Greetings, and welcome to the j2 Global First Quarter 2020 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Scott Turicchi, President and CFO. Thank you, sir. You may begin.
Thank you. Good morning, ladies and gentlemen, and welcome to the j2 Global Investor Conference Call for Q1 2020. As the operator mentioned, I'm Scott Chiricchi, President and CFO of j2 Global and I'm joined by our CEO, Vivek Shah. A presentation is available for today's call. A copy of the presentation is available at our website.
When you launch the webcast, there is button on the viewer on the right hand side, which will allow you to expand the slides. If you have not yet received a copy of the press release, you may access it through our corporate website atwww.j2global.com. In addition, you will be able to access the webcast from this site. After completing the formal presentation, we will be conducting a Q and A session. The operator will instruct you at that time regarding the procedures for asking a question.
However, you may email us questions at any time at investorj2global.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 could 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 ks filings, recent 10 Q filings, various proxy statements and 8 ks filings, as well as additional risk factors that we have included as part of the slideshow for the webcast.
We refer you to discussions in those documents regarding Safe Harbor language as well as forward looking statements. Now, let me turn the call over to Vivek for his opening remarks.
Thank you, Scott, and good morning. I hope everyone joining us today is doing well and are safe and healthy. I want to start by thanking all of J2's employees worldwide for their dedication and determination. I continue to be inspired by our organization's response to this crisis and impressed by the tremendous resilience shown by our people and businesses. We were early in our embrace of social distancing.
We began shifting our entire workforce, which is more than 4,000 people in over 60 locations to remote work on March 10th, which was well ahead of local orders. We're very thankful that our workforce remains healthy. Our ability to move everyone to remote work as seamlessly as we did is a tremendous tribute to our technology organization and the preparation and investments the company has made over the past couple of years. We've always believed that being a company that produces and delivers nearly all of its products and services digitally is an advantage, even more so in this environment. We're pleased with our Q1 results, which were in line with our expectations.
We're closely monitoring every part of the portfolio to evaluate the impact the pandemic is having on our businesses. Our March revenues were up 9.2% year over year, which was a tick under the 1st 2 months of the quarter, but in no way represents the kind of revenue drop many of our peers are reporting in March. Our April revenues are also relatively healthy coming in flat year over year. As we stated in the business outlook section of last night's press release, we anticipate Q2 2020 revenue to be slightly down and adjusted EBITDA and adjusted non GAAP EPS to be down single digit percentages versus Q2 twenty nineteen based on current performance. It's important to understand that our decision to withdraw our full year financial guidance in no way reflects a lack of confidence in our business, quite the contrary.
We feel our portfolio is demonstrating remarkable resilience. Rather, it reflects a reluctance to engage in pure guesswork as to what the world is going to look like starting in July. It might be helpful, however, for me to share some of the broad market trends that we're observing. Let's start on the advertising side of our business. In any downturn, the first expense cuts happened within the marketing and advertising budgets of companies.
It's the easiest thing to turn off as there are a few long term non cancelable contracts, there are few penalties or costs associated with canceling, and the revenue impact is felt in future periods. In this particular market, we have another factor, which is the explosion of ad inventory based on significant increases in media consumption that are causing compression on advertising rates. As a result of all of these trends, a number of the largest sellers of advertising in the world have reported significant, sudden and steep declines in revenue. H. A.
2 however, we are cautiously optimistic that our $510,000,000 annual ad business can perform better in relative terms. First, our advertising business has little local retail exposure in terms of customers. We have roughly 1100 advertisers who are mostly big companies, while many of the social media companies have millions of advertisers, a good number of them local businesses that have been hit hardest by the pandemic. 2nd, we have little exposure to the hardest hit ad category so far, travel, retail, food and auto. In fact, roughly 40% of our ad revenues fall into the health category, where we are seeing growth from pharma marketers.
As a point of reference, through April, Everyday Health has seen organic ad revenue growth of 5%. 3rd, the last marketing dollar cut is usually the best performing dollar. And as you know, about half of our ad business is performance based, meaning cost per click, cost per lead, or cost per acquisition. And the other half, which is impression based display, is usually measured and optimized on performance outcomes. We're hopeful moreover that these are mitigating factors for us in a punishing environment for ad sales.
On the subscription side of our business, which is about $850,000,000 annually, we are closely following subscription acquisition and cancellation trends. We have not yet seen any appreciable slowdown in our subscriber adds. We're stable in the near term, we believe for a few reasons. For starters, our services are viewed as more essential in a work from home environment. In fact, over the past 6 weeks, we've seen net adds for eFax in North America running about 50% ahead of plan as the rapid shift to remote work spurred orders, but we expect that will likely return to normal levels.
Our voice businesses, which offer softphone services, are relevant at a time like this, and we're seeing meaningful increases in email send volumes with our MarTech services. Security and privacy are as important now as at any time. Also, much of our subscription revenue employs a lighter touch sales model, meaning web and phone based customer acquisition, which have been less disrupted by the pandemic. Finally, our lower ACVs likely make purchasing much easier than larger ticket items. Where we have seen customer acquisition impact is where field sales and or physical contact are necessary.
