Welcome to j2 Global's 3rd Quarter 2019 Earnings Call. I am Sherry, the operator who will be assisting you today. On this call will be Vivek Shah, CEO of j2 Global and Scott Chiriqui, President of j2. I will turn the call over to Scott Chiricchi, President and CFO of J2 Global.
Thank you. Good morning, ladies and gentlemen, and welcome to the J2 Global Investor Conference Call for Q3 2019. As the operator just mentioned, I'm Scott Chiriqui, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah. We had the best 3rd fiscal quarter performance ever, setting records for revenue, EBITDA, free cash flow and non GAAP earnings per share.
In addition, we completed 4 acquisitions this past quarter, which Vivek will address in his opening remarks. In addition, we repurchased approximately 200,000 shares of our stock at a price of $80.74 per share. We will use the presentation as a roadmap for today's call. A copy of the presentation is available at our website. When you launch the webcast, there is a button on the viewer on the right hand side, which will allow you to expand the slides.
If you have not received a copy of the press release, you may access it through our corporate website atj2global.com/press. In addition, you will be able to access the webcast from this site. After we complete our formal presentation and remarks, 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 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 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, everyone. This was another terrific quarter across the board. Revenues were up over 17%, which is the strongest growth quarter we've had this year. Cloud services grew 14%, while digital media grew over 21%. We were particularly pleased with our 34% growth in Digital Media subscription revenues.
And importantly, we continue to see strong growth in free cash flow, which increased over 12% year over year. We also completed 4 acquisitions in the quarter and I wanted to use most of my time today to talk about them. As a reminder, we completed 4 acquisitions in Q1 and 2 acquisitions in Q2, making the total number of acquisitions this year 10. Generally speaking, we're seeing attractive deals across the markets and categories in which we operate. Our ability to transact efficiently, transparently and reliably and to see and create value where others cannot has allowed us to succeed in an M and A environment that can at times seem frothy.
As you all know, we organized the company into 13 business units. Of the 13, 5 of the units are below $75,000,000 in annual revenues. As we continue to grow as a company, it's a priority for us to scale these units to be north of $75,000,000 and ultimately north of $100,000,000 in annual revenues. Meeting those marks not only achieves growth goals, but also ensures the kind of diversification we look for in our portfolio of businesses. To that end, since January 2018, of the 21 deals that j2 has consummated, 11 were in cloud services and 10 were in digital media with 11 of our 13 business units closing at least one transaction.
Through a combination of organic growth and programmatic acquisitions, we have more than doubled our revenues and adjusted EBITDA at j2 over the past 5 years, making a recalibration of scale important and appropriate. 2 of the acquisitions consummated in the quarter should put 2 of our BUs north of the $75,000,000 mark in the next 12 months. Let me address the first one, which is BabyCenter. The parenting and pregnancy space is a very attractive one to us. It sits at the nexus of a broad range of digital health extensions, including fertility services, women's health, child and family healthcare and genetic health services.
By owning both BabyCenter and What to Expect, we believe we have become a global leader in this vertical where users can be served at every stage of the pregnancy and parenting journey. In the U. S, BabyCenter and What to Expect register a combined and deduplicated 70 plus percent of pregnancies annually. The BabyCenter, we now also have reach into non U. S.
Markets. BabyCenter operates 10 international sites, which include 5 that are non English language. Baby Center also brings a broader editorial focus, which extends beyond pregnancy and the first 2 years of parenting to include preconception and parenting up to 9 years of age. From a value creation point of view, this is very similar to our past Digital Media acquisitions. We see opportunities for business model innovation as well as focusing the business on profitability.
On the former, we have at what to expect and at many of the J2 Digital Media brands a great track record with performance marketing solutions where we generate customers and leads for our clients. Today, the BabyCenter business is primarily display advertising, while the What to Expect business makes a majority of its revenues from performance marketing. We believe we can successfully implement performance based solutions at BabyCenter to drive growth. On the profitability point, BabyCenter was a non core asset for its prior owner and not run for earnings. As you all know, that's not uncommon in the Digital Media world, but we've identified synergies and approaches to the business, which we believe will make the business solidly profitable in 2020.
We're also very excited with some of the talent we're picking up in the business who are both mission oriented and embrace the focus on profitability and profitable growth. The other acquisition that we expect to allow a business unit to achieve revenue scale is SpiceWorks. We love the information technology industry and over the last several years have acquired assets in the B2B space such as Emedia, Toolbox, Salesify and DemandShore. SpiceWorks is the most established of these brands, the deepest roots in IT. It's a professional network and a true community of IT pros who look to it for content, product reviews and apps.
Its business model is centered on being the marketplace where tech buyers and sellers come together. The combination of SpiceWorks with our existing B2B tech assets should position us as a close second to another fantastic public company in the space called TechTarget. We will go to market under the SpiceWorks brand as it is highly recognized and admired amongst tech professionals. There are 18,000,000 IT buyers in the SpiceWorks community. For IT vendors, the combination of our assets will provide them a unified suite of advertising, performance marketing and content solutions.
