Welcome to the j2 Global's Q1 earnings call. Leading today's call will be Mr. Hemi Zucker, CEO, and Mr. Scott Turicchi, President and CFO. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Scott Turicchi. Thank you, Mr. Turicchi. You may begin.
Thank you. Good afternoon, and welcome to j2 Global's investor conference call for the first fiscal quarter of 2017. As the operator just mentioned, I'm Scott Turicchi, the President and CFO of j2 Global, and with me today is Hemi Zucker, our Chief Executive Officer. We're very pleased with our Q1 2017 results, producing another strong quarter of particularly EBITDA and non-GAAP net earnings, both well exceeding our budget. As a result, our board has increased the quarterly dividend by an incremental $0.01 to $0.375 per share. We will use the presentation for today's call, a copy of which 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. Also, if you've not received a copy of the press release, you can access it through our corporate website at j2global.com/press.
In addition, you will be able to access the webcast from this site. After we complete our formal presentation, we'll conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, at any time, you may email questions to us at investor@j2global.com. Before beginning our prepared remarks, I will read the safe harbor language. This call on the webcast includes 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-K filings, recent 10-Q filings, various proxy statements and 8-K 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. If you now turn to the slide presentation on slide five, I will quickly highlight some of the Q1 accomplishments, go over the financial results, and then turn the bulk of the call over to Hemi for greater detail. Our revenue of $255 million for Q1 2017 is a record for us for any fiscal quarter in the company's history. This generated approximately $100 million in EBITDA, free cash flow of $62 million, and adjusted EPS of $1.19. Q1 2017 revenues grew by $54 million or 27% versus Q1 2016. EBITDA was up $13 million or 15% versus the prior year.
Our cloud division continued to execute, acquiring five companies during the first fiscal quarter, most of which closed towards the end of the quarter and had very little impact, if any, on Q1 results. The cloud segment had revenue of $142 million, up $3 million or 2.5%, although in constant currencies, that was up 4% as we continue to experience currency headwinds, particularly from the GBP, and that will continue through Q2. EBITDA was up $5.5 million or 8% versus Q1 2016. Our EBITDA margin for the segment was 53% compared to 51% in the same quarter of the prior year. Our digital media segment, aided by the inclusion of Everyday Health for a full quarter, had all-time high revenues of $113 million or up $51 million versus Q1 of 2016 and added $7 million to its EBITDA, or 35% versus Q1 of 2016.
I'll now ask you to turn to slide seven, where you will see how we, as we historically have done, present the aggregation of our various business units. On the top line, we have our cloud segment, which includes Cloud Connect, which is fax and voice, had a very good quarter at just under $94 million of revenues and $51.7 million of EBITDA or 55% EBITDA margins, a two percentage point pickup from Q1 of 2016. The other cloud services suffered some FX headwinds, were roughly flat in revenues at $46.7 million in the aggregate, but showed an increase in EBITDA to $22.8 million, 49% EBITDA margin versus 46% in Q1 of 2016. IP licensing was flat on the top line at $1.2 million of revs, although a little bit better flow-through to EBITDA, almost $800,000 or 66% EBITDA margin.
This combined for $141.5 million of total revs for the cloud segment, $75.3 million of EBITDA or the 53% EBITDA margin I referenced earlier. Dropping down to the next line, you have the total cloud that we just discussed, added to the digital media segment, which had $113 million of revenues, $27.5 million of EBITDA, 24% EBITDA margin. The parent, and I'll remind you, these are costs that we do not allocate to the various business units of $3.3 million in costs on a non-GAAP basis for the quarter versus $3.5 million in Q1 of 2016. All told, we sum those together for $254.7 million of revenues, $99.5 million of EBITDA or 39% total EBITDA margin for the company, adjusted net income of $57.8 million or $1.19 per share on a GAAP basis, $0.52 per share.
The primary differences between the GAAP and the non-GAAP are the depreciation and amortization related to our various M&A as well as acquisition-related integration costs in this quarter, specifically related to Everyday Health. Hemi, I'll turn it over to you for a greater depth of discussion on our cloud services.