Larger cloud fax deployments, which require in person sales efforts, and Ekahau, which sells tools for commercial Wi Fi deployments, have seen slowdowns. We've also seen meaningful reductions in corporate fax page volumes from healthcare customers who have suspended elective surgeries and therefore have lesser movement of medical records. On the cancel side, we have not yet observed higher rates of cancellations, evidenced by a slight decline in Q1 cancel rate from Q4 2019. But if past recessions are any indication, then we would expect to see increasing cancels as credit card statements and accounts payable ledgers all around the world get even greater scrutiny. Another headwind we have on the subscription side is ForEx, which has already cost us $1,500,000 in the 1st 4 months of the year.
All taken together, we are cautiously optimistic that the headwinds and tailwinds will cancel each other out, but much depends on the broader environment. Across the entire company, we have developed contingency plans to manage expenses, including pauses on hiring, delays on salary increases, delays on certain development projects, reducing less productive marketing spend, renegotiations with vendors and suppliers, and reductions in our real estate footprint. At the same time, we have not had to resort to the more draconian measures that we're observing by many in the industries in which we operate. And we're also funding some key growth initiatives at the company, given our very strong balance sheet and free cash flow. In the category of longer term themes that we believe will emerge out of this crisis, we have identified 4 that are important to j2.
The first is our belief that healthcare will finally embrace digital transformation. There are 2 areas in which we believe we can benefit. The first is in our cloud fax business. As we said in the past, we estimate that the vast majority of healthcare faxes are done with machines and servers. This crisis underscores the need to move from an on prem to cloud solution.
Furthermore, we recently launched a new platform called Consensus, which combines an improved enterprise cloud fax solution with secure direct messaging and patient record query capabilities. We believe that this will be an important platform as healthcare moves to the cloud. To learn more about it, please visit consensus.com. The second area where we see opportunities in what's referred to as detailing in the pharma industry. Historically, that's meant sending sales reps in to see doctors.
We believe that that will be replaced almost entirely by eDetailing, which is reaching doctors digitally through websites, email and webinars. Everyday Health Pro is in this business and our flagship site MedPage today saw a 33% increase in its physician promo revenues in Q1. The second theme is the rise of remote working. In cloud services, we are focusing our product development, marketing and sales at our security, privacy and voice businesses on work from home needs. What might have taken months of development is now being rolled out in weeks.
A prime example of that is the Evoice Meet product, which is a fully encrypted video conferencing solution for our customers. You can try the beta for yourself at meet. Evoice.com. The 3rd theme is our belief that video game play will only grow and establish itself as a leading form of entertainment. The spikes in consumption are evident and our ambition at Humble Publishing to be the leading indie game publisher is as promising as ever.
We expect to launch 19 games this year and another 60 games are in development for the future. The 4th theme is our belief that e commerce will become the dominant form of retail. Prior to the pandemic, e commerce only represented 11% of all retail sales. Now the entire public is growing accustomed to shopping online. As you know, we have long focused on being a driver of qualified traffic to online retailers through our editorial sites such as PCMag, IGN and Mashable, as well as our deal sites like offers.com and our Black Friday sites.
Now a few words about M and A. We are pleased to have consummated 2 transactions in Q1. While small, it's nice to see us get our 1st Cloudfax deal done in a few years, as well as add a condition specific site to the Everyday Health portfolio. But during this pandemic, we are very reluctant to close on transactions without visiting companies. Right now, we are planting a ton of seeds and when the clouds lift, we think we are going to be very well positioned strategically and financially to act on some very interesting opportunities.
We're also very focused on building our cash balance through ongoing free cash flow from our operations. Before I hand the call back to Scott, let me reiterate my utmost confidence in j2 and its prospects. I personally bought $1,000,000 worth of shares during our open window in March. The resilience and strength we're shown should convince even our biggest doubters that j2's portfolio, operating discipline and capital allocation are special. Scott?
Thanks, Vivek. I will provide a succinct overview of the Q1 results on Slides 4 to 6 to ensure that we have ample time for Q and A. We ended the quarter with approximately $625,000,000 of cash and investments after spending approximately $75,000,000 in the quarter on acquisitions and share repurchases. Now let's review the summary quarterly financial results beginning on Slide 4. As Vivek mentioned in his opening remarks, we had a solid Q1, which was in line with our expectations and saw an 11% growth in revenues to $332,400,000 up from approximately $300,000,000 in the year ago quarter.
EBITDA grew 2.6 percent to $116,800,000 The slower EBITDA growth, which was anticipated, was due to lower margin revenue contribution from Baby Center and SpiceWorks, coupled with the timing of certain Humble Bundle payments in 2019 that shifted out of Q1 2019 and into Q2. Earnings per share was flat at $1.40 aided by the higher operating income and lower share count, offset by higher interest expense due to the 1.75 percent convertible notes issued last November, as well as a modestly higher tax rate. We completed 2 tuck in acquisitions during the quarter and have repurchased 1,000,000 shares of our stock since the beginning of this year. Turning to slide 5, in Q1 we generated $95,200,000 of free cash flow, which was an 8.7% decrease from Q1 2019. The decrease was due to receivable collections anticipated in March that shifted to April of approximately $5,000,000 and higher CapEx of approximately $14,000,000 versus Q1 2019 that has been funding a variety of projects over the last year well as the implementation of various corporate systems.