And while the company has done a fantastic job in building true value for its audience and clients, as a venture backed company, Spice Works was not focused on profitability. We see a number of margin expansion opportunities when combining Spice Works with our other B2B brands and therefore a clear path to earnings. And the Spice Works team is onboard and excited for the change in focus. The 3rd acquisition in the quarter, SaferVPN is notable as it represents our first acquisition for our privacy business unit, which is looking to be active in the VPN space. While it was a very small deal, it is a step forward for the privacy unit's global expansion as SaferVPN is localized in 26 languages.
We hope it represents the first of many tuck ins in the VPN space. I'll also point out that the business is looking for ways to offer a broader suite of privacy and security solutions. For instance, we are working on ways in which we can bundle our VPN offerings with our SugarSync cloud storage offering and our VIPER antivirus offering. The 4th acquisition in the quarter, Off-site DataSync, is in our cloud backup business unit, which as you all know has been for the last couple of years, but highly profitable. Off-site Data Sync is a market leader in providing backup and higher margin customers and to acquire new customers both organically and through tuck ins.
Buying businesses is one thing, but when we can buy brands, we tend to get very excited. A hallmark sign of a great brand, especially in the Internet business is its ability to endure and maintain a leadership position in its space. BabyCenter was founded in 1997. Viceworks
was founded in 2006. And iContact, which was our first acquisition of the year, was founded in 2,003. We believe we have an unparalleled track record at our company of enhancing brands and improving their business models. With that, let me hand the call back to Scott. Thanks, Vivek.
Q3 2019 set a number of financial records for j2, including revenue, EBITDA, free cash flow and non GAAP EPS. These results were driven by several areas of strength in our portfolio of companies, notably strong growth in our media subscriptions, continuing growth in our VPN business, continuing good display advertising revenue and our relentless focus on costs resulting in strong EBITDA margins. We ended the quarter with approximately $191,000,000 of cash and investments after spending $165,000,000 in the quarter on acquisitions and share buybacks. Now let's review the summary quarterly results on Slide 4. For Q3 2019, j2 saw a 17 0.6% increase in revenue from Q3 2018 to $344,100,000 Gross profit margin, which is a function of the relative mix of our 13 business units, rose to 82.3% from 81.5% in Q2 2019.
We saw EBITDA grow by 13.2 percent to a 3rd quarter record of $134,800,000 The EBITDA margin for the quarter was 39.2%, which is strong in light of the fact that the 4 transactions completed in Q3 contributed an insignificant amount of EBITDA. Finally, adjusted EPS grew 11.1 percent to $1.70 per share versus $1.53 per share for Q3 2018. Turning to slide 5, in Q3, we generated $80,500,000 of free cash flow, which was 12.7% increase from Q3 2018. On a trailing 12 month basis, we generated $366,400,000 of free cash flow for 69.4 percent free cash flow conversion of our $528,100,000 of trailing 12 month EBITDA. Now let us turn to the 2 segments, Cloud and Digital Media for Q3 as outlined on Slide 6.
The Cloud business grew revenue 14% to $171,200,000 due primarily to growth in our new VPN business unit. Reported EBITDA increased by approximately 12% to $83,900,000 compared to $75,000,000 in Q3 2018. EBITDA margin is 49% after corporate allocations, down approximately 1 percentage point due to higher corporate allocations and a lower contribution margin from our VPN business. Exclusive of the corporate overhead allocations, EBITDA was $86,500,000 for the quarter with a margin of 50.5% compared to 50.9 percent in Q3 2018, due once again to the lower margin contribution of our VPN business, which we continue to invest in for future revenue growth. Our media business grew 21.3 percent to $173,000,000 and produced $53,500,000 of EBITDA or 16% growth.
EBITDA margin declined by 1.4 percentage points from Q3 2018 due to higher corporate We are reiterating our revised guidance range for the year as outlined on Slide 8. To remind you, our original high end of our range was $1,330,000,000 of revenue and $540,000,000 of EBITDA with $6.95 in non GAAP earnings per share. Those have now become the low end of our new range of guidance. We now expect revenues to be between $1,330,000,000 $1,370,000,000 of revenues, EBITDA to be between $540,000,000 $556,000,000 and non GAAP EPS to be between $6.95 per share $7.15 per share. Following our guidance slide are various metrics and reconciliation statements for the various non GAAP measures to their 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 Jayam Patil with Susquehanna. Please proceed.
Hey, guys. Congrats again on another great quarter. Had a few questions. Vivek, you talked about the VPN opportunity in your prepared remarks. Just wondering if you could talk a little bit more about just kind of how you see the broader opportunity, the ability to do M and A?
And then just also just how you think about the revenue growth and margin profile kind of over time for this business? And then just maybe a little broader than that, is how you see the cloud business evolving with the new head of cloud that you've brought on? I know you talked about security in your prepared remarks. Is that how you see that, the focus kind of evolving for that?
So great questions. I'll start on the VPN front and talk a little bit about the privacy space. And I think we've talked about this a little bit in the past. We think consumers and businesses really do care about privacy. Everything you see in the news, revelations about social media tracking, government surveillance are all just contributing to, I think, market demand for the kind of service that IPVanish and our VPNs offer.
So we think just from a marketplace point of view, we are well situated to take advantage of those trends. Specifically, IPVanish is really performing well. It's at or above expectations. However, we look at it, we're really excited about the team under Nick Nelson, who is running that business for us. And having our first tuck in done for this business unit is pretty exciting.
