our investment in marketing and lead gens specifically targeting healthcare customers. We're even using the lead gen capabilities on the Digital Media side to assist in those efforts.

In addition, we have reorganized our inside sales group both in terms of inbound and outbound calling, as well as our field sales force to focus better on covering the healthcare market. Of course these are longer, sales cycle sometimes up to 18 months, yet, we've already seen very encouraging and positive results from the first quarter.

Overall, corporate fax revenues were up 6% in Q1 on an organic growth basis, driven in large part by growth in the healthcare customer segment. Corporate fax represents about 38% of overall fax revenues and healthcare represents about 40% of corporate fax.

We are steadily building a strong pipeline of customers with our pipeline increasing solid double digits versus a year ago. Take for example, the University of Alabama Health Systems, which is a top 15 medical provider in the country and has a very cumbersome paper-based workflow involving a fair amount of parsing, re-entry and manual upload.

Our cloud based digital fax solution answered their challenges and needs. At first, we were deployed in a couple of departments and with a positive experience; we are now being rolled out system wide. Now to the topic of privacy. As many of you know, GDPR goes into effect in the EU on May 25.

j2 has been working diligently for over a year to ensure our compliance with this new law designed to protect the rights and privacy of personal data for all individuals in the EU. We have organized our existing and ongoing data integrity efforts and personnel under a data protection officer.

The team is conducting data protection impact assessments, updating our customer agreements and privacy policies, and reviewing and enhancing our technical and organizational controls to meet the requirements of the GDPR.

Along with the enactment of the GDPR, the industry has also closely followed the privacy issues relating to Facebook, and the ensuing congressional hearings which have raised many questions about how user's personal information is being collected and used.

At j2, our Digital Media businesses place advertising based largely on contextual relevance, not behaviorally target advertising. Contextual targeting has become more important for global clients because it's based on targeting content rather than users.

At its core, our Digital Media business is intent-based driven by the authoritative editorial content we publish.

Our users come to us because they are looking to make important wallet or time-based decisions, ranging from what computer to buy for the family to determining if they are getting what they are paying for with their broadband provider, to what video game they should buy, to what is the best baby stroller for their newborn.

All of these instances create highly relevant environments for advertisers and do not require the use of behavioral data. In fact, for most of advertising history – advertising's history ads have been placed based on two factors, the general demos of the audience of the show or publication and the adjacent content.

With the advent of social media and real-time bidding, we saw advertising targeted at individuals based on profiles built on past behaviors and actions. What surrounded the ad was of less consequence.

If the privacy debate starts to swing the pendulum back, then businesses with strong respected domains and relevant contextual environments like ours should be beneficiaries.

To be clear, we're not advocating for new regulation to weaken interest-based advertising as there is always the risk of unintended harm, but we do view our position as relatively safe.

On the Cloud Services side, GDPR is actually generating interest in our fax offerings given the secure nature of our cloud fax capabilities and experience and ensuring our customers compliance with privacy laws like HIPAA. Finally, I just wanted to welcome two important new executives to j2.

Dan Stone has joined us as President of our Everyday Health division. Dan is a very well-respected and admired digital health and media executive. He was CEO of AccentHealth, which was (11:35) and recently had a successful exit, and CEO of Imaginova, an innovative digital-media business. He also has a ton of corporate development and M&A experience.

Ron Burr has joined us as General Manager of our Voice and Messaging business at Cloud Services. Ron has a tremendous amount of experience in the voice and messaging world, and has run some very important and successful companies. He was the CEO of CallFire, CEO of Layer2 Networks and Co-Founder and CTO of NetZero.

I'm proud of the talent that we're attracting to j2. And believe it reflects the strength of our portfolio and the opportunities in front of us. Now, let me hand this call to Scott..

Thanks, Vivek. As I mentioned in the beginning of the call, Q1 2018 set a couple of financial records for j2 including revenue for a first fiscal quarter, as well as an all-time high for free cash flow on a quarterly basis. This was driven by our robust and diversified set of brands.

