Welcome to j2 Global's 4th Quarter 2019 Year End Earnings Call. I am Sherry, the operator who will be assisting you today. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. On this call will be Vivek Shah, CEO of j2 Global and Scott Turecki, President of j2.
I will turn the call over to Scott Turecki, President and CFO of J2 Global.
Thank you. Good morning, ladies and gentlemen, and welcome to the J2 Global conference call for the 4th fiscal quarter of 2019. As the operator mentioned, I'm Scott Turicchi, President and CFO of j2 Global Joining me today is our CEO, Vivek Shah. We finished the year strong with a record 4th quarter performance. Notably, we had record revenue, EBITDA and non GAAP earnings and it was our 24th consecutive year of revenue growth.
We will use the presentation as a roadmap for today's call. A copy of this 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 our press release, you may access through our corporate website atj2global.com/press. In addition, you will be able to access the webcast from this site.
After we complete the formal presentation, we will conduct a Q and A session. The operator will instruct you at that time regarding the procedures for asking a question. However, you may e mail 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 would cause actual results to differ materially from the anticipated results. Some of these 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 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. Let me start by saying how excited I am with our fantastic finish to 2019. With revenues up over 17% and adjusted EBITDA up over 14% in Q4, we just delivered our best quarter of the year, a year in which we exceeded our original guidance by a significant margin. We generated $1,370,000,000 of annual revenues in 2019, which surpassed the high end of our original guidance by The stock also performed well in 2019, up nearly 37%. And in recent weeks, we have traded as high as $104 Earlier in 2019, we made the decision to suspend our dividend in order to redirect that capital to acquisitions and investment opportunities where we believe we can generate better returns for shareholders.
We consummated 4 important transactions in 2019: iContact, IPVanish, BabyCenter and SpiceWorks for a total of about $400,000,000 All four of those acquisitions represent leading brands in their respective categories and strengthen our existing assets in those categories. We also raised about $550,000,000 through our convertible note offering in November, giving us ample dry powder to continue to pursue acquisition opportunities. We also made some key additions to our executive team. Nate Simmons joined us in September to run our Cloud Services division. He came to us from Symantec, where he served as SVP and COO of its 2.4 $1,000,000,000 consumer division.
Given our growing emphasis on security and privacy solutions, including VIPER, IPVanish and SugarSync, his addition should only accelerate our growth in those areas. We also hired a new Global Head of Human Resources, Michelle Dvorkin, who previously held that role at the KNOT Worldwide, as well as our first Head of Corporate Communications, Rebecca Wright. Now let me provide some texture to our 2020 guidance. We're guiding overall revenue growth of between 7% to 10%, which is consistent with how we initially guided revenue in 2019. As we've said in the past, we view the low to midpoint of our range as excluding any future acquisitions, while the higher end of the range contemplates acquisitions that would take place between now and the end of the year.
While the M and A pipeline is robust and we spent over $400,000,000 in calendar 2019, we have not closed on a material acquisition in the last 4 months. This, of course, is part of the normal ebb and flow of our acquisition program, and we're pleased with the potential of our current pipeline of deals. At the segment level, we're looking at Digital Media to grow around 10% at the midpoint, with cloud services at around 5% at the midpoint. Within digital media, we see a handful of growth drivers: gaming, broadband, B2B, parenting and pregnancy and everyday health professional. In the case of gaming, we experienced solid organic growth from our 2 principal brands in 2019, IGN and Humble Bundle.
We are ramping up our Humble Publishing unit and expect to launch about 20 games in 2020. We are quickly becoming one of the largest publishers of indie titles in the industry with an expectation of about 40 games in our library by the end of 2020. Our subscription business, Humble Choice, rolled out a new and improved subscription value proposition by offering subscribers a greater selection of games each month, along with some new price tiers. At IGN, we had a strong 2019, growing organically 10%, and we're optimistic about 2020 with the new generation of consoles launching in Q4. We expect to experience a bit of a lull in ad spending in the intervening quarters as games marketers hoard their budgets for the next generation of their titles.
But once those are released, it generally unlocks a lot of marketing dollars. At broadband, revenue growth continues to be strong. We anticipate the business growing over 20% organically. Ookla continues to see its data subscription service, Speedtest Intelligence, experienced high renewal rates and increased ARPA as we enhance the available datasets. We've also beta launched Speedtest VPN in collaboration with our IPVanish team and are seeing promising early results.
Our Ekahau business had a terrific first full year of ownership in 2019, and we believe will grow over 30% in 2020 with strong bookings over the past several months. Ekahau solutions are viewed as the leading tools for systems integrators as they develop and deploy Wi Fi networks for their commercial clients. In B2B and parenting and pregnancy, we will see the full year benefit of owning SpiceWorks and BabyCenter. The integration of both of these brands is going well. We are realizing synergies, consolidating teams, applying new revenue models and expanding share of wallet from customers.