Thank you, Scott, and good afternoon, everybody. I am very excited to be here today. My presentation, as usual, is two parts, Cloud and Media. I will start with the Cloud at page or slide number nine, and I will start with Q1 Cloud Connect, which is our fax and voice. During Q1 2017, we have reached all-time high Cloud Connect revenue of $94 million, which is 4% up versus Q1 2016. Fax revenue of $77 million continued to grow versus Q1 2016, driven mainly by strength in our premium fax brand, which is eFax. Fax revenue, while still growing, represents 30% of our Q1 revenue and represents roughly 43% of our consolidated EBITDA. Our subscriber base reached 2.4 million DIDs, which is 1.1% versus Q1. Growth in Q1 was organic only and does not include our latest acquisition that I will discuss in a moment.
Corporate fax revenue continued to grow up 3.3% versus Q1 2016. We acquired the assets of ScriptFax, which specializes on the healthcare vertical. As I said, we closed the deal in the last day of the quarter, and we did not feel comfortable to announce how many DIDs they have because we have our methods of counting it. It is up of 20,000 DIDs that will be added in next quarter. This further is expanding our corporate fax suite of products. On our voice front, our voice quarterly revenue is $17 million, grew 25% versus Q1 2016, driven by international acquisition and organic growth of our primary brand. Next, page 10, when I will discuss the Cloud Backup of 2017 Q1. Revenue of $28 million, up 1.5% versus Q1 2016.
This revenue could have been up 5% in constant currency or $29 million if we did not have a big FX impact there. We achieved EBITDA of $14 million, which is up 4% versus last quarter 2016. Our KeepItSafe Europe revenue grew 18% versus Q1 2016. We continue the integration of our acquired businesses. We are investing in R&D to support and develop the platform. We also successfully launched disaster recovery service, and we have a strong M&A pipeline. Next, page 11, where I will discuss our Q1 email security highlights. Q1 revenue of $10 million versus $12.3 million in Q1, and I will explain the decline in the revenue. During 2016 and 2017, we were very busy migrating to the FuseMail platform, four other brands that we have acquired. First is McAfee, that ended its life in the U.S.
Second is Stay Secure in Sweden, which we acquired in late 2015. Third is Comendo, a public company we bought in Denmark, also in 2015. Fourth is CudaMail, a U.S. company that was recently acquired. We have successfully migrated over 2.1 million users and retained 80% of those customers. The migration, when fully done, will increase our cost savings. All this effort was pre-planned, and while revenue went down as planned, and as is budgeted of course, we are working on increasing the margins. Once we finished migrating, we did not waste any more time, and during the end of Q3, we already acquired three new small companies. One is Sendinc, an email encryption platform, then MX Force, small anti-spam, antivirus company, and Lone Scope, which is a small email encryption. We have a healthy M&A pipeline and plan to close the year strong.
Page 12. I will discuss email marketing or Campaigner. Q1 2017 revenue, $7.5 million, 33% up versus Q1 2016. Our revenue run rate is $31 million. We acquired marketing company, Mail Mailer, small roll-ups that is in progress now. This was done in Q1. Campaigner continues to focus on product development and sales effort upstream to higher premium mid-market customers with higher usage. As you can see, usage is up 13% Q1 2016, and ARPA revenue per account is up 20% versus Q1 2016. These two are driving also higher EBITDA. Campaigner won three awards, three Stevie Awards. The Gold Award for Sales Operations, Silver Award for Sales Distinction of the Year, and Bronze Award for Sales Growth Achievement of the Year. I will discuss the digital media. I'm guiding you to page 14. Our digital media business had a very strong Q1.
Total revenue were $113 million or up 81% year-over-year, aided by the acquisition of Everyday Health. EBITDA was $28 million, up 36% year-over-year. Total multi-platform visits were up 28% year-over-year, reaching 1.4 billion visits. At our newest properties, Everyday Health, MedPage Today, and What to Expect, we had very productive quarter with new product launches and features. Focus on productivity and profitability, we continue the execution of our shrink to growth strategy. This is done by eliminating negative margin activities and eliminating low potential activities. This will result in higher EBITDA against reduced revenue. On the product side, we improved our site navigation. This is boosting our search engine optimization and also is improving the mobile experience. This effort resulted in a 33% lift in page views per visit.
