Welcome to j2 Global's 4th Quarter and Year End 2018 Earnings Conference Call. I am Michelle, the operator who will be assisting you today. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. On this call will be Vivek Shah, CEO of j2 Global and Scott Turicchi, President of j2.
I will now turn the call over to Scott Turicchi, President and CFO of j2 Global. Thank you. You may begin.
Thank you. Good morning, ladies and gentlemen, and welcome to the j2 Global Investor Conference Call for the 4th fiscal quarter of 2018. As the operator just mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah. We finished the year strong with a record 4th quarter performance across many metrics.
Notably, we had record revenue, EBITDA and non GAAP earnings per share as well as free cash flow. The same was true for fiscal year 2018 and it was the 23rd consecutive year of revenue growth for the company. The Board has approved an increase in the quarterly dividend by $0.01 to $0.445 per share. We'll 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've not received a copy of the press release, you may access it through our corporate website atj2global.com/press. In addition, you'll be able to access the webcast from this site. After we complete our formal 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, at any time, you may e mail us questions at investorj2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. 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've 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. Today, I'd like to on our accomplishments in 2018 as well as provide some color on our 2019 outlook. We finished 2018 with great momentum. In Q4, our revenues were up 9.4% year over year. Our adjusted EBITDA was up 8.7% year over year and our non GAAP EPS was up 17.9% year over year.
This was our strongest quarter since the Q1 of 2018, which is particularly meaningful given that Q4 is our largest quarter of the year. Of particular note, display ad revenues rebounded and were up year over year by over 3% in the quarter. As I mentioned in our last call, we were observing signs of improvement in pharma advertising and in fact that is precisely what we experienced in Q4. Full year 2018 revenues grew by 8%, but if you adjust for disposed assets and patents, we grew by 11%. If you take the further step and exclude backup, which as many of you know, is in a managed steady decline, and we grew by almost 14%.
In a year in which we faced 2 quarters of meaningful display advertising headwinds, I am very pleased with our results. Over the course of these calls in 2018, I outlined priorities and initiatives for which we have demonstrated significant progress. In my first call, I spoke of our goal of expanding subscription revenues at Digital Media. Our subscription revenues nearly doubled last year and we continue to seek ways to build recurring revenue streams across the Digital Media portfolio, both for consumers and enterprises. Almost 25% of our Digital Media revenues in 2018 were subscriptions, which is a key distinguishing characteristic of our business versus others in the Digital Media Industry.
In that same call, I expressed our enthusiasm for our security business, specifically our move into endpoint security with VIPER, which exceeded our expectations in 2018. I also spoke of the importance of email to marketers not just as a way to deliver messages to customer inboxes, but as a way to unlock identity across a number of platforms. The acquisition of Icontact several weeks ago enhances our position in email marketing software and paves the way for the pursuit of a more ambitious Martech vision. In the Q1 call last year, I spoke of the healthcare and corporate opportunity for our Cloud Fax business. Our corporate Cloud Fax revenues grew 6% in 2018 and we're continuing to make investments in our product, infrastructure and organization to deepen our penetration of the healthcare market where we estimate our share of fax volume is still under 5%.
In the Q2 call last year, I expressed our vision of being the single source of truth, a global standard in the broadband industry. Our position in the consumer market is well known with Speedtest, but we view broadband in the workplace and in commercial spaces as being an area of expansion. Our acquisition of Ekahau in Q4 provides us a great path into the enterprise with a company that provides software to design, deploy and manage Wi Fi networks at work. Then in our Q3 2018 call, I spoke at length about our approach to acquisitions and capital allocation. We closed on 11 deals in 2018 and our pipeline in 2019 is robust.
I'm also very pleased that we reintroduced share buybacks into our capital allocation strategy. We repurchased 600,000 shares in Q4, our first open market share buyback since 2012. As capital allocators, we are guided by one simple goal, which is to generate exceptional returns for our investors. And we believe repurchasing our own stock represents a very attractive investment opportunity. We believe investors are increasingly gaining a fuller appreciation j2 acquisition system.
Now, looking forward to 2019, the midpoint of our guidance is $1,310,000,000 in revenues, which represents 8.5% growth. If you exclude our backup business, our growth would be 10%. Between our two businesses in 2019, we view cloud services growing mid single digits including backup, but high single digits excluding backup and Digital Media growing in the low teens. Within Cloud Services, we see Cloud Fax growing low single digit, backup declining high single digit and the remaining voice, smart tech and security businesses growing nearly 25% year over year based on organic growth and the benefit of acquisitions. We're pleased with the progress we're making in these new product categories.
