Good day, ladies and gentlemen, and welcome to J2 Global’s Third Quarter 2020 Earnings Call. My name is Paul, and I will be the operator assisting you today. [Operator instructions]. On this call will be Vivek Shah, CEO of J2 Global; and Scott Turicchi, President and CFO of J2.

I will now turn the call over to Scott Turicchi, President and CFO of J2 Global. Thank you. You may now begin..

Thank you. Good morning, ladies and gentlemen, and welcome to the J2 Global investor conference call for Q3 2020. As the operator mentioned, I'm Scott Turicchi, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah.

We had an outstanding third fiscal quarter, our best ever, despite the ongoing pandemic, and crushing not only the analyst estimates, but our own internal estimates. We set records by a substantial margin for revenue, EBITDA, free cash flow, and non-GAAP earnings per share.

In addition, due to our strong free cash flow generation, we ended the quarter with more than 665 million of cash and investments, after spending 12 million for M&A, and approximately 150 million for stock repurchases, representing 2.1 million shares. 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.

In addition, you'll be able to access the webcast from this site. After completing the formal presentation, we'll be conducting a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, you may email questions at any time to investor@j2global.com.

Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.

Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements, and 8-K filings, as well as additional risk factors that we've included as part of the slideshow 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. Once again, J2 has demonstrated the fundamental strength of its portfolio, and the high quality of its underlying businesses. We materially exceeded all expectations, and blew by our records for revenue, adjusted EBITDA, and adjusted EPS for the third quarter.

I couldn't be prouder of our organization and the hard work of our team worldwide.

I remember thinking a few months ago that the second quarter would be a very hard act to follow, but Q3 has proven to be special, with all of our divisions operating at full tilt, while also coming to an agreement to acquire RetailMeNot on the second to last day of the quarter.

As we announced in yesterday's press release, we're pleased to report that the deal has now officially closed. More on that later. There were a number of positives on the revenue side in the quarter. Our gaming businesses grew approximately 10% organically, as we started to see the positive impact of new console cycle on our business.

We're also continuing to enhance our leadership role in the games industry, with IGN having served as lead production partner for the first all-digital Gamescom event, drawing 46 million users across multiple platforms. Our broadband businesses also grew 10% organically.

The Ekahau business, which as a reminder, sells Wi-Fi design and deployment tools for commercial spaces, returned to growth after seeing its business negatively impacted in the previous quarter by COVID. Not surprisingly, we continue to set testing records at Speedtest, with 1.75 billion tests in Q3, up 62% year-over-year.

Our businesses at Everyday Health had another fantastic quarter, growing revenues by 25%, the majority of which was organic. The professional business at Everyday Health continues to be a standout, anchored by our MedPage brand, which is up 119% in traffic year-over-year.

MedPage and its sister sites recently tied WebMD’s network as the most frequently visited medical information websites in a survey of physicians conducted by the Decision Resources Group. Impressively, 65% of physicians in the US stated that they visit our sites.

We're also one year into our acquisition of BabyCenter, which is operationally and financially running well ahead of plan. On the cloud side, our cloud fax businesses had one of its strongest revenue growth quarters at 4%, with the corporate cloud fax business growing over 12%.

While page volumes are now essentially at pre-COVID levels, much of the quarter was still at below normal volume, making our performance in corporate even more noteworthy. We believe that our product development and go-to-market strategies in the healthcare industry, are paying off, as we are winning larger contracts.

I know many investors questioned the relevance of our cloud fax business, but I would encourage them to appreciate what we really offer, which is a cloud solution to secure HIPAA compliant document transfer. And that solution is fueling $140 million plus corporate business, with double digit growth.

Within our cybersecurity portfolio, our VPN businesses were up 10% organically in the quarter, offset by expected declines in our backup businesses. We continue to be long-term bullish on the VPN endpoint and email security parts of this group, while we continue to manage backup for profitability.

We’re also excited to announce that we just acquired Inspired eLearning, which allows us to add security awareness training to our suite of endpoint, email, VPN, and backup solutions. As strong as our revenue growth was, our adjusted EBITDA and adjusted EPS growth were sensational, at 14.4% and 18.8%, respectively.

Most importantly, essentially all of that growth is organic, as we have little M&A in general, and the acquisitions we did, contribute little in earnings than last year's Q3. This is an important point as we manage the business for EBITDA, and we'll take lower revenue growth for higher profit growth.

While I know many in the market value organic revenue growth, with earnings being secondary, and in many cases non-existent, we view organic earnings growth as the primary goal of our businesses.

To the first three quarters of this year, during one of the most disruptive and challenging operating environments imaginable, we have grown our adjusted EBITDA by 8%, and our adjusted EPS by 9.1%, without M&A impacting those results much. But acquisitions are central to our total growth mindset and strategy.

So I wanted to spend a good deal of time this morning discussing the RetailMeNot acquisition, which as I mentioned, closed last week. This is a business that I personally studied and followed for over 10 years.

In 2010, I was working with private equity to acquire businesses that would form the basis of a digital media company focused on helping make buying decisions. RetailMeNot was a perfect target, but we came up short on valuation. We acquired Ziff Davis instead.

Since then, we've carefully followed RetailMeNot, waiting patiently for an opportunity to present itself. As our loyal shareholders know, we play the long game, and this situation reminds me of another asset for which our protracted patience was rewarded, Everyday Health. And today, Everyday Health will generate roughly $100 million of EBITDA.

