Scott Turicchi - President & CFO Vivek Shah - CEO.

James Breen - William Blair & Co. LLC Shyam Patil - Susquehanna International Group, LLP William Power - Robert W. Baird Walter Pritchard - Citigroup Global Markets, Inc. Rishi Jaluria - D. A. Davidson & Co. Jonathan Tanwanteng - CJS Securities, Inc. Greg Burns - Sidoti & Co. LLC.

Welcome to j2 Global Second Quarter Earnings Call. I am Donna and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. I would now turn the call over to Scott Turicchi, President and CFO of j2 Global.

Please go ahead, sir..

Thank you. Good morning and welcome to the j2 Global investor conference call for Q2 2018. As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah.

We're very pleased with the second quarter and first half performance of j2, most notably the strong free cash flow generation, improving margins and better than expected EPS notwithstanding some revenue softness. The Board is approved an increase in the quarterly dividend by $0.01 to $0.4250 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 we complete the formal the presentation, we'll conduct a Q&A session.

The operator will instruct you at that time regarding the procedures for asking a question. However, you may email us questions to any time at nvestor@j2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements.

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

Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we have included as part of the slide show over the webcast.

We refer you to discussions and those documents regarding Safe Harbor language as well as forward-looking statements. Now, let me turn the call over to the Vivek for his comments..

Thank you, Scott. Good morning, everyone. We are pleased to report record revenues, adjusted EBITDA and EPS for the second quarter. We'll get into more details about our results shortly, but as I have done in our last two calls, and that I look to continue to do in future calls, is to focus my remarks on largest themes across the J2 portfolio.

So today, I'd like to cover three topics. First, I'll share some of the dynamics we're seeing inside of our advertising revenue stream in the digital media segment. Second, I'll talk about how our Mosaic transaction relates to our larger vision for Ookla.

And finally, I'll describe a bit more about how our new leadership team is taking shape and why we're so excited about the talent we're bringing into the company.

While a record, our revenues were a bit soft in the quarter, pretty much all of that softness was within our advertising revenues, and as a result, we basically gave back the revenue surplus we enjoyed in Q1. So, through the first half of the year, we're essentially on target. As many of you, there are two components to our advertising revenues.

The display and video business and the performance marketing business. Our display and video revenues consist mostly of banner and video adds, that we sell on a CPM, cost per 1,000 impressions basis. Over the last 12 months, display and video represented about $250 million in revenue, across our tech, gaming and health properties.

We have sales forces who pitch programs and respond to request for proposals from advertisers and their agencies. When we're successful, we receive insertion orders for ad programs directly from agencies. We also generate display and video revenues through programmatic selling of ads, where it's an automated process.

On the performance marketing side, we generated revenues by receiving commissions on e-commerce transaction that result from users clicking on buy now buttons on our sites and then directed to the merchants' site to conclude the transaction.

We also received revenues for leads that we generate for enterprise vendors and in some instances, we get paid to drive clicks decline sites. Over the last 12 months, performance marketing represented about $200 million in revenue. Our performance marketing business is what really distinguishes us from many digital publishers.

Sometime ago, we understood the shifts taking place in the CPM-based market and focused our evolution towards being able to deliver ROI based solutions. And that' s the key distinguishing factor between display and performance marketing. The ladder is entirely about outcomes.

You are often driving discrete sales and transactions, the display and video business however, often has a branding awareness or favorability goal attached to it.

Also, another difference, is that the display and video businesses often pretty lumpy, you can see some pretty large fluctuations, quarter-to-quarter, so there are some timing issues at play. But we also believe and that something we've talked about, that the display market has some headwinds.

First, the move to programmatic has created some pricing pressure, as programmatic CPMs are generally lower. Second, the social platforms have created a lot of inventory that eats up large portions of advertiser budgets.

While there are vertical publishers and therefore had some strong endemic books of business, we're not entirely immune to the emerging oligopoly in the advertising market.

Third, clients are demanding measurable performance in ROI, which is why we embarked in the major transition in our digital media business to be able to deliver on those market needs. Finally, we still haven't seen a rebound in the pharma ad market and everyday health represents nearly half of all of the display revenues in the digital media segment.

This is all to say that near-term, we view our overall advertising business as a mid to high single-digit grower with performance marketing driving all of the growth. Of course, any improvement in the pharma category would represent upside as would any swing of the pendulum back, to premium vertical sites.

We're not relying on it and see our growth in performance marketing and digital media segment subscriptions which we discussed at length last quarter, driving overall digital media segment growth along with our M&A program. The media subscription businesses are right now on a run rate of a $130 million in annual revenues, which is remarkable.

Now, let me shift at Ookla. As you know, we're very bullish on our Ookla business, and have a vision for being the single source of truth, in global standard, in the broadband industry which includes mobile carriers, ISPs, device makers, tower companies, governments ASPs and content providers.

We received 10 million global tests per day across all of our speed tests platforms. Our website, mobile apps, browser plug-ins and smart TVs which we translate into vital research and analytics for enterprise clients as they can better understand the state of their networks.