Now let's turn to our 2 segments, Cloud and Digital Media for Q1 as outlined on Slide 6. The cloud business grew revenue 11.5 percent to $169,800,000 with EBITDA growing 4.3 percent to $78,400,000 after corporate allocations. The Digital Media segment saw growth of 10.1 percent to $162,600,000 with a slight decline in EBITDA of 2.1 percent to approximately $40,000,000 due to the shifting of timing of the Humble Bundle payments referenced earlier. I would note that absent corporate allocations, the Digital Media segment had a slight increase in EBITDA over Q1 2019. Finally, before going to our question and answer session, I would like to turn your attention to our business outlook on Slide 7.
As noted in the press release, we are withdrawing our previously issued financial guidance due to COVID-nineteen and the uncertainty of the macroeconomic environment. However, based on our current performance and expectations, we expect Q2 2020 results to be slightly down for revenues and adjusted EBITDA and non GAAP EPS to be down single digit percentages from Q2 2019. I would note that Q2 twenty twenty will benefit from acquisitions that are not contributory to Q2 twenty nineteen financial results. The revenue contribution from those acquisitions represents approximately 6 percentage points of year over year growth in the quarter. Given the nature of this macroeconomic environment and the need to evaluate operations on a short term basis, we have limited visibility at this time into Q3 and Q4 financial expectations.
Following our business outlook slide are various metrics and reconciliation statements for the various non GAAP measures and their nearest GAAP equivalent. I would now ask the operator to rejoin us to instruct you on how to queue for questions.
Thank you. We will now be Our first question comes from the line of Cory Carpenter with JPMorgan.
Maybe one and then a follow-up if I could. So Vivek and Scott, appreciate the color on the margin April trends, very helpful. I guess my question is, any signs of stability you're seeing in the 1st few weeks of May, from a trend perspective? And then maybe kind of pulling it all together, could you talk about Digital Media and Cloud Services, maybe the revenue and EBITDA assumptions embedded within your 2Q guide? Thank you.
Good morning, Cory. Thanks for the questions. So with respect to May, I mean, we're only 12 days in, but May looks just like April does. So essentially flat across the board. I do want to point out what Scott said in his prepared remarks, which is adjusting for M and A that contributes to this year that was not present last year, that's about 6 points.
So on an organic basis, trending about 6 points down in April May, and that's our expectation for Q2. And look, I think considering the environment in which we're operating, where essentially every business is feeling the negative impacts of the virus, particularly media businesses and ad based businesses. We think that's really outstanding and it reflects the strength of the portfolio and it reflects the strength of these brands. And so I think at this stage and as I said and as Scott reiterated, really the reason why we're not going to really speak beyond Q2 is we have no idea what the operating environment is going to be. It has nothing really to do with our businesses.
Our businesses are showing, I think, a fair amount of strength and resilience in this period. But it's really, as I said, pure guesswork to figure out what's going to happen starting in July and into the rest of the year. I keep seeing all forms of different recovery notions. I think this morning was the swoosh recovery. So again, I think everyone's trying to understand what's happening in the marketplace, not just us.
And I would just follow-up on that, Cory, that in terms of the two segments, they look similar in their operating performance in the 1st 5, 6 weeks of Q2, meaning flattishness on both. But as Vivek just mentioned, the media business does benefit from some M and A in Q2 that was not present in Q2 of 2019 where that's not the case for the cloud business to any material degree.
Okay. Thank you. Very helpful. And then just one follow-up and you touched on this on the call as well. I was hoping you could expand some on your 4Q call, you could lay out some investment areas in 2020.
Could you speak to how the current environment changes your plans, if at all? Maybe where you continue or plan to continue investing or even lead in, and then any areas where you may pull back?
No. So I don't think it changes our investment themes and where we would like to put capital to work. I think it changes our timing and I think it changes valuations. And so from a timing point of view, as I said, we're holding back right now. And it is us holding back thinking that we would prefer to be in an environment where we can actually visit companies before we transact.
And so that's something that we'll see for how long that's going to be our reality. But that's the timing issue. It's not about availability of ideas and availability of opportunities per se. And then in terms of valuation, I think that particularly in the media world and in the digital media world, I think seller expectations have come down appreciably and not surprising. And so we think we're going to benefit from being patient here.
In the meanwhile, we're going to continue to add to our balance sheet and continue to add to our buying power. But I think when the time comes for us to transact, I think we're going to see some very, very interesting opportunities.
Thank you. Our next question comes from the line of Saket Kalia with Barclays.
Okay, great. Hey, thanks for taking my questions guys and thanks for having me on the call here.
Absolutely. Good morning. Absolutely. Good morning.
Vivek, maybe just to start with you, understanding to your point, it's really hard to think about the back half of the year here in terms of the pace of the recovery, etcetera. So definitely not looking for any sort of quantitative forecast here. But maybe the question is, what are you hearing from advertising advertisers here for the latter part of the year? And what are some of the leading indicators here that maybe are informing your thought around how the back half of the year could sort of transpire for your advertising business. Does that make sense?
Yes, it does. I mean, look, I think it's category dependent. So if you look at the categories in which we operate, you have different things going on and you have different ideas amongst our advertising clients. So let's start with pharma. Pharma, as I pointed out in my prepared remarks, continues to grow.