Together, we expect our non cloud fax businesses to generate about $300,000,000 in revenues in 2019 and they offer core services to small and medium businesses from softphone to security to marketing technology. Within Digital Media, we see overall advertising growing mid single digits with display being slightly up and performance marketing driving more of the overall growth. As we pointed out in the past, the advertising business is almost split down the middle between the display and performance. We see subscription revenues growing 30% plus with continued organic growth and the benefit of acquisitions. 2018 was the 1st year in which our digital media business surpassed cloud services in revenue and while we've certainly achieved revenue scale in the business, we're still only operating in a few verticals and believe our playbook and business model can be extended to a number of other verticals.
From an adjusted EBITDA margin point of view, we believe we will remain flat in 2019. While I believe it's best to look at the margins of the 2 businesses independently, it is true that as Digital Media becomes a larger percentage of the overall business and operates at a margin roughly 15 points lower than cloud services, our overall margin comes under pressure. 2nd, the declines in backup are highly punitive, but nearly 100% flow through to adjusted EBITDA. 3rd, we are making some important investments in the business that would be expensed this year, including starting a project to move to a cloud based ERP system, investments we're making in cybersecurity and investments to drive organic growth across the various business units. Some of those investments will also come in the form of CapEx, which would partially affect our current year net income and be reflected in our non GAAP EPS.
Before I pass the call to Scott, I know there have been a number of press reports about layoffs in the digital media industry. Many of the companies involved have been running their businesses for an exit event, for venture like returns, while we have always run our business with a view towards earnings and cash flow. So I believe that many of these businesses, some of which have had solid growth, are shifting by cutting expenses to improve profitability. In addition, we have always run our business understanding that display advertising would not be enough. So we have a Digital Media business where subscriptions and performance marketing make up nearly 60% of our revenues.
Having multiple monetization levers has been a key differentiator for us. Finally, we operate in verticals, tech, gaming, healthcare with audiences that express high value intent. As I mentioned earlier, we believe there are other verticals where we can have success and it may well be that market pressures will allow us to acquire those assets at attractive prices. With that, let me hand the call back to Scott.
Thanks Vivek. As I stated earlier, Q4 2018 set a variety of financial records for j2 including revenue, EBITDA and free cash flow for a fiscal Q4. These results were driven by several areas of strength in our portfolio of companies notably improvement in the display advertising portion of our Digital Media business as well as our continuing strong growth in our media subscriptions despite some currency headwinds. We ended the quarter with approximately $293,000,000 of cash and investments after spending $184,000,000 in the quarter on acquisitions, stock repurchases and dividends. Now let's review the summary quarterly financial results, which you'll find on Slide 4.
For Q4, 2018, j2 saw a 9.4% increase in revenue from Q4, 2017 to $346,100,000 We saw FX affect our Q4 results by $2,500,000 versus Q4 2017 and $1,200,000 versus Q3 2018. This is the Q1 this year that our results were not meaningfully impacted by the divestitures in 2017. Gross profit margin, which is a function of the relative mix of our 13 business units remained healthy to 84% and improved 50 basis points from Q3 2018. We saw EBITDA grow by 8.7 percent to 154,300,000 Finally, adjusted EPS grew 17.9 percent to $2.11 per share versus $1.79 per share for Q4 2018 positively impacted by our increased operating earnings and lower domestic tax rates. Moving to slide 5, for the full fiscal year, we saw an 8% growth in revenue from 2017 to $1,207,000,000 But after taking into account the 3 divestitures in 20 17, j2 saw its growth in revenues increased by 11%.
Our EBITDA increased by 5.7% or $26,600,000 to $489,500,000 and our adjusted EPS was $6.35 per share for the year compared to $5.64 per share in 2017 or a 12.6% increase. As you know, we are strong believers in generating free cash flow. Turning to Slide 6, you can see we had a 27.2% increase in our Q4 free cash flow to $95,800,000 a record for a 4th fiscal quarter. For the full fiscal year, we generated almost $345,000,000 in free cash flow, a 30.2% increase from 2017 and a 70.5 percent conversion rate on our $489,500,000 of EBITDA. Now let's turn to the 2 businesses, Cloud and Digital Media for Q4 as outlined on Slide 7.