These real-world tests were at the core of our value proposition and we recently acquired Mosaic to enhance are offering by providing visualization and mapping solutions that we lack. What Mosaic has done is used public data sources and client provided data, the populated mapping solutions and Geospatial Analysis Engine.

What we can now do is leverage our speed test data with their mapping solutions to provide our enterprise clients more value and new products to attach to their contracts.

Last thing Mosaic has also developed some early expertise in 5G, internet of things and smart city analytics which we think will figure prominently down the road, as we see a greater variety of wireless connected devices worldwide.

We have a nice pipeline of acquisitions that we believe should allow us to expand our capabilities and product portfolio. Today, Ookla Services, the performance market that is data and insight related to the quality of fixed-and mobile networks.

We believe we have a ton of runway in that market, but we also have ambition to penetrate the coverage market which is why Mosaic made sense for us as well as the roaming and tower markets, application metrics and customer experience and other areas in high speed Internet. Now, let me talk about our leadership organization.

Much has changed since the beginning of the year. As you know, we promoted two of our top executives, Harmeet Singh and Steve Horovitz into Divisional President roles overseeing cloud services and Ziff Davis respectively. We also hired Dan Stone in April to be the President of Everyday Health.

All of our portfolio businesses report into Harmeet, Steve or Dan. While we've had General Managers in charge of our media units, the cloud services side does not always have business unit general managers. Now, all five of our cloud services businesses digital fax, backup, voice, email marketing and security have general managers at the helm.

With that, we now have strong leaders with full P&L responsibility and oversight of their products, strategy, engineering and development. It makes all of the difference to have that kind of focus and accountability.

John Lumberyard [ph] who has an incredible healthcare background having held senior roles at Demand Force, Orion Health, Zincs Health and All Scripts has hit the ground running in the Fax Unit. He's taken all the great work that was done in Q1 to enhance our position in the healthcare market and accelerated development, marketing and sales.

We closed 42 enterprise healthcare deals in the quarter, deployed a new restful API which integrates into healthcare EMR and EHRs and grew the overall digital fax business by 4.5% a good portion of which was organic. This was probably the best organic growth quarter for cloud factor in a very, very long time.

On the voice side, Ron Burr, having been CEO of CallFire, Layer II and the founder of NetZero immediately identified the opportunity to acquire Line 2 to fundamentally improve our eVoice offering.

The second line business allows small businesses and sole proprietors to add a second phone number to their mobile device as well as place or receive phone calls from a laptop. There is no hardware and it allows the small businesses to cost effectively and conveniently juggle personal and business phones and text messages.

With Line 2, we're now transitioning eVoice off of a legacy platform to a modern one that allows for advanced mobile features. Line 2 also brings a stronger mobile app and app development skills to match well with eVoice's web-based product.

Before Ron, our voice business was frankly an orphan that was essentially housed inside of our digital fax unit. It deserved real leadership to $65 million run rate business and we believe Ron will continue to drive smart thinking and strategy that will translate into growth.

Several weeks ago, we were pleased to welcome Tim Smith to the company, who is overseeing our cloud backlog unit. Tim has spent the last 15 years at Del EMC and Western Digital and before that was in the tech investment banking group at XCFB. He has the perfect background and skill set to tackle the situation at back up.

Finally, we promoted one of our brightest and most dynamic executed, Seamus Eagan into the General Manager role in our email marketing unit. We're excited for the business and its potential under Seamus' leadership. Now, let me pass the call on to Scott..

Thanks, Vivek. Q2, 2018 set a variety of financial records for j2 including revenue, EBITDA and free cash flow for a second fiscal quarter.

These results were driven by several areas of strength in our portfolio of companies, notably the digital fax business, performance-based marketing, and our media subscription businesses as well as sequential improvement in our EBITDA margins. We ended the quarter with approximately $428 million in cash in investments.

Now let's review the summary financial results, beginning on slide four.

For Q2, 2018, J2 saw 5.4% increase in revenue from Q2, 2017 to $288 million, even after taking into account the ASC-606 revenue recognition rules, which impacted us by $2.8 million in the quarter as well as the divestiture of assets later in 2017 that were present in Q2, 2017 of approximately $11.8 million.

Adjusted for these, revenue growth would have been 11.2%. Gross profit margin which is a function of the relative mix of our 12 business units remained strong at 83.7%, up from 83.1% in Q1, 2018. We also saw EBITDA grow by 3% to $113.5 million.

I would note that the ASC-606 impact of $2.8 million also reduces EBITDA dollar-for-dollar and penalizes our EBITDA margin by approximately 1 percentage point.

Finally, adjusted EPS was $1.50 per share versus $1.33 per share for Q2, 2017, positively impacted by lower domestic tax rates partially offset by higher interest expense of 6% notes issued last July and a higher share count.

I would note that after further study the tax reform act of 2017, we now believe that our tax rate for the year will be between 20% and 22% reduced from the original estimation of 23% to 25%. At midpoint of our guidance range this has an impact of approximately $0.21 per share and as a result, we are raising our non-GAAP EPS range by a like amount.

