In the seven years that I've been here and in the 20 years Scott's been here, we still get questioned about the viability of our model, questioned about our ability to sustain the j2 acquisition system, and therefore our overall growth. I believe the past 20 years should resolve for any rational observer these questions. My favorite indicator of our success is the five times ratio of our cumulative acquisition spend divided by our annual adjusted EBITDA. It demonstrates our ability to spend capital intently and wisely, as well as the means to properly integrate these assets once they're in j2's portfolio. We should continue to get better in the allocation of our capital. We have evolved our management structure, M&A team, and process, which has produced more ideas, greater deal flow, and more managers to integrate deals and create value.
The amount of capital available to us only grows as we continue to increase cash flows and the amount of leverage we can assume without much change to our credit ratings. Our portfolio has never been more diversified, yet our businesses share the common tailwind, which is the ongoing shift from analog to digital. We've expanded our capital allocation to include share buybacks, and we're pleased to have acquired 600,000 shares in Q4 of 2018 and expect to continue to be opportunistic going forward. We have conviction in our model and hold a firm belief that the next 20 years will be as bright, if not brighter than the first 20. If this sounds a bit like a full-throated defense of our model and company, it is.
We're very proud of what our organization has accomplished over the past two decades. There are certain foundational elements that will continue to guide our company. First, we expect to remain an active acquirer of businesses. We are well-positioned to grow our company through strategic and disciplined investing. Second, we will continue to focus on maximizing EBITDA and free cash flow generation while investing in tangible organic growth opportunities. Lastly, we will opportunistically expand our portfolio, particularly in spaces that we feel are fragmented and would benefit from a capital partner with a proven track record. This nimbleness resulted in the evolution of j2 from being just a digital fax company to our current position as a diversified portfolio of over a dozen business units. All of these tenets give us confidence in our future.
Before I hand the call back to Scott, I wanted to spend a few moments on themes for each of our business segments from Q2. At Digital Media, we continue to see growth out of display advertising of nearly 4%, with subscription revenues up over 30%, continuing to be a major driver of overall Digital Media revenue growth. In fact, combined subscription revenues at Cloud Services and Digital Media now account to 65% of total revenues. As you know, it's been our long-held strategy to increase the amount of recurring revenues at j2, and we're obviously making tremendous progress. We gave a bit back on Digital Media EBITDA margins, which were down approximately a point year-over-year, but still up through the first half. You'll recall that we had some expenses shift from Q1 to Q2, as well as higher allocations of our corporate overhead.
At Cloud Services, we continue to see big opportunities in the security and privacy space. As you know from the last call, we added VPN technology to our core offerings and are off to a good start in the first quarter of our ownership of IPVanish and its related properties. We have many opportunities for synergies with our email protection, endpoint security, and backup solutions that we're beginning to explore. I'd also note that our Cloud Services management continues to do a very nice job at managing EBITDA margins. Our EBITDA margins are a bit better than last year's, notwithstanding our investment in personnel and product enhancements. Also, this is one of the strongest revenue growth quarters for Cloud Services in recent memory, with revenue growth close to 13%, with the acquisition of the VPN assets being a key driver.
Now, let me hand the call back to Scott, who will go into greater detail on our results.
Thanks, Vivek. Q2 2019 set a number of financial records for j2, including revenue, EBITDA, and non-GAAP EPS. These results were driven by several areas of strength in our portfolio of companies, notably continued improvement in the display advertising portion of our business, our continuing strong growth in our media subscriptions, as well as the addition of our VPN business unit acquired early in Q2. We remain cost-conscious, resulting in strong EBITDA margins for the first half of the year. We ended the quarter with approximately $259 million of cash and investments after spending $242 million in the quarter on acquisitions and dividends. Let's review the summary quarterly financial results on slide 5. For Q2 2019, j2 saw a 12% increase in revenue from Q2 2018 to $322.4 million.
Gross profit margin, which is a function of the relative mix of our 14 business units, remained strong at 81.5%. We saw EBITDA grow by 10.3% to $125.2 million. Adjusted EPS grew 6.7% to $1.60 per share versus $1.50 per share for Q2 2018. I would note EPS growth was impacted by a 21% tax rate in Q2 2019 versus a lower than usual tax rate of 18.5% in Q2 2018. As you know, fundamental to our philosophy at j2 is generate strong free cash flow. Turning to slide six, in Q2, we generated $85.8 million of free cash flow, which was slightly down from Q2 2018 due to additional tax payments of approximately $5 million versus Q2 2018, and $9 million in comparison to Q1 2019.