And it grows both on the direct to consumer side, but even more so on the direct to provider side. So pharma advertisers have historically had messages for patients and messages for providers. And so we are seeing some pretty healthy trends, particularly on the provider side. And I think part of that has to do with this notion of physical detailing, a sales rep going in to see a physician is essentially isn't happening right now. And I think this will affect our permanent shift.
There are some exceptions. So if there's a drug that has a if there are any concerns about a negative interaction between that drug and the virus, they've gone dark. So we have seen a few drugs go dark from a marketing point of view, which I think is understandable. In the gaming area, we have something entirely different going on. And prior to COVID-nineteen, I believe I mentioned this at the Analyst Day in early March, is we were anticipating that many gaming advertisers and publishers were going to hold their spend to support the next generation of consoles, both Sony and Microsoft's consoles that are coming out during the holiday season in 2020.
And so we saw that already happening. And then add to that demand for gameplay is so high, there's probably a notion among some of the publishers of they don't really need to advertise right now because the demand is coming in. But again, I think with the console cycle, if it still comes in the fall, I think we're going to see some budgets release. And then on the tech side, again, it depends. If you're direct to consumer, you're trying to feed online sales where we are well positioned.
If you are enterprise in orientation, right now you may not value leads that you can't follow-up on and have an in person call. So it really is there isn't one answer in the categories in which we operate. And I don't know if it's we're lucky or we're good, but the things we're not dealing with are what many people are dealing with, which are travel and auto and these So that So that's kind of it's not one neat answer, but as we often do, we're unpacking it based on each of these different categories.
Got it. That makes a ton of sense and it's super helpful. Maybe for my follow-up for you, Scott, just maybe digging into the digital media business just a little bit more. How do you think about the subscription component of that business? Brian, I think that's going to include parts of businesses like parts of measurement, maybe some components of healthcare as well.
I think that was down sequentially. How do you think about that sort of seasonally in a typical year?
Yes. And I think that's an interesting point because our subscriptions in digital media do behave differently than the typical subscriptions in the cloud business, which is very sequential in nature. And for those of us and I know Saket you're relatively new to j2, if you go back to Q4 of 2018 and Q1 of 2019, you'll also see a sequential dip in subscription revenues in digital media. As you know, they're heavily weighted into the Davis business unit into the first two categories you mentioned, which is a Humble Bundle on the game side and Ookla in the broadband division. And they each behave somewhat differently, but let's take the games piece of the business.
We tend to see a surge of activity later in the year, in the second half of the year, particularly in Q4. That was noticed in Q4 of 2019, which had even relative to our own expectation about 10% outperformance in that quarter. Now the interesting thing about Humble Bundle is people are allowed to pause their subscriptions, which is very common as we exit Q4 and go into Q1. So we actually expect to see sequential declines in the Humble Bundle subscribers. And then as the year goes on, we tend to re amalgamate that growth and then even go beyond it.
Ookla is a little bit different in that it tends to be a very small number of subscribers. They're very chunky. So the timing on which they subscribe and for what they subscribe tends to influence the total revenue we book. Those 2 also seem to be a little bit weighted from Q2 to Q4 versus Q1 and that's also a function of the package they buy. So some are very short term in contract relationship, maybe measured in a matter of a few months and some come at higher value levels than others.
A lot of it has to do with the types of data that they are subscribing to. So I think if you look at our total subscription revenues on a year over year basis for Q1, they're up 12.5%. I would say that if you look at the run rate, the way we look at it for the business, once again with some degree of caution as we look at the back half of the year, we think that's tracking to about 10% year over year growth.
Got it. Very helpful. I'll get back in queue. Thanks guys.
All right. Thanks Saket. Thank you.
Thank you. Our next question comes from the line of Daniel Ives with Wedbush Securities. Please proceed with your question.
Yes, thanks. So
when you're talking about 2Q and obviously being down, so far it's been flat. Can you just maybe talk about like assumptions in some of the businesses from a high level as you're thinking about the quarter?
Yes. So I think I'll start and then Scott jumped in. But so again, when we're looking at it segment level, we look at cloud being essentially flat to slightly down with really no M and A in that mix. And remember, against last year, you have a full quarter of ownership for our IPVanish business. And then within that, if you just look within sort of the areas that we talked about at the Analyst Day, security and privacy and corporate facts continue to be very strong and strong organic growers, offsetting a little bit of decline on the WebFac side and a little bit of decline on the backup side.
In the Digital Media segment, again, we're saying revenues on a reported basis will be flat year over year, but it benefits in the advertising portion from BabyCenter and Spiceworks on the revenue side being in our Q2 'twenty numbers and not in our Q2 2019 numbers. So on that basis, really that 6 points of M and A really all falls within the Digital Media segment. And so as a segment, it's down, let's just say, if you want to see what is the organic decline in the Digital Media segment, it's 6 points.
Got it. That's correct.
Could you and maybe Scott could hit on the expense areas. But maybe from a media perspective, can you just talk about like day to day what you're doing in terms of just with navigating the businesses, look, obviously, all the different business heads, they're almost running their own businesses. But just maybe talk specifically in Digital Media, what you're doing almost day to day with clients with the business to kind of navigate this storm? Thanks.
Yes, it's a great question. I mean, I think, we're staying in constant contact with all of our clients. It's interesting in this remote work environment, there almost seems to be more of a willingness for clients to engage. I think everyone finds themselves with more working hours and less traveling, commuting hours and an interest in having these discussions. So I think the quality of the engagement between us and our clients is very strong, lots of discussions about future plans.