A portion of which, you will see on slide 4 with a focus this past quarter on our subscription services such as Humble Bundle. I remind you that many of these brands have come into our portfolio only within the past five years. We ended the quarter with approximately $400 million of cash and investments.

Now, let's take a closer look at the summary financial results on slide 5. For Q1, 2018, j2 saw a 10% increase in revenue from Q1 2017 to $281 million even after taking into account the new ASC 606 revenue recognition rules, as well as the divestiture of assets in later 2017 that were not present in Q1 2018.

Adjusted for ASC 606, revenue growth would have been approximately 11%. Gross profit margin, which is a function of the relative mix of our 12 business units remained a robust 83.1%. EBITDA grew 3% to $102.7 million. I would note that the ASC 606 impact reduces EBITDA dollar for dollar for revenue not booked.

Finally, our adjusted EPS was $1.22 per share versus $1.19 per share for Q1 2017. This was positively impacted by a lower domestic tax rate, partially offset by the higher interest expense on our 6% notes issued last July as well as a higher share count. Let's take a close look at the margin profile in Q1 2018 which is detailed on slide 6.

EBITDA margin in the quarter was $36.6% in line with our budget and about 2.5 percentage points lower than Q1 2017. There are four primary reasons for this. First, as we've discussed ASC 606 accounting, accounted for almost one quarter of the change or 72 basis points.

Two, a greater mix of Media revenue versus Q1 2017 was responsible for approximately 60 basis points. Three, our previously discussed revenue headwinds in our backup business unit accounted for approximately 77 basis points. And finally, increased professional fees for our audit and GDPR work accounted for approximately 36 basis points.

A core tenet to our business model is the conversion of EBITDA to free cash flow. We had a record free cash flow in Q1 of 2018 producing more than $90 million, up 48% from Q1 of 2017.

Due to the seasonality of our earnings, strongest in Q4, and collection of our receivables, strongest in Q1, it is helpful to look at the trailing 12-month free cash flow, which was $294 million and a conversion rate of 63% of the trailing 12-month EBITDA.

As Vivek mentioned in his opening remarks, subscription revenues especially in our Digital Media business is an ongoing focus. Our total subscription revenue, as detailed on slide 8, hit an all-time high on a quarterly basis in Q1 of 2018 at $178.7 million.

Of this amount, $29.3 million of subscription revenue was from our Media group or approximately $120 million run rate. Total subscription revenue represented 64% of our total revenue.

Our Digital Media business saw a more than doubling in its subscription revenue from Q1 of 2017 despite the impact of ASC 606 on our (00:15:51) subscription revenue and the loss of Tea Leaves subscription revenue. Now let's turn to the two segments detailed (15:58) on slide 9.

The Cloud business grew revenue 6% to $149.5 million and saw its EBITDA decline on a reported basis to $73.8 million from $75.3 million in Q1, 2017.

In Q1, 2018, we've done a reclassification of certain corporate expenses as well as the results from our AMT subsidiary to conform with our audit financials that we now produce for our Cloud business unit pursuant to the 6% offering consummated in July of last year.

The impact of these adjustments are approximately $1 million in Q1, 2018 resulting in a pro forma EBITDA of $74.8 million, approximately flat with last year.

Current quarter results were further impacted by the loss of patent licensing revenue due to ASC 606 of approximately $800,000, as well as the anticipated revenue declines in backup which hit EBITDA dollar for dollar of approximately $2 million, and an expected lower flow through on our recently acquired VIPRE business of approximately $1 million.

Our Digital Media business grew revenue 16% to $131.2 million and produced $31.4 million of EBITDA, a 14% growth.

The EBITDA margin for the quarter was 24% and was impacted by approximately 1 percentage point for ASC 606 and 1 one further percentage point or $1.3 million for the reclassification of certain corporate expenses from j2 Global to the Digital Media segment.