Due to the timing of such estimated tax payments, we believe that it is better to look at the trailing 12-month free cash flow and the conversion of trailing 12-month EBITDA to trailing 12-month free cash flow. On a trailing 12-month basis, we generated $357.3 million of free cash flow for a 69.7% conversion of our $512.4 million of EBITDA. Let's turn to the two businesses, cloud and digital media for Q2 as outlined on slide seven. The cloud business grew revenue approximately 12.5% to $169.1 million, due in large part to the new VPN business unit, increased revenue in MarTech, and a slower rate of decline in our backup business. Reported EBITDA increased by approximately 12.6% to $85.2 million, compared to $75.6 million in Q2 2018. The EBITDA margin is 50.4% after corporate allocations, slightly up from the EBITDA margin in Q2 of 2018.
Our Digital Media business grew revenue 11.4% to $153.3 million and produced $42.6 million of EBITDA or a 6.9% growth. EBITDA margin declined by about one percentage point from Q2 2018 due to certain license fees paid for gains in Q2 2019 that did not occur in Q2 2018, as we discussed on the last earnings call. We are reiterating our revised guidance range for the year as outlined on slide nine. To remind you, our original high end of our range was $1.33 billion of revenue, $540 million of EBITDA and $6.95 in non-GAAP earnings per share. As we stated last quarter, this becomes the low end of our new range of guidance, which we reiterate today.
We expect our revenues now to be between $1.33 billion and $1.37 billion of revs, EBITDA to be between $540 million and $556 million, and non-GAAP EPS to be between $6.95 per share and $7.15 per share. Following this guidance slide are various metrics and reconciliation statements for various non-GAAP measures to the nearest GAAP equivalent. Before turning it over to the operator for questions, I would like to draw your attention to slide 12, and specifically the cloud metrics. You will note a 27.5% sequential increase in our cloud customer base and a resulting decrease in average monthly revenue per customer. This is due to the inclusion of the VPN customer base, which has an average monthly revenue per customer of less than $7.
We include the VPN customer base as if it existed on March 31 for purposes of calculating the average base for the AMR per customer measurement. In addition, the increase in cancel rate is also due to the inclusion of the VPN customer base, which has a somewhat higher cancel rate than the other Cloud Services. Excluding our VPN business, the cancel rate remained flat at 2.2%. Finally, for our Digital Media metrics, I would note that the sequential and year-over-year declines in visits and page views are substantially attributable to declines in our Snapchat traffic, which constitutes a minute amount of our Digital Media revenue. I would now ask the operator to rejoin us and to instruct you on how to queue for questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Shyam Patil with Susquehanna. Please go ahead.
Hey, guys. Good morning. Congrats on a great quarter.
Thank you.
I had a few questions. First, I guess for you, Vivek. When you look at the M&A incentives for the GMs, do you see any kind of weighting first half or second half in terms of M&A transactions in a year? A follow-up to that is, when you look at the M&A pipeline, particularly for Digital Media subscription deals, can you just talk about how that looks, mid-size deals versus large deals?
Sure. On the first part of your question, in terms of the incentive structure for the General Managers, there's two components. In terms of their annual incentive, their bonus compensation, it is entirely EBITDA-based. It is a function of the EBITDA goals we set for the Business Unit at the beginning of the year. When M&A occurs that is incremental to what's in that goal and that target, that EBITDA contribution will count, let's say, capital charge for the asset. We look for things that can be immediately accretive vis-a-vis that capital charge. There really isn't a timing benefit. It isn't per se, you should do it early or you should do it late. It really comes down to can you move your scale? The second piece of their compensation is they're all shareholders.
Not unlike my own equity package, it is a mixture of time-based restricted shares as well as performance-based shares. They're incentivized to enhance the enterprise value and the per-share price of the company. On the second question around media and media subscription businesses, we really are looking for businesses where we can leverage our media audiences to drive customer acquisition and really sort of bend the CAC to LTV equation, right? As you know, in all subscription businesses, that's the equation. If we can reduce the amount of third-party marketing spend that we have, then that becomes very interesting. We've seen that obviously in the gaming space. I wouldn't confine it just to media subscriptions. We're also looking for cloud subscription services that can benefit from having media audiences that are relevant.