So I do think it's very healthy that way. And from an operating point of view, and I'll say this for all of Jay Kuh, and I said this in my prepared remarks, but it is remarkable to me how quickly and early we were able to get into this new environment. And I think the productivity levels of the company haven't been higher. And I'm pretty amazed at the product development work that's going on. I mentioned a couple of the things that we've rolled out in the Q1, but the pipeline is very strong and the product roadmap is very strong.
So that is a mindset that the company has right now, which is, look, you can't control the external environment, but we can certainly control our pace of development and our pace of innovation. And that shows up a little bit in the expenses. I'll be the 1st to tell you that the driver expenses year over year is compensation and that has to do with the organization that we've built to pursue the opportunities that we see in front of us and those aren't changed. So we have not engaged in any sort of large scale reductions in force or layoffs. We don't believe that our businesses are anywhere close to feeling the effects that other businesses in our industries are feeling and have gone to those.
And so we feel very fortunate at this point that we can keep this team in place and pursue all of the things that we are pursuing. And so whether it's the Everyday Health Group, Zip Davis or Cloud, each one of those divisions and inside of each of those business units have pretty ambitious projects on their plates.
Thank you. Our next question comes from the line of Shyam Peddle with Susquehanna. Please proceed with your question.
Hey guys, good morning. Good morning. Good morning, Scott. Vivek, at your Analyst Day, you talked about having some larger deals. It sounded like in the middle of the funnel.
It sounds like there could be somewhat of a pause now given the Salvo restriction. But can you just talk about kind of how you feel about those deals coming out of this? And if you expect M and A to be weighted more toward larger deals during the recovery, if you could just talk about that?
Yes, it's always hard to predict, but I will tell you that what might have been
larger a
couple of months ago just got smaller on the very same target potentially. So that we recognize, which is making sure that we understand the right price on pre existing assets, things that we've been working on. And then new assets start to come into view, right? I mean, so we do have those dynamics going on. But I'll give you the answer I always give because it is the truth.
It really isn't it's about putting capital to work to get maximum returns. And if that's come and we're built to do a series of small things or even larger things. And so to me, it's going to come down to what are the best available opportunities when we are in a position to transact. That's the key is that that's the unknown is when are we going to be in a position to feel comfortable to transact and will we ever get comfortable transacting without ever actually seeing a company physically. So it's a question and debate we have right now.
Right now my view is I think that's a hard thing to do. But again, depending on how long this reality is in place, it's something that we'll at least have a healthy debate about.
Okay, great. And then just a quick follow-up for Scott. Okay. Scott, in terms of gross margins overall and by segment and the op ups by the bucket, any color you can give us in terms of how to think about those for 2Q and just conceptually how you're thinking about those for the rest of the year?
Yes. Well, I think I'll limit my comments to Q2 just in general because of, as I say, the uncertainty of the macroeconomic outlook for the balance of the year, although I think some of these trends have a likelihood of persisting. In terms of the cost structure. Really, that's more of a probably revenue question. In Q2 specifically, I would say that the gross margins, they're not moving around a whole lot within each of the two segments.
I would think that those trends you saw in Q1 are likely to continue into Q2. In terms of the EBITDA margins, I would expect that our EBITDA margins to be somewhere between where we were in Q1, which was 35% EBITDA margin and where we were in Q2 of last year, which was 39%. You could use the midpoint of that just as a guardrail. And a lot of where the margin comes in, in Q2 will be a function of a couple of things. As Vivek mentioned at the beginning, as we said throughout this call, this is very much of a week to week analysis, primarily on the top line.
So incremental revenues that come in or don't come in relative to our current expectation will generally have a very high flow through to EBITDA. Most of that's going to come because there's not a lot of OpEx associated with that incremental revenue. There might be 15 to 20 points of COGS, but that's about it. And then the second thing is that a number of the initiatives that Vivek outlined at the beginning of his call and answered to some degree on the question that was just asked by Dan is really a timing issue. So we're tracking independent of the revenues all of the savings that are coming in from things like lack of T and E, although I wouldn't say that it's absolutely 0, Things like where there are elimination of certain costs that we previously thought were
necessary and have deemed now to be more
of a luxury. So those things are they will more fully benefit the back half of the year than they will Q2. So that's why there's going to be some, I think range of EBITDA margin regarding Q2. But I think as I say kind of it's a 4 point band, well, which in which you should be thinking. And then I would just bring you're not asking the question, but I'd like to bring it to the bottom line for Q2.
One of the things that we had going into this year was relative to the last several years, a decent interest rate environment. So because of the convertible note offering in November of last year, we have significant cash balances and they are growing. So even more than you see reported at the end of March, which is about 525 with the 625 of cash and investments. We were getting on a portion of that cash, a good portion close to 1.5% interest, which was offsetting some of the incremental interest interest expense. That has pretty much vanished.