Our Everyday Health Professional business, which caters to physicians and providers, has a shot to have another strong year after growing over 15% in 2019. All 3 of our brands in this unit, MedPage, Prime and Health E Careers are performing very well. Within cloud services, our growth should be driven primarily by our privacy and corporate fax businesses. We're thrilled to see our thesis on the growing importance of privacy to consumers and businesses proving out. IPVanish's customer base grew roughly 17 percent since we acquired the business in early 2019 and our team has embraced opportunities to bundle VPN with other J2 offerings.
In the Q4 of 2019, we added SugarSync secure file storage to IPVanish subscriptions, rolled out VIPER Ultimate Security for consumers combining malware protection with a VIPER branded VPN and launched the Ookla Speedtest VPN I previously mentioned. We expect our privacy business to grow strong double digits in 2020 from a combination of organic growth plus an additional quarter of ownership. We also anticipate continued growth in corporate fax, which is a $130,000,000 revenue business. As you know, we have increasingly focused our fax offerings on healthcare IT buyers who rely on our technology to securely transmit private patient information. To that end, in Q4, our eFax corporate and Sfax services earned iTrust certification, which in essence encompasses HIPAA and ISO information security standards and is a gold standard for compliance within the healthcare information industry.
We saw solid growth in corporate fax revenue and new bookings from small and medium sized businesses in 2019. In Q4, over 60% of new bookings came from health care customers in our corporate fax business. Overall, we believe our corporate fax business will grow close to 10% in 2020. We're also expecting deceleration in the revenue decline within our backup business, which shrank over 8% in 2019. We believe backup revenue will decline less than 4% in 2020 as we shift the business from an owned IP model to a premium hosted service provider model powered by our acquisition of Off-site DataSync in 2019.
This transformation should reduce our decline in 2020 and put us on track to grow revenues in 2021. One impact of this new model will be lower margins in this business unit, but still category leading for the backup market. On the EBITDA side, our guidance is between 5% to 8% growth, which is about 200 basis points less than our revenue growth. 200 basis points is about $10,000,000 in incremental expenses. We have a few things occurring on the expense side.
One, near term margin pressure from the acquisition of Spiceworks and BabyCenter, which were both unprofitable at the time of acquisition. 2, we are making organic investments in some of our businesses, notably Humble Publishing. 3, the business model shift at backup, which I just described and 4, continued investments in our financial and information security systems as we look to grow into a $10,000,000,000 enterprise value company. You will see this mostly reflected in the growth in our corporate expenses. Before I turn the call back to Scott, I just want to inform everyone that we are hosting an Analyst Day, our first in company history, on March 4 at the NASDAQ in New York City.
It will be an opportunity for us to dive deeper into our portfolio and to hear directly from members of our leadership team who you don't usually hear from. Each of our 3 divisional presidents, Steve Horowitz, Nate Simmons and Dan Stone will present as well our Head of Corporate Development, Sean Alford. I'm sure it will prove to be a worthwhile use of your time and give you a deeper understanding of the company and its businesses.
Thanks, Vivek. As I noted earlier, Q4 2019 set a variety of financial records, including revenue, adjusted EBITDA and non GAAP earnings. These results were driven by several areas of strength in our portfolio of companies, notably strength in our performance based marketing, media subscriptions and growth in our VPN business. In addition, we continue to work through the integrations of both BabyCenter and SpiceWorks, which contributed to our revenue in the Q4 and modestly to our EBITDA. We ended the quarter with approximately $675,000,000 of cash and investments after spending approximately $5,000,000 in the quarter on our 2 small tuck in acquisitions.
In Q4, we also raised $550,000,000 through the issuance of convertible securities priced at 1.75% interest and a conversion premium of 32.5%. Now let's review the summary quarterly financial results, which are outlined on Slide 4. For Q4 2019, j2 saw a 17.2% increase in revenues from Q4 2018 to 405,600,000 dollars As a reminder, the sequential increase in our revenues from the 3rd to 4th fiscal quarter is due to the holiday seasonality for some of our Digital Media properties. These outperformed our expectations, particularly Ziff Media Group, IGN and Humble Bundle. Adjusted gross profit margin, which is a function of the relative mix of our 13 business units, remained healthy at 84.3% and improved 30 basis points from Q4 2018.
We saw EBITDA grow by 14.3 percent to $176,300,000 and finally adjusted EPS grew 12.8% to $2.38 per share versus $2.11 per share for Q4 2018, despite interest being $3,000,000 higher and non GAAP depreciation being $2,000,000 higher and a slight increase in our tax rate. Moving to Slide 5. For the full fiscal year, we saw 13.6 percent growth in revenue from 2018 to 1.372 as Vivek mentioned earlier, this was a $40,000,000 increase versus the original midpoint of our 2019 guidance. Our EBITDA increased by 12.4 percent or $60,700,000 to a record $550,200,000 and our adjusted EPS was $7.08 per share for the full year compared to $6.35 in 20.18 for an 11.5 percent increase. Turning to Slide 6, you can see that due to about $25,000,000 in timing differences due to working capital in our Digital Media businesses similar to 2017, we had a 14.3% decrease in our Q4 free cash flow to 82,100,000 dollars The collections in Q1 2020 will bias our quarterly free cash flow and our free cash flow conversion in Q1.