In some ways, you can argue that's what VPN is.
Great. Second question. Interest rates are coming down. Just wondering, does that impact kind of how you guys think about leverage and valuations?
I think there's two separate elements to that. As it relates to valuations, we have, as you know, fairly strict parameters that we adhere to irrespective of the market environment, whether it's driven by interest rates or other valuations. That remains unchanged in terms of what we're looking for in terms of rates of return. The first part of your question in terms of the lower interest rates, may give us opportunities to look at our capital structure and lower our average cost of capital. Now, having said that, you know, our capital structure really occurs in two separate pieces. We've got at the parent, the converts, which have got about 22 to 23 months before their first put call date, but they are in the money. That's the $402.5 at $325.
Downstairs at the Cloud Business, where we have most of our leverage, the 650 of 6% notes are currently non-callable. Their first call date is in one year in July of 2020 at 104.5. We have a modest amount of bank debt that's drawn about $100 million. That's around a 5% rate that sits on top of that. We have much more limited opportunities downstairs from a refinancing standpoint. Of course, we do have an unlevered Media Business, which could take advantage of either the bank debt market or the high yield market. I would say that we remain, given our cash flow characteristics, the cash balances that we maintain, and the incremental amount that we have put on the line downstairs at the Cloud, I think in a comfortable position to meet our M&A needs and our other capital allocation needs.
Thank you. Just my last question. Scott, I know you guys don't guide quarterly, but any color on how we should think about gross margins and EBITDA margins by segment and for the year for 3Q and 4Q, as well as how you guys are thinking about free cash flow for the year as well?
You're correct, we don't guide by quarter, but I think the general trends in the margin structure of the two segments remains consistent with the understanding that obviously the media business has dramatic leverage as we move from Q3 into Q4. We would expect the margins of the media business in Q3 to be roughly consistent with where they have been in the first half of the year. Same thing with the cloud. Then an uptick in the margins in media to the 40% range, EBITDA margins in Q4, which would then bring us to close to the mid-30s EBITDA margin for the media business for the year and right around 50% EBITDA margins for the cloud business.
In terms of free cash flow, we continue to look at our EBITDA conversion ratio very close to 70%, which would get us right to that $375-$380 range of free cash flow. As I pointed out in the prepared remarks, we do have some timing differences that affect the quarterly productivity of free cash flow. We had some benefits in Q1 that reversed out in Q2 based on the timing and the magnitude of some estimated tax payments. That's why, as I said in the prepared remarks, we always encourage you to look at the trailing 12-month free cash flow and the conversion of that free cash flow from its EBITDA, which is basically right around 70% on the trailing 12 months through the end of June 2019.
Great. Thank you, guys. Congrats again.
Thank you.
Our next question is from Daniel Ives with Wedbush Securities. Please go ahead.
Yeah, thanks, great quarter. My question is on the Digital Media business. Maybe just talk about the pipeline that you're seeing on the advertising side for healthcare pharma. I know sometimes you have pretty good visibility into next three, six months or even longer. Maybe talk about that first.
Yeah. The pharma market continues to be pretty strong for us. As I think I might have mentioned in the last call, the call before that, the pipeline at the FDA has never been stronger. The volume of drugs that are getting approved or have been approved and therefore have marketing budgets attached to them are pretty substantial. We are certainly a beneficiary of that, and we're continuing to see that both on the direct-to-consumer side, where pharma is looking to market its drugs to patients, also on the provider side, where it's looking to market to prescribers. Both sides of the market, and it's one of the advantages we have, I think, at the Everyday Health Group, is that we reach both consumer, patient, and provider, prescriber. We're seeing that strength.
More generally within the market, we're seeing some interesting things, in the pipeline. We're thinking about other parts of the healthcare ecosystem. We have healthcare systems, hospitals themselves, that are an interesting category for us. We have moved into that business with Health eCareers, where we do recruiting services for hospitals looking to get doctors, physicians, assistants, and nurses, as well as our Castle Connolly business, where we're rating doctors, and that may turn into some interesting opportunities with hospitals. The payers, right? Insurers as well as employers who are self-insured is another interesting market for us to get into. We like the pharma market. It continues to be strong for us, and we are thinking about how we can expand more deeply into other parts of the healthcare ecosystem.