Typically business units that are new to J2, it takes a little while for them to consummate their first transaction. They probably broke a record in terms of how quickly they were able to move. And part of that has to do with prior to our ownership, they also had done some tuck in acquisitions in the space to get to the scale that they were at. So in many ways and one of the reasons why we viewed them as the right acquisition for us originally was that a demonstrated track record from an M and A point of view. Long term, the way we often think here is you often hear in SaaS companies, they talk about the rule of 40 where you take your revenue growth, you take your margins and you try to get to And historically on the cloud side, we would achieve that or more than that by more focus on margin than on organic growth.
I view IP Vanish as being a little bit different in that it has real organic growth. And so there, I'd be careful about managing the margin at historic cloud levels. And you see it a little bit in our cloud margins for the quarter about 40 basis point drag from the VPN business. So it doesn't make a huge impact in the segment, but we don't want to choke it from a growth point of view. And then on I think your last question which relates to Nate Simmons, so super excited to have Nate.
Nate's been with us now for 60 days. Nate and I worked together in a prior life at timing, so we know each other well. His last stint was the COO of Symantec's multibillion dollar consumer business. And so when you look at our portfolio and you look at our VIPER business and you look at our IPVanish business and you look at our SugarSync and cloud businesses and even when you look at the cloud fax business, they're all security businesses, right? We've talked a lot about cloud fax for instance and how it's essentially a secure document transfer business.
So much of the portfolio fits within that world, having an executive who brings industry perspective was really valuable. Then I'd also add that he's an expert at customer acquisition and retention, understands subscription models really from the beginning of his professional career. So having that skill set also at the leadership level was really valuable for us.
Great. And on the digital media side, BabyCenter looks like a really good deal. Just wondering kind of how the M and A environment is now in digital media as you look across the key verticals where a larger player?
Yes. I think if you can be a cash buyer in the digital media industry, which we are and historically have been, I think your advantage. I think it's a buyer's market. There have been a lot of other deals in the industry that have been equity deals. Those are different.
I think because there it's relative valuations, it's trading stock for stock. I think if you are interested in an asset or if we're interested in an asset and we're willing to put our cash behind it, we generally are doing well. And so I think that is in this environment an advantage for us. And we're very excited for BabyCenter and we're very excited for SpiceWorks and its industry. It is similarly well known and respected and established.
So look, I think, as we said in the past, the market and I said in my prepared remarks, it can be frothy, but I think the proposition we often present as a buyer in whatever space we're looking at can be attractive. And then the volume, the deal flow that we're seeing with all the general managers in place, with the divisional presidents in place, with corporate in place continues to be pretty vibrant. I mean we've deployed one last question.
Over $420,000,000 this year
in the 9 months.
And I had one last question. Scott, could you just talk about just how to think about the margins for the segments, not just in 4Q, but general framework at a high level just going forward? And also for 4Q, how are you guys thinking about the various OpEx lines, particularly sales and marketing?
Okay. So in general, let's talk about the EBITDA margins by segment before corporate allocations because I'm starting to see that and the reason we do the corporate allocations, I think as you know, is because of our bond structure at the cloud business and the fact that we have separate audited financials and as a result we have to impute a fully loaded charge to the cloud business and as a result we do the same for the media business. One of the things I'm observing and you'll see it even in the sequential numbers from Q2 to Q3 is an increase in corporate allocations albeit the total corporate expense was roughly the same. And the reason for that is that you're seeing as we've talked about both in the prepared remarks and the first question now, an increase in revenue for these deals without a commensurate current increase in EBITDA, but it is triggering more corporate allocations to be sent down to both the cloud and the media business units. So I think that the target margins for the segments before allocations continue to be around 50% for the cloud business.
It was slightly higher than that in the quarter. And the target margin in media is about 35%. It's a little bit under that target margin. Now that's a trailing 12 month or an annualized margin. Because to your point, in the 4th fiscal quarter, we will generally see our Media business perform in excess of 40% EBITDA margin, not uncommon for it to be 41 ish.
And the cloud business really is not so much impacted by the 4th fiscal quarter seasonality. And to the extent it is, it actually is negative. So there tends to be some dampening more on the top line if we look sequentially from Q3 to Q4. I would expect all those trends to be true in this fiscal year. One of the things that has changed though in the last year is that in the cloud business, it was common around the middle of November to pull back on sales and marketing.
And so that was a compensating offset for the fact that there was less business days and as a result less revenue generating opportunities and that would not only sustain the margin in Q4, but sometimes even elevated a bit. That's something we began to reverse about a year ago. Obviously, it's something that Nate is studying right now in terms of the amount of marketing we should put in these businesses. But clearly, as you've heard Vivek talk, both as it relates specifically to the VPN assets, but I'd say more broadly the cloud, where there are opportunities to spend money, we should do it. If there is profitable growth to be had, we should do that even if it means some slight degradation in the margin for the quarter.
I would make one further comment about Q4. I do expect our corporate expenses unallocated to increase as they normally do from 3% to 4%, because we're now in the heart of the period from an audit standpoint for the filing of what will ultimately be the 10 ks in February of 2020. And so it is typical that we have a several $100,000 increase sequentially in our corporate expenses from Q3 to Q4 as the Sarbanes work is done and the audit work is done and various tax work is done.