What's been attractive about RetailMeNot for all these years, is that it solves two persistent and growing needs. For the consumer, it produces savings to the discovery of deals and discounts. For the retailer, it produces qualified traffic. Think of it as digital foot traffic. In physical retailing, location and agglomeration produces foot traffic.

But in the world of online shopping, every retailer has to develop methods for drawing in customers. Working with what the industry refers to as affiliate publishers, online retailers are increasingly looking to them to generate demand and drive conversions.

Prior to the pandemic, we were bullish on the long-term shift from brick and mortar to e-commerce, but the pandemic, we believe, has dramatically and permanently accelerated that shift, making the timing of this acquisition very compelling. In addition, we believe the relevance of savings for consumers will only grow in a difficult economic climate.

We've been an affiliate publisher since our early days in digital media. In my first presentation to the investment community, right after J2 acquired Ziff Davis, we shared a slide outlining our desire to capture consumers in every phase of the purchase journey, which we broke into four steps, discover, choose, buy, and use.

That strategy has been the underpinning of the growth in our performance marketing revenues. Of the $250 million of performance marketing revenues we do in a year, almost half falls into the affiliate publishing category. It's been a key differentiator between our publishing business model and those of others.

We started in the discover-and-choose phases, leveraging our reviews and buying guide content at PCMag, IGN, and later with Mashable, Everyday Health, what to expect, and BabyCenter. We then moved more into the choose-and-buy phases with the acquisitions of offers.com, blackfriday.com, and a series of other Black Friday sites.

While our efforts have made us a top affiliate publisher in the industry, driving approximately $1 billion of retail sales, the acquisition of RetailMeNot puts us at an entirely new level.

RetailMeNot’s website, mobile app, and browser extension, draw 650 million annual visits, and drive $4.3 billion of retail sales, about four times our existing retail sales. On a trailing 12-months basis, RetailMeNot’s revenues were about $180 million, and their EBITDA margin percentage was in the low 30s.

Our new colleagues have done a fantastic job at establishing RetailMeNot as a favored brand amongst shoppers, and a leading source of traffic and sales for retailers. We believe our combined portfolio of affiliate commerce assets, will create value in four areas, take rate, margins, traffic, and future acquisitions.

On take rate, our current affiliate publishing business enjoys about a 10% rate, while RetailMeNot is around 4%. The delta is largely due to the difference in payments for demand clicks versus conversion clicks. The former will earn a higher commission if the affiliate publisher is viewed as driving incremental traffic.

While the latter runs a lower commission as the affiliate publisher is viewed as driving conversion. Preventing cart abandonment and generating incremental traffic are a valuable combination.

We believe our skills and experience at producing content that drives demand clicks when distributed on RetailMeNot’s platforms, will allow us to start improving RetailMeNot’s overall take rate. Every point of take rate improvement would be worth $43 million of annual revenues.

On the margin front, our current affiliate publishing portfolio operates at about 10 points higher than RetailMeNot’s, but RetailMeNot has historically had margins as high as those as well. We believe that together, we can return to those margins, and apply are well-defined and successfully executed shrink-to-grow strategy.

In the case of RetailMeNot, the company has pursued non-core projects, such as gift cards and in-store that have not only harmed margin, but also distracted from the core affiliate publishing business. On traffic, RetailMeNot has seen challenges both in terms of aggregate traffic, and then the shift from desktop to mobile.

On the former, we believe investments in editorial content, especially the type that will drive demand clicks, will help to grow traffic. In addition, we believe that the Deal Finder browser plugin is a huge opportunity.

It competes with PayPal’s Honey, which is ahead of Deal Finder in installs, but together, they have less than 1% penetration of internet connected devices. In other words, it's very early days, and we think there's room for a few players in the browser extension market.

And we believe we can leverage J2’s media audience of several hundred million worldwide, to drive adoption of Deal Finder. I'm also happy to report that the patent litigation that existed between PayPal and Honey with RetailMeNot, has all been resolved. That had been an overhang for a while, and we're glad to see that dealt with.

On the shift from desktop to mobile, we believe reorienting the mobile strategy to focus on mobile e-commerce, as opposed to the mobile device being used for in-store coupon redemption, will help in closing the monetization gap. Finally, we believe that the J2 acquisition system, can continue to be leveraged in the affiliate commerce space.

The acquisitions prior to RetailMeNot of offers.com and our Black Friday sites, have generated amongst the highest IRRs in our acquisition history. We believe we've acquired RetailMeNot at an attractive EBITDA multiple, and within 12 to 24 months, expect to operate at an annualized EBITDA run rate of $80 million.

The affiliate commerce industry is fragmented, and we see an opportunity to continue to consolidate to achieve scale. I'd like to conclude with another update on our ESG initiatives. As I discussed in detail in our last call, we've made a great deal of progress on our ESG efforts, especially in the area of diversity, equity and inclusion.

In Q3, we announced the deposit of $10 million in four Black-run banks and credit unions. These deposits enhance the lending capabilities of these institutions, which serve Black and Brown communities in LA and in New York and in places in between.

We also announced an expansion of our partnership with the NAACP, in which we are committing $6 million of advertising over three years to support the messaging of the leading civil rights organization in the US.