The cloud business grew up revenue approximately 1% to $148,100,000 and was negatively impacted by FX, patent revenues that existed in 2017, but not in 2018 and the decline in our backup business. As you know, we experienced seasonal weakness in Q4 in the cloud business due to fewer business days. Reported EBITDA declined by $1,000,000 to $75,800,000 compared to Q4 2017. As we've noted throughout this year, a reclassification of certain corporate expenses to conform with our audited financials for the cloud business impacts the results by $1,700,000 for the quarter. So on an apples to apples basis, our pro form a EBITDA would be $77,500,000 which is an increase of $700,000 and resulting in an EBITDA margin of 51.2%.
Our media business grew revenue 16.8 to $198,000,000 and produced $79,800,000 of EBITDA or 18.6 percent growth. EBITDA for the quarter exclusive of corporate allocations not present in 2017 was $81,600,000 compared to $67,300,000 in 2017 producing an EBITDA margin for the quarter of 40.3 percent up 60 basis points from 39.7% in Q4 2017. Turning now to slide 8, let's quickly review the annual results by business. The cloud business finished the year with $598,000,000 of revenues, a 3.3% increase over 2017 and an increase of 6.1% exclusive of our backup business unit. I am pleased that the fax business unit continued to grow by 2.3% as well as each of the other business units in cloud with the exception of backup, which Vivek touched upon earlier.
EBITDA was just in excess of $300,000,000 after a $6,100,000 charge of corporate overhead allocations. On a comparable basis with 2017, the EBITDA increased despite a significant portion of the backup revenue decline flowing through the EBITDA. The EBITDA margin remained strong at slightly in excess of 50%. Our Digital Media business showed a 13.1% increase in revenues to $609,300,000 and EBITDA grew to 197,100,000 dollars after allocating $5,900,000 of corporate expenses. On a comparable basis with 2017, EBITDA grew by 17.9% to $203,000,000 for a 33.3 percent EBITDA margin.
This was despite headwinds in Q2 and Q3 of this past year in display advertising revenue. Vivek provided some highlights of our 2019 guidance at the beginning of our call. On slide 10, we have outlined some additional elements to help you understand the midpoint of our guidance range. For the Cloud business, we expect a 5% growth in revenue and EBITDA margins consistent with 2018. For our Media business, we expect revenue growth in excess of 10% and an improvement in EBITDA margins from 2018.
Also for the purposes of modeling the quarters, remember that our Digital Media business experiences significantly more seasonality than our cloud business. We expect that only 20% of the annual expected media revenues will be recognized in Q1 approximately 30% will be recognized in Q4. Also remember that we have significant fixed costs in the media business, so we experienced meaningful EBITDA margin improvement from Q1 to Q4. I would note that we expect to experience higher non GAAP depreciation this year due to the full year expensing of acquisitions done in 2018 and early 2019 as well as incremental capital investments in our fax and backup business units. We believe that our tax rate would be between 20.5 percent 22.5% this year and EPS will be calculated using an imputed share count of 48,800,000 shares.
Finally, on slide 11, our guidance for 2019 is as follows: For the fiscal year revenues between 1,290,000,000 $1,330,000,000 EBITDA between $520,000,000 $540,000,000 and non GAAP EPS between $6.65 per share $6.95 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 and to instruct you on how to queue for questions.
Thank you. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up and rejoin the queue for any additional. Our first question comes from the line of shim Patel with Susquehanna Financial. Please proceed with your question.
Hey, good morning guys. Congrats on the strong end to the year. I had a couple of questions.
Vee, you talked
a little bit about toward the end of your prepared remarks just about the shifting digital media landscape and the industry wide layoffs that we've seen. And you touched on a little bit how this can help you with M and A. Can you just elaborate on that, just kind of how it can help you with M and A? And then also, how that might also help with just gaining ad spend share in the overall industry?
Yes, Alex. So in terms of what's going on in digital media in general is I think companies and brands that haven't built non display monetization elements, which in our case as you know our performance marketing and subscription businesses are finding it challenging for all the things we've talked about in the past relative to display. And so I think for many of these companies, we represent an interesting option where we can leverage our technologies, our platform, our teams to quickly put those revenue streams and those levers in place. Mashable is a great example of that. So when we look at what we've done with Mashable, we have very quickly built an at scale performance marketing component to that business.
So I think as a lot of these companies are thinking through, should they raise more funding, should they entertain a transaction, I think we represent an interesting option. Just in that in terms of ad spend, I've talked about this in the past. I do think that we're interesting as a vertical player because I think with our vertical focus and in market audiences where we're tracking people down the purchase funnel, that is unique. And so when we think about assets that we would add to the portfolio, they would have to meet those requirements. We would stay away from general interest, broader based general news brands because our monetization playbook doesn't apply as well in those instances.
So obviously we always get a lot of phone calls, but we seem to be getting more phone calls these days.
