Good morning and welcome to j2 Global's Second Quarter 2019 Earnings Conference Call. My name is Claudia, the operator who will be 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] On this call will be Vivek Shah, CEO of j2 Global and Scott Turicchi, President of j2 Global. I will now turn the call over to Scott Turicchi, President and CFO of j2 Global..

Thank you. Good morning, ladies and gentlemen and welcome to the j2 Global investor conference call for Q2 2019. As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah.

We continue to execute well on the second quarter setting records for revenue, EBITDA and non-GAAP earnings per share and just missing on free cash flow due to timing and magnitude of some estimated tax payments. We'll 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've not received a copy of the press release, you may access it through our corporate website at j2global.com/press. In addition, you'll be able to access the webcast from this site.

After completing the formal presentation, we will conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, you may e-mail questions to us at anytime at investor@j2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language.

As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that will cause actual results to differ materially from the anticipated results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to the risk factors that we've disclosed in our 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've included as part of the slide show for this webcast.

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

Thank you, Scott, and good morning, everyone. We set yet another quarterly record for revenues, adjusted EBITDA and EPS for the second quarter. I am also really pleased to say that we've been stringing together some strong quarters and I continue to be optimistic about the outlook for the rest of the year.

A couple of weeks ago, Scott and I along with members of our leadership team, Board of Directors and a group of employees who won j2 achievement awards, which is the company's highest distinction have the honor of ringing the opening bell with the NASDAQ to celebrate the 20th anniversary of our IPO.

It was a terrific morning in many regards and I'd like to congratulate our organization and thank all of our employees, past and present for their great work these past few decades. The occasion was also a very clear reminder of our incredible track record and the long-term success and sustainability of our model.

We were part of the IPO class of 1999, which was the largest class in the history of the stock market. 546 companies went public that year, raising more than $69 billion in capital. It was an unprecedented year in many regards and smashed every known record.

It was the year of dotcoms and the very height of one of the biggest bubbles the markets have ever seen. Scores of companies went public that were unprofitable and commanded astronomical valuation that were predicated on nontraditional valuation method. Of the 175 tech companies that went public in 1999 only 41 are public for today.

Many went bankrupt, some were sold and others just evaporated. Of those tech companies are still public today, j2 ranks sixth in market cap. I find that remarkable and we are the sixth largest publicly traded tech company from the 1999 IPO class and I doubt anyone who could've predicted that 20 years ago.

Even more impressive our price-performance ranked fifth amongst those tech peers and as a company, we've weathered the collapse of the dotcom bubble as well as the collapse of the housing bubble and an unprecedented recession. In fact, we more than weathered those significant market corrections.

We've grown revenue every single year since being founded in late 1995. I'm not sure of how many companies can make that claim to have grown revenues for 23 consecutive years.

Yet in the seven years that I've been here and in the 20 year Scots been here, we still get questions about the viability of our model, questioned about our ability to sustain the j2 acquisition system and therefore our overall growth. I believe the past 20 years should resolve for any rational observer these questions.

My favorite indicator of our success is five times ratio of our cumulative acquisitions spend divided by our annual adjusted EBITDA. It demonstrates our ability to spend capital intently and wisely as well as the means to properly integrate these assets once they j2's portfolio and we should continue to get better in the allocation of our capital.

We've evolved our management structure, emanating and process which has produced more ideas, greater deal flow and more managers to integrate deals and create value. The amount of capital available to us only grows as we continue to increase cash flows and the amount of leverage we can assume without much change to our credit ratings.

Our portfolio has never been more diversified yet our businesses share the common tailwind which is the ongoing shift from analog to digital. We've expanded our capital allocation to include share buybacks and we're pleased to have acquired 600,000 shares in Q4 of 2018 and expect to continue to be opportunistic going forward.

We have conviction in our model and hold a firm belief that the next 20 years will be as bright if not brighter than the first 20. So if this sounds a bit like a full throated defense of our model and company, it is.

We're very proud of what our organization has accomplished over the past two decades and there are certain foundational elements that will continue to guide our company. First we expect to remain an active acquirer of businesses. We are well positioned to grow our company to strategic and disciplined investing.

Second, we will continue to focus on maximizing EBITDA and free cash flow generation while investing in tangible organic growth opportunities. Lastly, we will opportunistically expand our portfolio particularly in spaces that we feel are fragmented and would benefit from a capital partner with a proven track record.