I encourage you to spend some time with the new responsibility section on J2.com, where you'll see a number of our ESG initiatives outlined. We also welcomed another new board director to J2, Pamela Sutton-Wallace.

Pam is a highly accomplished and nationally recognized healthcare executive, who currently serves as the SVP and regional COO of New York Presbyterian, and was formerly the CEO of the UVA Medical Center. Given the importance of healthcare to our company's portfolio, Pam's industry experience and insight will be very valuable to the company.

As I've said on previous calls, J2 is committed to advancing board refreshment, and ensuring we have the optimal mix of experience and backgrounds on our board. Now, let me hand the call back to Scott..

Thanks, Vivek. Q3 2020 set a number of financial records, for which we are quite proud, given the continuing pandemic, including revenue, adjusted EBITDA, free cash flow, and non-GAAP EPS. These results were driven by better topline performance and an improved cost structure. We ended the quarter with approximately $665 million of cash and investments.

After the quarter closed, we spent about $420 million to acquire RetailMeNot, and replaced our 6% cloud notes due 2025, with new 10-year, 4 and 5, 8% notes at the J2 global parent. Let’s review the summary quarterly financial results on Slide 4.

For Q3 2020, J2 saw a 3.7% increase in revenue from Q3 2019, to $357 million, which exceeded our expectations. Gross profit margin, which is a function of the relative mix of our business units, rose to 84.7% from 82.3% in Q3 2019, in part due to lower cost in the media segment. We saw EBITDA grow by 14.4%, with third quarter record of $154.1 million.

The EBITDA margin for the quarter was 43.2%, a margin I might note, we usually see only in Q4, versus 39.2% a year ago, due to the improved gross margin, as well as cost containment in our operating expenses.

Finally, adjusted EPS grew approximately 20% to $2.02 per share versus $1.70 per share for Q3 2019, driven by the aforementioned increases in EBITDA and a reduced share count.

Turning to Slide 5, in Q3, we generated a third quarter record $93.7 million of free cash flow, which included $14.5 million of estimated tax payments usually due in Q2 that were deferred and paid in Q3, an approximate 20% increase from Q3 2019.

This was after continuing to make significant investments in our businesses through $20.7 million of CapEx. On a trailing 12-month basis, we generated $387 million of free cash flow, for a 66.7% free cash flow conversion of our trailing 12-month EBITDA of $580.2 million.

Now let's turn to the two businesses, cloud and digital media for Q3, as outlined on Slide 6. The cloud business was flat in revenue for Q3 2020 at $170.2 million of revenue, compared to the same quarter a year ago.

Remember that during the quarter, we divested our Australia and New Zealand voice assets, which cost the cloud business approximately $1 million in revenue during the quarter. The improvement in revenue from Q2 was due to improved usage from our healthcare customers, as well as new signups across our various cloud services.

Before turning to EBITDA, since we no longer have debt at the cloud business, we will not be allocating corporate expense to the two segments as we did previously. This was done so that our cloud segment financials would conform to the standard load cloud financials that are audited each year.

We believe that this allows for a better comparison operational results, since the two business segments do not control corporate expenses, nor their allocations. EBITDA increased by approximately 1.6% for our cloud business to 87.8 million, compared to 86.5 million in Q3 2019, after removing corporate allocations.

The EBITDA margin of 51.6%, is up about one percentage point from Q3 2019. Our media business grew revenue 8% to $186.7 million, and produced $75 million of EBITDA or 33.2% growth, after removing corporate allocations, compared to Q3 2019.

The EBITDA margin increased by 7.6 percentage points from Q3 2019 to 40.2%, due to incremental high margin revenue, lower costs, and an improved OpEx cost structure.

On Slide 7, I’m pleased that after reintroducing guidance only last quarter, we are raising the guidance for 2020 based on the strong Q3 results, as well as the inclusion of RetailMeNot for two months.

Our reinstated full guidance now estimates revenues for the year between $1.447 billion, and $1.462 billion, adjusted EBITDA between $595 million and $605 million, and non-GAAP EPS if between $7.85 per share, and $8 per share.

This implied at the midpoint, an increase in 2020 revenues, adjusted EBITDA and non-GAAP EPS of 4.6%, 6.6% and 8.7%, respectively, compared to the guidance previously issued.

I would also note that the low end of our EBITDA and non-GAAP EPS estimates, exceed the original high-end pre-COVID guidance of $595 million of EBITDA, and $7.66 of non-GAAP EPS. Finally, before turning the call back to the operator for Q&A, I want to address our current trading multiple.

Last quarter, Vivek noted that J2 believed it was an unprecedented time to buy J2 stock, and we acted upon it.

If we look at our own historic trading multiples based on revenue, EBITDA, free cash flow, and earnings, we believe we are significantly below our averages, and well below our highs, notwithstanding the company having more revenue, EBITDA, and EPS than any time in our history.

By way of example, on a trailing 12-month basis, traded 2.7x revenue, 7.1x adjusted EBITDA, 9x non-GAAP EPS, and 10.4x free cash flow, which are between 30 to 40% of our average multiples and over 50% off of our highs. I would now ask the operator to rejoin us to instruct you on how to queue for questions..

[Operator instructions]. And your first question is coming from Cory Carpenter from JPMorgan. Cory, your line is live..

Great. Thanks for the questions. Vivek, maybe one for you on RetailMeNot, and then I'll have a follow-up for Scott as well. So, appreciate the color you provided on the call, and congrats on the closing.