What to Expect launched two new ad offering, also leveraging the know-how and the platforms of Ziff Davis. First ad offering is Delivery Room, which is a branded content studio that sold over 30 campaigns to marketers, already sold. The other offering is MomReach, which allows us to target mothers based on the age of the children. This is a very unique offering of ours in the parenting space. Our relationship with the Mayo Clinic. The Mayo Clinic diet subscription product. According to the U.S. News & World Report, it just tied for the first place for the best diet commercial. MedPage. Historically, our MedPage Today received most of its traffic from search, direct, and email. During Q1, we saw great success in using social media to drive traffic, with referrals being up 320%. Finally, we migrated many of our site to the cloud.
This is resulting in faster load times, cost saving, and the ability to release new product and features faster. Page 15. As you know, our strategy at IGN is to continue to build our video offering and platform. Last month, we announced a very exciting partnership with Twitter, in which we will produce over 130 hours of live coverage of the annual E3 show here in Los Angeles. E3 is the biggest event in video games. IGN will exclusively be carried on Twitter. Yet this is another example of how we are leveraging social platforms for video distribution and monetization. The partnership is also represents our expansion into live video versus our historic trends, which was video on demand. Across all platforms, IGN generated 703 million views in the quarter, which is up 34% year-over-year.
Social followers grew 60% to over 22 million. YouTube subscription increased 25% to 9.8 million, and app install grew 10% to 15.4 million. On the international front, we launched IGN China in Mandarin, making us available in one of the world's biggest gaming marketing in the world. This marks our 28th international version of the site, of the IGN site. Next, page 16. On the Ookla front, total tests exceeded 600 million tests in the quarter, up 10% year-over-year. The growth is led by mobile tests growing 22%. What's impressive about our mobile growth is that it is all done from our Speedtest native app. You cannot run tests via mobile browser, as it is our belief that app-based testing yields the most accurate results.
Finally, as you know, we license our Speedtest app to ISPs who use them on their own site and help us to generate more revenue and more tests to monetize. With that, let me pass the call to Scott.
Thank you, Hemi. The final slide before we go to Q&A is on slide 18, which is the reconfirmation of our fiscal year 2017 guidance. As a reminder, that's for revenues between $1.13 billion and $1.17 billion, and adjusted non-GAAP EPS of between $5.60 a share and $6 a share. I would remind you that it is not our policy to alter our guidance unless and until it becomes very clear that the current guidance that we have is no longer tenable. When we have raised guidance in the past, it's been much later in the year. Finally, supplement information beginning on slide 19 and really the numeric analysis on 20 and following.
You'll see the metrics for the company, the Cloud Connect business, the Digital Media business, and a variety of reconciliation schedules that will give you the nearest GAAP equivalent to the various non-GAAP measures used in this presentation. At this time, I would then ask the operator to come back and instruct you on how to queue for questions.
Thank you. Ladies and gentlemen, 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 the speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.
Okay, before you finish polling for the live questions, we have a couple of questions via email, which I will address. There is a variety of questions, but I will try to homogenize them. They are around our various M&A strategy. In short, the questions are we seeing that there is any resistance to sellers right now, given the uncertainty as to the taxes in the U.S.? I would say the answer is no. I do not think that is deterring sellers from selling. I would also remind people that we are looking on a global basis, so while what is happening here in the U.S. or may happen is interesting, it certainly does not affect anything in the various other jurisdictions in which we do business. In terms of how we finance these acquisitions, we have had a preference for a combination of free cash flow and debt historically in the high-yield market.
We did issue a convert approximately three years ago. That has tended to be actually a fairly expensive piece of capital for us, given how the stock has performed from the issuance at the time, which was around $50 a share, to currently $90. It is one of the reasons also we do not use our common stock to acquire companies. Having said that, though, we also are studying what the administration is saying about tax reform, that may very well influence our views on a forward-looking basis, depending upon the probability that the corporate tax rate is substantially lower from the current 35%. Then in terms of our mix of M&A, it is correct the last few quarters, with the exception of Everyday Health, most of the businesses we have bought have been very small.