This nimbleness resulted in the evolution of j2 from being just a digital fax company to our current position as a diversified portfolio of over a dozen business units. All of these tenants give us confidence in our future. Before I hand the call back to Scott I wanted to spend a few moments and themes for each of our business segments from Q2.

At Digital Media, we continue to see growth out of display advertising of nearly 4% with subscription revenues up over 30% continuing to be a major driver of overall digital media revenue growth. In fact combined subscription revenues at cloud services and digital media now account to 65% of total revenues.

As you know it's been our long-held strategy to increase the amount of recurring revenues at j2 and we're obviously making tremendous progress. We gave a bit back on Digital Media EBITDA margins which were down approximately a point year-over-year but still up through the first half.

You'll recall that we had some expenses shift from Q1 to Q2 as well as higher allocations of our corporate overhead. At Cloud Services, we continue to see big opportunities in the security and privacy space.

As you know from last call we had VPN technology to core offerings and are off to a good start in the first quarter of our ownership of IPVanish and its related properties. We've many opportunities for synergies with our email protection, endpoint security and backup solutions that we're beginning to explore.

I'd also note that our cloud services management continues to do a very nice job at managing EBITDA margins. Our EBITDA margins are a bit better than last year's notwithstanding our investment in personnel and product enhancements.

Also this is one of the strongest revenue growth quarters for cloud services in recent memory with revenue growth close to 13% with the acquisition of the VPN assets being a key driver. Now, let me now hand the call back to Scott who will go into greater detail on our results..

Thanks Vivek. Q2 2019 set a number of financial records for j2 including revenue, EBITDA and non-GAAP EPS.

These results were driven by several areas of strength in our portfolio of companies, notably continued improvement in the display advertising portion of our business, our continuing strong growth in our media subscriptions as well as the addition of our VPN business unit acquired early in Q2.

In addition we remain cost-conscious resulting in strong EBITDA margins for the first half of the year. We entered the quarter with approximately $259 million of cash and investments after spending $242 million in the quarter on acquisitions and dividends. Now let's review the summary quarterly financial results on Slide 5.

For Q2 2019, j2 saw a 12% increase in revenue from Q2 2018 to $322.4 million. Gross profit margin which is a function of the relative mix of our 14 business units remained strong at 81.5%. We saw EBITDA grow by 10.3% to $125.2 million. Finally adjusted EPS grew 6.7% to $1.60 per dollars versus a $1.50 per share for Q2 2018.

I would note EPS growth was impacted by a 21% tax rate in Q2 2019 versus a lower than usual tax rate of 18.5% in Q2 2018. As you know, fundamental to our philosophy at j2 is to generate strong cash flow.

Turning to Slide 6, in Q2 we generated $85.8 million of free cash flow which was slightly down from Q2 2018 due to additional tax payments of approximately $5 million versus Q2 2018 and $9 million in comparison to Q1 2019.

Due to the timing of such estimated tax payments, we believe it is better to look at the trailing 12 month free cash flow and the conversion of trailing 12 month EBITDA to trailing 12 month free cash flow. On a trailing 12 month basis, we generated $357.3 million of free cash flow for a 69.7% conversion of our $512.4 million of EBITDA.

Now let's turn to the two businesses cloud and digital media for Q2 as outlined on Slide 7. The cloud business grew revenue of approximately 12.5% to $169.1 million due in large part to the new VPN business unit, increased revenue in Martech and a slow rate of decline in our backup business.

Reported EBITDA increased by approximately 12.6% to $85.2 million compared to $75.6 million in Q2 2018. The EBITDA margin is 50.4% after corporate allocations, slightly up from the EBITDA margin in Q2 of 2018. Our media business grew revenue 11.4% to $153.3 million and produced $42.6 million of EBITDA or 6.9% growth.

EBITDA margin declined by about one percentage point from Q2 2018 due to certain licensed fees paid for gains in Q2 2019 but did not occur in Q2 2018 as we discussed on the last earnings call. We are reiterating our revised guidance range for the year as outlined on Slide 9.

To remind you, our original high-end of our range was $1.33 billion of revenue, $540 million of EBITDA and $6.95 in non-GAAP earnings per share. As we stated last quarter this become the low end of our new range of guidance which we reiterate today.