For the full fiscal year, we generated $350,400,000 in free cash flow, a modest increase from 2018 due to the reasons that impacted Q4 2019. For the full fiscal year, we experienced the free cash flow conversion of approximately 64% of our EBITDA. However, when adjusting for the timing of the $25,000,000 of digital media working capital, we see a conversion rate in the high 60s, which is in line with the levels that we indicated throughout the year and that we expect. Now let's turn to our 2 businesses, Cloud and Digital Media for both for Q4 as outlined on Slide 7. The Cloud business grew revenue approximately 14.3 percent to $169,300,000 despite the seasonal weakness in Q4 due to fewer business days.
The growth was driven primarily from the VPN business unit, which we acquired in April 2019. Excluding our VPN business, cloud revenue still increased over last year's levels. Reported EBITDA increased 6.5% to 80,700,000 with a margin of 47.7 percent after the allocation of certain corporate expenses. The moderation of our EBITDA margin is due also in part to our VPN business, which is growing having a lower than 50 percent EBITDA margin. Our media business grew revenue 19.3 percent to $236,300,000 and produced $98,200,000 of EBITDA or 23.1 percent growth, once again after certain corporate allocations.
Turning to Slide 8, let's quickly review the annual results by business. The cloud business finished the year at $662,000,000 of revenues for a 10.7% increase over 2018 and it was the 1st double digit year of revenue growth since 2016. Again, this increase was primarily but not solely driven by the unbudgeted benefit of owning the VPN business for 3 fiscal quarters. EBITDA was just in excess of $325,000,000 after 9,700,000 of corporate overhead allocations. Our digital media business showed a 16.6% increase in revenues to just over $710,000,000 and EBITDA grew to $235,000,000 after allocating $10,600,000 of corporate expenses.
When excluding Baby Center and SpiceWorks, our 2 most recent digital media acquisitions, we still had approximate revenue growth of 10%. Vivek provided some highlights of our 2020 guidance at the beginning of our call. On Slide 10, we've outlined some additional elements to help you understand our guidance range as well as the midpoint of our guidance. For our cloud business, we expect revenue growth of approximately 5% at the midpoint from EBITDA margins in line with 2019 before corporate allocations. For our Digital Media business, we expect revenue growth in excess of 10% and an EBITDA margin before corporate allocations of approximately 34%.
Also for the purposes of modeling the quarters, remember that our Digital Media business experiences significantly more seasonality than our cloud business. We expect that only 20% of the annual expected media revenues will be recognized in Q1 and approximately 30% will be recognized in Q4. Also remember that we have a significant fixed costs within our Digital Media business, so we experienced meaningfully higher margins in Q4 versus Q1. By way of example, it is typical that our Q1 EBITDA margin for Digital Media will be in the mid-20s and in Q4 in excess of 40%. I would note that we expect to experience higher non GAAP depreciation by approximately $6,000,000 this year due to the full year expensing of acquisitions done in 2019 as well as incremental CapEx spent in 2019 that we will begin to depreciate.
We believe that our interest expense net of interest income will be similar to 2019. Further, we believe that our tax rate will increase slightly from 2019 due to changes in our global tax structure and will be within the range of 21% to 23% this year. And EPS will be calculated on an imputed share count of 48,700,000 shares. Finally on Slide 11, we outline our guidance for revenues, adjusted EBITDA and non GAAP EPS. We expect our revenues this year to be between 1,465,000,000 and $1,505,000,000 which translates into a 7% to 10% growth.
EBITDA, we expect to be between $575,000,000 $595,000,000 with a growth between 5% 8%. Finally, our non GAAP EPS, we expect to be between $7.36 a share $7.66 a share, which at the midpoint indicates an increase of about 6%. Following our guidance slide are various metrics and reconciliation statements for the various non GAAP measures to the nearest GAAP equivalent. I would now ask the operator to rejoin us to instruct you on how to queue for questions.
Thank Our first question is from Daniel Ives with Wedbush Securities. Please proceed.
Yes, thanks. And obviously, great year to you and the team. So when you think about M and A, just obviously with the convert and just given position or strength, are you thinking about it like we're looking for larger deals, ones that maybe rival some of the biggest you've done or it's more in the number, where we're going to do it across the group? Obviously, it depends on what's out there, but I just want to hear that.
Right. Thanks, Dan. Good morning. So I think it's across the board. All 13 of our business units are actively engaged in deals that would sit within those business units.
The 3 parent the 3 divisions are also looking at deals of Davis Everyday Health Group and Cloud Services. And then the parent is also looking at deals. So this is probably, I'd characterize as robust, an M and A pipeline as I've seen in my time at the company. There's just a lot out there for us to assess and process. It has been 4 or 5 months since we've done something meaty.
And so we anticipate that there will be some meaty opportunities for us in the not too distant future. But we're also going to continue to do our tuck ins and continue to do the smaller deals that are turnkey that are either subscriber acquisition deals or traffic acquisition deals, which our platform can integrate pretty easily.