Slide 10 presents our financial data in tabular format all of which we have discussed in the previous slides. Finally, we are reaffirming our annual guidance of revenues, EBITDA and adjusted non-GAAP EPS. As a reminder we estimate our 2018 revenues to be between $1.2 billion and $1.25 billion.

EBITDA to be between $480 million and $505 million, and adjusted non GAAP EPS of between $5.95 a share and $6.25 a share. Following our guidance slide are various metrics and reconciliations statements for the various non-GAAP measures to the nearest GAAP equivalent.

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

At this time, we will be conducting a question-and-answer session. Our first question is with Shyam Patil with SIG. Please proceed with your question..

Hey, guys. Good morning. Congrats and thanks for doing the call....

Good morning..

...in the morning. I had three questions.

First question, Vivek, you talked about the subscription business, I was wondering if you could talk just a little bit more about what additional opportunities you see to grow and expand that revenue stream (18:56) across kind of various verticals within Digital Media, and how the margin profile compares to the overall Digital Media segment?.

So let's start with the Humble business, which is a big driver of the subscription revenues that we saw in Q1.

So we're still early innings, I think in terms of unlocking the synergy values that exist between IGN and Humble Bundle in terms of leveraging the IGN audience to promote and to market as well as secure games, which is the key value proposition in the business.

So I think there are just a series of things that we'll be able to do that creates value between those two brands.

I think, more generally, when we think about subscription on the Media side, there's the consumer subscription opportunity, which is how do we leverage our audiences to a – to generate interest in subscription offerings, and therefore not need to spend as much on marketing as possibly other consumer subscription offerings, right? So from a margin profile, I think we have interesting margin profiles because we're not spending as much on CAC.

And then we also think about on the Speedtest side how do we create data and insight from our audiences that can be packaged into subscription businesses for companies, which is what we do with Speedtest Intelligence. And again it's kind of the exhaust that comes out of our offerings.

So in Speedtest case, it's a consumer proposition where you're doing speed testing but the aggregated data that comes from that activity forms the basis for a data subscription business. So those two models of trying to identify ways to develop and harvest subscription revenues are the two key drivers.

And the last thing I'll just say is from an M&A point of view, we're looking for assets like Humble that fit in any of the verticals we're in, whether that's a health vertical where we do have a small subscription business, it's about $7 million of revenue called the Mayo Clinic Diet, we'll look for more things that align with the different verticals that were in..

And I would just – I would just add to that, that in terms of the margin profile and there are different margins associated with each of those three streams. But in general they are going to be in line with our expectations for the medium margins in the mid-30s.

Some will be a little higher, some will be a little lower but in the aggregate they should be contributory to that mid-30s EBITDA margin..

Great. And my second question, Vivek, you put in place several new general managers for businesses that previously didn't have them.

I know it's early but what impact are you seeing on the business performance, as well as on the pipeline for M&A from these changes?.

Look, I think the talent we're bringing in, the first thing, I'll say is incredible talent. These are all CEOs. They run businesses. They run P&Ls. They understand how to deploy capital.

They have the mindset that we have here that is very sort of cost benefit driven and everything we do and every dollar that we spend, whether it's M&A or within the operating expenses of the business. So we found the right people. It is early.

Dan's early and Ron and some other folks are early but they bring a lot of focus, I'll use voice for instance, right. Our voice assets didn't have, I think, the definition that Ron is bringing in terms of what should the products be, what should the go-to-market be, what should our M&A profile be.

And that I think is going to be very helpful and we'll start to demonstrate real measurable results in the future. I really do, I think, they're focused on it and that kind of focus we believe will bring results. So we're excited for it. Another key position that we are eager to fill is the general manager for the fax business.

And from a profile point of view, given the success we're having in corporate fax particularly in the healthcare market, we'd like someone who understands that healthcare and corporate market really well. So, we'll organize and we are organizing our search around the opportunity that presents itself in that business..