We expect our revenues now to be between $1.33 billion and $1.37 billion of growth, EBITDA to be between $540 million and $556 million and non-GAAP EPS to be $6.95 per share and $7.15 per share. Following this guidance slide, are various metrics and reconciliation statements for various non-GAAP measures to the nearest GAAP equivalent.

Before turning it over to the operator for questions, I would like to draw your attention to Slide 12 and specifically the cloud metrics. You will now a 27.5% sequential increase in our cloud customer base and the resulting decrease in average monthly revenue per customer.

This is due to the inclusion of the VPN customer base which has an average monthly revenue per customer of less than $7. We include the VPN customer base as if it existed on March 31 for purposes of calculating the average base for the AMR per customer measurement.

In addition the increasing cancel rate is also due to the inclusion of the VPN customer base, which has a somewhat higher cancel rate than the other cloud services. Excluding our VPN business, that cancel rate remained flat at 2.2%.

Finally for our digital media metrics, I would note that the sequential and year-over-year decline in visits and page views are substantially attributable to the client in our Snapchat traffic which constitutes a minute amount of our digital media revenue. I'd now as the operator to rejoin us and to instruct you on how to queue for questions..

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Shyam Patil with Susquehanna. Please go ahead..

Hey guys. Good morning. Congrats on a great quarter. I had a few questions. I had a few questions.

First, I guess for you Vivek, when you look at the M&A incentives for the GMs, do you see any kind of waiting first half or second half in terms of M&A transactions in a year and then a follow-up to that is when you look at the M&A pipeline particularly for digital media, subscription deals, can you just talk about how that looks, midsized deals versus large deals?.

Sure. So on the first part of your question in terms of the incentive structure of the general managers, there's two components. So in terms of their annual incentive their bonus compensation it is entirely EBITDA based, it is a function of the EBITDA goals we set for the business unit at the beginning of the year.

When M&A occurs that is incremental to what's in that goal and that target, that EBITDA contribution will count less a capital charge for the asset and so we look for things that can be immediately accretive vis-à-vis that capital charge and so there really isn’t a timing benefit. It isn’t per se you should do it early, you should do it later.

It really comes down to can you move your scale. And then the second piece of their compensation is all shareholders and so not unlike my own equity package, it is a mixture of time-based restricted shares as well as performance-based shares and so they are incentivized to enhance the enterprise value and in the per share price of the company.

On the second question around media and media subscription businesses, we really are looking for businesses where we can leverage our media audiences to drive customer acquisition and really sort of bend the cap to LTV equation right, as you know in all subscription businesses, that's the equation and so if we can -- we can reduce the amount of third party marketing spend that we have then that become very interesting and we've seen that obviously in the gaming space and I wouldn't, I wouldn't confine it just to media subscriptions.

We're also look for cloud subscription services that can benefit from having media audiences that are relevant and in some ways you can argue that's what VPN is..

Great.

Second question, interest rates are coming down, just wondering does that impact how you guys think about leverage valuation?.

So I think there is two separate elements to that. As it relates to valuations, we have as you know fairly strict parameters that we adhere to respective of the market environment whether it's driven by interest rates or evaluation. So that remains unchanged in terms of what we're looking for in terms of rates of return.

The second or the first part of your question in terms of the lower interest rates may give us opportunities to look at our capital structure and lower our average cost of capital. Now having said that, our capital structure really occurs in two separate pieces.

So we've got at the parent that converts which got about 22 to 23 months before their first put call date but they are in the money that's the 402.5 at three in a quarter. Downstairs of the cloud business, where we have most of our leverage, the 650 of 6% notes are currently non-callable.

Their first call date is in a year in July of 2020 at 104.5 and we have a modest amount of bank debt that's drawn about $100 million that's around 5% rate that sits on top of that.

So we have much more limited opportunities downstairs from a refinancing standpoint and of course we do have an unlevered media business, which could take advantage of either the bank debt market or the high-yield market, but I would say that we remain given our cash flow characteristics the cash balances that we maintain and the incremental amount that we have put on the line downstairs with the cloud I think in a comfortable position to meet our M&A needs and our other capital allocation needs..

Thank you. And it's my last question.

Scott, I know you guys don't guide quarterly, but any color on how we should think about gross margins and EBITDA margins by segment and for the year for 3Q and 4Q as well as kind of where you guys are thinking about free cash flow for the year as well?.

Yeah so you're correct. We don't guide by quarter but I think the general trends in the margin structure of the two segments remains consistent with the understanding that obviously the media business has dramatic leverage as we move from Q3 into Q4.