So, let's take a closer close look at the EBITDA margin profile in Q2, 2018. The EBITDA margin in Q2, 2018 was 39.4% ahead of our budget and about 1 percentage point lower in Q2, 2017. ASC-606 as I just mentioned accounted for almost all the differential in margin this quarter versus Q2, 2017. In addition, as we discussed last quarter.

Two newer acquisitions Viper and Mashable continue to be in the process of integration and also produce a slight drag on our overall EBITDA margin. As you know, a core tenant of our business model is the conversion of EBITDA to free cash flow.

Turning to slide five, you can see we had a record free cash flow in a second fiscal quarter, producing $87 million, up 22.4% from Q2, 2017. While there can be influences on any given quarter due to the timing of tax payments, collection of receivables spends on CapEx and timing of payables.

It is helpful to look at the trailing 12-months free cash flow which was $309.9 million and a conversion of 66% of the trailing 12-months EBITDA. As Vivek mentioned in his opening remarks, subscription revenues especially in our digital media business remain an ongoing focus.

Our total subscription revenue is detailed in slide six in all-time quarterly high in Q2 at a $181.5 million, of this amount, $31.3 million of subscription revenue was from our Media Group and is on an approximately $130 million run-rate. Total subscription revenue represented 63% of j2's total revenue for the quarter.

Our Digital Media business saw a more than doubling in subscription revenue from Q2, 2017 despite the impact of ASC-606 in our Ookla subscription revenue. Now, let's turn to the two segments as outlined on slide seven. The cloud business grew 3.9% to $150.3 million.

We saw a real strength in the fax business, which grew 4.5% year-over-year, a good chunk of it organic driven by our healthcare initiative. I can't remember a quarter of organic growth of stronger fax, it's been many years. EBITDA declined slightly on a reported basis to $75.6 million from $77 million in Q2, 2017.

However, as we noted last quarter, we've done a reclassification of certain corporate expenses to conform with our audit financials for the cloud business which we furnished to our 6% noteholders. The impact of these adjustments is $1.2 million in Q2, 2018 resulting in a pro forma EBITDA of $76.9 million approximately flat with last year.

In addition, current quarter results of both revenue and EBITDA will also impacted by the loss of patent licensing revenue due to ASC-606 of approximately $800,000. EBITDA margins expanded by 2 percentage points from Q1 2018 to 51.4% and 49.4%.

Our media business grew revenue 7.1% to $137.6 million or 16.6% after taking into account that divestiture of Cambridge and Tea Leaves and produce $39.8 million of EBITDA and 8% growth.

EBITDA margin for the quarter was 29% and was impacted by approximately 1 percentage point for ASC-606 or $2 million and slightly less than 1 percentage point for reclassification from j2 of certain corporate expenses of $1.2 million. Slide eight presents our financial data in tabular format showing the year-over-year change for the various results.

Finally, we reaffirm our annual guidance of revenues, EBITDA and raise our adjusted non-GAAP EPS due primarily to our lower expected tax rate.

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 are increasing our adjusted non-GAAP EPS range to between $6.16 a share and $6.46 a share.

Following our guidance slide, are various metrics and reconciliation 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 questions..

Thank you. [Operator Instructions] Our first question is coming from James Breen of William Blair. Please go ahead..

So, the mature margins will be in the media space as you get through some of these energies going forward. And then, how you anticipate sort of - sorry, and how you anticipate some of the revenue mix in the Media Group going forward as well? Thanks..

Jim. We missed the first part of your question. You weren't live for some reason.

So, can you restate the first part of your question?.

Just where you think margins go and media is you can get through some of this integration with some of the things you bought and where the margins could be there longer term. And then what the advertising revenue mix or subscription and advertising revenue mix will be in media? Thanks..

Yeah, I think we will, pleased with where the margins are going in digital media as you know. Through the process of integration of Everyday Health, they came in a little bit last year, we have a target margin of approximately 35% EBITDA for the digital media business consolidated. As you know, Q4 is seasonally rich and Q1 and seasonally live.

We're tracking on the margins, we are for the first two quarters of the year. And I'm pleased to say that Everyday Health in particular, is showing very strong improvement, it's EBITDA margin up 27% year-over-year.

So, I think on the margins, you should look at mid-30s, we might be a tick under that this year, as you know, we have Mashable and Viper on the cloud side, which is different question. But that are still in the process of being integrated. But I think, if you look at a year or so about 35% EBITDA margin.

In terms of the mix of the business, right now in digital media, it's roughly 40% display in video, 40% performance-based marketing and about 20% subscription.

I expect there to be some moderation in that overtime with the rate at which subscription is growing, it probably comes a slightly larger percentage, as does performance-based marketing, because those are both demonstrating double digit growth.

So I think if we look at a year and obviously dissolve qualified by what we may buy in the future and what its revenue streams may be, but if you took the current book of business and just rolled it forward, you're going to see that subscription piece creep up and the performance piece creep up and display go down a little bit as a percentage of the totality..