Great. And just my last question, Vivek you made an interesting point about contextual targeting as it relates to a potential pendulum shift from GDPR.

The question is, do you see a potential share shift toward contextual based targeting and then your opinion will this dampen the trajectory that we've seen for the programmatic or TV market? Just curious on your kind of industry thoughts there..

Yeah. Look, I think at this stage it's all theoretical, right. So I do think that theoretically if interest-based advertising becomes, a, of less interest and, b, harder to do, because it could create a violation of a very serious and significant law. Then I do think that it will swing the pendulum back to contextual.

Look, the reality is that contextual advertising has always been valued, but it's premium priced and interest-based advertising has always been cheaper, and therefore considered more efficient.

I think what's going to end up happening though is that you'll have to give up that efficiency if you want the value that comes from placing an ad in valuable content where the content is the targeting parameter versus the user. So, look, I think it's theoretical we haven't seen anything yet, it's early.

The law hasn't gone into effect yet, it is only Europe, right. So for us Europe is relatively small, it's about 5% of our Media business. So even there if you start to see the benefit, I'm not so sure it will be meaningful enough in the context of our business.

Now, if GDPR becomes a global standard or inform (25:14) standards in the United States and other places, then it becomes a more meaningful driver and where if the theoretical swing of the pendulum happen, it would benefit us..

Great. Thank you, guys..

Thank you..

Our next question is with Walter Pritchard with Citi. Please proceed with your question..

Hi. Thanks. Two questions here. First, just on seasonality in the business, I'm wondering – it feels like Digital Media came in a little bit high this quarter. I know that's been a tough one to sort of pinpoint seasonality given M&A in prior periods and some volatility.

Can you talk about the better performance in Digital Media and why that didn't drive any and change to the year? And then just had one follow-up question..

Sure.

I think the seasonality generally holds as we discussed in the Q4 call, meaning that while there can be some shifting and arguably there was a little bit in Q1 and we do have some streams of revenue that don't follow precisely the same pattern of seasonality, the subscription business being one of them, an important driver, it's still heavily Q4 weighted.

So, those proportionalities we gave in the Q4 call where we talk about Q4 being 30-ish percent of the revenue for the year and Q1 being 20% still hold. So, there shouldn't be any material change in the view of the seasonality as it relates to the Digital Media business..

Great. And then just – we heard loud and clear, I think here the emphasis on subscription in Digital Media. I just want to get an update on two businesses. Backup, I think you talked about declining.

Can you talk about the prospects for that business leveling off and any right-sizing moves you're making there to help mitigate? And then on the healthcare side in Digital Media, are you seeing any stability in that? I know that vertical from a pharma and so forth perspective has been a little bit challenging..

Yeah. So, Walter, on the backup side, as I think Scott mentioned, we saw about $2 million of revenue and EBITDA decline and was (27:23) dollar for dollar in the backup business. And we haven't done any M&A in recent memory....

In a year..

...in a year. And that had to do with the fact that in the backup market the asset prices are very high. And so when we had done our initial building of the business in M&A, it was at a different time, and we were able to get good assets at attractive prices, pullout (27:47) cost.

We still have a $50-million EBITDA run rate business there, but the ability to add on to that from an M&A point of view has been challenged, and we haven't chosen to invest in marketing to try to grow revenues. And that is a choice and I think we've talked about this that we're looking at.

But right now it's sort of in a steady state sort of point of view, where we're seeing low single, mid-single digit declines in revenue as you are going to get some level of churn in these customers. So right now I think we're in the – we're sort of in a wait and see with the backup business.

On the healthcare side, I would say that there are a lot of good things going on. We feel good about the consumer part of the business. Traffic is up for the first time in a couple of years and so our initiatives around SCO and building content to drive traffic are paying off, the same on the professional side.

We also integrated Health eCareers very seamlessly and that's gone very well for us. And then on the pregnancy side, we're seeing a lot of progress. We had an astonishing sort of pick up in registrations. We're now on a run rate to register 72% of pregnancies in the United States this year, and then traditionally we do about half.