So we would expect the margins of the media business in Q3 to be roughly consistent with where they've been in the first half of the year.

Same thing with the cloud and then an uptick in the margins in media to the 40% range EBITDA margins in Q4, which would then bring us to close to the mid 30s EBITDA margin for the media business for the year and right around 50% EBITDA margins for the cloud business.

In terms of free cash flow, we continue to look at our EBITDA conversion ratio very close to 70% which would get us right into that $375 million to $380 million range of free cash flow and the conversion of that free cash flow from its EBITDA which is basically right around 70% on a trailing 12 months through the end of June 2019..

Great. Thank you, guys and congrats again..

Our next question is from Daniel Ives with Wedbush Securities. Please go ahead..

Yes thanks and great quarter. My question is on the digital media business, maybe just talk about the pipeline that you're seeing on advertising side for healthcare and Pharma. I know sometimes you get pretty good visibility into next three, six months or even longer, maybe talk about that first..

Yeah so the pharma market continues to be pretty strong for us.

As I think I might've mentioned in the last call the call before that the pipeline of the FDA has never been stronger and so the volume of drugs that are getting approved or have been approved and therefore have marketing budgets attached to them are pretty substantial and so we are certainly a beneficiary of that and we're continuing to see that both on the direct to consumer side where Pharma is looking to market its drugs to patients but also on the provider side, where it's looking to market to prescribers.

And so both sides of the market and it's one of the advantages we have I think of the everyday health is that we reach both consumer, the patient and provider prescriber and so we're seeing that strength. And then more generally within the market, we're seeing some interesting things in the pipeline.

We're thinking about other parts of the healthcare ecosystem, we have healthcare systems, hospitals themselves that are an interesting category for us.

We have moved into that business with healthy careers where we do recruiting services for hospitals, hospital looking to get doctors, physicians assistants and nurses as well as our capital Connolly business where we're waiting doctors and that may turn into some interesting opportunities with hospital and then the payers right.

So insurers as well as employers who are self-insured is another interesting market for us to get into. So we like the Pharma market. It continues to be strong for us and we are thinking about how we can expand more deeply into other parts of the healthcare ecosystem..

Got it. So I look on the backup business, obviously we've seen some competitors continue to see softness, any changes in the thinking in the backup business in terms of any of the trends or maybe even more aggressive on M&A or the opposite in that, thanks..

Yeah so as we've said we back up for us is in sort of the state of managed decline where we're very focused on EBITDA and free cash flow generation. Having said that, Q2 was actually better than Q1. So sequentially the decline was less and so we feel good about that.

We do to your point see some tuck in acquisition opportunities that are attractive and fit. Our M&A requirements is in a hurdle. So look we look at it as it is one of the primary only drags within the j2 portfolio in terms of revenues but it's actually possibly finding it's bottom which is a positive sign for us..

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

I guess first just congratulations on the 20-year milestone and great perspective there. Just couple of questions, first I guess on the VPN assets acquisition, maybe any color on how that's performed relative to expectations. It would be great to get any granularity on what the revenue contribution was, just kind of the outlook there.

And then I guess other piece to that is what kind of cross-sell opportunities are you seeing on the revenue side? I think you referenced opportunities for security back up, I am sure that's early, but any further color there would be great too, Thanks..

Yeah so look, we're really pleased with the VPN assets, the core asset is IPVanish. We I think acquired very strong business, a great leadership team under Nick Nelson who has really made an immediate impact inside of the company and look one, I think the VPN and privacy space is just, the demand just continues to grow.

I think as there's more consumer and business concern and the tension around social media and government surveillance and other forms of privacy violations and breaches, I think we just have a natural demand occurring and in fact I would put the VPN assets into the category of assets within our portfolio that I would refer to as our high-growth assets.

And so I put Ookla into that category and I put Humble Bundle into that category and I put Ekahau into that category and I would put IPVanish into that category, which is exciting particularly for the cloud services side of the house to have something that has that kind of growth potential.

It also is a highly fragmented market the VPN market, there are hundreds if not thousands of solutions and so we think we've a strong one. We think we have one that earns high trust marks which is absolutely vital and critical if you're providing a VPN service. So we see the opportunity I think to be opportunistic in this market.