Got it. Yeah. I want to look on the backup business. Obviously, we've seen some competitors continue to see softness. Any changes in thinking in the backup business in terms of any of the trends or maybe even more aggressive on M&A or the opposite? Just interested in that. Thanks.
Yeah. As we've said, backup for us is in sort of the state of managed decline, where we're very focused on EBITDA and free cash flow generation. Having said that, Q2 was actually better than Q1. Sequentially, the decline was less, we feel good about that. We do, to your point, see some tuck-in acquisition opportunities, that are attractive and fit our M&A requirements and hurdles. Look, we look at it as it is one of the, frankly, only drags within the j2 portfolio in terms of revenues. It's actually possibly finding its bottom, which is a positive sign for us.
Thank you.
Our next question is from Will Power with Robert W. Baird. Please go ahead, sir.
Great. Thanks. I guess first, congratulations on the 20-year milestone, great perspective there, Vivek. Just a couple of questions. First, I guess on the VPN assets acquisition, maybe any color on how that's performed relative to expectations? It'd be great to get any granularity on what the revenue contribution was, just kind of the outlook there. I guess the other piece to that is, what kind of cross-sell opportunities are you seeing on the revenue side? I think you've referenced opportunities for security backup. I assume that's early, any further color there would be great, too. Thanks.
Yeah. Look, we're really pleased with the VPN assets. The core asset is IPVanish. We, I think, acquired a very strong business, a great leadership team under Nick Nelson, who's really made an immediate impact inside of the company. Look, one, I think the VPN and privacy space, the demand just continues to grow. I think as there's more consumer and business concern and attention around social media and government surveillance and other forms of privacy violations and breaches, I think we just have a natural demand occurring. In fact, I would put the VPN assets into the category of assets within our portfolio that I would refer to as our high-growth assets.
I put Ookla into that category, I put Humble Bundle into that category, I put Ekahau into that category, I would put IPVanish into that category, which is exciting, particularly for the Cloud Services side of the house, to have something that has that kind of growth potential. It also is a highly fragmented market, the VPN market. There are hundreds, if not thousands, of solutions. We think we have a strong one. We think we have one that earns high trust marks, which is absolutely vital and critical if you're providing a VPN service. We see the opportunity, I think, to be opportunistic in this market.
The last thing I would just say is that while the Q2 cloud revenue growth, 12.5%, was very strong and driven in large part by the VPN assets, the rest of cloud did very well, and Voice and MarTech in particular had pretty strong year-over-year quarters. It is certainly a driver of what we saw in Q2, but I don't want that to discount some of the strength we're seeing in other parts of the cloud.
Yeah, I would just add to that we actually experienced in Q2 better performance in what I'll call the rest of the Cloud Services business exclusive of VPN than we did in Q1. You'll remember that was a little under 2% growth in Q1. The second piece to take into account, and it's something we're actually still working through, is we do have deferred revenue haircuts for any set of customers that we acquire in a subscription business. In the VPN space, it is more typical than in some of our other spaces to have more than month-to-month contracts, some even going out as long as three years. There's a larger base of deferred revenue than we would experience in other deals of similar size, but also a higher discount rate, since on the margin, there aren't as many costs to attribute to servicing those customers.
We have a fairly big reduction in the book of revenue that we acquired this year and to a lesser extent next year through the deferred revenue haircut, which as I say, we're still working through. We've got an estimate for this quarter that I think is very solid, but we work with third parties to actually nail that down, and that will be finalized the quarter we're in Q3.
Okay. All right. No, appreciate that. Okay. I guess maybe just second question, just coming back, well, I guess to the other growth drivers on the Digital Media side, thinking of Ookla, Humble Bundle, I think you, Vivek, referenced growing north of 30%. Anything in particular you'd call out there? Is it just the same trends moving forward, one of those assets performing better than the others, or just continue to see kind of full steam ahead on both fronts?