Great. Thanks. And then just a follow-up on the cash flow very strong this quarter. Anything in particular that's leading to that and then how did you see that trending as we move through the back half of the year? Thanks..

So, it helps having a lower tax rate means we have less estimated tax payments and less tax payments to do. So, doing the deeper dive on the Tax Reform Act and being able to look at some of the nuances there that ended up accruing to our benefit, helps not only this year but going forward.

As I mentioned in the prepared remarks, there are timing differences related to things like collection of receivables and payables, so I would not look at the 76%, 77%, flow through of EBITDA to free cash flow as normative. I think the trailing 12 months is more representative in the 65% to 66% range.

I would expect a lower dollar amount of free cash flow in Q3, because it is also the quarter in which made our bond payments.

So, we have both the interest on in the convertible securities as well as the 6% notes we have in interest payment coming up in Q3, so that will knock down the Q3 free cash flow somewhat, then in should begin to pick up in Q4 and then accelerate into Q1 of 2019.

But look at the trailing 12, look at that $310 million, as you recall even though we don't formally guide the free cash flow, the midpoint of our range in guidance implies the $310 million number, we're already done on a trailing basis, with upside as we look to the back half for the year.

So, I expect this to, do better than the 3.10 for full year 2018..

Great, thanks..

Thank you. Our next question is coming from Shyam Patil of SIG. Please go ahead..

Thanks, guys. Good morning. I had a few questions. The first one Vivek, just on the media business. The pressures you outlined I guess had kind of been in this space for a while, just curious why you think they are impacting the business now and kind of how do you think about the playbook to deal with these pressures going forward..

So, yes, look, those aren't new, I thought it was just helpful to reiterate them, those are things we have been dealing with for a while.

Look, I have been around the CPM add business for 24 years, so I have kind of grown accustomed to the choppiness and fluctuations that are inherent in the add business and so I don't view this any differently, it doesn't really alarm me.

I think in many ways what we have been doing over the last five years, building our performance marketing business and now more recently building our subscription business has always been in the context of understanding some of these headwinds in the display and video marketplace.

So, I kind of look at Q2 a little bit as some combination of just kind of getting back to lead we had in the first half - in the first quarter. So, we're kind of getting back to where we want to be and where need to be.

And watching these trends, look we think long-term and we've said this before, we don't view the display portion of the business as the driver of growth for digital media. It really is the performance marketing and subscription parts of the business.

So, not a surprise for us, we have known these issues, I don't think they manifest differently in Q2 per se, I just think we have seen some choppiness and at this level of dollars, it's not uncommon for a couple of campaigns to either start early or start late.

And the other thing I'll just point out, is half of the display business is Everyday Health and the comps for Everyday Health are different, relative to last year and as Scott pointed out, we have been in our shrink to grow with Everyday Health. So, the EBITDA margins are up 27% year-over-year even though the display revenues are down..

Got it, thank you. And just a follow-up. Scott you reiterated the guidance and you talked about kind of the range for EPS.

But just in terms of revenue and EBITDA, how are you going to thinking about the annual range at this point, are you - are you still comfortable with the midpoint or would you direct it in any particular direction within the range..

I'll make couple of comments. First, I am very comfortable on all three of the ranges, meaning revenues, EBITDA and non-GAAP earnings per share. We're comfortably within the range. And I think that coming out of Q1 if you would have asked, I would have said, look, we're tracking ahead of the midpoint of the range for all three.

I think to be a little bit cautious as the CFO. So, what I think there is some good momentum in the back half for the year. If you press me today, let's say on the revenue that probably be a little bit under the midpoint. EBITDA, I think very close if not at the midpoint and in terms of EPS, probably above the midpoint. Even of the revised range..

Good. Thank you, guys..

Thank you..

Thank you. Our next question is coming from Will Power from Robert W. Baird.

Thank you, Yeah, just a couple of quick questions. Vivek, I think you had indicated you expected digital media to continue to grow mid to high single digits. And I just wanted to confirm is that the organic expectation. I'm just trying to understand the key drivers of that given - the weaker results here in Q2.

And, what I think it's probably organic growth kind of blow that level. What gives you similar display challenges you're facing, what gets your back to that kind of higher single-digit range..

I think, we're more, I would say to your point. I think, we're more on the mid-single digit organic growth, right. So, I think again, what drives back these is really strong double-digit growth in the performance marketing business organic, as well as in the subscription business and not expecting a lot out of display.

Now again, if you want a path display, we do view the Ziff Davis properties, the tech and gaming properties has been sort of lower single-digit display growers whereas the Everyday Health piece really, again because of the comp, but also we haven't yet seen a return of the pharma ad market, we think we will, but we haven't seen that on the consumer side, on the DTC side.

So, we're going to continue to stay conservative there. So, I would just amend the state and say, where we might have been mid to high single-digit. I think right now, we're more comfortable in sort of the mid-single digit range..

Okay. And I guess, as a related question, as you see the shift within digital media, from display to performance marketing, how does that impact margins.