And then the last thing I would just say is that while the Q2 cloud revenue growth 12%, 12.5% was very strong and driven in large part by the VPN assets, the rest of cloud did very well and invoice in Martech in particular had pretty strong year-over-year quarter.

So it is certainly a driver of what we saw in Q2, but I don't want that to discount some of the strength we're seeing in other parts of the cloud..

Yeah and I would just add to that, that we actually experienced in Q2 better performance in what I'll call the rest of the cloud business exclusive of VPN than we did in Q1.

You remember that was a little under 2% growth in Q1 and then the second piece to take into account and it's something we're actually still working through is we do have deferred revenue haircuts for any set of customers that we acquire in a subscription business.

In the VPN space it is more typical than it's for other spaces to have more than month to month contracts, some even going out as long as three years.

So there is a larger base of deferred revenue than we would experience in other deals of similar size, but also a higher discount rate since on the margin, there aren’t as many cost to attribute to servicing those customers.

So we have a fairly big reduction in the book of revenue that we acquired this year and to a lesser extent next year through the deferred revenue haircut, which as I say we're still working through.

We've got an estimate for this quarter that I think is very solid but we work with third parties to actually nail that down and that will be finalized this coming well the quarter we're in Q3..

Okay. All right. No I appreciate that. Okay. I guess maybe just second question just coming back well I guess to the other growth drivers on the digital media side, I think at Humble Bundle, I think look at that reference growing north of 30%.

I think your particularly call out there is it just the same trends moving forward, one of those assets performing better than the others or just continue to see full steam ahead on both fronts..

Yeah I think they are both executing according to plan. We feel very good about where they are. It might just point out within the broadband assets the Ekahau asset, which is still relatively new for us is performing really well.

Lots of product enhancements, lots of pushes, looking at pricing models and ways in which we can generate more value from the customer base and so that's doing very well for us. And then the other thing is, I would just say in the Hubble Bundle business there is three parts to the Humble Bundle business.

You have the subscription business which we've talked about and continues to be a nice business for us.

The store business, which is more single unit sale transaction business and then the publishing business and the publishing business is one that we are leaning into where we work with indeed developers to provide financing to publish their games, to market their games, put them in the normal distribution channel where PC games are sold and we're making a very nice return on our investment just to those revenues and then have the ability to include those games within our subscription service some months down the road and that's also attractive because now we're including our own game versus licensing a third-party game.

So that is something that we're going to look to invest in more. We've got a nice pipeline of games but I think this is an area that we see real opportunity in these sort of in the games that aren’t really on the radar of the larger game publishers. We're looking for AAA franchises that have multiyear value and are a very different part of the market.

So that's may be a new element to the Hubble Bundle business for you to consider..

Our next question is from Nick Jones with Citi. Please go ahead..

One on I guess kind of holes in your product portfolio. I think the VPN acquisitions helped patch up some of the web security.

Are there any other areas that are may be obvious for improvement or some holes in products and then secondly, on kind of bending this cap to LPV equation, a lot of these pipelines for potential acquisition generated from where you are generally most of the traffic via target advertising or how should we think about how these types of acquisitions are targeted or sourced?.

Yeah so just on the first question in terms of the product portfolio and components that are missing, I think in each of the market spaces we're in, we like the assets that's fairly complete but there are always opportunities for us to add components and one thing I didn't answer on an earlier question but is related to this, we are having success in bundling now and that's been something that historically we haven't done as much on the cloud services side.

But now the ability to bundle our endpoint security which is under the Viper brand, our file sync and back up on the consumer side which would be sugar sync and IPVanish and the ability to give you one price for all three services make it a great value proposition and make it incredibly sticky and in fact we have moved the management of the sugar sync business from under the backup unit and put it actually into the VPN unit because it's very consumer driven where the rest of the backup assets are more business customers and enterprise customers and so it's a different customer set.

So we see opportunities in doing that. On the question relating to how do we leverage media audiences for subscription, it can be sponsored post, it can be targeted advertising, it can be email let's just think of it right. We get paid a lot of money by other providers to market their services. We essentially become our own customer right.

So we're able to do for ourselves the things that we do for third parties, but at very little if no marginal cost to us and really no opportunity cost. It's not like we are shifting inventory that would have been monetized with a third party to us and losing that revenue. So it is truly all incremental..

And one qui8ck follow-up, I guess we focus a lot on j2 Global acquiring but how should we think about potential divestiture? Is there any kind of areas I think where you guys think about this?.