Yeah, I think they're both executing according to plan. We feel very good about where they are. I might just point out within the broadband assets, the Ekahau asset, which is still relatively new for us, is performing really well. Lots of product enhancements, lots of pushes, looking at pricing models and ways in which we can generate more value from the customer base. That's doing very well for us. The other thing is, I would just say in the Humble Bundle business, there's three parts to the Humble Bundle business. You have the subscription business, which we've talked about and continues to be a nice business for us. The store business, which is more single unit sale transaction business, and then the publishing business.
The publishing business is one that we are leaning into where we work with indie developers to provide financing to publish their games, to market their games, put them in the normal distribution channel, where PC games are sold. We're making a very nice return on our investment just through those revenues, and then have the ability to include those games within our subscription service some months down the road. That's also attractive because now we're including our own game versus licensing a third-party game. That is something that we're going to look to invest in more.
We've got a nice pipeline of games, but I think this is an area that we see real opportunity in these sort of indie games that aren't really on the radar of the larger game publishers who are looking for AAA franchises that have multi-year value and are a very different part of the market. That's maybe a new element to the Humble Bundle business for you to consider.
Great. Yeah. Thanks for the color.
Our next question is from Nick Jones with Citi. Please go ahead.
Hi. Thanks for taking the questions. Just one on, I guess, kind of holes in your product portfolio. I think maybe the VPN acquisitions help patch up some of the web security. Are there any other areas that are maybe obvious for improvement or some holes in products? Secondly, on kind of bending this CAC LTV equation. Are a lot of these pipelines for potential acquisition generated from where you're generating most of the traffic via targeted advertising? How should we think about how these types of acquisitions are targeted or sourced?
Yeah. Just on the first question, in terms of the product portfolio and components that are missing, I think in each of the market spaces we're in, we like the assets. It's fairly complete, there are always opportunities for us to add components. One thing I didn't answer on an earlier question, but is related to this, we are having success in bundling now, and that's been something that historically we haven't done as much on the Cloud Services side, but now the ability to bundle our endpoint security, which is under the VIPRE brand, our file sync and backup on the consumer side, which would be SugarSync and IPVanish, and the ability to give you one price for all three services, make it a great value proposition and make it incredibly sticky.
In fact, we have moved the management of the SugarSync business from under the backup unit and put it actually into the VPN unit because it's very consumer-driven, whereas the rest of the backup assets are more business customers and enterprise customers. It's a different customer set. We see opportunities in doing that. On the question relating to how do we leverage media audiences for subscriptions, it can be sponsored posts, it can be targeted advertising, it can be email lists. Just think of it, right? We get paid a lot of money by other providers to market their services. We essentially become our own customer, right? We're able to do for ourselves the things that we do for third parties, but at very little, if no marginal cost to us and really no opportunity cost.
It's not like we are shifting inventory that would have been monetized with a third party to us and losing that revenue. It is truly all incremental.
Got it. Thank you. One quick follow-up. I guess we focus a lot on j2 Global acquiring, but how should we think about potential divestitures? Is there any kind of areas or any way you guys think about this?
Look, I think the answer is, and we saw this in 2017, is we're certainly open to it, right? It's a portfolio, and our view isn't we're only buyers. We're certainly willing to entertain offers that value these businesses in excess of what the market may be valuing and where we may not feel it's strategic, or where we may not feel we have future growth opportunities, or where we may not feel we can execute the M&A program as well. We're open to it. We get calls from time to time. We're certainly. I do think that's a little bit of a shift, I do think, our openness and willingness to do it. Right now, I wouldn't say there's anything active, and I wouldn't say there's anything meaningful going on.
Got it. Thank you for taking my questions.
Of course. Thank you.
Our next question is from James Breen with William Blair. Please go ahead.
Thanks for taking the question. Just following up on the VPN business. Obviously, the ARPU is lower and the churn is a little bit higher, but can you talk about some of the economics there? Also, does this give you sort of a footprint in that space to do more M&A, or are there other companies out there where you can add customers to your current platform? Thanks.
Yeah. I'll have Scott talk on just some of the metrics because they show up a little bit in our customer counts and ARPA. On the second piece, absolutely, and I do think that the VPN space is fragmented, has many sub-scale providers who are going to find it difficult to compete with the likes of us, and they're fairly straightforward migrations from a technology and customer experience point of view. We see pretty interesting opportunities from an M&A point of view. The other thing is, we also have a white label version or portion of our VPN business where there are entities who may be interested in launching their own VPN for their own customer group, and we're able to provide that and power that, and there we just get paid a license fee or a per-seat type fee from that provider.