Our next question is from Nick Jones with Citi. Please proceed.
Hi, good morning. Thanks for taking the questions. First, one on I think you said on the prepared remarks that 11 of 13 units closed at least one transaction. I guess can you talk about the ones that did not close that transaction? Is there something specific to those units that is more challenging in the pipeline?
No. So the 2 units that didn't transact were our gaming unit, which is IGN and Humble Bundle, which is doing very well and growing very strong. And so we're really focused on the organic opportunities that exist there. And actually from a capital allocation point of view, one of the things that we're doing at Humble Bundle is really building out our Humble Publishing business. So this isn't the subscription service.
This is where we serve as the publisher with an indie game developer. And we right now have 47 games that we've either launched or in development that will be humble games. And so those games get released in the normal cycle and channels of game releases. We have participation as the publisher in the revenue generated from those games and then the ability to include those games in our subscription service, which obviously has great advantages since we have an economic interest in those very games. So we're putting capital to work there from a game development point of view.
The other business unit where we haven't done a transaction is actually CloudFAX. And so there, I think I would also say that a lot of the focus has been on the corporate FAX side where we continue to see solid growth and continuing to pursue that. That isn't to say that we wouldn't be interested in web fax deals, we are. There just aren't as many of them today as they've been historically. And so our equation historically was sort of maintain the business through acquisition of Webfax and bringing those subscribers on.
What we're doing now is really growing the corporate business to sort of manage any of the pressures we're feeling on the Webfax side. So those are the 2 where we haven't done a deal in the last little bit.
Another one kind of on M and A, is there as kind of the ad business, it seems to be really focusing on audio and video. I mean, are those verticals or areas that you guys would like to monetize and is that kind of on your radar for acquisitions?
Well, look, video is a key part of how we monetize properties today inside of our advertising business. IGN has got a substantial video business. Mashable has got a substantial video business, Everyday Health has a video business. So video has been part of our advertising mix for a while. We don't do as much in audio.
We it's a space we'll look at. But remember, in our advertising business, I'd say a couple of things. Number 1 is, the display business continues to grow and it's been growing for 4 consecutive quarters after there was a period of time where we were having some challenges. So we feel very good about that. And then the customer generation performance marketing components of what we do, where we're not selling CPM advertising, cost per 1,000 display advertising, but we're selling cost per click, cost per lead, cost per acquisition.
That is sort of that is what the marketplace is really looking for. So when you put format aside, what they really want is can you generate customers for us? Can you get us measurable ROI where we're fitting into their CAC LTV equations? That's where we do our best. And so any format that can produce those outcomes, we're interested in.
But we're really focused on being able to drive those outcomes.
Got it. And then just one last one, given kind of the size of the deals JT Global has done this year, is there any kind of color you can give us on organic revenue
growth? Yes. So look, I think our view on organic growth and our perspective is unchanged. We still look for mid single digits on the digital media side, kind of low flat to low single digits on the cloud side, and then the balance really coming from the acquisition activity. But as I've said in the past, it's one of those things where we look at it as whether I'm putting marketing dollars to work or staff dollars to work at the income statement level to drive top line, which we will do, or I am putting cash from our balance sheet to work to acquire businesses where we can generate more cash, we'll do that too.
And so we kind of look at it as how do we put our capital to work to generate the best returns and that changes over time. It also changes on the portfolio.
Yes, it's
very much business unit by business unit. Absolutely.
Our next question is from Will Power with Robert W. Baird and Company. Please proceed. Will, your line is live.
Yes. Sorry, can you hear me now?
Yes. We can hear you, yes.
Yes. Okay, great. Yes, I guess a couple of questions. Maybe Scott, just starting with guidance framework, you had some nice upside in revenue in particular in the quarter here. How we think about full year guidance in conjunction with that given you'll have a full quarter in Q4 of the recent acquisitions.
So why don't I why don't we start with that, then I have a second question.
Sure. So I think it's a
good place to start because obviously we only had a partial impact of the 4 deals in Q3. And I think as we've highlighted, the media deals, BabyCenter and SpiceWorks were meaningfully more large than the 2 deals on the cloud side in this particular quarter. So I think that if you look at our full year guidance range, which we reaffirm, we do expect that on the revenue side, we should be trending towards the very high end of that range, which if you recall is $1,370,000,000 for the year. However, given that the fact that SpiceWorks and BabyCenter are very much in transition in terms of gaining So that's $5.48 is the exact midpoint of the revised So that's $5.48 is the exact midpoint of the revised increased range of EBITDA and $7.05 in EPS.
Okay. That's helpful. I think it makes good sense. I guess the second question is just coming back to BabyCenter and SpiceWorks. Any color with respect to how you're thinking about either revenue contribution or revenue growth trends from here and how kind of the normal shrink to grow kind of fits into that?
Just trying to get a sense for contribution kind of growth rates going forward. And I guess just Vivek, maybe tied to Baby Center, what are the display trends there look like? Because it sounds like that's the bulk of the business. Is that business still growing too? Or how do you think about transitioning that and how fast the performance marketing?