Great, great. And Vivek, one of your initiatives when you joined was expanding the GM structure. Can you just talk about what impact that had on the strong performance and execution in 4Q and kind of the pipeline and just the pace of execution as you head into 2019? And then Scott, just on the midpoint of the guidance range, how much of the 2019 growth is coming from M and A you expect to do this year?
Okay. I'll let V go first. Yes. So look,
I think the general managers are absolutely vital, not just with respect to the Q4 performance, but to 2019 and beyond. So we have a little over a dozen general managers who are each in charge of very specific business units who have full P and L responsibility and own all aspects of their enterprise. They own product, they own engineering, they own monetization, they own the business. I view each of them as essentially backable CEOs to use a private equity parlance. They're of that caliber.
They're of that strength. And so their ability to operate these businesses well is high. But in addition, they are generating a significant amount of pipeline activity when it comes to acquisition. And so I do think that's been a profound impact when you think about all the divisional presidents, all of the general managers, Scott, myself and a few folks in corporate, you now have a number of people engaged in sourcing, evaluating, diligencing, ultimately transacting and integrating acquisitions. So I think it's vital to what we're doing and I think it is starting to show up in our results.
I certainly think it showed up in Q4.
I would agree. And I think it's one of the biggest accomplishments in 2018 for j2 is getting the structure in place and the people the right people within the right structure. Answering your second question, if you take the guidance range, at the midpoint of the guidance, there is no further specific M and A contemplated to achieve that midpoint. We did close a deal, iContact, that Vivek mentioned in his opening remarks in January. So that's been included as part of the cloud business and the MarTech piece of it for the full fiscal year, but no other M and A is assumed.
Great. Thank you, guys. Congrats again. Thanks, John.
Thank you. Our next question comes from the line of Daniel Ives with Wedbush Securities. Please
So maybe you could talk just on the
Digital Media side in terms of some of the strategic changes, obviously, like the display, it seems like that headwind is really abating and more of the move to programmatic and the subscription business even seems to be more pronounced in 2019.
Maybe can you just talk about your
M and A strategy, how that's kind of impacting in terms of
the types of deals you're looking at in 2019? Thanks.
Hey, Dan. So let me start with display and what we observed in Q4 and how we're thinking about 2019. So the strength we saw in Q4 had a lot to do with the pharma ad market and Everyday Health Group's contribution to the overall display revenue bucket, which everyday health as I've said in the past is about half of our display business. I think one of the things to note is the pharma industry is in an interesting place. I think in 2018, pharma the FDA approved 59 drugs, which is a record for the FDA.
So having a robust pharma pipeline is essential to the long term growth prospects of the Everyday Health Group and specifically the pharma advertising piece. So we feel good about where the pharma industry is and where and how we compete within that industry, which is a key driver to the display business. On the tech and gaming side, we're also seeing some strength. And I think there we've really tuned our programmatic advertising capabilities. And I think we've done a very nice job in driving more performance attributes out of our display business.
So that the display business is more resembling our performance marketing business, where it's driven by return on ad spend. So for now, and I've said this in the past, and I said this I think in the Q2 call, reiterated in the Q3 call, the display business can be lumpy and when we saw that. And so when you look at it in its totality in 2018 and you look at the strength in Q4, we're essentially flat year over year. So given the size of Q4, generating the growth that we did in Q4 almost offset the declines that we saw in Q2 and Q3. On the subscription side, we are now at a run rate on the digital media side of $160,000,000 in revenue.
So now we're at some reasonable scale on the subscription side of the Digital Media business. And overall for j2 by the way, 60% of our 2018 revenues were subscriptions. And as you've heard us talk about frequently in the past, the more we can from a mix point of view be in the highly recurring revenue stream, mix of our overall business, the better. The last thing I'll just on your question relating to M and A, it's sort of similar to the response I gave to Shyam, which is, look, we're going to be highly disciplined. There are a number of assets in the marketplace that we're assessing and I'm sure we'll assess going forward.
We just need to be able to replicate what we're doing. And we think there are assets in the existing verticals, but there are a number of verticals that are high purchase intent verticals that have not yet really driven the kind of model that I'm describing that we would love to get into. We are still really just in 3 verticals, tech, gaming and one might argue gaming is a subset of tech and healthcare. So I think we've got a lot of room for expansion in other high value verticals.
Keep it up guys. Thanks.
Thanks, Dan. Thanks, Dan.
Thank you. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.
Great, thanks. Yes, just a couple of questions. I guess Vivek, just wanted to come back to the subscription outlook. I think you said you expected 30% growth in 2019. And if that's right, I guess I just wanted to understand the key drivers of that.