We can come at the market that way, and that's a nice competitive advantage for us.
On the metrics, most of the customer base that we acquired, as you know, it occurs under four or five different brands, would be at the smaller end of the spectrum, meaning they're either individual users or SOHOs, in a B2B case. They've got an ARPU, and there's different programs. As I mentioned to an earlier question, there are month-to-month subscribers, there are annuals, there's two-year, three-year subscribers. Based upon that mix, we're going to get an ARPU on a net-net basis, somewhere between $6 and $7 per month. That's a lower ARPU than we've historically gotten in the rest of our cloud business, and it's why you see the $16 average ARPU in Q1 come down to $14, in Q2.
That will move around a little bit based upon, as we move forward, the relative mix between that SOHO customer versus the B2B on the one hand, and the different packages on the other.
From a profitability standpoint, the EBITDA margins for that business are in line generally with the cloud business around that 50%, or are they better?
No, they're actually somewhat lower.
Okay.
It's a strongly profitable business, and actually, I would give, as Vivek mentioned earlier, a lot of credit to the incumbent historic cloud business because the margins actually went up in Q2 despite the fact there was some "drag" from the VPN business because that's a business that right now, at its scale, is more around 40% EBITDA margin.
Great. Thank you.
Look, and the other thing I'm just going to also point out is it's a growth business.
Yes
We are going to be aggressive in investing to generate future growth.
Right. Its goal is not necessarily to drive it to 50%-
Correct
in the near term.
Okay. Thank you.
Our next question is from Rishi Jaluria with D.A. Davidson. Please go ahead.
Hey, guys. Thanks for taking my questions. A couple ones here. First, I wanted to dig into some of the VPN assets and maybe particularly IPVanish. I think, especially since we can see the impact on metrics on the customer and on ARPU side, just help us understand directionally, is the VPN business primarily actual SMB, or is there a bigger consumer piece to that business? My understanding is that most of your current cloud business is SMB with relatively low consumer exposure. This may be a little bit of a different market focus.
It is.
Yes.
It is absolutely much more of a consumer value proposition. Having said that, there are SMBs, and we are developing solutions for even larger companies. We've got a brand called EncryptMe, where companies can buy VPN for their teams and for their organizations, which they really ought to do, because when you consider about how many endpoints in the world that are business endpoints, whether those be laptops or phones that are connecting to in-flight Wi-Fi, airport Wi-Fi, hotel Wi-Fi, all of that's unsecured
Coffee shops.
Coffee shops. That's unsecured. It's a risk to the enterprise, and those risks should be resolved. We see an opportunity. With respect to the business as it is today, it is consumer. However, where I think we're leveraging our collective expertise is that about 60% of Cloud Services subscriptions are generated online. The discipline of online marketing, online customer acquisition, understanding sources of traffic, drivers of conversion, different testing of different funnel experiences, that's a common thing, whether it's eFax, whether it's IPVanish, whether it's Line2. Also, our understanding of how to sell through on mobile devices and then through app stores is also sort of a common experience. While a little bit of a different market for sure, I think a common set of marketing practices and dynamics.
Okay. Got it. That's helpful. I think just to understand, do you have any other cloud businesses that in the past that you can bring some experiences from, or is there something that you can bring from what you've done with the Ookla and Humble Bundle, some best practice from that into kind of adapting your go-to-market and sales motion with the VPN assets?
Well, listen, again, I think on the customer acquisition side, yes. I think that it is the same, whether it's paid search, organic search, content recommendation engines, affiliates. I wouldn't make such a big nuance between the SMB buyer and the consumer buyer because they're buying online. I think that's still just people who are buying online, and so there's a lot of collective experience. I also think on the customer service side, we have a fair amount of customer service infrastructure and knowledge across the company, and are sharing lots of best practices around customer service. Obviously, yes, on the media side, the Humble Bundle subscription business is entirely a consumer subscription business. I think there are learnings there that we can apply.