Yes, it's a great question. Look, the first order of battle here and it is consistent with what we've done in the past, whether it was Mashable IGN, even PCMag at the beginning is to really get to profitability. As Scott said, and as I mentioned earlier, these are not profitable businesses. We believe they will be profitable businesses. We've seen, as I've said, we've seen these scenarios before.
It will be a combination of the two things you mentioned. In the case of BabyCenter, for instance, building in the performance marketing revenue streams, the lead gen and affiliate commerce revenue streams that are nascent or non existent there that are a majority of what the What to Expect business does will unlock new revenues and likely offset some of the challenges that do exist in the display business on the baby center side. They've had some challenges there. But again, I think as we add in these new revenue streams, those offset those challenges. And I think we can also probably bring some of our skill set on the display side.
But then really on the cost side, the business wasn't run for earnings. It just wasn't the purpose of that business inside of its inside of the prior company. And obviously for us having earnings assets and cash flowing assets is critical and central to what we do. So it is a bit of the shrink to grow. It is a revenue diversification.
And I think it's also just being clear about what success is and what the goals are for the business, which I will say the team that is the go forward team absolutely embraces and understands.
Okay. Helpful from that standpoint. I mean, any other color you're able to write at this point in terms of how to think about general growth trajectories? I mean, does it fit within the broader digital media framework in terms of what they've been generating over the last 12 months in terms of growth rates?
Yes. Look, I think they will look like the other businesses that have gone through the process that I just described. And so I and I actually think particularly in the parenting and pregnancy space, it could be even more attractive. This is a space if we have leadership positions in a lot of different categories, this could be our strongest leadership position from a digital media point of view. It sort of reminds me of the position we have in our broadband world with Ookla and some of its assets.
So it has those characteristics.
Okay. Thank you.
Our next question is from Rishi Jaluria with D. A. Davidson. Please proceed.
Good morning, guys. This is actually Hannah on for Rishi. Thanks for taking the call. So, Vivek, you said on Baby Center, it's primarily display advertising currently and then you plan on developing performance marketing down the line. Do you see an opportunity to monetize it as a subscription offering at all?
It's a great question and obviously building the subscription business inside of digital media is a focus. What we may more likely see is that I think we can be an engine for other subscription services within the broader space and either become a marketplace and therefore get compensated for driving subscriptions to various services. For instance, we do that today in the cord blood industry with what to expect, where we are a pretty significant subscription service that lasts quite literally the life
of the
cord blood that is banked from the baby. So that is an example where no, we would likely not be a cord blood bank ourselves. We would much rather be in the business of generating subscribers for them. I think there may be other instances where if it's a subscription service that feels like the kind of subscription service we can either that we could operate, either build or acquire that is closer to what we do, then that might be something that we would spin up to leverage the media audience like we've done with IGN and Humble Bundle. But if the question is would I charge for what is currently free, the app, the pregnancy tracking, the tools, no, we wouldn't do that.
Okay, great. That's helpful. And then could
you talk about how Ekahau performed in the quarter? And I think you previously mentioned integrating Ekahau and Speedtest. I was wondering where we are on that?
Yes. So ECCO is doing great. It's a strong double digit organic grower. We'll continue to be that. It is primarily right now it's market, our systems integrators who use the software and the Sidekick hardware to design, deploy and manage Wi Fi networks in commercial settings and Wi Fi in commercial settings is very important, right?
Any business, any entity, if their Internet is not working or is not working at the level they'd like it to work, it's a real problem from a productivity point of view. So that market continues to be great. We do see opportunities in other ways of looking at this market more from a monitoring point of view versus more the front end of design and deployment. And so we are starting to see some interesting traction there. And then the integration right now of or building of a product in Speedtest that essentially allows you to do at home, what Ekahau allows you to do in commercial places is on the roadmap.
It has taken a little bit of a back seat to things that we're doing in the VPN space between IPVanish and Speedtest. That has presented itself as a more pressing and more interesting opportunity. And so we'll be launching a new product, a collaboration between Speedtest and IPVanish in the 4th quarter.
Great. Thank you, guys.
Our next question is from James Breen with William Blair. Please proceed.
Thanks for taking the question. Just one clarification. Scott, I think you said that you spent $420,000,000 through the 1st 9 months on M and A, is that correct?
That's correct.
So that and I think you were $270,000,000 through the 1st 6 months. So if you look at what you spent, the $150,000,000 this quarter, any sort of guidance in terms of the relative size of those deals and maybe the general multiples, have they been in line with what you've done historically?
You got it. That's exactly right. So yes, the $150,000,000 of spend, although it was across obviously different business units and the two segments, We are consistent with, as you know, the multiples we historically pay. I'd say on a revenue basis, although, as you know, that's not how we buy these businesses, but you can think of it in that way. Obviously, we don't have we're not giving specifics by deal or even by business unit because we don't report that way.
But I think if you take the aggregate and as I mentioned earlier, that $150,000,000 of spend is heavily weighted to the media segment versus the cloud segment in this particular quarter. The $270,000,000 though that was spent in the 1st 6 months was all cloud.
Okay.
All
right. And then just as I look at through your the supplemental stats, looking at cash flow, you tend to see a pretty good bump up in the 4th quarter. It looks like you have to be up north of the $110,000,000 range to be sort of in that 375 level that you were talking have been talking about previously. Is that given the M and A this year and despite some of the increased expense in the Q4, it still seems you can be in that 3.70%, 3.75% range for the full year?