Part of that, I would say in the last five or six months, has been a function that larger transactions which we have looked at outside of Everyday Health have been too expensive. A lot of that has to do with the correlation to the stock markets either approaching or at all-time highs. We have tended to focus on smaller deals. There continues to be a large number of them out there, although as we get bigger, it is our desire to focus on what I will call intermediate size deals. Then in terms of those acquisitions, the goal has been a 20% cash-on-cash return. I would say that historically we have been very good at, if not achieving, coming very close to achieving those kinds of returns. Although we use different models for different parts of the business, generally in the cloud, it is the goal not to grow the revenues.
In fact, as Hemi will talk about or has talked about, there'll be cases where we'll actually shrink the revenues or we know there'll be revenue decline because of either expected customer attrition or customer attrition upon migration. In the digital media business, it usually is the concept of taking the asset, initially shrinking it down to its core, and then from that point, growing its revenue. We have these different models for the different parts of our business. I now ask the operator to take the first live question.
Thank you. Our first question comes from the line of Greg Burns with Sidoti & Company. Please proceed with your question.
Good afternoon. With the shrink to grow strategy with the Everyday Health assets, I was wondering if you could give us an update on your thoughts around Cambridge and Tea Leaves, how you see them fitting into the business. Are those assets that you'd look to keep and grow? How much revenue are they currently generating?
They're about $50 million, five, zero, revenues combined. We have been exploring, to your point, that they are not, in our judgment, as strong a fit, certainly for a digital media company as, say, the other assets such as everydayhealth.com, MedPage Today, Mayo Clinic, and What to Expect. At this point, we don't have an update. As we've said in the last couple of quarters, there have been parties that have been interested that have contacted us. We've actually now moved that into a more formal process to deal with those inquiries, and I think that we'll be at a decision point probably in the next 2 to 3 months as to whether those assets, either individually or collectively, are going to be kept or sold.
Okay, thank you. I missed what you were saying about the converts earlier, but could you just give us an update on the broader refinancing or where you stand in that process?
Sure. As you know, we've talked about for at least a couple of quarters now a comprehensive refinancing that would take out the 8% notes at the cloud level, retire the bank facility that was put in place at the time of the acquisition of Everyday Health in December of 2016, possibly raise a little additional capital beyond that. I think as I mentioned, it has been our preference and our bias to finance within the debt markets, be it at a high-yield market or the bank market. We are, though, studying, as I just mentioned, the contemplated proposed tax reform because obviously the lower the marginal tax rate goes, the less valuable those interest deductions are.
Having said that, the convert that we issued three years ago is rather expensive because the stock has performed very well, when you look at the overall IRR of that instrument, we're still better off having done high-yield debt. I would say that within the next couple of months, we'll have made those decisions and hopefully have a transaction done.
Okay. Thank you.
Thank you. Our next question comes from the line of Shyam Patil with SIG. Please proceed with your question.
Hi, guys. Good evening.
Good evening.
First question on Everyday Health, Scott, can you talk about where you think you guys are in terms of the synergy realization roadmap? Would you say that you're in line with your plans? Would you say you're tracking ahead of plans? Just kind of curious where you think you guys are.
I think if you talk about it on a formal basis, we would be in line to slightly ahead of our plans in terms of cost reduction. I think, when you talk about synergies, there's two pieces to it. There's right-sizing the cost structure, which is something that the team was very aggressive doing almost immediately upon acquiring Everyday Health back in December. There's a second piece, which is a little bit less tangible or less quantifiable, and that is evolving the understanding of how the business is going to operate on a going-forward basis. I'd say that's a process that takes time. In some cases, it's correlative with also changing certain people out, introducing a new mentality, as we've talked about before. As you know, we're very focused on profitable revenue, not just revenue for the sake of revenue.