We are still getting some yield, but I would say it's conservatively down 100 basis points and we're now getting in the 40 to 50 basis point range. So just to make it clear to everybody, I'm looking at our interest expense net assuming no currency translation adjustments in other income of $16,300,000 for Q2. I think that's likely to $1,000,000 for Q2. I think that's likely
to sustain itself in each of the following quarters
and our non GAAP depreciation right around $15,000,000 As you saw in Q1, our tax rate came in consistent with our budget, which is right around 22%. And then one last thing, because I know I'm going to get asked it is we have the share buybacks. Technically, they spilled into the Q2, but as a practical matter, we actually executed all the trades in Q1, but we paid for about 350,000 of those shares in Q2. So that's why I referenced earlier, we the 1,000,000 shares. There was a partial benefit of that in the effective share count for Q1 that will be fully realized in Q2.
So if you look at the EPS, the effective share count in Q4 of last year was $48,500,000 and Q1 of this year was $48,100,000 and we're expecting it to be in Q2 around 47.2, 47.3.
Our next question comes from the line of Nick Jones with Citi.
Could you dive in a little bit on the cloud services side and what you're hearing from the SMBs? And
I
think you have a pretty broad coverage there of the types of users. So any additional color there would be helpful. Thanks.
Yes, Nick, thanks. So again, I think the question that everyone's asking really is on the cancel side. Are you seeing the kind of cancellations that others that are S and P focused are experiencing? And the answer to that to this point is no, actually cancels, as I think I mentioned in my remarks in Q1, were an improvement over Q4 and in the early goings of Q2. We haven't seen any indication of it.
But Scott does remind me that in past recessions, we had seen increasing cancels. We were a very different product portfolio there. We were largely WebSaks. So it will be interesting to see how the non WebSaks portion, which is larger than the WebSax portion within cloud will behave. I think you've got a couple of things going on.
I think number 1 is, I don't think we're not selling very high price point products. I believe that the products that we're selling, if you are a going concern in the business or products that you need and are somewhat essential to what you're doing. I mean, you look at our email marketing business, I was surprised by this, but the scent volumes are even bigger. And that's because if you are a retailer and you're trying to drive online sales, you're going to use email marketing as a cost effective and then quick to turn on tool. So I guess it shouldn't be that surprising.
On the ad side, again, because of most of our acquisition, customer acquisition is done on the phone or on the web, those have been unaffected and some could argue have been more effective in this environment than other forms of customer acquisition. Where we are seeing challenges, as I mentioned, is we are seeing significant page volume decreases. It's not a huge portion of the overall revenue, but we are seeing fewer spends amongst healthcare enterprise customers where we do get a marginal amount of we get an incremental amount of revenue on volume. But we think that will return when elective surgeries and non COVID care start to kick in across our customer base. And I would add to that.
The only other thing, sorry, sorry. The only other thing is I would say that just on the healthcare piece, the healthcare is a huge part of the cloud customer world. I really, really do believe that this event is going to trigger a lot of change. And I think that change is going to be helpful to us. And you should spend some time on consensus because I think you'll get an appreciation for the interoperability solution that we're building.
So I just I'm bullish about that. Obviously, again, I can't tell you when healthcare will return to some form of normalcy, but I do believe that the solutions that we're building here are important. So in many ways, these are healthcare solutions that are a part of the cloud business. And what
I want to follow-up on, Nick, was that when Vivek said that the product mix has substantially evolved from say the Great Recession of 'eight, 'nine, I'll be a little bit more I think definitive on that that really the business, if you look at the late 'eight, early 'nine timeframe is what we call the Web fax business that was outlined in the Analyst Day by Nate. And so that was heavily really SOHO weighted at the time, not even what we now call SMB. So the mix between Soho, SMB and Enterprise is substantially different today than it was back in 2008, 2009. And just to give you a benchmark, going into the Great Recession in terms of the peak, the cancel rate increased about 50 basis points per month. It started at a higher rate.
It was at 3% versus the current 2%, 3%, 2%, 4%, and it peaked at 3.5%.
Great.
Thank you. Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for the question. You guys actually have answered most of mine, but just one for you. One thing that was not addressed at the Analyst Day was the prior cross sell programs that I think are important in the cloud business that really didn't work out in the past cycle when you guys try to do it under the old management team. But I guess what's the difference this time and how are the early cloud cross sell programs going with this environment?
Yes. Thanks, Jim. Appreciate that question. So we're doing a few things. So we and we might have talked about this, I can't remember at the Analyst Day.
But so we've started to bundle SugarSync and IPVanish. That really is a retention play. So same price both products together. And it's early because we're not in that many renewal cycles. The month to month look good, but we haven't yet hit an annual cycle.
But from a retention point of view, that seems to be working and we're seeing some good early positive signs. We've also bundled VPN with Vypr. We've done a Vypr being our endpoint product and then we've created a VyprVPN leveraging our white label VPN technology inside of the security and privacy business. And there we're trying to drive more average revenue per user. And there we're seeing some good progress and solid numbers, double digit growth in revenues on that bundle.
Then we've got the Speedtest VPN, which is actually a digital media and cloud services collaboration where we're leveraging the footprint of the native application Speedtest and build inside of it a white label Speedtest VPN that for the beginning was just free with some data limits. And now we've added a monetization layer to that and the early results are good, where if you hit a certain when you hit the usage cap, you have to convert into a paid subscriber if you want to continue to use the Speedtest VPN. And then in another cloud digital media bundle, we actually use Humble Bundle. And so Humble Bundle did a work from home bundle that had non j2 and j2 products. I think we had encrypt.