So that's actually been a very positive sign. And then of course with Dan Stone in place, he's got a real vision to how to expand in clinical settings, and in some other places in which we're not playing from a healthcare media point of view. So we're excited for that..

Great. Thank you..

Thank you..

Our next question is with James Breen with William Blair. Please proceed with your question..

Thanks for taking the question. Just a couple one maybe for Scott, just how you're thinking about the balance sheet here and the free cash flow generation continues to seem fairly strong.

And also, as you think about that relative some of the (29:40) subscription businesses, I know you said the margin profile is similar on the Media side, but as – how does the free cash flow profile look? Thanks..

Sure. So on the free cash flow, obviously, it was a very strong quarter. As we noted last quarter and I think it's becoming more so true as the Digital Media business becomes a equal in size or if not even somewhat larger share of j2's total revenue. So we do a lot of earnings in Q4, but because of the collection cycles, we get most of the cash in Q1.

So if you recall from last quarter, we talked about $20 million roughly of booked earnings that we did not yet collect. So you could almost take the $20 million off the $90 million and move it back into Q4 of 2017. Having said that, $70 million of free cash flow in the first fiscal quarter is also very strong.

It's about a 70 – high 60s-percent conversion rate of EBITDA. So that's why I pointed out in the remarks that I think really our fourth quarter trailing free cash flow conversion to EBITDA is probably a better metric.

So we are, because of the strength in Q1, tracking a little bit ahead of that $310 million free cash flow that we articulated last quarter, which would be consistent with the midpoint of our EBITDA guidance for the year.

As a result of that, even though we spent $100 million in Q1, so even though there were only a couple of M&A deals, they were larger in size on average, and we paid the dividend and we paid interest expense, we still ended the quarter with $400 million of cash and investments in the balance sheet. So we remain at very strong position.

We're looking obviously, to put that to work in additional M&A. We maintain the philosophy on the dividend. So you saw a dividend raise this quarter, so that that payout remains roughly in the 25% of expected free cash flow range for the year. At this point, pending any large deals I don't see the need to take on any further financing.

So our balance sheet remains stable at the $650 million of debt downstairs at the cloud level that's the high yield notes at 6%. And at the parent the 3.25% converts there a little over $400 million base amount..

Great. (31:54).

We do have the borrowing capacity just to be clear, if such a need would arise. But right now we're in a very good position..

Great. And then just on the Media segment back (32:06) around IGN and Humble Bundle obviously I think Verizon reported that they – their wireline traffic was up like 40% because of Fortnite.

Wondering how things like that sort of flow through into those Media businesses for you?.

Yeah. Look, gaming is hot, right. And so, participation levels are up. There's some high quality triple-A titles. It generates more traffic and generate more advertising and it generates interesting gameplay. So it's all good. And I think.

We've known this for a while but I think with the sort of widespread popularity of fortnight I think people are understanding the role that gaming plays within the entertainment industry and society in general, so it's all good. It's really good..

Great. Thank you..

Our next question is with Rishi Jaluria with D.A. Davidson. Please proceed with your question..

Hey, guys. Thanks for taking my questions. I appreciate all the detail around subscription revenue within Media. I guess kind of starting out with the Speedtest subscription business.

Is there a conversion element to growing this business where you're are taking existing traditional Speedtest customers and kind of moving them over to subscription, and if that is the case what does that sort of sales motion look like?.

Yeah. So the way that we operate the Speedtest Intelligence business today is, it is largely ISPs, mobile carriers, device makers, some cell tower companies that are subscribing to get real-time access to the data that we generate from Speedtesting activity that's taking place on the apps, on the native apps for Speedtest, or on Speedtest's website.

And so, they are using that data to do one of two things usually both. One is, network analytics to understand how their networks are performing relative to their competitors and then often, correlating that to churn and customer acquisition to really try to draw that business insight.