Sometimes we call it internally empty-calorie revenue. It's getting into the business. It's calling those revenue streams or those situations out, but it's also then reorienting the mentality on a forward-looking basis in terms of what constitutes revenue streams and deals that we really want to do within the context of the healthcare vertical. I'd say in the second piece of it, we're probably tracking, but it's something that takes months.
Got it. Next question. I guess, Hemi, I can direct this to you. In terms of the M&A pipeline there? Then within that business, are there certain pockets where you're seeing profitable growth in other areas where you have declining revenue streams? Just kind of curious if you could talk about the various pieces in the cloud services business.
Yes. Thank you. First of all, I want to add something to Scott's comments to Greg, on the two assets that are for sale. We are getting bids. We have competition on it. Being conservative and not to create any bids, but we are making good progress there. To your question, on our businesses, and I'll go one by one. First of all, on the Cloud Connect. Cloud Connect actually is doing better than we thought. We have surprised ourselves. We're seeing that we still have the fax assets to acquire, and that's a very good one. Also, in the last quarter, month, days, we are seeing much less expensive CPAs, especially in the largest market in the U.S., so that's very encouraging. I have only good expectations there.
On the backup, we have strong M&A pipeline. We are about to close several deals within the next few weeks. Small, one of them is kind of medium-sized. We're making good progress there. Assets that we acquired, and we thought that they will decline, are declining much slower than we thought. As you can see, the EBITDA has maintained very high. Email security, we have several M&A opportunities. One of them is relatively to this is mid-size. We hope to close it in this month. As the revenue is only $40 million, if you do a deal of several millions, it's impactful on this side, and it is in the territory that we already are there, so we can do fast integration. On Campaigner, we have opportunities.
It is a $31 million run rate. I believe that we can close the year on a run rate of $35 million or even most of it with just our regular run-of-the-mill M&A. Did I answer you?
Yeah. Thank you, Hemi. That's helpful. I have one more question. Scott, you addressed this a little bit in your prepared remarks, but in terms of the language in the press release where you said you're currently ahead of EPS expectations, I certainly understand, it's not in your nature to raise guidance this early in the year, but how should we interpret that comment? Is that relative to the midpoint of the annual range? Is that relative to the high end of the annual range? Just trying to put it into context.
Well, yeah. The budget is the midpoint, so it's $1,150, and it's $5.80. It's in the context of our budget, which is the midpoint. Obviously, the range of guidance is just that it's a range around it. For reasons that are not entirely clear to me, we seem to have, in the first fiscal quarter, a very wide range of analyst dispersion, even though within the full fiscal year, both individually and in the aggregate, all of our analysts tend to be within our revenue and EPS guidance range. I'm not entirely clear why this is occurring, but I know in this fiscal quarter, we had a couple of analysts that were on the bottom line, fairly wide of the mark, in terms of earnings, which caused the bias up in the average.
We wanted to make the point that we're comfortably ahead of our own EPS and EBITDA budgetary numbers, which bodes very well for the full fiscal year.
Let me add, as you know, our media business is now almost half of the total revenue. Our media business is biased strongly towards Q4. We have also, in comparison, some other businesses of j2, strong Q4. We have budgeted our EPS over the quarters to achieve the number. As Scott said, there are two analysts that while of the total year okay, they ran ahead of us on the EPS. Our budget is with most of the analysts, but not with the few outliers. The comment that I made under my quote is to get the shareholders comfortable that according to our budget, according to our numbers, with our 20-some years of meeting our numbers, we are still very comfortable with them.
Great. That's very helpful. Thank you, guys.
Thank you.
Thank you. Our next question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question.
Hey, guys, it's James Fish on for Walter. Thanks for the questions, and sorry if you have answered them as I'm jumping between calls here.
No problem.
Kind of first, we're still seeing a large amount of small businesses using hardware-based fax. How is the conversion of a customer going from hardware to online working, and how do you categorize the opportunity there?