I was hoping you could just unpack a bit more on some of the strategic benefits you see that RetailMeNot brings across your digital media portfolio, maybe how it fits within your existing businesses, such as offers.com, and then also some of the synergies that you're expecting. .

Well, thanks for the question, Cory, and good morning. So look, as I said in the earlier remarks, this is a space that we have been in for a while, the affiliate publishing space and the affiliate commerce space. We know it exceedingly well through offers.com and our Black Friday sites, as well as our content sites such as PCMag and IGN.

So it's a space we've done well in. We've got a great track record. We've got great platforms, and RetailMeNot is a leader in this space. And so we think combined, the opportunities in the areas I talked about, take rate, and margins, and traffic growth, and future M&A, are pretty robust. So this is one that we're really excited about.

It's one that I personally tracked for a while, and I think we can do something really special with it. And we're excited to welcome our colleagues, mostly down in Austin, to the company..

Great. And then maybe Scott, just to follow up on the updated 2020 guide, could you just help unpack your expectations for revenue and profit, maybe in digital media versus cloud segment? And then also one question we've been getting a lot of, just how you're expecting - how much you're expecting RetailMeNot to contribute to the quarter. Thank you. .

Yes. So let me - thanks, Cory. Let me try to put all that together in sort of one comprehensive answer. And I thought you did a pretty good job last night in your note. As Vivek mentioned, you know, the trailing 12-month revenue of RetailMeNot is $180 million, operating in the low 30s EBITDA margins.

We’ll get one sixth of that in our current fiscal year or Q4. As you noted, there is seasonality. So, we'll get a little bit more than that percentage, and we should do better on the overall margin, as you normally would see in our own digital media businesses.

Also remember that we're going to lose about 3 to 4 million in the cloud business because of A and Z voice not being in the revenue for a full quarter versus Q4 of ‘19. It was in the quarter Q3 for about two months.

And then we also - I’d just remind people, we have some degree of negative seasonality in the cloud sequentially from Q3 to Q4, as we lose a few business days. Although, as Vivek mentioned, we've been having positive trending on usage, which may compensate for some of that, at least on a sequential basis.

Then in terms of the overall margin, what we expect then for the rest of the businesses is, we've guided them to be essentially flat. They could be a little bit up. They could be a little bit down. And influencers there are going to be the following.

We remain, one, cautious because of the continuing pandemic and the talk of a second wave and how that might impact the economy. And two, I would just remind you that in the year ago quarter, BabyCenter and Spiceworks were recently acquired. And as part of the shrink-to-grow, there'll be revenues, not in Q4 2020 that were in Q4 2019.

The opposite to that though is, we expect our EBITDA margins to be about 200 basis points better than last year. So they’ll be up, not only year-over-year, Q4 to Q4, but also sequentially from Q3 to Q4..

Thank you. And the next question is coming from Shweta Khajuria from RBC Capital Markets. Shweta, your line is live. .

Okay. Thanks. Let me try two, please.

Could you please talk about your work composition? Are we - should we - should investors be expecting any further changes? Are you satisfied with the changes you've made? And then the second one is, can you please talk about the trend you saw within your media segment through the quarter? So, sequential trends from July to August, August to September, and then how - what you're seeing early on in the fourth quarter so far.

Thank you..

Thanks, Shweta. Let me take the first ones, Scott, and maybe you take the second one. So, let me start by saying, look, we have, we think a fantastic board that brings a diverse set of perspectives and skills to the equation.

Over the last few months, we've added two fantastic new board directors, Scott Taylor, who was formerly the General Counsel at Symantec, and brings just a great cybersecurity perspective, amongst other things, but cybersecurity, as you know, is an important part of our portfolio.

And then as I said in our early remarks, Pam Sutton-Wallace has just recently joined the board.

She brings, as the current regional COO of New York Presbyterian, and former CEO of the UVA Medical Center, just a fantastic view into healthcare and the health systems, which is really relevant obviously to our health media businesses at Everyday Health Group, as well as our cloud services businesses, particularly our corporate cloud fax.

So the new perspectives we think are great. The board is now 10. It’s expanded. We think it's the appropriate group to have around the table. And so we're excited about it.

And I think ongoing, we're going to continue to look for opportunities to refresh, to bring in new perspectives, and to ensure that the skillsets align with the evolution of the portfolio..

Thank you. And the next question ….

Scott - sorry to interrupt. Scott, the second question. .

Yes, there was - I think she had a second question. So let me address that. So, Shweta, in terms of the digital media progression, I'd say it followed a similar path to what we talked about in Q2, which was sequential improvement throughout the quarter from June when we ended Q2, through September. Each month was better than the previous.

And so far, based on the early evidence, I would say that's tracking also through October. Just remember that in Q4, our most important months are November and December, and really beginning in about 10 days, through about Christmas time. But so far, we continue to see improving informing trends in our digital media businesses.

Okay, you can take the next question. .

Certainly. The next question is coming from Nick Jones from Citigroup. Nick, your line is live..

Great. Thanks for taking the question. I think maybe this one is for you, Vivek, but I guess, can you talk about - you know, when you talk about discovery, discover, choose, buy and use, are there opportunities within the healthcare business to do this? When I look at Vericast’s properties, they have RXSaver.

We recently saw GoodRX go public, kind of doing the same thing, but for pharmaceuticals. There’s telemedicine marketplaces.