How much of that was organic expectations versus any M and A impacts?
Yes. So we've got a fair amount of growth coming through our Humble Bundle and our Ookla businesses, which just as a reminder for everyone, the Humble Bundle business is a consumer subscription business where you pay each month to get a bundle get access to a bundle of games at a steep discount as well as a trove of games that are available to play at any time. It's been a great business for us and highly synergistic with IGN and we've been very pleased and continue to see great growth characteristics in that business. And I think you're hearing a lot about gaming subscription as the next evolution in the gaming industry going from selling of units to subscription. So we feel good about the space we occupy there.
On the Ookla side, this is more of an enterprise subscription business. It's a data as a service, a DaaS business, where we're able to aggregate the intelligence that we can gather across 100 of millions of these tests that are conducted every period and provide insight into the state of networks for carriers and for fixed broadband providers and they can benchmark against each other so that ultimately we get faster and better Internet to as many customers as we can. So both of those are real drivers to the subscription business. We've added from an acquisition point of view Ekahau, which I spoke about briefly in the call, but I'd like to elaborate a little bit about that business, because we're really excited for it. So Speedtest, very popular amongst consumers, 300,000,000 devices.
We get really great insight into fixed broadband and wireless networks, where we felt we needed to build our presence and our penetration is in the workplace, whereas everyone knows fast, reliable Internet is table stakes and it is absolutely vital to every business and into every industry. What Ekahau offers is software and actually hardware that enables workplaces and commercial spaces to design and deploy and manage Wi Fi networks. And that to us is in and of itself a great business. And then the ability to leverage that data, I think is going to be interesting for us. The ability to take the technology at Ekahau and integrate that into the Speedtest consumer application, so that the Speedtest consumer application is not just testing your speeds, but actually figuring out where to place your routers, where to place your repeaters, how to set up, how to configure those devices so that you get better Wi Fi at home.
So really strategic acquisition for us. And you'll see, we did some smaller deals within this business, last year, Downdetector and Mosaic. So you'll see us continue to be aggressive in this whole broadband intelligence space. So really it's the organic growth coming out of the existing businesses and our expectations of driving organic growth in the Ekahau business to be very clear. It's more the organic growth in the Ekahau business that is going to contribute to our growth expectations for subscription than Ekahau itself.
Okay. Yes, that's helpful. And maybe Scott, just on the free cash flow outlook for 2019, can you walk us through kind of the puts and takes there? I know you'd referenced some CapEx initiatives. How do we think about the free cash flow outlook?
Well, let me start by saying obviously 2018 was a very strong year. As we've talked about in the past, we normally target conversion of EBITDA to free cash flow in the 66%, sixty 7% range, we actually did over 70% flow through in 2018. We don't necessarily expect that to repeat. There were some benefits from the Tax Reform Act that are one time in nature. Obviously, the tax rate is a more permanent benefit that we do believe will flow through.
So I think that targeting in the 66%, 67% range on the 5.30 percent of EBITDA is a reasonable estimate. Some of the things that we will see an increase on the CapEx side, which were noted is some investments that we are making that will be in the form of capital in both the fax and the backup business. There is also some additional, although it will be expense investment that we are making in an ERP system that we will bear the cost at corporate. But you obviously see that run through the P and L and that's already taken into account in both the EBITDA and EPS estimate.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Rishi Jaluria with D. A. Davidson. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Nice to see a bounce back on the media side. I guess just starting on the digital media subscription business, A, from a housekeeping perspective, what percentage of digital media in the quarter was subscription? And B, as you think about building out more recurring revenue streams within digital media, I know, Google, you've talked about extending it to other areas and Humble Bundle is obviously doing well.
Are there any other areas of digital media that you've been able to get into that subscription bucket? And what other parts of digital media do you think that you can expand as subscription offerings or convert there? And then I've got a follow-up.
So when we think about, Rishi, when we think about subscriptions in the Digital Media business, there are 2 dynamics at play. So one is, where do we have a large consumer audience that we can leverage from a marketing point of view to sell subscriptions into, right? So I think what a lot of digital media companies do is create paywalls to charge for the very content that historically has been free. We don't do that. And I understand why certain organizations do and it seems to work well for them.
We choose instead to find an asset like a Humble Bundle, which is a serious appeal to an existing consumer audience and a content audience and try to leverage that audience and sell our subscription offering into them, which has a huge advantage because as you know, in nearly every subscription business that you find, the marketing budget and the cost per acquired customer is the single largest line item. And so when you have the ability to reach 100 of millions of people a month, which we do, finding subscription services we can sell to them is the name of the game. And so we're thinking that through on the healthcare side. We have a small subscription business there in the Mayo Clinic Diet. But what other areas of healthcare can you see a subscription offering?