So that's really business intelligence and then, the other use case is for marketing where they look into the data and then, look to make advertising and marketing claims about being faster or being better or being advantage against their competition. So that's – that is the Speedtest Intelligence business.

I think, the driver for us right now from a growth point of view is we still have a relatively small share of the overall market. I mean, you're talking literally in the tens of thousands of providers of broadband and we have customers that number in the hundreds. So from a penetration of market point of view, it's still very early for us.

And the other thing I would also point out is that while right now what we offer is network performance. We are increasing the capability, establishing the capability to actually understand the performance of applications like Netflix which would open up a whole new universe of customers for us too.

So those are really the drivers and then there's always price. I mean I think we look you know we're still early in the – in the selling of subscription data, Data-as-a-Service. And so I think there's probably price optimizations that we can also focus on. I think – I think we can – we're important, we have a very high retention rate.

Once we get into a customer, we kind of become part of their analytics package and their executive dashboards..

Okay. Got it. Thanks Vivek. That's helpful.

And Scott I just wanted to kind of talk about the Cloud Services EBITDA margin side, I understand there's the impact from cloud backup and some ASC 606 and I think some revenue reclassification, but I think once we get through some of these headwinds and one-time factors how should we be thinking about the cloud margins going forward from here?.

Well, two things. First of all the down streaming of expenses from the parent is an ongoing, that's not a one-time. The ASC 606 will bleed off over the course of this year. So as we get into next year that will become a non-event but it will be somewhat of a drag for the balance of this year, but the corporate expenses will remain.

I think they're going to be stable in the $1 million to $1.25 million per quarter level that you've seen in these most recent quarters. You should take that into account. Then it really comes down to a mix of the underlying businesses. As we talked about in one of the earlier questions, you know we are seeing some headwinds on the backup business.

They have ameliorated somewhat from the previous quarter, but we are still anticipating and budgeting that there will be some downward trending over the balance of the year.

We are looking at ways to offset some of that decline in revenue, but our thesis right now is, it will still be very difficult to acquire in that space, and it will be very expensive to organically acquire customers.

So that's our current – not only it's in our budget when we said at the beginning of the year, but as we look and we roll the forecast forward, we maintain that. So I think that on an as adjusted basis, you're looking at margins that'll be right around 50% EBITDA.

And that's taking into account the ASC 606 impact, it's taking into account the down-streaming of corporate expenses, as well as our ongoing view on the backup business.

Now, the correct answer to that as it relates to over the four quarters will really be the mix of the five business units that make up that EBITDA margin because what we have going on, our business units that are in the low to mid 30s. And then we have business units that are upwards to high 50s.

So the mix of those businesses also a driver to the margin. But I think if you use around 50%, that's a good margin..

Got it. That – that's helpful.

And last one just for housekeeping, Scott did we see any material impact from currency on the reported numbers?.

No. They were – on a year-over-year basis, a bit of a benefit. I want to say they aided a little bit about – a little over 1 percentage point in growth year-over-year..

Got it. That's helpful. All right. Thanks guys..

Thank you..

Our next question is with Greg Burns with Sidoti & Company. Please proceed with your question..

Good morning. Can you just give us maybe a little bit of color about the two acquisitions you completed this quarter? They were decent sized, I just wanted to get a feel for how you just kind of fit it in to the respective verticals within your business.

And then maybe if you can give us a sense of is there any opportunities on the cloud side with VIPRE from a margin transformation angle, and with Lifescript from a kind of a revenue enhancement perspective? Thank you..

So I'll start with VIPRE. For us VIPRE was a strategic play to really become a more complete security offering. As you know we have the FuseMail business, which is e-mail security.

And to really be complete as an SMB offering, you need e-mail security, you need endpoint security which is what VIPRE offers and you need web security which is still a hole in our portfolio. And we might also add VPN in that as well.

And so VIPRE was an important step, certainly not in a – the final step but an important step in rounding out our security offerings. We also like it as a brand, so when the process of adopting that brand across the security suite of offerings and so we feel like we've got something that's got some strong recognition. The integration has gone well.