Yes, I think that's correct. I think you might be a little high on what we needed book in Q4, but you're in the ballpark. And I think that, yes, that is would be consistent with our expectations in terms of the EBITDA generation in Q4. Now you know the Q4 EBITDA and Media part is collected in Q4, a larger chunk is collected in Q1 of the following year. So a lot of the cash flow that we'll collect in Q4 will be basically all of the EBITDA generation on the cloud side and a fraction from the media side.
But I think that if you look at what we did last year, you look at the kind of growth rates we're having, that maintains that remains achievable.
Okay. And then just one on the buyback.
Yes.
Just some of the details there and then how you guys structurally are thinking about that?
So, in the quarter, we bought just under 200,000 shares at about $80.74 price. As you know, in Q4 of last year, it was 600,000 shares at right around $71,000 So, we're in about 800,000 shares we've evolved the program at about $73 a share. So it's worked very well. The philosophy and I think the evolution in our thinking on buybacks and this even predated the cessation of the dividend, although I think now in hindsight you can see the value in eliminating the dividend given the capital we've deployed this year, the $420,000,000 in M and A plus almost $20,000,000 on buybacks. So we have, I'll call it an algorithm that we come up with a price where we can say internally to our business units and division presidents that if we're going to take this capital and go into the market and buy our stock, we believe it will have a competitive return versus if we gave it to your business units to go do a deal.
And so the good news is having bought 800,000 shares of 73 and the stock is at 95, that point has been validated within that 800,000 buyback. So that's how we do it every 90 day window. They don't map to calendar quarters. They're offset a little bit. But every 90 day window, we come up with a price.
And if that price is hit during the quarter as it was in Q3, we buy. When the stock then traveled above that price, we don't buy. And so I think given the history and what's been almost a year now under this program, I think our judgment is it is working. I think in hindsight, we wish we would have bought some more shares at these prices. But we do need to spread the capital around.
So we will continue under this program. No doubt there will be, I think as we look forward, some tweaks to it. Next year in February, it's in February of every year that we look at the total size of the buyback program. We've been operating under a program that was started several years ago with 5,000,000 shares and we've just been degrading that as we bought shares back. I think now we're close to a 1,000,000 shares left under that program.
So one of the questions in February will be the size of the program on a going forward basis. But that's for a few months from now.
Okay. And then just strategically maybe for Vivek, as you look across the 14 business units, are there any that you feel maybe under scaled here with an opportunity to get bigger through M and A obviously and then some drive just better margins profitability?
Yes. Look, I mentioned earlier in the call, there were 5 units that haven't yet met the $75,000,000 annual revenue threshold. That was the pregnancy and parenting unit and our B2B unit in the Ziff Davis side. With those strategic acquisitions, we've moved those above that hurdle. The 3 that are still not there are our voice business, our MarTech business and our endpoint security business.
So I could say on the endpoint security business depends on how you define things, because if I attach the multiple of our security brands together, we would certainly be at that scale. So those are areas we would like to see some traction. We've done some interesting things obviously MarTech. We bought the eye contact brand, which we like a lot and voice. A couple of years ago, we bought Line 2, which is a really good product.
We just need to scale it as a business. So those are probably some areas where we would like to see some activity.
And in terms of the pipeline, obviously, you guys stepped up the M and A this year and a big part of what you spent the year to date was the VPN transaction. But do you feel like without sort of that level of transaction, you can sort of maintain this $400,000,000 kind of run rate over the next couple of years, is there enough deals out there?
I mean, look, I think again, I think it is first off, I'll say I think there are a lot of interesting acquisition opportunities for us right now. And I think again depending on where the markets are and what the business climate is, there may be even more. So I'm optimistic from an acquisitions point of view in terms of what the next 12 to 36 months will look like. I'll start there. Within the portfolio, we have a number of high quality organically growing businesses where we see runway and that's our broadband businesses with Ookla and Netaou, that's our gaming businesses with IGN and Humble, it's our Everyday Health Group, which continues to grow organically, high single digits, possibly low double digits on the corporate fax side, on VPN.
So there's a number of things that we feel very good about within the portfolio of businesses. And then look, I think as you know, historically, we've probably generated about $3,000,000,000 of cash since Since we became cash flow positive. Since the company became cash flow positive. 2,002. And we probably spent about $3,000,000,000 on acquisitions.
And so it's kind of what we internally refer to as the cash flywheel. We generate cash from these operations. We deploy them to generate businesses that we can optimize to generate cash that will allow us to go back and continue to do that. So I think you should expect and from my perspective, that's what we do. And I think the markets are aligned for that.
I would just add one comment. I think in the last couple of years, I'll call it the system of acquisition in j2 has been refined and evolved. And part of it is the structural elements of the M and A teams, the size of it, I think bringing it to corporate, not having it fractured between cloud and media is an important element in the amount of M and A that can get analyzed. The other thing is just the sheer diversity of the number of business units and the expansion of the number of business units over the last 2 to 3 years because we've got more eyes and ears out there seeking deals to make and enhance their business units and their divisions. And so the combination of those 2, which I think we've seen cumulate over the last 2 years is why we're able to spend this level without doing a large transformational deal because I get that question a lot.