We're thinking about that on the technology side as well. What other services can we acquire through our acquisition program and generate that cross sell? Then the 2nd category of subscription is how do we take, let's just call it the exhaust that comes out of our content businesses and our tools businesses and package that up as data insights. So that's what Speedtest is. It is a consumer application that generates a high volume of intelligence.
And so we think that's also a very interesting model for us. And so we're thinking through research businesses, survey businesses, businesses where our audiences can generate insights that are sellable on a subscription basis to clients. And so in some ways, we're moving into that with our Prime acquisition, which does continuing medical education in the healthcare space. So that's
the percentage, it was about 22% of revs in Q4 and a little bit higher for the full fiscal year.
Got it. Thanks. And I'm sorry, that's 22% of total revenue or 22% of Digital Media revenue?
Digital Media's revenues.
Okay, got it. Thanks.
So roughly cut it in half for
the company as a whole.
Perfect. That's helpful. And then we saw cloud growth kind of decels in the quarter. I know backup has its issues. Was the growth that we saw in cloud just primarily a function of the drag from the cloud backup business or were there other contributors that led to kind of cloud going down?
Yes. So look, I think we have the backup business continues to be a drag. In Q4, it performed relatively worse than the other quarters in the year. Having said that though, we do actually see signs of a deceleration in the decline going into 2019 as some of the investments we're making in account management and in infrastructure are yielding retention of logos that should help us going into it will help us in 2019 and we're seeing that. The other big issue we had on the cloud side, which is more of a cloud issue than a digital media issue is the FX bad guy that really weighed into the tune of A little under $2,000,000 $2,000,000 That's
Q4 2017 to 2018, but it also hit us sequentially.
So we've had really those 2 main challenges.
The 3rd
year over year is basically elimination of patent revenue.
That's right.
That would
have been booked in Q4 of 2017, but under ASC 606 disappeared in 2018. So those are the 3 big drivers of Q4 2017 to Q4 2018.
Got it. That makes sense. And then last one, I'll just and I'll jump off. But I just want to understand your commentary around CapEx. So I see on Slide 10, you talk about how there were increased CapEx in fax and backup.
I get the fax side, you've talked about wanting to accelerate organic growth on the fax business. What was the CapEx in the backup business? I'm a little curious about that given that that's a kind of a declining business and one that's been underperforming and what those investments went to? And then just as we think about CapEx for next year, how much of that increase in CapEx on the Fax side was maybe one time in nature versus ongoing? Thanks.
Yes. So look, I think on backup side, while it is a declining business, we think we can stem that decline by retaining customers by improving our back end and our infrastructure. Remember, the interesting aspect of backup is that when you retain a customer, it typically yields increased revenue because their data expands every period, right? So retention has even more value in a backup business than in a typical subscription business where the ARPA or the ARPU stays reasonably flat. Here it grows because of data growth.
So from our point of view, as we modeled the CapEx investments we would make in backup and the return we would get on the incremental revenues related to the retention of customers we would otherwise lose without those investments, it made complete sense and the paybacks are pretty quick. To be clear, these investments are 2019 investments. They haven't happened. So they're perspective. They're not past investments.
And then just on the fact side, the enterprise market, particularly in healthcare continues to be attractive and we feel that we are best of breed, but there are certain things we want to develop that we think will be somewhat breakthrough in the healthcare market and we're investing against that.
Okay, that's helpful. Thank you guys. Thank you. Thank you.
Thank you. Our next question comes from the line of Walter Pritchard with Citi. Please proceed with your question.
Thank you. Two questions on my end. 1, just on the Digital Media acquisition environment. I mean, Vivek, you alluded to there's been layoffs across the industry, certainly a tougher landscape probably for your peer set than 90 days ago. I'm wondering how you think about M and A And is it time to get more aggressive there?
And is that part of your it sounds like not part of the guidance necessarily, but is that how much of a chance is that as we look into 2019? And just had a follow-up on VCS.
Hey, Walter. So look, I think again, one of the things we'd like to be able to do is, look, if we can make digital media content brands, digital media sites and businesses more successful, then that's attractive, right? And so we think we can. We've demonstrated that. Look at our history.