Is there any way or opportunities to kind of bridge your knowhow in retail to kind of the healthcare space? Or is there kind of a different dynamic there that makes it more difficult from like an SEO perspective or marketing perspective? Any thoughts there would be helpful..

Thanks, Nick. It's a great question. So, let me start by saying that we actually do do a fair amount of affiliate commerce within the Everyday Health Group, the parenting and pregnancy space with BabyCenter, and what to expect.

As you can imagine, we do very well in categories such as baby registry, cord blood, and things that attach themselves to families that are expecting. So we see a fair amount of transaction volume and compensation there, and we continue to view that as a growth area.

Within the other health properties, we do have categories, including wellness and diet and meditation, subscription businesses where we are compensated for driving transactions. And we see opportunities there.

You know, the pharma discount space, which is getting a lot of attention, given the success of GoodRX, is a space that we have started to dip our toe into that water. There are complexities there, where essentially a lot of the affiliate players are really PBMs, Pharmacy Benefit Managers themselves. And that might be a level too far for us.

We don't know, we're going to have to look at that. I think more appropriately, I think Everyday Health has an opportunity to work with the GoodRXes of the world, which we've done, and the Sharecares and other entities in the space, to be drivers of their businesses. So that would probably be the more appropriate place for us to sit, but we do.

We view any category where consumers are looking online to, as we say, discover the product they want, choose, buy, and use it, and where we can get compensated for driving that transaction. So, the health category is absolutely one..

Great. Thanks for taking my question. .

Thank you. And the next question is coming from Shyam Patil from Susquehanna. Shyam, your line is live. .

Thanks. Hi, guys. I had a couple of questions on RetailMeNot, you know, thanks for the color on the trailing 12-month revenue and margins, as well as the expected future run rate.

But I was just curious, you know, with the shrink-to-grow strategy, as well as just your overall strategy for the business, are there any guideposts you can offer in terms of how to think about, you know, revenue for RetailMeNot for next year, as well as EBITDA? And also, is there anything we should keep in mind regarding seasonality for both revenue and EBITDA, specifically for RetailMeNot as we try to model out next year?.

Yes. I think that you highlighted an important point. So the trailing 12-month revenue, as we noted, is $180 million.

I think that our expectation, and we're obviously still, you know, very much deep in budgeting and not prepared yet to release 2021 guidance, but I think you should expect that number to be possibly down somewhat in 2021 as we do shrink-to-grow. The compensating factor is, the margin should be up.

As Vivek noted, we've got about 10 percentage points in margin to gain in that business. We don't think we'll get them all next year, but certainly as we are exiting 2021 and going into 2022, we should be starting to hit a more normalized margin level. So I think that'll give you some guideposts.

In terms of seasonality, it's similar to our core digital media businesses, where you're getting 30-ish percent of the revenue in Q4, and a fall-off in Q1. So I think you can impose a similar seasonality to what you've already been seeing in our digital media portfolio..

The only thing I might - Shyam, the only thing I might add to what Scott said is, I think we have a great deal of understanding of the parts of the business that we don't think are promising, and therefore might fit the shrink-to-grow piece.

What we need to work on through our modeling and our budget process, is how quickly we can achieve growth in the areas that I outlined in my early remarks. And depending on that timing, you could absolutely see an offset to the shrink-to-grow.

So I think that's the piece that is the unknown, which is the timing around the progress we're going to make against the various pieces. You know, look, we want to be very focused in the near term. We're moving into Black Friday, Cyber Monday, Cyber Week. This is the peak shopping period. So in many ways, we don't want to distract anyone.

I think the company needs to be focused on executing well in the next two months. And then I think we'll be in a better position to start to put in place the various growth strategies and ideas that we have. So, look, give us a little bit of time to unpack that, and I think by the time we're issuing guidance next year, we'll have a very clean answer..

Thank you. That’s very helpful. I have one follow-up. Just on the fax business, you know, the growth rates you called out were very impressive.

Can you just talk about, you know, that opportunity going forward? And just, you know, in particular, how do you think about the growth opportunity within fax overall, as well as corporate fax, and then, you know, within that, just the healthcare business?.

Look, you know, I've said it many times, I'm not sure anyone ever really registers it, but we have now $140 million plus corporate fax business, with double digit organic growth. This is not new. And it's a fantastic opportunity. And I think as more and more of healthcare looks to shift to the cloud, we're going to be a beneficiary.

And the fact remains that for HIPAA compliance reasons and interoperability reasons, fax is a preferred method of document delivery and transfer. So we continue to be bullish in that aspect of the business.

And as I've said, I think if we had described this as, I've got an ACIT business growing double digits organically at $140 million, operating at ridiculously high margins, trying to solve healthcare interoperability, it probably - that'd be worth more than all of J2.

But when we say it's fax, for some reason, the - what I just said and what preceded that, somehow gets - falls away. So we're bullish. We think it's a great business. I've always said it's a great business..

Great. Thanks, guys..

Thank you. And the next question is coming from James Fish from Piper Sandler. James, your line is live..

Hey Vivek and Scott, congrats on a great quarter and closing RetailMeNot. Really impressive results. But Scott, this is the largest buyback that is larger than the last seven years combined that we've seen.

Is it that you're seeing less opportunity in M&A closures, or just more opportunity in your own shares, which based on your commentary and valuation, would suggest the latter.