Got it. Okay, thanks. That's helpful. Speaking of the Digital Media subscription business, looks like we've been working kind of in the mid to high 20s range as a percent of the total Digital Media business. I know that's obviously been a focal point, is growing that. That was 13% a year and a half ago. Looks like it's kind of been in the same range for a while now. Just help us understand, I mean, is this kind of the steady state of where we should expect that, or is there kind of other levers to seeing that kind of business as a percent of the total Digital Media business, kind of continue to grow from here?
Well, look, I think if the portfolio were to stay unchanged, you would continue to see the subscription portion of it be larger and larger. Now, I will also point out the non-subscription pieces are growing nicely, and so you have got that in the proportional question. I think as we acquire in media, to be very clear, we're interested in a full range of assets, including display-dependent assets that have performance marketing components to it. Also, performance marketing-driven assets that we want to add to our performance marketing portfolio and subscription. It's a little hard to answer without being able to know over the next 12, 24 and 36 months which of those assets and in what proportion-
Right
they're going to be. I don't want to leave the impression that the performance marketing and display pieces are pieces that we're not interested in growing and acquiring into. We are. Subscriptions as well.
Okay, got it. That's helpful. Wanted to turn to OCV. It looks like, I think you had about $37 million in investments there in terms of actual capital called. Last year, about $10 million in Q1, and we'll see when the 10-Q comes out, how much in Q2. Maybe just help us understand, to the extent that you can share, where are those investments going and maybe your sort of outlook on that.
I think you pulled the information from the Q, so I think you're pretty close to the amount we have invested. You will see some additional investments that we made during Q2. What I would note is that now that the fund has been up and running for a while, they're starting to see some monetization events. In terms of their base of investments, they've got about eight of them. They range from life sciences to mobile payments. It's really a broad array. One of the companies that they invested in went public about two, three months ago, called Precision BioSciences. You'll notice, both in our financials and you'll see it also when we file the Q at the end of this week, that there's a gain posted.
In previous quarters, you'll see that when we mark the market, there's losses on the portfolio, primarily for the fees that we pay. In this quarter, you're going to see that's not only reversed out, but there's a gain. That's not a realized gain because there's a lockup period and we don't control the disposition of those shares, OCV does. One company's already gone public. I believe that there's at least one other situation where there'll be a pending transaction that will also create a monetization event. Right now, as I say, for where they're at in the life of a fund, at least two of their situations already bearing fruit in terms of a return, even if not fully realized to us in cash, I think is positive.
The other investments, given the stage they're at, are not quite ripe for either going public or a monetization event. I think that from our standpoint, we're going to start to see some return of capital from these investments. I still budget that we will expend about $50 million a year in terms of the investment into OCV to get to our full $200 million commitment. We spent a little bit under that last year because they just didn't have the breadth of deals and capital calls. We may, I think, be probably a little bit under that number again this year, but that'll be in part a function of what they have in their pipeline between now and year-end.
Great, thanks. Last one from me, and I'll hop off. From a housekeeping perspective, Scott, any impact on or drag from currency on growth rates in the quarter?
No. FX had very little impact in the quarter.
All right, great. Thanks. All right. Thanks, Scott. Thanks, Vivek.
Yep, thank you.
Our next question is from Jon Tanwanteng with CJS Securities. Please go ahead.
Hi, guys. Thank you for taking my questions. Again, congrats on the strong performance in the past 20 years and in the quarter.
Thank you.
First of all, can you talk about how the fax business performed and maybe break out the enterprise versus SMB performance and how your efforts to penetrate healthcare and enterprise are progressing?
Yeah. Fax revenues were up a couple of million dollars sequentially, which was nice from Q1. The corporate business was up about 7% for the quarter, that's mostly in the healthcare space. Things are going according to plan. We've deployed and are continuing to deploy salespeople in the field to have the discussions to convince healthcare clients to shift from their analog solutions to cloud. It takes a while. There's a fair amount. Healthcare moves slowly, when it moves, it kind of moves in big ways. We like the size of some of the opportunities that are in front of us. It continues to be a pretty good growth business at about 7%. On the web fax side, I would say that we haven't done a transaction-
25 months, I think.
since 25 months. In two years, we haven't done one. That still holds together reasonably well without M&A. Historically, the web fax side has grown entirely through M&A, but we've been very focused on better customer acquisition, better customer retention. An interesting dynamic is the actual search query volumes, when you look at fax and fax-related terms, is up. We're seeing that as a sort of proxy for interest in the solution and the service that we provide. We're happy. The margins continue to be very strong. John Evergall, who runs that business for us, does a very nice job, and they're investing. He's investing, yet finding ways to improve margins in other places.