Well look, I think the answer is in and we saw this in 2017 is we're certainly open to it right. So it's a portfolio and our view isn’t we're just only buyers.

We're certainly willing to entertain offers that value these businesses in excess of what the market may be valuing and where we may not feel it's strategic or where we may not feel we have future growth opportunities or we may not feel we can execute the M&A program as well. So we're open to it. We get call from time to time.

So we're certainly and I do think that's a little bit of a shift. I do think our openness and willingness to do it, but I don't -- right now I wouldn’t say there is anything active and then I wouldn’t say there is anything meaningful going on.

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

Thanks for taking the questions, just following up on the VPN business obviously the ARPU was lower and the churn is a little bit higher, but can you talk about some of the economics there and also it just give you sort of a footprint in that space to do more M&A, are there other companies out there where you can add customers to your current platform, thanks..

I'll let Scott talk on just some of the metrics because they show up a little bit in our customer counts and ARPU, but on the second piece absolutely and I do think that the VPN space is fragmented, has many subscale providers who are going to find it difficult to compete with the likes of us and they're fairly straightforward migration from a technology and customer experience point of view and so we see pretty interesting opportunities from an M&A point of view.

The other thing is we also have a white label version or portion of our VPN business where there are entities who may be interested in launching their own VPN for their own customer group and we're able to provide that and power that and there we just get paid license fee or a per seat type fee from that provider.

So we can come at the market that way and that's a nice competitive advantage for us.

So on the metrics, most of the customer base that we acquired and as you know it occurs under four or five different brands would be at the smaller end of the spectrum meaning they're either individually users or so hosts in a B&B case and so they’ve got an ARPU and there is different programs and that I mentioned to an earlier question, there are month to month subscribers, there are annual, there's two year, three year subscribers.

Based upon that mix we're going to give an ARPU on a net, net basis somewhere between $6 and $7 per month.

So that's a lower ARPU than we've historically gotten in the rest of our cloud business and it's why you see the $16 average ARPU in Q1 come down to $14 in Q2 and so that will move around a little bit based upon as we move forward, the relative mix between that so customer versus the B2B on the one hand and the different packages on the other..

And from a profitability standpoint, EBITDA margins for that business are in line generally with the cloud business around that 50% or are they better?.

No actually they're somewhat lower.

It's a strongly profitable business and actually I would give as Vivek mentioned earlier a lot of credit to the incumbent historic cloud business because the margins actually went up in Q2 despite the fact there were some quote unquote, drag from the VPN business because that's a business that right now at its scale is more around 40% EBITDA margin.

And on the other thing I am just going to also point out is it's a growth business and so we are going to be aggressive in investing to generate future growth. It's a 50% correct in the near term..

Our next question is from Rishi Jaluria with D.A. Davidson. Please go ahead..

Hey guys. Thanks for taking my questions, a couple here. First a lot of, dig into some of the VPN assets and maybe particularly IPVanish.

I think can you especially since we can see the impact on metrics on the customer on ARPU side, please help us understand directionally is the VPN business primarily actual SMB or is there a bigger consumer piece of that business because my understating is that most of your current cloud business is SMB with relatively low consumer exposures.

So just maybe a little bit of a different market progress..

It is absolutely much more at a consumer value proposition. Having said that, there are SMBs and we are developing solutions for even larger companies.

We've got a brand called Encrypt.me where companies can buy VPN for their teams and for their organizations, which they really ought to do because when you consider about how many endpoints in the world that are business endpoints or those be laptops or phones that are connecting to in-flight Wi-Fi, airport Wi-Fi, hotel Wi-Fi, all of that's unsecured.

Coffee shops that's unsecured, it's a risk to the enterprise and those risks should be resolved. So we see an opportunity, but with respect to the business as it is today, it is consumer.

However, where I think we're leveraging our collective expertise is that about 60% of cloud services subscriptions are generated online and so the discipline of online marketing, online customer acquisition, understanding sources of traffic, drivers of conversion, different testing of different funnel experiences, that's a common thing.

Whether if efax, whether it's IPVanish, whether it's line two. Also our understanding of how to sell through on mobile devices and then through app stores is also a common experience. So a while a little bit of a different market for sure, I think a common set of marketing practices and dynamics..