What is the margin profile display look like versus the other two growth areas?.

Yeah, there is a fair consistency amongst them. So, the high incremental flow through that you would see, there is no traffic acquisition costs associated with either really display or performance marketing. So, those have sort of reasonable characteristics. The subscription side is showing the same sort of margin.

We often think about - are their points where we invest more in marketing to accelerate subscriber growth, it's something we think about, and just something we're going to watch where if we think we can get great ROI, we'll do that.

But right now, there is everything is sort of narrowing to the same band of EBITDA margins across the difference pieces of the media business..

Okay. Fair. Thank you..

Thank you. Our next question is coming from Walter Pritchard of Citi.

Hi. I guess, Vivek following up on the question from earlier in the year or from earlier in the call here. It feels like these headwinds have been there. It seems like you sort of skirted the headwinds acknowledging some of the issues in the healthcare market.

Why do you think now, it's impacting your revenue on the DM side and then just had a follow-up with Scott?.

Walter, I think it's hard to tease out, how much of this is the manifestation of the pressures that have been there now for a while and how much of this is simply just seasonality and choppiness. Remember in the insertion order piece of the display business, which is a large chuck of our display business. It's order-by-order.

And so, if orders get delayed or if they get canceled and if there are shifts, you can see those kinds of impacts. So, again, when we look at it in total, sometimes it's hard with display advertising to measure at five quarter, right.

So, I think we're looking at from a first half point of view and say OK, we're sort of even and really and as you know, it's the second half that matters a lot for this business and how the holiday seasons is going to shake out in Q4.

So again, I think I wouldn't say this is the direct manifestation, I do think though, it's what keeps it from being the kind of grower that we see performance marketing and subscriptions being..

Great. And then, I'm not sure to direct this one to, but either one of you, on the M&A front, it seems like you have, to some degree all of your GMs in place at this point and your ability to kind of discretely do M&A in those categories is may be improved.

I'm wondering if that logic is valid and how we should think about M&A, I guess, especially on the cloud side relative to having these PM's now very well aligned..

So, you're absolutely right. So, I think having a dozen general managers in place across our portfolio is going to directly translate into more M&A activity and we're seeing it in the pipeline. We closed three deals since in this quarter. So, we're now five deals I think in the last..

45 days..

45 days. Just smaller, but again I think they each do different things and I talked about Mosaic and I talked about Line 2. They are very important I think in the context of where we want to take these businesses. So, we are seeing pretty much a lot of interesting opportunities in every one of our segments.

The only two in every one of our business units, the only two that we're not seeing attractive deals are back up and in fax. But as Scott pointed out and as I pointed out, the organic characteristics of Cloud Fax are pretty compelling. And our focus on the healthcare industry is clearly paying off and it's still early.

So, we look at the strength of that and saying okay. The absence of M&A in the Cloud Fax space we can deal with, because we see a fair amount of organic opportunity. So now we're very bullish. I think you're going to see some interesting activity from us in the second half of the year..

Great. Thanks a lot..

Thank you. Our next question is coming from Rishi Jaluria of D.A. Davidson. Please go ahead..

Hey guys. Thanks for taking my questions. Vivek I wanted to share with you, can you expand a little bit on your commentary in terms of weaker pharma ad sales.

Is this a macro issue related to budgets and drug pricing or is it a matter of missing out on pharma advertising budgets?.

I think it's the first. And there is probably some measure of the latter as we gone through some organizational changes, changed our sales leadership and some of our key marketing folks.

But I think what's happening in pharma still, is that the industry because of self-imposed drug caps is just pulling back on the kind of marketing spending that they're doing. And so, it affects everyone in the space and we certainly hear that in the marketplace.

Now, I do think that the drug pipeline is interesting over the next 12 to 24 months, but I think will unlock dollars. And I do think there is a beginning of a movement in the pharma - in the DTC pharma world, to shift from traditional venues, television and print which still accounts for a vast majority of pharma spend into digital.

So, we do believe from a secular point of view, from sort of a high-level long-term point of view that pharma advertising spend will return and will start to shift from traditional to digital platforms. It's also one of the spaces that we like that the social media property doesn't really compete for pharma from a regulatory point of view.

You can't run pharma advertising inside of user generated content. And so, it's the one ad category that is somewhat protected from the --. And so that's an interesting dynamic, but right now, I do think, I think it's market and probably some measure of some of the sales force changes that we've made.

So, we'll have a better sense I think in this quarter as we go through what are upfront. So, in the pharma business a fair amount of stuff gets done upfront. So, the upfronts will I think be telling for us on a go forward basis..

Okay, thanks. And Vivek just to be clear, you're not expecting that rebound this year. It's more of kind of overtime you expect things to kind a -.

That's right..

Okay perfect..

That's right..

And Scott, I wanted to touch on the digital media margins. I know you've talked a little bit about this in the prepared remarks, but maybe on the EBITDA margin on the media side were relatively flat, Op margins were down.