We're seeing some good sequential month-over-month growth in the VIPRE endpoint business itself. So we feel very good about the transaction. On Lifescript that was much smaller. That was really an asset deal where we were picking up some e-mail addresses. We were picking up some lead gen capability but really small. So just a tiny tuck-in..

Okay. And then you might have discussed this in the past but a little different presentation this quarter with the slide deck in terms of the detail and particularly with the cloud businesses.

Is there any reason for that or are you looking at the business holistically in a different way? How should we think about your view on the different segments of the business and their relative importance?.

Yeah. I think that as we outlined in the Q4 call, which was Vivek's first call. When he came in, how do we look at j2 and what is j2. And clearly from a reporting standpoint, we have these two categories of Digital Media and Cloud.

And I think, sometimes there's a little bit too much of the minutia in terms of details that were going on in the presentation that were – with respect to the Cloud business, but very different presentation for the Media business.

So when we sat down and we looked at how do we want to present j2 going forward, we looked at what is really the approach that is most effective to conveying the necessary information to the Street. And so, it's obviously a work in process. You saw sort of take one in Q4. This is take two and we are probably going to continue to evolve it.

So I think, the goal is to present the information from a financial standpoint as we report it which is in two segments, but then to dive down into any one of the categories you all are interested in, as it relates to the Q&A of the business..

Yeah..

So ask about any business unit, ask about any sub-contextual piece of it, but it's very hard as you get bigger and have more business units which one are you going to profile in a given quarter, which ones you are not going to profile..

Yeah. And I just think as a – from a formatting point of view, the old presentation was just a large laundry list of highlights and we felt that what would be more appropriate and helpful is focus on some larger themes which in this case obviously, was our healthcare fax initiatives and Media subscription and then GDPR and privacy.

And then ensure that we get all of the results out and get to Q&A as quickly as we can versus numbing you with five pages of bullets..

Yeah. Thank you..

Our next question is with Jon Tanwanteng with CJS Securities. Please proceed with your question..

Good morning, Vivek and Scott. Thanks for taking my questions.

Just looking at the fax business, is that mid-single digits growth rates sustainable given the level of penetration you're seeing in the market, especially in health care, the internal efforts to improve sales in lead gen and the regulatory changes you're seeing in things like GDPR? Thanks..

Yeah. Look, we're very excited for it. I mean I think the probably the most interesting statistic that we've come across is the one I mentioned in – at the outset which is 95% of the fax activity from eFax healthcare clients are going to non-eFax customers. That means that in our opinion all of that activity is on the table for us to go grab.

And the share that we have today is a $40-million business, that's just in the corporate piece. There's a portion of our "direct-to-customer" web fax business that is likely healthcare, but that's the smaller offices and the doctor's offices, but when we think about enterprise, hospital systems, PBMs and pharmacies that's the $40-million business.

The growth rate in that which is a solid double-digit growth rate we believe is sustainable and we just got started..

I think that's the key. Is that – while there have been historic products and services that cater to the healthcare space those are improving and being added to. Secondly, there is a concerted focus within the fax team. Third, we're actually going outbound as opposed to waiting for a hospital or some sort of a medical entity to contact us.

And fourth, I would say is (44:54) that having leadership – senior leadership that is familiar with this space on the Digital Media side provides a very good opportunity for the digital fax people to look and collaborate, possibly find leads. So that piece of it is very new.

And you shouldn't expect I think dramatic things over the next couple of quarters, if you take some time for these to rollout but I am (45:24) very enthusiastic about what I'm seeing. I believe there is more upside as we go into 2019 for us in this space given these elements that we brought together..

Great. Thanks for the color. And just how does the M&A landscape look like in terms of availability pipeline and evaluations that are out there I think you gave some good color on the backup space.

What about your other target markets?.