Me, which is our remote access VPN product in that bundle and we drove some good orders. So for the most part, I think the natural bundling has happened and that's mostly in sort of security plus privacy coming together as well as we're now exploring some more on the SMB enablement side, which is do our MarTech customers want our softphone services, do our softphone services want our MarTech. So that's sort of the next wave of exploration in terms of ways in which we can cross sell.
Got it. Thanks for the color and good luck this quarter.
Thank you. Thanks.
Thank you. Our next question comes from the line of James Breen with William Blair and Company. Please proceed with your question.
Thanks for taking the question. Just a couple. 1, Vivek just talked a little bit about Ookla. What have you seen as a trend there? I've seen with people working from home, a lot of people are checking their speed to make sure they get the bandwidth they need remotely.
And then 2, just from an M and A perspective, obviously, not a lot happening when you face to face. What is sort of not capitalized operating from an operating perspective, your ability to do multiple deals in a single quarter? If things were to open up a bit, you do a bunch of stuff at one time. To what extent can you do that across your different operating segments and your different general managers? Thanks.
Yes, great question. So just on the Speedtest side, we've seen volume testing volume increase 25 percent year over year, really for the reasons that you just described. That doesn't necessarily immediately translate into revenue as remember the foundation of the business is subscription and licensing of data. Certainly having more data helps improve that product. It's not something we would necessarily charge more for.
It certainly cements our position in measurement and broadband measurement. So we'll take it and it's good. It doesn't it's not a traffic lift, does not equate to a dollar for dollar lift in revenue. And then in terms of the second question, look, I think as we said in the past, given our general manager structure, as long as the deals are spread generally across the various general managers, we could do a lot at once. And so, because again, we get deals done at the general manager level, we get deals done at the divisional level, we get deals done at the corporate level.
So when you look across the number of sponsors that you have inside of the company, it's close to 20 sponsors. And it really sponsors being individual sponsors, just to clarify. So having that many sponsors allows us I think to integrate and to acquire a fair number at the same time if that's what ends up happening.
Thank you. Our next question comes from the line of Shweta Kuguria with RBC Capital Markets. Please proceed with your question.
Great. Thank you. Could you please, Scott, talk about how you're thinking about marketing spend just overall across the business? How we should think about it as maybe traffic on some properties increase and you may want to lean into it if pricing is attractive versus not on some other businesses. How should we think about marketing spend in Q2 and if you can for the rest of the year?
Thank you.
Sure. You
know that's Go ahead, Scott.
No, go ahead. Go ahead.
No, I was just going to say through the 1st 4 months of the year, we've actually increased our marketing spend year over year slightly, not in a significant way, largely due to what you've just described. We think there's some interesting buying opportunities as a marketer from a customer acquisition point of view. And this is entirely on the cloud side, right? On the media side, we don't do much in the way of traffic acquisition. It's mostly organic, but on the cloud side, we spend marketing payment to acquire subscribers.
And as I think I might have mentioned in my call, we're seeing, for instance, on the WebFX side, a nice uptick in customer additions ads sub ads. So we want to lean in because there's others we compete with maybe pairing back. There's some interesting prime real estate available for us. So we're going to do that. Having said that, we have cut other spend that we just didn't think held the same kind of return to some of this new incremental spend.
So our ability, I hope to manage the marketing budget to being slightly up, but getting far more yield out of it is what we're attempting to do.
And what I was going to go, I think Vivek has hit most of the points is this was as we started to look at Q2, but also beyond meaning Qs 3 and 4 in this environment, where should marketing be? There was an implementation in the Great Recession of 2008, 2009 of I'd say across the board cuts in marketing. And we chose to take a different approach this time because it really is a function of the effectiveness in the yield of that spend. So one of the things particularly with the cloud business since that's where most of that spend originates is to really look at it day by day and week by week. So we are monitoring the effectiveness of this spend.
We're making judgments about the LTV of the customers acquired. And of course, the important aspect on the marketing is most of that can be moderated positively or negatively very quickly. So that's one of the key items that we're very vigilant on as we look forward not just in this Q2 that we're currently in, but also for the balance of the year. But right now as long as the spend is good, certainly in those areas that Vivek mentioned, we would continue to spend the money.
Thank you. Our next question comes from the line of Will Power with Robert W. Baird and Company. Please proceed with your question.
Great, thanks. Yes, a couple to, I guess, look at it. Maybe just to come back or follow-up on some of the SMB commentary, obviously encouraging, I guess, thus far not to be seeing an increase in cancel rates. But I wonder if there's anything else you're seeing with respect to deferred payments, any higher bad debt, anything along those lines that gives you really signs of caution there?
No. Look, nothing meaningful, nothing appreciable. And again, it's early and possibly one thing to think about is, because our price points are relatively low and as people start to study their expenses, whether it's showing up on a credit card or showing up on an AP ledger, we're further down that list. So that could be possible a possibility. The other thing is remember our industries happen to be healthcare, legal, financial services.
Those seem to be doing better than some other industries. And then I think it's important to draw a distinction between local retail and SMB. I think they're conflated in a lot of people's minds. And so we're thinking about all of the businesses that have shuttered on Main Street. That's not our customer base.
So that's another distinction. But again, it's early. And that's the thing that I continue to press internally and externally is we're only 2 months into this.
Yes. Okay. Yes, that's helpful color. Okay. And then I wonder if you could just touch on VPN.