Got it. And maybe just a follow-up like on Digital Media specifically in terms of M and A pipeline, why do you think that is? Now obviously look it's your background for decades. But just why do you think from an M and A perspective it's as robust? I mean what do you think at least you're hearing from some of the potential candidates?
Yes. Dan, I think it has a lot to do with our business model and approach to monetization. So in areas where we see the opportunity to deploy affiliate commerce and performance marketing, lead gen type revenues inside of a content business. That is one of our specialties. And so we'll find opportunities where they don't have the know how, the technology or the team to unlock those and we do.
And so we're in a position to create value around the performance marketing business model. In other instances, it's our ability to marry a consumer audience for content with a subscription service, which is what we've done obviously in the gaming space with IGN and Humble Bundle. And then finally, what we have proven the Eucla business is our ability to monetize data and to create data analytic products that are meaningful. And so I think we are a far more versatile digital media company. We have the ability to operate in multiple spaces, technology space, the health care space, the gaming space, in the shopping space.
So I think it's that combination of having a fairly broad portfolio, but also very specific ways in which we can unlock value. And then I think the other thing I will say is that many of the Digital Media companies come out of either a venture backed situation, a unicorn type situation. They were trying to be something that they really weren't going to become and we're able to sort of rationalize it and add it to our spice
works. Like a spice works.
Great insight. Thanks.
Our next question is from Sean Patil with Susquehanna Financial Group. Please proceed.
Hey, guys. Good morning. Great quarter and year. I had a few questions. Vivek, the past couple of years, it seems like every time you've entered a year, you had 1 or 2 kind of key things that you focused on.
I know initially it was the GM structure and getting better at executing on M and A across the business. As you look at 2020, what are the 1 or 2 kind of big things or key things that you're focused on?
Yes, I'll do it. I'll go by operating division. So on the cloud services side, I think we are knitting together between IPVanish and SugarSync and VIPER and some of the other associated brands, a really interesting security and privacy bundle that I think we'll be defining for how we approach 2020 beyond will inform our internal activities, our organic growth initiatives as well as our M and A. So I think security and privacy and by the way, I would throw the corporate fax business into that. We have $130,000,000 business on the Corporate Fax side that is all about the secure transmission of documents.
So whether we're protecting patient information or we're protecting devices or we're protecting privacy, this notion of protection I think is kind of a very important organizing principle for Nate Simmons and the cloud services team. I think on the Ziff Davis side, it's the continued execution of performance marketing and the subscription generation both in the data subscription business at Speedtest Intelligence as well as the Humble Bundle business. The one thing I'll underscore, I mentioned it in the prepared remarks and I don't want it lost is we are very bullish on the Humble Publishing business. This is where we are the publisher of games and we have the ability to, I think through the insight of what we see through our subscription service identify winning games, the ability to market those games through our various channels including the Humble store and then ultimately being able to include those games in our own subscription service Humble Choice, there is a really interesting flywheel effect that goes into play. So we're excited about that.
And then I think on the healthcare side, the professional part of that business has done extremely well and it had a very strong 2019. We're optimistic about 2020. This is our MedPage business where we're providing news and information to physicians, our Prime business, which is continuing medical education for physicians and our Health eCareers business, which is a recruitment business for hospitals. We like all of those businesses, they work well together. And I've said this I think in the past, but when you look at the 1,000,000 physicians in the United States, they are quite literally the most valuable media audience in the world given that they are writing 1,000,000,000 of dollars of prescriptions for pharmaceutical drugs every year.
So a hard to reach and valuable audience. I'll also say that we are excited about the idea on our parenting and pregnancy side with what to expect in baby center. We own number 1 and 2 in the space. And it's a great space to be in. And so I think we're just beginning to scratch the surface various operating divisions.
That are driving the various operating divisions.
Great. Thanks. And just there's been a lot of talk in the industry about changes that Chrome is making. It seems like they're going to make some now and then in a couple of years. IOS is constantly updating to limit tracking, user tracking and targeting.
Just curious, I mean, as you look out in the near term and kind of intermediate term, do you see much impact from these on digital media? Or do you think it's mostly noise? What are your thoughts on those industry changes that they're not changing?
Yes. No, I think it's a real subject. And I think that the business models that rely on data collection for ad targeting are going to be challenged. Now the good news is that is not our business model. Our business model is placing advertising and links and lead gen activity contextually.
So I think if you are playing a contextual game, where you're producing end market content to then put in market advertising or in market marketing services, I think you're going to do well. So I think there is a shift to the contextual targeting versus behavioral and interest based targeting. The second thing I will say and I've said this in the past and I think this is going to be this is going to prove to be prescient is that I think e mail matters. And I think having registered users which we have across all of our brands large registered users, user databases where we have e mail address. E mail is in many ways identity.
And so and it's the one piece of identity that generally never changes, right? Your personal email address or addresses are the addresses that you've had probably for the last decade. And so we are very focused on building our email databases. We have an entire part of our portfolio, our MarTech, that is dedicated to building email databases for its clients. So I think those that have sort of direct relationships with their audiences will also I think, be advantaged in this new sort of cookie free, anti tracking world.