Can you just help us understand the moving parts here? I understand Mashable is a little bit more dilutive, but also Q2 last year did include Tea Leaves, which was a money of losing business. And then maybe what sort of impact the 606 have been and one more follow, and I'll jump off..

Sure. So, I think you actually hit all the pieces. So, if you look at this year, we have the benefit of removing the low margin businesses of Cambridge and Tea Leaves. But to some extent that's replaced by Mashable, which is still in the process of integration and is still a drag on our overall media margins.

And on top of that you have in the quarter about $2 million primarily affecting the Ookla business in digital media that relates to ASC-606 that's 2 million hit to revenue and to EBITDA, so it flows through at a 100%.

So, I think when you put those pieces together you'll see that the margins we look more to EBITDA margins than the operating income because as you know there's a fair amount that flows through in depreciation amortization, I'd say on the core depreciation meaning the non-not the amort of intangibles, we have had in the last couple of years some higher CapEx in digital media so that is flowing through in what I'd call the hard depreciation component as opposed to the soft component.

But I would say mostly the ASC-606 and Mashable in terms of normalizing the margins..

That's helpful and then….

Also remember I don't know if you're looking at a for a post allocation because if you look at it year-over-year remember we conformed this year the accounting where we're pushing down from the parent certain cost of both the cloud and the media segment in the quarter that was roughly $1.2 million for each but when you look at the prior year there's nothing being pushed down.

It's an apples to oranges comparison..

Margins were up year-over-year..

EBITDA margins were up..

Okay, got it..

So just keep that so there's three moving pieces allocations which you can choose the pro forma in or not ASC-606 and Mashable..

Okay. Perfect. And just on the topic of ASC-606, can you remind us which specific businesses are impacted on the rev rec side.

I know you've mentioned Ookla subscription in the past you've mentioned the licensing in IT income are there any other segments impacted from 606 on the rev rec side and then are there any changes when it comes to operating expenses?.

No, you hit the revs correctly so just to review in the quarter $2 million for digital media all of that coming out of Ookla on the cloud side about 800,000 all of that coming out of what we used to call patent licensing revenue and no material change or benefit in terms of ASC-606 as it relates to expenses..

Okay, perfect. That's helpful..

ASC-606 revs are punitive and that it's taking away revenue that was very high margin..

That makes sense.

And then I guess last was there any currently impact in the quarter or should we be thinking about currency for the back half of the year?.

No, in fact we looked at it, FX was really immaterial. We look at Q2 2017, Q2 2018 as you know that mostly impacts the cloud business given its diversity of revenue streams overseas and currencies.

Most of which are still tethered to the UK pound, the Euro, then it kind of falls off the Canadian dollar, the Aussie dollar and there are a few other currencies in there, but no I don't think FX is going to be a big issue one way or the other..

Got it. Right, thanks..

Thank you. Our next question is coming from Greg MacDowell of JMP Securities. Please go ahead..

Hi guys. It's Pete Larry [ph] in for Greg.

Can you give me some color on the M&A landscape just in terms of what you're seeing in terms of valuations, are valuations on the small side being impacted there's some impact as much as some of the heightened valuations we're seeing on in large tech companies and then just the second part of that question can you remind us about how you think about investing in up and down markets and maintaining discipline.

Thanks..

Sure. So, as we've talked about before I think you see a lot of headline deals out there, we can name some names publicly traded companies there are in the midst of trading and you see the multiples at which they're trading at.

And I would say that for anything that is upsized, meaning hundreds and millions of dollars in revenue certainly those that are a publicly traded. What you see going on in the marketplace either equity valuation wise or actual trade that have taken place for M&A, those tend to be elevated.

We have participated in varying degrees to some of these deals that have cleared the market. And it is not uncommon that we are 20%, 30%, even 40% lower than where the deal actually clears. Now as you know we don't premise j2 on doing large transactions.

We want to be in that deal flow every now and again and Everyday Health comes along, but for the most part whether the multiples are a floppy valuation or not that's generally not where our focus is. It is the case that as you start to move downstream, there is less correlation with the market dynamics and the multiples that we pay.

So, I would say that for the most part we do the tuck-in deals.

I wouldn't say, they are completely immune, but I would say they are more or less immune from the market dynamics, because often there are other drivers that are influencing the sale of the assets, and there is intangible benefits that the sellers want beyond just the economic dollars, it may be an asset in a portfolio that isn't performing to the PE or VC's liking.

And so, for them to be able to get it out of their portfolio of stock allocating time and money to it, is a real benefit, beyond just what's the highest bid, and we've won deals like that, where we're not necessarily the highest bidder, we're still in obtain market multiples, but we are bringing in intangible value to the equity owners..

And I think that's an important point that Scott makes and we're seeing more volumes as deals, where we think we're uniquely positioned to extract value.

Where we've got a platform, we have got an existing business, we've got an approach that is unique and allows us to view this asset differently than the marketplace, we're seeing more of those and that's why - the sweet spot. Now the business is that are rocket ships in it themselves.

So are demonstrating growth and consistent growth and improving margins.