Great. Thank you for that color. Just going back to the topic of the margins in the VPN business, where can those go as you bolt on assets in what appears to be a target-rich environment? Are they the same scaling opportunities and migration economics as in your traditional cloud businesses?
Yeah. I think they're actually very, very similar to what we've seen in other cloud spaces. Again, I just think one of the things I want to continue to stress is, this is a business, we've talked about this, where we see tangible organic growth opportunities we are going to invest in. We're not looking at a magic margin percentage. We're really looking to feed our growth engines, and we view this as an engine.
Okay, fair enough. Finally, can you just give us a little more color on the scope and quality of M&A opportunities for second half and into 2020? I know you've done about $270 million of deals this year. What looks likely to close by year-end, what does the mix look like in the pipeline? Is it more cloud and VPN, or is there a bigger balance towards media?
No, it's a mix. Look, I think we've got close to half of the business units participating in prospective M&A right now. We've obviously had a run in the first half of the year that's been dominated by the cloud. Although there was a small media deal done in Q2 that goes into our Ziff Media Group. We have a balance on both sides. I think it's very hard to predict what the total outcome will be, but as I said in the last earnings call, I feel very confident that we will spend clearly more than the free cash flow we will generate this year, which, as I said earlier, is about $375 million-$380 million.
Whether that comes in a series of smaller deals spread across five or six BUs or is more concentrated is a function really of which deals get to the finish line and at what point in the year. I think you're going to see a mix of deals between now and year-end.
Great. Thank you, and congrats again.
Thanks.
Our next question is from Pat Walravens with JMP Securities. Please go ahead.
Oh, great. Thank you very much. Thank you for the 20-year perspective. None of the companies I covered back then are still in business. That's one indication.
That's a bad line.
I have two big-picture questions. The first is just, when you look at the M&A pipeline, do you feel like sellers' expectations are at a reasonable point these days?
Yeah, look, I think it depends, right? You've got the range. The great thing about us is, we'll look at all situations, and we keep an open mind, and we look for a path to value creation. I think some buyers may not have that. We have the ability to take a growth asset, leverage both our balance sheet and the assets within the company to accelerate that. We'll look at those assets. We'll also look at assets where there's a profitable core, and we need to shrink the asset to get to that profitable core and then look to grow it from there. I don't know if all buyers could do both of those things, for instance. We've got versatility as a buyer. I think we also have a very solid reputation for moving decisively and quickly.
To the degree to which speed and certainty is valued by a seller, we're the buyer. Where it comes to someone's looking for the greater fool, those aren't processes we're ever going to win, those will always exist. I've been in markets up, I've been in markets down, you'll always find assets like that. I think the high level is that we are not seeing a shortage of interesting, actionable opportunities for us.
All right, great. My second question is, are you guys seeing any changes in sort of the macroeconomic environment, either on the Media or the Cloud Services side?
I feel like the macro things that happen often have nothing to do with our business, but we get swept into it. We don't have much of a business in China. It's de minimis for us. That doesn't stop us from getting pulled in to that tide. I think the larger things, often, if one took a closer look at what we do and where we make our money and how we make our money, don't apply to us, but it has an impact, obviously, on the company's stock price, right? Beyond that, I actually think, the areas that with display, having had challenges in the past, we feel good, three consecutive quarters of display growth, which we feel good about. No, I don't see things specific to our businesses and our industries and our markets that worry me.
We just worry about the larger market, which we can't control.
Right. All right, great. Thank you.
There are no further questions registered at this time. I would like to turn the floor back over to Scott Turicchi for closing comments.
Thank you, Claudia. We thank everyone for participating today in our Q2 earnings call. As usual, look for a press release soon about upcoming conferences, some beginning as early as next week. Obviously, there's a hiatus in the latter part of August, and then there's a series of conferences beginning right after Labor Day in September. We'll look forward to communicating again our Q3 results sometime in early November.
Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.