And I'll also say that it just is more attention to the need for privacy solutions like IPVanish.
Great. And I have a couple of quick ones for Scott. Scott, on for guidance, you guys mentioned at the high end, there's some M and A assumed. Can you just talk about what level of M and A are you assuming it's kind of similar to what we saw in 2019? And then I know you guys don't guide quarterly, but any color on just how to think about aggregate revenue and EBITDA seasonality just kind of 1Q and throughout the year?
Perfect. So I'll take your first question. And the first question on the guidance is one of sort of a philosophical element. So to be clear, at the midpoint of our guidance, that only contemplates the assets we own today. So it contemplates no M and A in 2020.
So what we're saying is to be at the higher end of the range, assuming all other organic and operational activities are as planned, that will be driven by M and A. Now as you can tell, to go from the midpoint to the high end of the range is not that many dollars in revenue or EBITDA. It's only $10,000,000 in EBITDA to go from $585,000,000 to $595,000,000 So we don't need the volume of M and A that we did in 2019 to drive that delta. And as you know, last year that volume of M and A not only caused us to go above the high end of the range, but actually to reset our guidance to yet higher levels. So 2 different elements are going on.
It's not as though there's a secondary budget with a certain amount of M and A baked in that says, oh, here's $10,000,000 of EBITDA. It's more of the philosophical bands with the still intention based on what Vivek said earlier that we will expand all or substantially all of our free cash flow generation this year in M and A or at least in capital allocation activities, probably heavily weighted M and A, but there could be stock buybacks as well. In terms of your second question, you're correct, we don't guide quarterly. But as to your point, we have the slide in the deck about, particularly in Digital Media, the seasonality. So we come off of a very good quarter in Q4.
Generally, it represents 30 plus percent of the Digital Media's annual revenue exclusive of any M and A. And as a result, you see some dramatic shift in the profit margins on an EBITDA basis between Q4 and Q1. So last quarter, Q4, we'll do in excess of 40%. I think it was 43% EBITDA margins for Digital Media. That will reverse down to somewhere between the call it around mid-20s, so 24%, 25% for Q1.
And the reason for that is that there is the seasonal bias and there's a heavy fixed cost nature. In addition, you may recall that in 2019, we had some shifting of expenses in our Humble Bundle business out of Q1 into Q2, which made Q1 look better by about $3,500,000 So I would expect for Q1 of this year there to be a modest uptick in EBITDA versus Q1 of last year because of some of those cost elements. In addition, as you'll notice in the slide and as Vivek talked about in his prepared remarks, we continue to make investments both in our as we evolve some of our systems within j2 on the finance side and in the infosec area. And some of those costs will flow through corporate throughout the year, but they will some of them will be in Q1 of 2020 versus Q1 of 2019. So I would expect a more muted growth in EBITDA and net earnings in Q1 year over year for those reasons.
Got it. Thanks guys. Congrats again.
Thank you.
Our next question is from James Fish with Piper Sandler. Please proceed.
Hey, guys. Congrats on the year and nice Q4 and also nice to be back on the J2 story here again. You guys are talking more about a bundle approach on the BCS side than you guys have historically before. I understand the product side of it all, but what from a go to market perspective are you encouraging to for the bundling to occur given these units operate in silos historically?
Yes. So, hey Jim, it's a great question. So, in the let's just start with the direct business, which is the online channel as the source of acquisition. And we're testing a variety of things. In some instances, it's one price and you get a suite of services.
In other instances, it is an upsell that you purchased the product and then we're offering you another product at a discount or in a some kind of trial period. And what we're looking for is where can we drive unit revenue and where can we drive retention. And so we're testing various ways within the online channel and the online channel is a very, very large channel. It is the main channel for SugarSync for IPVanish and the VIPER consumer business. As we move more upmarket and we start to leverage our inside sales, which is more of the SMB market, we're starting to move into actually some different solution sets.
So a lot of what your typical endpoint VPN has privacy and file storage, but then we're also moving into remote Encrypt. Encrypt. Me that does precisely that and is far more cost effective and easier to deploy than sort of the legacy on premises VPN solution. So that's where we start to bring encrypt. Me into the proposition.
And again, it's the same thing. If it's inside sales, it could be a bundle, it could be a cross sell, it could be an up sell. And I think the reason if you take a step back as to why you're hearing us talking about bundling on the cloud side where we have not historically talked about that is I don't think we ever had like assets. I don't think we had bundable assets. I think the CloudFAX customer was frankly quite different than the MarTech customer or the need or the use case was different.
And so bringing those together seemed like an artificial way to bundle, whereas these security and privacy really are all protection. They are all protection services and they fit well side by side and together.
Got it.
That makes a lot of sense. And then just two quick ones for me. How do we think about the impact of the backup transition on gross margins? You guys alluded to it on the script. And then can we get the difference in the display advertising versus subscription revenue within the digital media business for this quarter?