And while we're kind of thinking about it today, if we do have a blue sweep, is there any impact to how your taxes might change here?.

So, I think you kind of answered your own question, Jim, in that - and the beauty of our capitalization is, we were able to do both. Obviously, we closed a few small deals in the quarter. We've now closed what will be our second largest transaction in the company's history, of RetailMeNot.

And at the same time, we’re able to buy back in excess of 2 million shares, $150 million. And really it's driven by that chart on Slide 8 that I put up, which is the tremendous discount, whether you look at the average multiples of J2 or the highs, and we'd argue probably the highs would be more relevant than the averages.

Find it to be very compelling and very competitive with, you know, investing money in assets. So, you know, because of how we are high free cash flow oriented, because our capitalization is such it affords us the ability to do both, we will continue to look at both sets of capital allocation activities.

In terms of the blue wave and taxes, you know, the Biden plan, there's a lot of unanswered questions and details that are left out. Certainly, the headline is that corporate taxes would go up from the stated 21% to 28%. So you can, at one level, look at a seven percentage point increase.

Having said that though, the details are really the function of what happens to the mechanics of what happened in 2017. There’s things like GILTI and (DIP) that were put in place. Do those remain? Do they come out? We still maintain our international tax structure.

So, might that become more relevant again to the extent that the rates go up and provide some degree of offset? Right now, the plan is far too sketchy.

It's far too high level to know what the impact would be, other than it's likely that the taxes in the aggregate, when you sort through it all, would be higher than they are under the current 2017 Tax Reform Act. But the degree of magnitude is really unknowable..

Yes, understood. It's still during the Election Day today after all. And then just some housekeeping items. Can we get a breakdown within the digital media business? I know it's in the Q, between advertising and subscription. And then any update as to the cross-selling programs that have been going on in cloud services.

And if there are any bundles that are especially working well. .

Sure. So the first one, you're going to see that it's about 74% for the quarter of performance-based marketing and display advertising. Display advertising and video having a slight lead over performance-based marketing and about 26% of subscriptions. You'll see that on the Q, which hopefully will be filed either Friday or Monday.

And Vivek, you may want to address what's been going on in cloud with some of the bundles..

Yes. So, we've been doing a fair amount of testing between our backup endpoint email and VPN packaging. We've seen some really good success in some ARPA increase, as well as just what we think will be improved retention. It's still early to really understand that because it's - you know, you kind of need a whole contract year to go by.

I'll also say, you know, that we're continuing to look at acquiring new solutions that can be built into the suite. So I mentioned Inspired eLearning, which closed yesterday, which is security awareness training. And so security awareness training, I’m sure everyone on this call has done it.

You know, your company provides through a third party like IEL Training around basically not clicking on bad links in emails and on the web. And so, you know, packaging that in, we also think is going to be an interesting upsell and cross-sell opportunity. And it was a piece of our suite that we were missing.

The people we compete with, particularly in email security, have all done acquisitions in this space. And so we're excited to have that as well within the lineup. .

Understood. Congrats again, guys..

Thank you. .

Thank you. .

Thank you. And the next question is coming from Daniel Ives from Wedbush. Daniel, your line is live..

Yes. Thanks. Could you talk about, especially on healthcare pharma, you know, I think you tend to see six, nine months in advance on the advertising front. Could you just maybe talk about some of those trends that you're seeing, obviously stable to strong, but just maybe talk about that..

Yes. Hey, Dan. So, the pharma market continues to be very strong. As I’ve said in the past, it's in two markets. There’s the direct-to-consumer market, DTC, and then there's the direct-to-provider market, DPP. On the consumer side, I think increasingly, pharma are shifting dollars from traditional television to digital.

And so that's why we're seeing double digit organic growth in our consumer business. As I've said in the past, we're seeing the same dynamic, possibly even more profoundly, in our professional business, anchored by MedPage, where the traditional marketing vehicle or mechanism was pharma sales reps, visiting pharma - visiting physicians’ offices.

That really has stopped or come to a pretty significant - you know, to a low - to a small crawl. And that now they're looking for digital solutions to reach physicians. And as I pointed out in our prepared remarks, our position and penetration of physicians is really remarkable.

We’re neck and neck with Medscape, which had always been the market leader. And so we feel very, very good about that. So we continue to feel bullish about the pharma market, which is material for our media business..

Great. And then maybe Scott, you could hit this, now obviously, you know, when the pandemic first started and there was a perception from an M&A perspective, that was really going to slow you guys down, just given the typical model, especially on larger deals.

Obviously, we've seen a deal this quarter, but could you maybe just talk about that? I mean, going forward in terms of big M&A due diligence, the way the team is, have you guys adjusted now, it seems, to a new norm that wouldn't stop you from larger, much more significant M&A?.

I think the answer - and Vivek may want to chime in, the answer is absolutely yes to that.

As you know, and as we pointed out in Q2, we thought it was prudent, given all of the uncertainty in both work from home for our own company and employees, as well as how it would impact, not only our own businesses, but target businesses we were looking at to put a pause on.

But then as we saw our own success in working from home, and the productivity actually remaining very strong, the M&A team began to refocus, first on things that we had looked at in the more recent past. So we had some knowledge of it, but now they've gone full bore, I mean. So we are completely engaged in M&A.

obviously, we did a few small tuck-ins during the quarter that we already announced, as part of an earlier release. Of course we talked a lot about RetailMeNot, but I think on a going forward basis, we really - there's the three types of M&A that remain very prevalent. So we have those small deals that are tuck-ins that you saw us do in Q3.