Okay got it, that's helpful and I think just to understand, do you have any other cloud businesses that you can in the past, so you can bring some experiences from or is there something that you can bring from what you've done with that Ookla and Humble Bundle, some best practice on that and to kind of adapt to your go to market and sales margin with the VPN assets..

Again I think on the customer acquisition side, yes I think that it is the same whether it's paid search or organic search, content recommendation engines, affiliates, I would make such a big nuance between the SMB buyer and the consumer buyer because they're buying it online.

So I think that's still just people who are buying online and so there is a lot of collective experience.

I would also think on the customer service side, we have a fair amount of customer service infrastructure and knowledge across the company and are sharing lots of best practices around customer service and then obviously yes, on the media side, the Humble Bundle subscription business is entirely a consumer subscription business and so I think there are learnings there that we can apply..

Got it, thanks. That's helpful. And then speaking of the Media Subscription business, it looks like we have been kind of in the mid to high 20s range as a percent of the total media business, I know that obviously been a vocal point is growing that and that was 13% a year and a half ago.

It looks like it's kind of been in the same range for a while now.

Just help us understanding is this kind of the steady-state or we should expect that or is there kind of a other levers to seeing that kind of business as a percentage of the total media business kind of continue to grow from here?.

Look I think if the portfolio were to stay unchanged, you would continue to see the subscription portion of it be larger and larger.

Now I will also point out, the non-subscription pieces are growing nicely and so you have got that in the proportional question, but I think as we acquire in media to be very clear, we're interested in a full range of assets including displacement and assets that have performance marketing components to it, also performance marketing driven assets that we want to add to our performance marketing portfolio and subscription.

So it's a little hard to answer without being able to know over the next 12, 24 and 36 months which of those assets and in what proportion they're going to be. So I don't want to leave the impression that the performance marketing and display pieces are pieces that we're not interested in growing and acquiring into we are, but subscriptions as well..

Wanted to turn to OCV, it looks like to get about $37 million in investments there in terms of actually capital call, last year about $10 million in Q1 and then we'll see on the 10Q comes out how much in Q2, but maybe just help us understand to the extent that you can share where are those investments going and maybe your outlook on that?.

Yeah so I think you pulled the information from the queue, so I think you're pretty close to the amount we have invested. You will see some additional investments that we made during Q2. What I would note is that now that the fund has been up and running for a while, they're starting to see some monetization event.

So in terms of their base of investments they’ve got about eight of them. They range from life-sciences, to mobile payments. So it's really a broad array.

One of the company that they invested in went public about two, three months ago called Provision Biosciences and you'll notice both in our financials and you'll see it also we filed a queue at the end of this week that there is gain posted.

In previous quarters you'll see that when we mark-to-market there is losses on the portfolio primarily for the fees that we pay.

In this quarter, you're going to see that's not only reversed out, but there is a gain, now that's not a realized gain because there is a lockup period and we don't control the disposition of those shares, OCB does but one company has already gone public I believe that there is at least one of the situation where there will be a pending transaction that will also create a monetization event.

So right now as I say for where they're at in the life of a fund to have at least two of their situations already bearing fruit in terms of a return even if not fully realized to us in cash I think is positive.

The other investments given the stage they're are not quite right for either going public for a monetization event, but I think that from our standpoint, we're going to start to see some return of capital from these investments.

I still budget that will expend about $50 million a year in terms of the investment into OCV to get to our full $200 million commitment. We spent a little bit under that last year because they just didn’t have the breadth of deals and capital calls.

We may I think we probably a little bit under that number again this year, but that'll be in part a function of what they have in their pipeline between now and year end..

Vivek thanks. And then last one for me and I'll hop off, but from an housekeeping perspective any impact on or drags on currency on growth rates in the quarter..

No, FX had very little impact in the quarter..

Our next question is from Jon Tanwanteng with CJS Securities. Please go ahead..

Hi guys. Thank you for taking my questions and again congrats on the strong performance in the past 20 years and in the quarter.

First of all, can you talk about how the fax business have performed and maybe breakout the enterprise versus mid perform excuse me, SMB performance and how your efforts to penetrate healthcare and enterprise are progressing?.

Yeah so fax revenues were up couple of million dollars sequentially which was nice from Q1.

The corporate business was up about 7% for the quarter and that's mostly in the healthcare space and so things are going according to plan where we've deployed and continuing to deploy salespeople in the field to have the discussions to convince healthcare clients to shift from their analog solutions to cloud, it takes a while.