It started with PCMag, which had just come out of bankruptcy. We followed that up with IGN, followed that up with Everyday Health and now with National. A pretty consistent track record of taking businesses that were in some state of trouble or problem and being able to create value pretty quickly and sustainably. So we don't think these are coincidences. We think these are things that can play themselves out.
Yes, there's more volume of inbound discussion and inquiry into whether or not we'd be the right home for those brands. We will continue to be selective and choose right because that's important that it can be brands that we are absolutely clear of our ability to create value. We don't want to buy other people's problems. That's not something that strikes us as a good business choice. And so we think there are a number.
As I mentioned in response to an earlier question, there are a bunch of verticals we'd love to get into. So it is an interesting time for us and we're in a fairly good capital position to transact if and when we see things that are clear value creating opportunities.
Got it. And then just on the enterprise commercial side, you've got some new businesses there, the business that you just bought in the Wi Fi space. Is there any change to how you're going to market there? Do you unify the sales force? Do you have to make more investments there?
That'd be it sounds like maybe some of that is part of the guide for this year, but would be helpful to understand more detail.
Yes. Look, so I would say we are investing in both field force sales as well as account management across the board. Historically on the cloud side, most of our customer acquisition was either online through channel or through phone. As we build out our enterprise offerings, both mostly in fax, you need a field force. And so we recently hired a very strong person to run the Enterprise Facts business, Johnny Hecker.
We're excited to have him under John Nebergal, who was recently joined as the head of the cloud fax business. And they are building a really strong sales force in that space. And then on the digital media side, which has always been field force driven because when you think about the advertising business or at least the RFP insertion order against Ekahau, which has been mostly channel, against Ekahau, which has been mostly channel. So Ekahau has been mostly through the channel. We are investing on feet on the street direct to clients and seeing some really good traction.
Great. Thank you.
Thanks, Walter.
Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Hi, guys. Really nice quarter. I hopped on a little late, so I apologize if you addressed this already. Just to clarify, you mentioned declines in backup in 2019, maybe flowing from what you saw in 2018, but you're still investing there given that economics work. Can it recover in the out year?
What is the longer term strategic plan for this business?
That's hard to say. Look, I want to be cautious and it's been my style generally. I'm more optimistic. Yes. Look, my view is we can decelerate and we can get to some stasis.
Whether or not we can get to growth will entirely rely, I believe, on whether the M and A landscape for backup assets changes where we can transact at reasonable pricing. Remember, the whole thesis around backup, which worked for its first few years was that there was such fragmentation in this space that you didn't need to invest in sales to drive new logos. You could certainly just acquire companies and the logos that came with them and pretty much migrate those customers over with your existing infrastructure. Value point of view. So I don't think until that changes, do you get to growth, but I think you can get to stability.
But Scott, do want to share your outlook?
I'm a little more optimistic on the M and A front. I think 2 things are going to occur, although you might not see the impact until 2020, which is why we've guided in a, I'd say conservative fashion in 2019. One is, as Vivek mentioned earlier in the call, these capital investments are ongoing now. So, we will not get the full year benefit of them in this calendar year. They will bleed over into 2020, although I think we'll get some benefit throughout the course of this year.
And I'm a little bit more optimistic that at least in certain situations there is M and A that we can transact. I don't think it's going to be very large. I think that plays to the historic sweet spot of that business of doing tuck in deals, but I think if we can do a couple of those this year, we have a chance of outperforming our conservative expectation
and I'll leave it at that.
And I'm not usually the more optimistic one
in the room.
That's helpful. And then can you talk a little bit about iContact and Castle Connolly, just more detail on what you paid and what revenues and margins look like and where they can get to under your management?
Yes. So I'll talk about iContact first in the context of a broader vision for MarTech. So our thesis is that small and medium businesses, when they become marketers, they start with email, because it is the most fundamental form of marketing. When we build a list, when we start communicating, it's the freeway freeway of marketing. You're not paying for the media.
We want to build our position in that space. IContact allows us to do that, adds more SMB customers to the campaigner business, which does a very similar thing. Long term though, we'd like to be able to move into other earned media marketing spaces, start to think about social media management, reviews management, SEO, all of the things that a business looks to do before they get into buying ads and doing true paid advertising. We think having that MarTech suite starting with email is kind of the anchor and the customer base, which we can cross sell all of these other services. So very strategic in that and we have a great team at Campaigner, a great team at Eye Contact.
We just brought in a terrific executive in Michael Pepe, who was actually a mentor of mine back in my Time Warner days. And so we really have some great leadership organized around that. Castle Connolly is the beginning of our attempts at the Everyday Health Group to seriously get into the reviews and ratings business in healthcare. And we think as consumers are confronted with more provider choices, they want to be informed as to who to see and where to go. And Castle Connolly in its work in reviewing and creating top doctors is a leader.