Jim, I addressed it, but I would gladly talk about it a little bit more. I just said that our sign-ups come from straight to site, upgrades of free to paid, and most of it is coming from search. Our search results are divided between people that come directly to our website and those that go on the mobile app. We have developed a very expensive mobile app, and we are seeing more and more sign-ups coming to our mobile app. Those sign-ups are much less expensive to us. We have cases that their return is less than two months of subscription. We also are seeing, actually surprised ourself, with the low CPA and the high organic growth, we kind of budgeted for flat-ish year, but we are seeing it being much better than that.
Yes, there is continued conversion from hardware, and a lot of it is coming from other competitors that are not providing the service levels, especially in the corporate world. We just bought a company, as I said, that's specializing in the medical field, which, you know there are very high demands there on HIPAA compliance and other things. We bought a company. Actually, we didn't know about its existence up to a few months ago. They're bringing in more than 20,000 subscribers, which I did not include in our numbers because they counted a little bit different. We are actually very encouraged on the facts. We surprised ourselves.
I think I'd add to that, Jim, that when we look at the corporate, particularly on the larger scale deployments where we have the actual sales force that's out there, I'd say almost all of their wins are conversions from an incumbent hardware system to the outsourced as-a-service solution. I think that those, earlier on, a few years ago, there were some questions or resistance about the whole idea of outsourcing, security. There were all kinds of questions. I think that as the years have gone by, each of those concerns have fallen by the wayside. That's been one of the areas that's been very productive for us in the overall digital fax space, has been that medium to larger enterprise customer.
I just came back last week from Japan, which is, to our belief, is the second-largest potential market in the world, with 120 million citizens heavily relying on fax. We are there only, like, 50-some thousand DIDs. We love this market. The churn is low, the commitment. One of the largest competitors of ours is actually giving us signs that he's ready to move on. At that point, I believe that we will have even easier way to continue to grow. They're just late adapters, but they continue to use fax. This is going to be the next wave. I'm not announcing the wave, but I can tell every time I come back, I'm very excited to see the potential there.
Got it. Thanks. Going after another question that was asked, I know of. Backup looks like it slowed as you guys have monetized and rationalized pricing. It has been a few quarters since you did a larger online backup asset like SugarSync, for example. What do you think of this market, and do you really think you need to do a larger deal in this space to get this business back on track and growing double digits again?
First of all, we would love to make a larger deal if it comes by and if it is profitable. SugarSync is example of a company that we bought, and we paid very low price for a business that in our plans, in our justification for the board, was to decline. It actually declined much lower. We increased the prices, and it went well. We have several M&A deals. We do not want to jinx them. We do not want to announce because we are still in negotiation. None of them is huge. None of them is very large, but there are plenty of them. There are, I would say, three to four companies with revenues between $10 million and $20 million, and they are all coming, and they are knocking on our door. We think they are too expensive. We tell the VCs, "Go shop somewhere else." None of them sold.
None of them shut the door with us. Because of the pricing and the expectations, I am not even including it. It is not in our budget. It is not going to be a part of our discussion. We have the patience, we have the money, we have the capability, and I am optimistic.
Got it. Thanks, guys.
Thank you. Ladies and gentlemen, our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.
Thanks, guys. This is actually Charlie on for Will. In thinking about the Digital Media business and specifically your activity on social platforms like Facebook and Snapchat and with the Twitter deal this quarter, can you update us on where you are in terms of monetization related to those social platforms? How big of a revenue opportunity do you think that could be in the future?
Well, it's still small today. The answer is we're monetizing against all those platforms. It's a little bit of an apple and orange. I think the last time we talked about this, we either didn't own Everyday Health or we owned it was Q4 for a month. At the time, the social media component, which really applied to everything exclusive of Everyday Health's set of assets, was less than 5% of the Digital Media revenues. That will be an increasing percentage on the tech and games over time. As Hemi mentioned, there's some things that have been launched within Q1, within the Everyday Health portfolio that is also applicable to social media, but it's really at the starting line. It's going to take a while for that to bleed in and to become a meaningful percentage of revenues.
Of course, at least initially, the overall percentage of social media's impact on our overall Digital Media would be less because it's being diluted by the Everyday Health set of assets revenue that has close to zero today. I think that in general, we're very bullish that this is an opportunity to extend our reach, to build in additional demographics that we might not otherwise have access to. It's still very much the early stages. I think it's hard to predict, say, two or three years out what is the right percentage of Ziff Davis' total media revenue that could be off of these social platforms. Today it's still a low single-digit number.