I mean, as it turns out, I think moving into that business was probably timely given the demand for work from home and whatnot. So I know you touched on some of the cross selling initiatives there, but maybe just talk about the broader trends you're seeing there, anything on growth rates would be great.
Yes. No, we're continuing on the personal VPN side. We continue to grow organically in that business at nice growth rates. We think the stay at home orders absolutely help us where we are very focused. I was talking about product development and roadmap.
1 of our brands called encrypt. Me is a remote access VPN. So think of VPN both as a privacy tunnel as well as a remote access platform. We're more of the former, but we have the technology and ambition on the ladder. And that we think could be a very, very interesting opportunity for us.
But we have some product development and marketing work that we need to do there. We also have a white label VPN business that we've used internally with Speedtest and VIPER, but we also work with other partners who want to build VPN technology into their offerings and then we get paid a licensing fee or a seat fee and that's also picking up. So we're happy to be in that business. I agree with you. I think we really liked the business prior to the pandemic, but we like it even more now.
It's a very relevant and timely proposition.
Our next question comes from the line of Jaluria with D. A. Davidson. Please proceed with your question.
Hi, Eric and Scott. Thanks so much for taking my questions. Glad you're all staying safe out there. I just wanted to ask about 2 of the different businesses. First on the everyday health side Vivek, I appreciate your commentary that advertising revenue is up 5% in April.
Just what are you seeing out there in terms of traffic patterns there, especially with the Flags Everyday Health property? And then, Scott, on BabyCenter, you did mention it's a lower margin business, which hit a little bit of EBITDA growth in Q1. Can you just remind us on BabyCenter what the EBITDA profile right now looks like and what kind of work needs to be done to get those margins more in line with the rest of the media business or the rest of
the healthcare business? Thanks. I'll start just on the Everyday Health traffic question. So our consumer facing properties, Everyday Health, what to expect from baby center have seen low double digit increases in traffic as obviously more and more individuals go on line to search on COVID and COVID related items. Where we're seeing a very significant amount of traffic is on the provider side with MedPage today where traffic's increased 100%.
And that's where, by the way, more of the monetization opportunities exist, as I mentioned, with more focus on direct provider advertising versus direct to consumer advertising. I think there are 2 reasons why our MedPage traffic has grown. 1 is that I think you've got more medical professionals who are at home, who are researching and MedPage today's coverage of COVID-nineteen has been just outstanding. And so we're seeing the provider community come in. But I also think we're seeing consumers, we're seeing patients, we're seeing individuals who want a deeper medically driven and scientific set of answers and content that maybe historically they haven't looked for.
So we're seeing the traffic growth, we're seeing it in consumer far more on the professional side, smaller base, albeit. But again, it's the professional side that's really driving our revenue gains. And again, that 5% is the organic overall everyday health growth rate. It's higher than that because of BabyCenter in the mix.
And I think you had
a question then, Rishi, on the BabyCenter integration, although I would say this is probably an applicable statement also to SpiceWorks. So BabyCenter being in the everyday health group, SpiceWorks being of course within Zit Davis. We are seeing improvement as those assets are being integrated. I would say that there still is probably 7 to 10 percentage points get to be picked up as baby center continues to be integrated into what to expect. So there is some seasonality in that business as well as the broader trends in digital media.
So that integration is very much on track, very much continuing and I expect that we will continue to pick up those points over the balance of the next in real time probably 4 to 5 months. That was a Q3 2019 transaction and we said it would probably take about a year in each instance to bring those to target margins.
Thank you.
Thank you. We have reached the end of our question and answer session. I'd like to turn the call over to Mr. Turicchi for any closing remarks.
Thank you very much. We did receive one question via email. So I'd like to address that before we close out the call. When we were talking earlier about the 1st 6 weeks of Q2, the question came in whether we were speaking about its flatness relative to Q1 or Q2 of 2019. Now remember, particularly in Digital Media, the quarters matter.
So sequential really is not what we look at in Digital Media. You can look at that in cloud. In the case of cloud, I would say both year over year and sequentially flat would be appropriate. In the case of digital media, we're speaking about the year over year comparisons. And then there was just a question in terms of the mix of our revenues in Q1 of 2020 versus Q1 of 2019 in our media business.
And I do actually want to note this that we did see in Q1 of 2020 actually performance based marketing slightly eclipsed display. So display was 35% of the revs, performance marketing was 36, subscriptions were about 28. If we look at the year ago period, which was Q1 of 2019, that would have been 37% display, 34% performance and 27% subscriptions. So, I think as we've talked about throughout this call and throughout a number of calls, the goal has been to move more and more of that advertising revenue into performance category and we are seeing some shifts in the proportional relationships. As the operator mentioned, this does conclude our earnings call for Q2.
Normally, I would say we will be out there meeting you at a variety of conferences. I think they've all converted even through mid June to the virtual format. So we do have a number of those. We have a press release out already talking about the 2 will participate in May, including 1 tomorrow. But there are also in early June are 6 or 7 conferences in the 1st 10 days of June.
So I think there's 7 or 8 between now and mid June. And so we look forward for you to reach out to the various brokerage firms hosting those conferences. We will be doing 1 on 1 and in some
cases fireside chats as well.
And then we would look to announce our Q2 results as we normally do in the 1st 10 days of August. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.