Those are very much garden variety, easy to execute almost in any environment. I'd say we have a very nice pipeline of the mid-sized deals. Think of the BabyCenters, the Spiceworks we did last year. And then we have a group of the more RetailMeNot size deals, some a little larger, some a little smaller.

You know, as I always caution people, there's always a lower probability on those deals. Some of them are competitive and some of them, when we get into the diligence, you know, we just cannot affirm the price that is being expected by the seller..

Great. Great quarter. Thanks..

Thank you. And the next question is coming from Saket Kalia from Barclays Capital. Saket, your line is live..

Excellent. Hey, guys. Thanks for taking my questions here. Vivek, maybe just to start with you, a lot of talk about RetailMeNot so far. So, sorry to beat a dead horse, but, you know, I thought the math that you walked through earlier was interesting. I was wondering if you’d just recap it a little bit high level.

I think it was about 43 million in incremental revenue per point of take rate improvement. Can you just walk through that math again and why you think there's room for upside there on that take rate? And maybe as part of that, sort of reconcile that for me with the commentary around shrink-to-grow.

It feels like that's - there's incremental revenue opportunity, but we've talked a little about shrink-to-grow. So, can you just recap what parts of the businesses are shrinking, where it seems like a part of the business might actually grow? There's a lot there.

Does it all make sense?.

Yes, it does. Thank you, Saket, for the question, and it's a good one. So, the way we get at every point equaling $43 million of annual revenue, is that RetailMeNot’s current annualized retail sales, for which it receives a 4% commission, is $4.3 billion. So that's simple math.

And so the idea is, and as I said, our properties, which produce about $1 billion of retail sales, so, far less than RetailMeNot, enjoy a 10% take rate.

And the difference really comes down to, are you viewed as producing demand, or are you viewed as preventing cart abandonment? And the way to shift upmarket from cart abandonment to demand - and by the way, both are very valuable. So don't get me wrong. We want to do both, and we're excited to have both.

But it doesn't mean that you can't, at RetailMeNot, start to present deals versus presenting coupons, and that's the difference. There's a difference between a user at a checkout experience saying, you know what, I'm going to apply a coupon.

And it creates a conversion event, versus a consumer seeing a deal on a product that they weren't otherwise considering, and the fact that the product is a quality deal and a quality product, drives them to purchase. And that's more of what our existing assets have accomplished. They didn't start that way. We evolved them.

offers.com, a lot like a RetailMeNot, coupon-driven. We've been able to evolve that asset. So we have confidence in our ability to evolve RetailMeNot. Then in your question about, well, if that's going to generate incremental revenue, but then there are going to be certain businesses that you start to pull away from, as I said, it's a timing issue.

The things we're going to pull away from, you can do pretty quickly, right? The things we're going to grow into, take time. And so it's just a matter of, what is that timing going to be when we say, hey, listen, in-store isn't that attractive for us. Let's dial that back. That can happen immediately.

The process by which generating content, distributing content, negotiating new rates with retailers, that takes time. That doesn't happen overnight. So in my mind, you know, you give us 12 months on this, and I think we're going to get to a very interesting place where we have eradicated the revenues that generate no earnings, generate loss.

And at the same time, we start to see the upswing on our growth initiatives. And this is precisely what we've done in this space a couple of times before. So we have a lot of confidence in it..

Got it. Very clear and helpful. Scott, maybe for you for my follow-up, maybe looking at the organic business, you know, EBITDA in the digital - in digital media in particular was better. I think you mentioned a point earlier, the 40% margin release and seen outside of a Q4.

But really want to dial into sort of the gross margin piece, because I think that's been up and sort of approaching this 90% level for a couple of quarters now.

And so the question is, is this maybe related to some of those BabyCenter synergies, for example, shining through? Or is there something related to pricing? I guess I'm trying to understand, if we feel that gross margin, excluding RetailMeNot, of course, is sustainable organically in your view..

Yes, I think, and yes, appreciate the question there. So the answer is sort of yes across the board. As Vivek mentioned, and I think we talked about it last quarter, BabyCenter achieved its integration in terms of its financial integration status earlier than expected. That's only improving. So we're getting the full benefit of that in Q3.

Also, though, go back to what we talked about in Q2, in terms of the various programs we put in place that affected both cost of goods sold, as well as OpEx. And so it had to do with, in essence, a complete renegotiation of all of our contracts. So that did affect COGS. We did not, to just remind people, do a riff.

So it did not affect the employee component of that, but it did affect the vendor piece of it. And then, so we do think that all or substantially all of it is sustainable as it relates to the core business. Obviously, there'll be work to be done to bring those safe programs to RetailMeNot..

Got it. Very helpful. Thanks guys..

Thank you. And the next question is coming from James Breen from William Blair. James, your line is live. .

Thanks for taking the question. Just a couple. Can you just talk about sort of the revenue breakdown on the digital media side between the different types of advertising, subscription, et cetera, and how you've seen that trending if you imagine there's strength in gaming? And then just a couple for Scott.

You did do a few other acquisitions in quarter one. If you can tell us how much you spend on those three, and then also how much is left on the buyback. Thanks..