Well, don't you have to do a large deal to perpetuate this kind of spend and this kind of growth? I say no, no. We've got really 17 different places we can put money if you count the parent as 18. All looking for deals and those deals with some exceptions maybe at the parent don't have to be that large. But they can be very impactful and very meaningful for a given business unit or for a given division.
Great. Thank you very much.
Our next question is from Daniel Ives with Wedbush Securities. Please proceed.
Yes. Thanks. Scott, to your point that you've talked about, just talk about appetite for maybe, is this something where you feel like you can lever up more if the right deal or the right number of deals came through just given the success you guys have been having? Maybe just talk about that and even the leverage structure in terms on the parent or on media and cloud?
Yes. So let's start with where we're at right now. So I would say we are modestly leveraged. As I mentioned earlier, we have somewhat of a unique structure and that all of our debt is not at the parent. The bulk of it is at the cloud.
The media is not a participant or an obligor in any way that converts it at the parent. So, we look at the structure, it's interesting both the cloud level and consolidated, we're at about a little over 2 times gross debt to EBITDA levered. So, we take at the cloud level, it will be $650,000,000 of the 6% notes plus $128,000,000 drawn with a line divided by its trailing 12 month EBITDA. Then when we do consolidate it, we add another $402,500,000 at the parent for the converts, but we bring in the media EBITDA. Coincidentally, it's about 2.1, 2.2 times.
We've got about $100,000,000 of cash in the bank. We've got about $72,000,000 of borrowings under the line of credit because while we did bring it up to acquire SpiceWorks and Baby Center, we also intra quarter paid it back down to the $128,000,000 level. So we've got between the cash flow we generate every month, the availability under the line and the cash on the balance sheet for what I'll call our garden variety M and A, what we just did last quarter, spend 150,000,000 dollars that's already in house. Now as we look forward, I think there's 2 opportunities. 1 is and it's not necessarily in direct relation to your question, but I think we have an opportunity in a low interest rate environment over time to clean up our capital structure.
I think we can make it more efficient. I think we can also lower our cost of capital. I think in conjunction with that, we can also expand though the availability of our access to capital. And one of the things that I'm looking for over time, not necessarily imminently, is for us to get to a position where we've got $200,000,000 to $300,000,000 of undrawn lines of credit available, specifically for our capital allocation activities. So that if we do have a larger transaction in a given quarter, we borrow under the line, then as cash flow comes in, we pay that back down.
But certainly from a direct answer to your question, the ability for us to take leverage up from 2 to 3 times, very easy to do in a very accommodative marketplace. We've told the rating agencies, we've told the public that we're very comfortable up to 3 times gross debt to EBITDA. We've also had the caveat that said, look, under the right circumstances, we might temporarily take it higher than that. So I feel very good about our positioning in terms of access to the capital markets, our liquidity for both what are our likely needs, but what might also be our theoretical needs if certain other situations present themselves.
Our next question is from Pat Walravens with JMP Group. Please proceed.
Great. Thank you and congratulations you guys.
So first off, post the WeWork debacle and all the news about that, are you seeing the owners of some of these assets thinking that maybe they're more interested in selling?
Look, I wouldn't comment on a specific situation. I do think I call it sort of there's an anti unicorn sentiment that seems to be pervading the marketplace. I think is benefiting us from a few points of view. I think you've got investors who are taking a look at our name and our story that may not have in the past and we're having those conversations and that's nice to see. I think it's also in the M and A market, I think some of the transactions we're doing, Baby Center, Spice Works, iContact, these are known brands out of known owners.
And so when you do that, that also puts you on some other radar screens. Look, I think we're well known as a buyer, but I think some of these deals have put us on some other radar screens that we may not have been on. So I think that's helped us from an awareness point of view. And then generally speaking, I think look, I think you've got a lot of owners, whether they're venture owners, PE owners, public companies that are looking at their futures and wondering, would it be better right now to seek strategic alternative? And that's our wheelhouse.
When you think of the 3 deals that I've mentioned, 2 were carve outs from large public companies. And not everyone is able to consummate that kind of deal and do it in the way in which we can do it, which understands from their point of view what makes the deal a smooth deal.
All right, great. Thank you. And then my follow-up is what are you guys seeing in the macroeconomic environment? Are you seeing any signs of change? And then can you just remind us and Scott, we talked about this when we had you on the road, but can you just remind us sort of the last time around when we hit economic downturn, what did you see?
How long did it last? And then what happened afterwards?
Sure. So I think
the answer to your first
question is no. I think we continue to see certainly in our core markets, which about 80% of our revenue is derived in the U. S. On the media side, it's probably closer to 95%. On the cloud side, it's around 75%.
So, really for us, U. S. And Canada would be the core marketplace, followed then by Europe where there is and has been some volatility, particularly in the UK, more on the currency side around Brexit. So we've seen some toing and froing in the GBP to U. S.
Dollar, which has had some headwinds in the most recent quarter, particularly on our cloud business because that's where most of the GBP revenue is coming from within J2. But I think in terms of general macro conditions in the U. S, there's some economic information out this morning on jobs. I think we can we see it to continue to be in the good stable category. And we look at sort of some underlying KPIs or metrics from some of our business units.