Those are harder, right, because those are the ones that have attach to them very premium multiple, so we are staying from that and that's what and its starts referring to, but we are seeing more of that pharma category where we believe we've got an approach that is unique to us to create value on the revenue side, on the cost side.

and those are increasing. And I think part of that back to Walters point, is having these dozen General Managers each with a vision and a mindset and approach to it, consistent generally but bringing that focus line two was a great example of that, we wouldn't have even thought of that, if we work for Ron. So, you're going to see more of that..

And I think it's correct, so just sort of a wrap it all up. the key and I think to believe the goal and this is the function of our structure of the parent is to message that discipline to the presidents and the general managers and their various M&A, people within the two segments.

And to add to that checks and balances, because this is not about in any given timeframe, doing X or Y amount of deals or spending Z amount of capital. it's really over an extended period of time putting like we did in the last five years, another $1.5 billion to work.

And so, I am saying we have to be patience, because things that we're looking that we like, are just not the right valuation.

But I think as Vivek just mentioned, we're looking at the M&A a little bit differently maybe that we did in the past, where we are looking into portfolios where we can bring unique and differentiated value to the table, either as it relates to the seller and or is it relates to how we integrated within our existing business units.

And so, we can extract value that is unique to us. so, we're not paying a bad multiple from the seller's perspective, it's just we're synergizing it down to that five times EBITDA multiple when the work is done.

So, I feel very, very good that even in these markets, we will deploy a significant amount of capital this year, it's about a $100 million in the six months, I think it's going to be a larger amount in the back half for the year.

I don't know why, but it seems like last few years we've had more spend and deal flow in the back half of the year, and in the front half of the year. I think that's going to be true again this year..

Okay, that's great. Thank you.

And then just quickly on the new eVoice platform and the functionality you've added to fax and the healthcare vertical, it seems like there is momentum in cloud communications and cloud productivity suites, has that landscape changed and do you see sort of the interest areas that a potential headwind because of more interest or tailwind and that you are seeing more customers interest in those types of solutions..

Well, look I think on the Cloud Fax side, the real driver is our approach to these verticals and healthcare being at the top end of that.

We are solving a real problem in that industry, you can't go a week without people, sort of complaining about the paper-based approach of healthcare, we bring that digital interoperability that they are looking for, but our market share still is small, healthcare takes a while to adjust.

But we're now trying to force that issue through product development through sales, through marketing and being not waiting for the phone to ring, for hospital system for instance to switch to our Cloud Fax solution. But for us to get in there and convince some of that and to handle them do that, right. So, I think that's what you're seeing there.

And I think we're uniquely positioned in that marketplace. I don't think there's quite anyone like us that that can do this in healthcare.

I think on the voice side, the part of the business that is most of the businesses the second line business that I referred to, which I actually think from a market point of view is people talk about the gig economy and you talk about more and more people being independent and freelance in orientation, they often view their laptop and their phone, they don't want to carry two phones, and they don't necessarily need a second set of hardware to be able to provide a professional face to their business.

And so, we like it, we think it's a good space to be in, we think the markets growing, we think we're one of the larger providers, there are some smaller providers in this space, we think that they would be natural role of candidates, because we do think now between eVoice and Line 2, we've got the best of breed in second line.

And so, we like the space and it's one where, we think there is some good cross selling opportunities, that is something that we are now exploring in earnest within cloud, which is trying to push these services. Now something that's been talked about, I think a lot been done and the general managers are forcing that agenda too.

So, I think the both spaces where we're not running into real competition..

Great. Thank you..

Thank you. Our next question is coming from Jonathan Tanwanteng of CJS Securities. Please go ahead..

Vivek, you mentioned a lot of ongoing trends and display and video in the CPM.

Was there any impact or do you see anything coming down the road on the privacy farm with GDPR on Facebook, either headwinds and tailwinds? I think you addressed the last quarter, but now that we're here, have you seen anything further?.

It's still early. Again, I think long term, there's a thesis that says, hey, data driven targeting will diminish, and contextual based targeting will grow. We certainly didn't see that, in the quarter. And an interestingly, if you look in the M&A marketplace, there have been a lot of data-oriented ad tech businesses that have traded at big multiples.

It's a little bit of an interesting discussion in the marketplace, which is a lot of these businesses were probably at the top of people's lists in terms of people who would be negatively impacted by GDPR and the California valid initiative that's now turned into the California law relating to privacy, and yet that hasn't played out.

So, I think it's very early days and it is worth mentioning the California legislation, it is not quite GDPR, it is being, it's being negotiated right now, a law has passed, it doesn't go into effect for a little while, and I think there is some work being done to sort of refine it. So, I don't think the issue of privacy goes away.

The impact of privacy on the advertising market is still unclear. Could there have been some very near-term, when I talk about lumpiness and choppiness could advertisers have said, before we spend more right now, let's understand the implications of these laws. And let's pull back a little bit of our spin possibly, possibly.

But again, that would, you think would happen more in Europe and our European ads businesses is like, 5% of that for the ads business. So, I'm not sure that was there. But that's a possibility and it's something we talked about it internally.