Yes. So let me talk a little bit about the strategy at backup and then maybe Scott can answer some of the questions on margins. But generally speaking, as you know, backup has been a space in which we were challenged to find compelling M and A valuations that made sense for us. We operated at a very high margin. And what we have come to the conclusion is that we are instead of leveraging our own IP and selling our own IP into clients, we're essentially going to be a value added, host it reseller of various solutions, whether it's Veeam, ASE or Asigra.
And so by transitioning that way, we find that we don't necessarily need to invest the R and D to have the winning technology, which is very hard to do, but we can leverage our infrastructure in being able to sell through 3rd party technology. Doing that introduces a new cost, which is the cost of that 3rd party technology, which in a typical backup business would have offset against our R and D. We weren't investing in R and
D in our own IP. And so that does introduce a new cost base, but it puts us in a position where we believe and I mentioned in our in my prepared remarks that the backup business will get to stability and growth within the next 12 to 24 months, albeit at a different margin. So I'll pause and just Yeah. I would say that the transition we're going through right now from a margin perspective is really one of scale. So as we add these additional costs and evolve the business, there'll be a combination in the gross profit and in the OpEx.
I think combined, we're talking about call it 10 percentage points lower as we move through this transition. And then we expect as we scale that margin then to lift back up, not necessarily to the 50% or 50% plus that that business unit operated at historically, but probably somewhere in the high 30s to maybe 40%. And I'm talking on an EBITDA margin basis. In terms of your second question, the advertising for Q4 for the Digital Media business, which is a combination of display and performance was about 75% of the revenue and 24% were subscriptions and there's 1% that's other. And for the full fiscal year, which I think is a little better way to look at it because of the seasonal bias in Q4, which does bring us additional display advertising, it was about 40% display, 33% performance marketing, so 73% advertising, 26% subscriptions and 1 percentage point of other.
Our next question is from James Breen with William Blair and Company. Please proceed.
Thanks for taking the question. Just a couple, I guess for Vivek, can you just talk about you made mention of the growth in the corporate back business and what's driving that now? And how you've seen that improve? And where you think it's going? And then for Scott on the cash flow side, you talked about some of the working capital push that's happening from Q4 into Q1.
I think you said around Digital Media around $25,000,000 So just sort of looking at an annualized basis, would free cash flow have been closer to $375,000,000 for 2019? And does this imply that you'll see sort of an outside free cash flow number in the Q1 that would normalize back down to the Q2
of 2020? Thanks. I'll take that. I'll let Vivek chime in. The answer to your question is yes, yes and yes.
Now you may remember that a similar situation occurred in Q4 of 2017 and for the full fiscal year 2017 relative to 2018. And you'll see in the slide deck where we outlined the free cash flow and we've got the history, which is on Slide 6. You'll see that 2016 to 2017 was very muted and then 2017 to 2018 there was a pop. So I would expect we'll see something similar in 2020. I can tell you we've had good cash collections in the 1st 40 days of the year.
So it's just a timing issue. We're not totally able to influence the rate at which these advertisers pay. So it's a function of when the actual revenue occurs how late in the quarter. And then as you know, it's not uncommon that those collections occur over the next 100 days. So and timing is always going to be I think a little bit tricky in predicting the net cash from operations between Q4 and Q1 particularly when you've got a robust growing sequential quarter to quarter growth in Digital Media.
And just as I was just going to say as a follow-up to that. So if you sort of think about free cash flow from 2019 to 2020, assuming sort of 2019 was around that $375,000,000 level with the adjustment, Given the commentary on 2020 about where revenue growth would be along with some additional expense, taxes up a little bit, Do you see free cash flow growing modestly sort of mid single digits from 2019 to 2020?
Well, I think it depends how you deal with the $25,000,000 If you're going to put it back into 2019, then yes, you'd have a lower rate of growth from 2019 to 2020. If you take that $25,000,000 and put it in 2020, obviously, it's going to be a bigger growth. So I think this year, even with some of the additional expenses operationally in CapEx, with that $25,000,000 we should be somewhat north of $400,000,000 of free cash flow.
Okay, great. Thank you. And then Vivek just on the strategy side around the EBITDAX. Thanks.
Yes. Look, so I would tell you that we have $130,000,000 Health Care IT business that's growing double digits and has great potential. As you know, as I've talked about in the past, the healthcare industry sends something like 9,000,000,000 faxes a year. That is growing at a reasonably high clip. Yet less than 4% of those are faxes that we're involved with either on the send or receive side.
So we actually have a real view into market share. So we've got a $130,000,000 business that's not all healthcare, but it's dominated by healthcare in a market where we're still small. And the incumbent really is the machine. And I think what we're now seeing through our work, which is a it's a sales and marketing process, is really convincing health care organizations, replace them with cloud based solutions, which he in and replace them with cloud based solutions, which yet we have the market leading solutions. So I think execution against that, I think it takes a while.
They want to see these machines hit end of life. But we're long term bullish on the opportunity. We're going to be at the HIMSS conference in March. We're going to unveil some new features and solutions that go beyond facts that really get into more workflow in the health care space that I think is going to be very exciting and help accelerate growth in that business.