Right. Makes sense. If I could squeeze one more in.
Sure.
Would you be able to provide us with a breakdown between performance marketing, display advertising, and licensing revenue in the digital media business?
That's a great question. Well, we've actually been talking about, with the inclusion of Everyday Health, what's the right way to look at the digital media business.
We're not quite ready to go live with this, but I'll give you a little bit of a preview. If we look at the Q1 numbers, advertising, which would be all of our CPM, inclusive of video, inclusive of display, is a little under 50%. This now includes the Everyday Health revenue. Okay? Performance-based marketing is about 35%. Licensing and a little bit of subscriptions, about 10%. Then the new piece is what we call services, and this would be predominantly Tea Leaves and Cambridge from Everyday Health, also at about 10%.
Great. Thank you very much.
You're welcome, Charlie.
Thank you. Our next question comes from the line of Don Fahnestock with BWS Financial. Please proceed with your question.
Good afternoon, guys. Thank you for taking my questions. I know you said that the goal is to grow revenue in a number of your businesses, could you explain what's driving the growth in fax this quarter, especially on an organic basis? Hemi, I'm not sure, did you give out any churn metrics at all this time?
Can you repeat?
Yeah, the churn metrics are there.
Yes, the churn metrics are there. They were slightly high.
Twenty-one.
It's-
2.27-
Page 21, not 21.
Page 21, you'll have.
Got it.
Churn metrics. You'll see it was 2.22% in Q1 of 2016, 2.27% in Q1 of 2017. Obviously, creating some headwind in the first fiscal quarter of 2017 in all the things Hemi talked about as it related to the email security business, particularly McAfee end of life.
Yeah.
We also had in the DID-based business, one corporate customer that did a cleanup, which is not uncommon. Typically, the corporate customers will have a block of numbers, and from time to time, they'll go through based upon their actual employee base, and they'll give back some numbers.
This customer is almost zero impact on our revenue because he was like a bulk customer.
Right
that bought and paid. "Here is my corporation. Here is the amount." As the contract came to renewal, they reduced the DIDs, it has almost zero impact on the revenue.
If you look at the five quarters presented there, I mean, it's been basically between 2.2 and 2.25, or 2.2 and 2.3. There's all kinds of noise that will move it 10 or 20 basis points.
It could have been lower if I included the acquisition of the fax deal, as I said, 20, maybe even 30, that we bought in the end of the quarter, we didn't want to bother with it.
You had another question?
Yeah. I was just wondering what was driving the strength in fax.
I don't know. As I said, we surprised ourselves. I think that more and more companies, as they are moving their telephone systems to SIP and all those things, suddenly they discover that they're naked because when they move to VoIP, fax is not supported by VoIP. There are some that claim it does, but it does horrible work. Actually, we have some VoIP providers out there that buy their fax lines from us. I think this push to VoIP and digitizing of the telephone switches is pushing corporations to find a reliable fax solution, they come to us. I actually, as I said, I'm happy to see that it's still strong. I think that more people are aware of the fact that fax can be digitized and it saves them money.
At that point, they save for the, I don't know, $100 and some dollars a year are rather heavy that not. We are benefiting from it.
Got it. That's helpful. Just on Everyday, it seems like you've made a lot of progress in launching and migrating practices.
Yes
The j2 best practices, and new revenue streams. Are those proving to be as material and profitable as you want them to be, or is it too early to tell at this point?
They are material because not only we have speed and everything, we can actually have less system, less people. The people of Everyday Health, they want to be successful, so every time we bring something that they see as an improvement, it increases their satisfaction with the jobs. This is a company that was, on a while, trying to sell itself. It's not a great position to be when you know that your company is being sold. Now they see that the Ziff Davis guys are coming, the same city, other side of Manhattan, it creates an excitement. It's all positive and, as you know, Scott and I, over the years, have been very conservative. As I said before, we are ahead of our EPS.