But again, I think it's early to really understand what the impact of this privacy legislation is going to have in the ad market generally..

Got it. That's helpful. And Scott, can you just break out a little bit more how backup during the quarter, if contribute to the, you're able to decline in cloud? And maybe second, how do you see that the near and longer-term trends for the business both on the needle.

How the business trend is going and how you stand our portfolio perspective?.

Yes. Similar to the first quarter or a couple million-dollar decline year-over-year from Q2 2017 to Q2 2018. We did a little bit better as you recall in Q1. We talked about that hitting EBITDA dollar-for-dollar. As we said in the Q1 call, our goal was to manage that business for margin. This was pending Tim Smith's hiring.

So, we're able to do a little bit better. We didn't lose dollar-for-dollar in Q2 of the revenues loss to EBITDA, I think it was about $0.80 on the dollar. So that was good.

I think the general trends in the marketplace are not substantially different from we talked about previously, which is, very aggressive, sales and marketing, a lot of which we think is, we question the economics behind it. M&A valuations elevated.

Although, I would say we started to see a few things on the tuck-in side that may not quite mirror that, they might be attainable. And a lot of this now, we're very pleased to have Tim onboard.

Because he will take over this, He's digesting where we're at and what the opportunities are to really give us the view of the right answer for the backup business going forward. So, I think in the near-term, the way we've continued to forecast it for the balance of the year, we're not assuming any change in anything we've said previously.

So, a continued somewhat slow erosion of the top-line with some cost mitigation, but still a substantial hit to EBITDA for revenue dollars lost. And with Tim getting up to speed, I think a better answer as we go into 2019..

Great. Thank you very much..

Thank you. Our next question is coming from Greg Burns of Sidoti & Company. Please go ahead..

Good morning. What's the split of media subscription revenue between Ookla and Humble Bundle.

And what are the relative growth rates for those two businesses?.

So, we gave you some little hint last quarter about Humble Bundle. We talked about the two of them being on a $130 million run rate. And there is actually some other subscription elements to go into it. Although it is dominated by Ookla and Humble Bundle.

I think we've decided that it's not prudent for us, and I'd say us collectively shareholders and others to really split that out. Because in both cases, Ookla and Humble Bundle, there are both competitive reasons and situations that we're involved in negotiation wise. But I think don't think that that split make sense.

Now, you can go back to last quarter as we gave some information, you can tease it out. But I will tell you as Humble Bundle did grow sequentially from Q1 to Q2. So, those numbers we gave you last quarter are higher on both an actual and a run rate basis. But we don't intend to break those out..

Okay. And Vivek earlier you talked about some of your initiatives to move Ookla beyond the broadband test market.

But in terms of on the Humble Bundle, are there any strategic initiatives you might want to highlight in terms of revenue enhancements or margin transformation preference?.

Yeah. We're doing some interesting things. I think I might have mentioned this in the past, but I'll mention it now. So, we're trying to enhance the subscription itself and what you get as a subscriber for instance now annual subscribers to Humble Bungle get Viper, which is our antivirus endpoint solution.

And so that now is closed to $100 value that is built into what is closed to $100 or more than $100 annual subscription. So, we're looking for things within the company that are relevant to the subscriber base to give them more value for their subscriptions.

Additionally, I think I mentioned this in the last call, we are financing gains where we provide the finishing funds which will allow us some control over those gains to participate any economics for those gains and their release windows and have the ability to include them in our bundle at attractive economics.

And so that will continue and we're ramping up our finishing funds activity relating to indie development of games. And so, and then I think I've mentioned this, but also continuing to find ways in which IGN and Humble can help accelerate each other's path within the gaming universe. And then we've also - we've started to move into some tech bundles.

So, we've done some things in the tech space, software space. We actually did, we did a security bundle. And Viper was in that security bundle. So, there are a bunch of things like that, that I think fit in sort of the collaboration across j2 category, but also fit into how do we enhance this membership and continue to add value to it.

I think that's very important..

Yeah, Thank you..

Thank you. At this time, I would like to turn the floor back to over to management for closing comments..

Thank you. Before we do that, we did receive one question via email. And the question was about the amount of revenue from the assets we divested throughout 2017 that are not in our 2018 number. So, just as a quick review, on the Digital Media side in two separate transactions. Last year, we divested Cambridge and Tea Leaves.

They accounted for about $10.5 million of revenue in Q2, 2017 and zero of course in 2018. On the Cloud side, we divested Web24 which was our smaller web hosting business in Australia. That had about $1.3 million in revenues in Q2 of 2017.

So, combined for the company as a whole, about $11.8 million of revenues from the divested assets were present in Q2, 2017 and not in 2018. And then finally with no other questions by email, we thank you for joining us on this Q2 earnings call. There are several conferences that we will be participating in right after Labor Day.

So, look for a press release shortly to announce those, the first week of September. And then there will be other follow-on conferences between now and when we announce Q3 results which we would look to do in early November. Thank you..

Thank you..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day..