Great. Thank you.
Our next question is by Mick Jones with Citigroup. Please proceed.
Hi. Thanks for I guess I want to piggyback off that last comment about some workflow processes for healthcare. Is there a robust pipeline of potential acquisitions for kind of health tech? I think a big gripe for a lot of medical professionals is the amount of administrative work. Any color there would be helpful.
It's a great question. Again, if I could attach the healthcare IT multiple to our to acquire in HCIT. That would be a space that would be difficult for us to buy in. And so we're building in that space and we're making investments, capital investments in developing really on our own. There's a partnership that we haven't announced that we are that is part of this.
Facilities some of those. Yes.
For the most part, it's not going to be a buy. It's going to be a build and rent within health care. The valuations are just too high.
That makes sense. And then one follow-up on kind of the changes in Google. I guess I understand how it can impact targeting, but
does it have
a potential impact your ability to assign attribution
to some
of your cost per action or performance marketing? And then I guess could you remind us what kind of the ratio is between display and performance?
Yes. So just to answer that question on a full year basis, display was about 40% of the digital media revenues, performance marketing was about 33 So they're almost equalizing in terms of scale. No, look attribution is an interesting thing. In a lot of the if it's CPC that doesn't get affected. If it's cost per click it doesn't get affected.
If it's cost per lead it doesn't get affected. If it's cost per acquisition or a percentage of the cart, all of the affiliate networks that sit between publishers and merchants have the ability to map to URLs. So you don't need cookies even there to get attribution. So in our 3 primary performance marketing pieces, CPC, CP, L, CPA, the cookie less future doesn't interfere with attribution.
Great. Thanks for taking my questions.
Sure.
Our next question is from Rishi Jaluria with D. A. Davidson. Please proceed.
Hi, guys. Thanks for taking my questions. First, I wanted to maybe touch on the cloud EBITDA margin side. It sounds like you're guiding to margins being relatively flat. I understand the VPN business is a little bit of a drag on it sometimes in the actual growth business.
Maybe help us understand, how should we be thinking about VPN margins maybe going beyond next year? Is this just is there something structurally about the VPN business that's going to make this a lower margin business? Or is there a path to get that to become a 50% EBITDA margin business? And what would be those drivers?
No. So two things. 1, and we didn't highlight this, but in the 4th fiscal quarter, the cloud business, but really most of it was the VPN business with a little bit from iContact. There were as we sort of get through the year of these acquisitions and in some cases, 3rd parties, meaning the sellers were involved in providing us financial information. There were certain true ups of about $1,500,000 negative to the top and bottom line, most of that in the VPN business.
So that had about a 1 point margin impact in Q4. Those are non recurring, but then nevertheless they hit the quarter. So that's one thing to keep in mind. I think in terms of your longer term question, we look at the VPN business, it is a growth business. I think Vyvents mentioned in his prepared remarks, it's a double digit grower.
We intend to continue to feed that business and that growth and build that customer base. So the goal is not to take that business unit and force it to get to 50% EBITDA margins or something in excess of that with no growth. We're going to feed it, we're going to continue to market it. So I think that an appropriate margin level for the VPN business is somewhere between the high 30s to low 40s, could use 40s kind of an average margin. And of course, we'll make decisions over time based upon the M and A that we do in that space, some of the cross selling activities that Vivek mentioned and that we're working and experimenting on to see how much either we should moderate some of that feeding or increase that feeding in terms of both personnel and sales and marketing dollars.
But we do you should not expect that you should not plan for it to be a 50% EBITDA margin business. We look at, I'd say, the portfolio in cloud and given the relative percentage of its contribution today to still on before corporate allocations to be right around 50%, probably a little bit under this year, but right around or hovering near 50%.
Got it. Thanks. And in the release, you talked a little bit about the international reorg, not to get too ahead of the Analyst Day next month. But maybe if you could tell us a little bit about what's going on, on the international side that you had this reorg going on and how that flows through to the different business units?
Okay. So first of all, the reorg has nothing to do with the operations of J2. That's it's all a tax matter. So you may recall some number of years ago, the European Union put pressure on Ireland to increase its tax rate. So we have operated for 15, 16 years under what's known as a double Dutch Irish structure.
So we have a fair amount of IP that is outside the United States. There would be 2 elements to the structure, Ireland itself, where we have substantial presence and an Andy called nonresident Ireland, which for us happens to be the Isle of Jersey. The Isle of Jersey, as we enter 2020, is starting to build in more presence rules, meaning they want more personnel and staff literally on the island. And the value of that piece diminishes as the Irish tax in Ireland moves up and evolves. So we transferred the IP within the J2 system such that it created this gain.
You may notice that our GAAP tax rate looks very odd this quarter. It's a negative or a benefit. So we have recognized from a GAAP accounting standpoint a $53,000,000 gain, hence the negative tax rate. We've eliminated that from our non GAAP presentation, hence the more normalized tax rate of 21.3%. From a cash perspective, we will realize that $53,000,000 roughly over the next 15 years.