Yes, sure. Let me - why don't I be quick and start? Just on the advertising side, advertising was up about 10% year-over-year. We had organic growth at Everyday Health and gaming and Ookla. We also did have some benefit from some M&A from prior periods. We do have some challenges on the lead gen side, on the B2B side.

That’s still not at the level we'd like it to be. We think this has been the one area of the advertising business that's had COVID and pandemic related challenges. I want to point out something very important though. We get little to no election advertising, and that has been a major boost in the advertising numbers of other digital media businesses.

So we are performing at this level - our display is up 13% as part of the advertising. So, advertising was display and performance marketing. This is our eighth consecutive quarter of growth. Those who've been around the company a while, remember a time when display was a concern, and we have gotten past that.

And then just on the subscription side, media subscription side, we're roughly mid-single digits, which is a deceleration in the media subscription business. Part of that is kind of some competitive headwinds in the gaming subscription space, but that's been offset and it doesn't show up here per se, but in our increased games publishing at Humble.

That’s become a much more material and important part of that business's strategy, which is to be a publisher of games, versus just having the subscription service..

And then, Jim, in terms of the second question, the deals that we closed. During Q3, we spent about $8 million on those. So as you can tell, they're small tuck-ins. This does not include, obviously, RetailMeNot or IEL, which Vivek mentioned in his opening remarks, which just closed yesterday, which will be Q4 deals.

And then in terms of the stock buyback, we initiated a 10 million share program at the end of last quarter, meaning Q2. So we've now purchased 2 million shares under that program. So, 8 million shares remain..

Great. Thank you. .

Thank you. And the next question is coming from Will Power, calling from Baird. Will, your line is live..

Okay, great. Thanks. Yes. I guess I'll try to fit in a couple of questions here. Maybe just following up just quickly on the media subscription comment, when you're looking at kind of mid-single digit growth, does that include Ookla, or is Ookla separate from that? I guess I'm kind of curious what you're seeing at Ookla.

It sounds like really good download trends. And how can, you know, 5G perhaps positively, you know, impact that? So just trying to get a little more color on that piece of the business to start..

Yes. So, the Ookla business is in - much of the Ookla business is inside of that. The advertising portion of the Ookla business is not inside that. You know, it's interesting. We are seeing extraordinarily high levels of testing volume, which is not surprising, obviously, which improves the dataset.

It doesn't necessarily convert, you know, point for point in terms of revenue, but it is strengthening our already strong market position in terms of data capture. And we think that as 5G rolls out, you're going to have the same volume of increased testing. And I think it will allow us to produce new datasets for which we can charge incrementally.

So, I do think that will be a tailwind for the Ookla business. And then I think, look, the one that you didn't mention, but I'm going to mention just because it's related is Ekahau.

You know, Ekahau really was impacted by the fact that, you know, what it sells, really couldn't be used at the height of at least the first wave, which was, you know, office buildings being shut down, but we're seeing a really nice recovery there.

And I think an understanding that when people do return to offices, the Wi-Fi needs to be as strong as it's ever been, as there's still a contemplation that even inside of offices, you're going to have high broadband usage with video conferencing.

You know, the video conferencing activity will continue, we think, to be meaningful, not just because people are working from home, because I think when you have the mixture, the hybrid, which is what we're seeing in a lot of businesses where you’re people in an office and people at home, they're still going to video conference.

And that's going to put more, I think, strain on broadband networks. And so a business like Ekahau, I think, will thrive in an environment like that..

Yes. Okay, makes sense. I guess second question, you know, Vivek, you had, I guess, targeted $80 million in EBITDA for RetailMeNot in the next 18 months kind of rough timeframe, I think. Maybe just talk about, you know, the key drivers of that.

How much of that is revenue improvement, you know, take rate, other things along those lines, versus, you know, cost opportunities, you know, the shrink-to-grow piece? I’m just trying to get a sense for, I think it what the lowest hanging fruit is there, and kind of the competence level of reaching that target..

You know, Will, I’d just say it's all of that. I think that the - you know, I think we'll certainly see margin earlier as we deprioritize low and negative margin businesses, i.e. shrink-to-grow. I think we will start to see the benefits of take rate and traffic, but that's going to take longer.

That doesn't happen overnight, but it will happen, we believe, within that 12 to 24 months timeframe. And then the gravy would be future M&A on the platform, right? So, in my opinion, you know, there's an order of battle. It's not any different than our typical order of battle.

And so, you go at the things that you can deprioritize first, and then you build in the other pieces. And so again, I think by February when we have our next call, I think we'll have a better sense of the pace and timing of the organic opportunities around take rate and traffic..

Great. Thank you..

Thank you. I would now like to turn the call back to Scott Turicchi for any closing remarks. .

Thank you very much. We appreciate all of you joining us today for our Q3 earnings call, unpacking the results, as well as getting a deeper dive on RetailMeNot. As usual, we will be at a number of conferences, albeit virtual, between now and the end of the year. So look for press releases to announce those conferences.

Also, we will be doing a variety of non-deal roadshow activities, virtual of course. And so if you have any follow up questions or interests, please reach out to me or to Vivek, or to one of our analysts, and we'll be happy to facilitate a conversation.

And then we would expect our next regularly scheduled earnings call to be approximately in the second week of February to announce Q4 results, and then release 2021 guidance. Thank you. .

Thank you. .

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..