Yeah. Look, I think we're seeing interesting opportunities in every one of the business units in which we operate. We are focusing on deals more like VIPRE that bring some revenue scale, and do take some time.

We will be opportunistic, don't get me wrong we were with Lifescript for instance, where we will find smaller assets, but we're not trying to put, we're not focused on how many logos we have on the slide every quarter. We're really focused on things that are going to have a real impact on our business.

I would say just in terms of areas of focus, we have some holes in security we would like to fill. We continue to like the e-mail marketing space a lot. We have an asset in campaigner (46:28) that is growing nice organically, but isn't that the scale we would like it to be.

It's below $30 million of revenue and we'd like to be a bigger player in e-mail marketing.

We like the second line voice business, which is what we do at eVoice, where we help sole proprietors use their mobile phones and add a business line to it with auto attendant, we think just where the gig economy is going and sole proprietors and people being independent fits well with the offering we have there, and so we'd like to see our ability to bulk up there.

And then on the Media side, as I said subscription recurring revenue businesses that map nicely to our verticals. We always love intent driven businesses that drive our performance marketing business and then video, video is a space that you know if we can find assets at reasonable prices, we would go after that as well.

So there's a bunch of places we like, a bunch of places we're looking and a number of general managers that are intent and focused in those areas. And like anything else, like in M&A you just can't time the stuff right, and we are very disciplined. So we're not – we'll weigh things out, we hang around a lot of hoops and wait for the rebound..

Great. Thank you very much..

Our next question is with Charles Erlikh with Robert W. Baird. Please proceed with your question..

Yeah. Thanks, guys. Good morning.

I was hoping you could talk a little bit about Mashable and how that's been going for you and where you are in that integration, how that business has been performing since the acquisition, maybe you could talk a little bit about the plan and the vision for that asset?.

Yeah. So it's still early days, it's still a drag from an EBITDA point of view, but we imply – that was all planned and anticipated, right. This was an asset, which was publicly reported that was losing a fair amount of money.

And so there's been cost reduction in synergy exercise and now we're working those through the system and we're nearly complete, but there's some still things that we need to do to just put the business in the right sort of financial footing.

And then as we look forward, the big opportunity we see with Mashable is really on the performance marketing side.

So when you look at a lot of our tech properties, we do a very good job of collecting commissions by sending our audiences to online retailers because we write product reviews or we create lists like the best blank, right (49:26) the best VPN or the best laptop or the best wireless network, that construct an editorial approach is one that we're beginning to implement.

And I would say we're beginning, we're still early to implement at Mashable, but Mashable has frankly the best domain authority and brand of our content businesses, right. So domain authority being quite literally a technical term which is how the search engines view the authority of the brand, it's the highest in the company.

So contents that we produce on that brand will rank well, and if we produce the right commerce oriented content like I described, it will rank well in search, and we feel optimistic about the revenues that it will drive. So everything's on plan. It's still you in optimization mode.

And I also think it does have a halo effect with the rest of our tech media properties where I think we're now getting RFPs, request for proposals, from advertisers that we used – we didn't always get in the past, right, because I think, it's just considered – I think it's considered a pretty high – it's the sizzle brand, right.

And so you get invited to certain opportunities now that we weren't getting invited to before that has a benefit to the overall tech portfolio..

Got it. Thanks for the color, Vivek..

Sure. Thanks..

Our next question is with Matthew Wells with Citi. Please proceed with your question..

I was just dialing in for Walter. We're all set. Thank you. (50:39).

This seems to be the end of our question-and-answer session. And I would like to turn the call back over to Scott Turicchi for closing remarks..

Great. Thank you very much. We appreciate you all listening in this morning to our Q1 earnings call. We put out a release a couple of days ago announcing a number of conferences that I will be at over the next five to six weeks, so check that to see if you'll be in any of those cities who would like to schedule a one-on-one.

Obviously, we're available for additional conversation just call or e-mail us. And our next scheduled earnings call will be in early August. Thank you..

Thank you..

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