There's a fair amount of healthcare move slowly, but when it moves it kind of moves in big ways. So we like the size of some of the opportunities that are in front of us. So it continues to be a pretty good growth business at about 7%.

And then on the web fax side, I would say that we haven't done a transaction 25 months, just 25 months, so two years we haven't done one and so that still holds together reasonably well without M&A. Historically the web fax side has grown entirely through M&A but we've been very focused on better customer acquisition, better customer attention.

An interesting dynamic is the actual search query volumes when you look at fax and fax related terms is up. So we're seeing that they proxy for interest in the solution service that we provide. So we're happy and the margins continue to be very strong. John [ph] who runs that business for us does a very nice job and they're investing.

So he's investing yet finding ways to improve margins in other places..

And then just going back to the topic of the margins in the VPN business, where it kind of goes bolt on assets and what appears to be a target rich environment are the same scaling opportunities and migration economics as in your nutritional cloud businesses?.

Yeah I would say they're very, very similar to what we've seen in other cloud spaces but again I just think one of the things like want to continue to stress is this is a business we talked about this where we see tangible organic growth opportunities we are going to invest in and so we're not looking at a magic margin percentage.

We're really looking to feed our growth engines and we view this as an engine..

And then finally can you just give us a little more color on the scope and quality of M&A opportunities for second half and into 2020.

I know you've done about 270 million of deals this year, what looks like the close by yearend and kind of what does the mix look like in the pipeline? Is s more cloud and VPN or is there a bigger balance towards media..

No it's a mix. Look I think we've got close to half of the business units participating in perspective M&A right now. So we've obviously had a run in the first half of the year, that's been dominated by the cloud although there was a small media deal done in Q2 that goes into our Zip Media group. We have a balance on both sides.

I think it's very hard to predict what the total outcome will be, but as I said in the last earnings call, I feel very confident that we spend clearly more than the free cash flow we'll generate this year which as I said early is about $375 million to $380 million.

Whether that comes in a series of smaller deals spread across five or six BUs or is more concentrated to the function really of which deals get to the finish line and at what point in the year but I think you're going to see a mix of deals between now and year end..

Our next question is from Pat Walravens with JMP Securities. Please go ahead..

Great. Thank you very much, and thank you for the 20-year perspective. No other companies I cover back that are still in business. That's one indication. So I have two big picture questions. The first is just when you look at the M&A pipeline, do you feel like sellers expectations are at reasonable point these days..

Yeah look I think it depends right. you've got the range and so the great thing about us we look at all situations and we keep an open mind and we look for a path to value creation and I think some buyers may not have that.

We have the ability to take a growth asset, leverage both our balance sheet and the assets within the company to accelerate that and so we'll look at those assets, but we'll also look at assets where there's a profitable core and we need to shrink the asset to get to that profitable core and then look to grow it from there and I don't know if all buyers could do both of those things for instance.

And so we've got versatility as a buyer. I think we also have a very solid reputation for moving decisively and quickly. So to the degree to which speed and certainty is valued by a seller, then we're the buyer. Where it comes to someone is looking for the greater full those aren't processes we're ever going to win and those will always exist.

I've been in markets up, I've been in markets down and you'll always find assets like that, but I think the high level is that we are not seeing a shortage of interesting actionable opportunities for us..

And my second question is, are you guys seeing any changes in the macroeconomic environment either on the media or the cloud services side?.

No I feel like the macro things that happen often have nothing to do with our business but we get swept into it. We're not we don't have much of a business in China. Its de minimis for us but that would -- that doesn't stop us from getting pulled in to that tide.

So I think the larger things often if one took a closer look at what we do and where we make our money and how we make our money, don't apply to us but it has an impact obviously on the company's stock price right.

But beyond that, I actually think the areas that with display having had challenges in the past, we feel good three consecutive quarters, display growth which we feel good about. So no I don't see things specific to our businesses and our industries and our markets that worry me. We just worry about the larger market which we can't control..

There are no further questions registered at this time. I would like to turn the floor back over to Scott Turicchi for closing comments..

Thank you, Claudia. We thank everyone for participating today in our Q2 earnings call. As usual look for a press release soon about upcoming conferences, some beginning as early as next week.

Then obviously there is a hiatus in the latter part of August and then there is a series of conferences beginning right after Labor Day in September and we look forward to communicating again our Q3 results sometime in early November..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..