And then we do see because of the evolution of the structure and where we're earning our money in 2020 about a 70 basis point increase in our tax rate on a non GAAP basis from 21.3% to 22%. But the day to day operations of our international businesses, most of which are on the cloud side, remain unaffected. The people are in London, the people are in Ireland, throughout Europe, all of that stays in place.
Okay. Got it. That's helpful. And then turning to the gaming side of the equation, two questions there. First is, as you talked about coming out with 20 games publishing this year, which would be, if I'm honest thinking about double the size of the existing portfolio, effectively double the size of your portfolio of indie games publishing.
Maybe you could help us understand the economics on that and what sort of contribution we expect from that? And then second, I mean, given the strength in your gaming business, both from the Humble Bundle side as well as on IDN. What are opportunities for MMA in gaming looking like? Are there opportunities to grow more properties and expand the footprint on the advertising side? Are there other ways to lever the publishing side of the business?
Just universe of indie developers, who are
seeking essentially
2 things. They're seeking who are seeking essentially 2 things. They're seeking financing and they're seeking marketing in choosing a publisher to go with to publish their game. And so what we typically do is we'll write a check. In exchange for that check, we will get a percentage of revenues generated by that game in all channels in which it is sold and distributed, as well as depending on the deal have various other rights, but always including the ability to include it into our subscription service at no incremental charge to us where we're typically paying for non owned games a fee for including those games inside of our monthly service.
And so the economics are what is the return on the investment we make against those games. And in all cases, we are looking for positive ROI on the sales of that game in its normal channels. We then have the incremental revenue that comes from sales of that game through our own channel through the Humble store and then ultimately the benefit of having that game inside of Humble Choice, our subscription product at no cost. But those two other things are pure gravy. The first thing has to be true, which is we invested X in the game and we're going to see more than X in our returns related to the normal sales of that game.
Now with respect to your question on M and A, I think we would be open to gaming information, news that is advertising based like IGN is today. We like that space. We want to continue to be in that vertical into that space. I think any sort of technology within the gaming space that may enhance our subscription value proposition. We're always thinking about things that make a Humble Choice membership even more valuable.
So we're looking at various things that would do that. There would be the possibility of buying a library, buying another publisher's library of games, if it made sense for us and we saw long term value in that library and able to leverage that library within our services. So really all of the above.
Got it. That's helpful. All right. Thank you, guys.
Thank you. Thank you.
Our next question is from Jon Tanwanteng with CJS Securities. Please proceed.
Good morning,
Just a little bit more
on the Humble business. What kind of dollar investment will that be needing in 2019 as you grow these indie games, which I understand are much smaller? And where does that investment go in terms of magnitude or percentage of revenue as that as you go to 40, 80 games in the library and even beyond that?
Yes. So look I think it is in the single digit millions of incremental expense in 2020 versus 2019. So it is not a significant drag on the overall at the J2 level, but it is it does explain, I mentioned in the more capital to work, we will. But we're really limited in our infrastructure on how many games can we actually bring to market based on the team, based on our scheduling. So that really is more of a limit than anything else.
Okay. Great. And then more broadly on the $10,000,000 in additional, either expense or margin drag on a year over year basis. Could you help us understand the scheduling that is that weighted more towards Q the first half or if there's any of the lumpiness as it gets spent through the year, just like how you had to push some spending out to
Yes, I would say there's probably a little well, there's different elements in that $10,000,000 So the drag from the acquisitions of Baby Center and Spiceworks would be more front end loaded. Because as we said last year, when we acquired them, that's a process over a 12 month period of improvement. I think in terms of the things like the Humble Bundle Publishing and the infosec or the systems element, which occur in corporate, those will probably be more ratable over the 4 quarters. So I think you have different things you have different pacings based upon which of those four items we're talking about. But I would say that in the aggregate, there'll be a little bit more on the front end loading side if you take that 10,000,000 dollars in its totality.
Got it. Okay. And then last one. You mentioned the corporate Fax growth rate. Your expectations for this year about 10% growth.
Remind us what the split is again between corporate and non corporate and what your expectations are for growth on the other side, if it's flat or is it growing, if you're still seeing particular declines there?
Yes. So about 40% of the overall Class Fax business is in the corporate space. I'd say the other 60% is flat to declining. Historically, it's been maintained at flat through M and A on the Webfax side. We haven't had a Webfax transaction in 2 plus years.
In 2 plus years. So I think I view that as kind of a modest a very modest decline or to flat depending on a couple of factors. But we don't view that we view it as stable not growth. If we can find M and A in the space great. But our focus is really on growing the corporate
business. Got it. And just to tack on one more. Do you see opportunities in corporate or excuse me in Fax for M and A at this point? And also on the backup side where you're changing strategies, is M and A still in the cards for this?
Yes. Look, I mean there are deals to be done in both spaces. And again, because we have the broad portfolio, we never feel like we need to do a deal in any one particular space. We've had a lot of inbound, but not at prices that we're willing to transact at. So we'll wait it out.
Great. Thank you so much.
You're welcome.
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