It is a tiny business today. Think of it more as a service, but something that we think we can leverage to something
very large.
And in the answer to your other question, we're under an NDA, so we're not at liberty to disclose the purchase price for iContact.
Okay, fair enough. And then finally, just a little more detail on the fax and voice business if you could. I saw DID revenue was down both year over year and quarter over quarter, but you said fax grew 2%. Was voice weak or was there something else going on?
Yes. Voice was down a little bit, I think both year over year on a sequential basis. We've got a portion of that business primarily down in Australia and New Zealand that has shown weakness over the last probably number of quarters. Also there's an FX component does affect the voice business as well as the fax business, although the vast majority of it goes to the fax business as it relates to the DID. The other thing is that you may remember Q4 of 2017 was somewhat of an anomalous quarter for the fax business.
We don't normally expect to see sequential growth from Q3 to Q4 in large part because there is a decline in business days which both affects the usage component of revenue, but also the number of selling days, so gross adds. That was not the case in Q4 of 2017. That was more of the case as we would traditionally see from Q3 to Q4 of 2018. And I think as it relates to Q4 of 2017 there were some experiments and things going on in the marketing program that juiced the gross adds and the revenue in that quarter, but that was not necessarily sustainable long term revenue.
Got it. Thank you very much.
Thank you. Our final question comes from the line of James Breen with William Blair and Company. Please proceed with your question.
Thanks for taking the question. Just a few. On the backup side, just wondering how large that is now and if you think there's a level of point which you reached some stability there in terms of declines. And then, sorry, EBITDA was up about $25,000,000 year over year, free cash flow is up $80,000,000 Is this new sort of free cash flow yield level sustainable over the long term? Thanks.
So in terms of the backup business, it closed the year as we expected right around $101,000,000 of revenues. I think in terms of the answers of stability, you might get a little bit of variance between Vivek and myself. We're not expecting if you mean stability to be flatness in 2019. It's not been budgeted that way. As I say, I'm a little bit more optimistic that as we head into 2020, combination of the CapEx investment and some tuck in M and A, we have a chance of bringing that business to stability if that's defined as flattish revenue in 2020.
But we've got a lot of work to do between now and then. So let's revisit that question maybe in a couple of quarters. As it relates to the free cash flow generation, obviously it was a phenomenal year. I would just remind you if we go back a year, we commented that about $20,000,000 of the free cash flow that we generated in Q1 of 2018 really belonged to 2017. And the reason for that is some timing differences and collection patterns, particularly in the digital media side where you have a very strong Q4, you earn the money, but you collect the vast majority in the following quarter.
That's starting to normalize a little bit as the media business is a bigger component of overall j2. So the variances are less, But if you look at 2017 versus 2016, there was a big jump up in large part because of everyday health. So I would normalize the free cash flows and maybe pull $20,000,000 out, throw it into 2017 that helps to normalize a little bit, but also don't underestimate the impact of the Tax Reform Act. That probably brought us $25,000,000 to $30,000,000 of real tangible benefit in 2018. Having said all that, there was still very strong flow through on the incremental EBITDA of about $25,000,000 in fact more than I would normally expect flow through to free cash flow.
But some of that is based on timing of collections, timing of investments from a CapEx standpoint. So that's why for 2019, I'm looking at a more normalized conversion rate for the course of the full year, not necessarily for any 1 quarter because there is some variability of about 66% to 67% of the projected midpoint of 5.30 percent of EBITDA.
Great. Thanks. And just one housekeeping issue. With respect to the guidance, you said about 48,800,000 shares when clearing the EPS guidance for the year. Does that include any expected buyback this year?
No. What it does include is the effect of the 600,000 shares we did repurchase in Q4. It does assume what I'll call the normal granting cycle of j2, which will come up over the next few months for the executives for new hires and promotions, but it does not assume any further buybacks.
Great. Thanks a lot.
You're welcome.
Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Turicchi for any closing remarks.
Well, thank you very much. We appreciate your time and attention today for our Q4 2018 earnings call. As you can see, there's a lot of exciting things going on at j2. We're very enthusiastic about not only the way we finished the year, but as we're beginning 2019. I would note if any of you have follow-up questions, we are available.
You can call or email us. Also there will be a release out probably in the next couple of days about upcoming conferences, specifically towards the end of this month in San Francisco. There will be 2 of them and there will be other conferences following between now and our next earnings call, which will be scheduled for sometime in early May. Thank you very much.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.