And what you're referring to, we go back to the Great Recession, which is now 10 plus years ago. And obviously, hopefully, they whatever the future recession is, is not of such a draconian magnitude. But there we were able to see things in some of the underlying metrics some number of months ahead before Lehman went bankrupt in September of 'eight, which really triggered what became very obvious in terms of declining in GDP and layoffs, spike in unemployment, etcetera. So I'm not suggesting that one should use that as an analogy for what might be a future recession. But if you wanted to stress test and say that this is sort of at the 3 standard deviations out there from the norm.
What we saw at that time was and of course we didn't own the media business, so this is really a cloud perspective or subscription business perspective, was an increase in the cancel rate. And what tends to happen there is your smaller customers, depending on the severity of a recession in its duration, just closed shop. And so we saw an increase in the cancel rate over about a 2 quarter period. It escalated over that month period of about 75 basis points per month over what was the then norm. But then by March of 2009, when really the worst had already occurred, then the cancel rates started to come down and in fact hit new lows, lows that have been pretty much sustained within a tight band to the present time.
And really what happened on the cloud side was those smaller, weaker SMBs that could not withstand the recession were gone. The customer base that remained was inherently stronger and then new customers that you added through that period also tended to be stronger, hence the lower cancer rate on a going forward basis. So that gives you some sense of it in terms of how the business responded under very difficult circumstances about 10 years ago.
That's super helpful. Thank you.
Our next question is from Jon Tanwanteng with CJS. Please proceed.
Hey, good morning guys. Nice quarter. My first question, Vivek, can you clarify just a bit on the opportunity you said you see in MA just for the near term? Is there more to do this year in Q4? And does the pipeline support kind of the $400,000,000 run rate you've done already in 2019?
Yes. Look, I'm going to speculate on this quarter. Right now, there's a lot of things taking place. I kind of look a little bit over longer periods of time. So I think if you look at the next 12 months, I think if you look even further out there, this is kind of the run rate.
I think it's around equal to our free cash flow. This year was a little bit higher. I think there can be years where it's a little bit lower. And if you look by year, that's kind of proven to be true. In fact, I don't think this even is the year where we've deployed the most amount of capital that was probably several years ago.
That was 16%.
That was 16%.
That was 16%. About everyday health. Right. So if there are deals of that magnitude, then obviously that can change the capital allocation in a particular year. So again, I would just look at it more on sort of these longer views than just the next quarter or the next two quarters.
Okay, fair enough. And what are your target margin expectations for SpiceWorks and BabyCenter? I get they're not contributing or maybe not even profitable in Q4, but did they get to that 35% segment margin next year and then? Yes, absolutely.
Yes. No, that's the goal. That's the goal. Now, as you know, that margin may not be attached to the same top line because we often fire revenue that can't make that. So we get rid of or empty calorie revenue might be a different way to say it.
So we like highly caloric, I guess, revenue. But we do anticipate that for both those businesses.
Okay, got it. Within the next year?
Yes. Now again, it may not be for the next 12 months, but that will be the run rate. It takes us a while to optimize. It doesn't it's not a light switch.
Sure. Okay, perfect. And then finally, just a little bit more squeeze on the Ookla side of the business. Can you update us on the integration of both Ekahau and Mosaic, some really good IP there. Is there an opportunity ahead of the 5 gs deployments here in the U.
S. And around the world?
Yes. No, look, I think there are big opportunities for all the brands. And I'd also add DownDetector, which is another brand within our broadband family that has just launched or relaunched a subscription service to help entities see when their services have service interruptions. So I think across the board, there are collaborations, sales teams are working together. Just to be clear, they are individual sales teams, but sales teams are working together.
We go to certain events like Mobile World Congress together to look for ways in which we can support one another's proposition. The buyers are a little bit different. Just to be clear, on the Speed test intelligence side, our DAS, data as a service product, you're generally selling to network buyers at ISPs and carriers, to some degree, device makers, government, cell tower companies. Whereas in the case of Ekahau, today as the business is currently constructed, it's mostly systems integrators that are hired by commercial tenants or commercial building owners to develop the Wi Fi plan within the structure, right? So a little bit different, but what we're also beginning to see is a new body of data that is different than consumer initiated testing, which is what you have at speed test that I think could become an interesting data set within our data as a service business.
That hasn't happened yet, but that could be an interesting new opportunity for us. Ultimately, in all of these, whether it's carriers looking 5 gs deployment or commercial tenants looking for the best Wi Fi. And to be clear, 5 gs is not going to solve Wi Fi within workplaces. That is not a replacement for. If anything, it is possibly an increase in expectation of the experience you're going to have within your office.
Okay, great. Thanks guys.
This does conclude the question and answer session. I would like to turn the conference back over to management for closing remarks.
Thank you very much. We appreciate everyone for joining us on our Q3 call. We did put out a press release a few days ago announcing our upcoming conference activity in November. A little later this month, we'll be putting out the conference activity for the month of December. I know there are several already slated, including the NASDAQ Conference in London, Barclays Conference in San Francisco.
So stay tuned for that. And then our next regularly scheduled call will be sometime in February to announce Q4 results and provide 2020 guidance. Thank you.
This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.