Great. Thanks. Just finally, on the refinancing or potential refinancing, Scott, I'm sorry, did you mention the potential size of the additional debt that you would want to take on?
We've talked about in the past that given the refinancing that we intend to do here as it relates to the bank line, the 8% notes, the call premium, it pretty much necessitates a transaction or a mixture of financing in at least the $500 million range.
The reasons to flex higher would be opportunities in M&A?
Correct.
Got it.
Add a little bit more U.S. cash to our balance sheet. That can be done through a line of credit that's undrawn. It's, as I say, you got to think about it more, I think particularly in this fluid tax environment, more about there's different pieces and different ways to get to that equation. There's a minimum number we need to just do the plain refinancing. If you think about accessing additional capital, there might be ways, in addition to a single financing, how that might be achieved, like an undrawn bank line. The only other wrinkle is where are marginal tax rates likely to be. Obviously, higher marginal tax rates make debt more appealing. Lower marginal tax rates maybe make it less appealing relative to some other alternatives.
Right now, everybody's guessing in terms of what tax reform actually will happen, when it will happen, and what form it will take.
Understood. Thank you for the color.
No.
Thank you, Don.
Thank you. Our next question comes from the line of Rishi Jaluria with JMP Securities. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Couple of ones on Everyday Health. What impact did the shrink to growth strategy within the quarter have on the digital media side of the business?
I'm not sure what you mean, what impact did it have?
As in, was that a headwind to digital revenue.
Sure
Then, maybe directionally, what size of an impact was that?
The answer is yes, but that was also contemplated. I think as we mentioned last year, if you bifurcate the Everyday Health business into sort of two components, there's about $200 million of advertising revenue, and there's $50 million of what we're calling services revenue. That's the Tea Leaves and Cambridge. If you take a look at that $200 million, we're looking at about a 10% reduction in that revenue based upon our then estimates. I think we talked about it in February during our Q4 call, that that $20 million was not either at all contributory in terms of earnings or very marginally contributory. That piece is being called out, and I'd say that that's reasonably ratable over the four quarters, but not necessarily perfectly so.
Rishi, when we bought Everyday Health, we knew about Tea Leaves, we knew about Cambridge. Scott said $30 million of revenue, $50 million of revenue, sorry. We budgeted it, and they are meeting their budget, but they are an asset that we want to diversify out. The only thing we don't know is when. They actually are not dragging us down. They're executing per the plan. They are making the numbers. Just the only thing that is still up in the air is the timing.
Okay. Got it. That's helpful. Staying on that topic with Cambridge and Tea Leaves, I know we expect the digital media EBITDA margins to ramp as the year goes on, but how would digital media EBITDA margins in the quarter look today excluding those two assets?
If you exclude Tea Leaves and Cambridge?
Correct.
They're going to be, probably a couple points higher.
Okay.
Maybe a little bit much. About a point higher.
Okay. Got it. Just two quick housekeeping questions. First, what was the overall impact, and I'm sorry if I'm making you repeat yourself, but to revenue from FX headwinds in the quarter?
Almost $3 million for the company as a whole. About $2.2 million of that is the cloud, and a little under $800,000 is media.
Got it. Scott, in the investor deck, when you talk about free cash flow, I see there's the $20 million for
Yes
contingent compensation. Then, I guess, can you explain the rationale behind that and how we should be thinking about that number in our free cash flow models going forward?
Yeah. I actually think the free cash flow is understated by probably another at least $10 million, and I'll explain why. When we bought Everyday Health, Tea Leaves had been purchased in 2015, and part of the consideration was an earn-out. Obviously, we closed Everyday Health in December. It was known to us at the time that it was highly likely that Tea Leaves would make its earn-out criteria in 2016, payable in 2017. The way I've always looked at that is that's just part of the purchase price of Everyday Health, that $20 million. Now, accounting-wise, because we own the asset, it goes out of our cash flow as a payment in Q1.
We've added that back to normalize the free cash flow because I really look at it as we paid $20 million more for the Everyday Health asset because that was a known entity at the time of closing. In addition to that, though, we've had probably $10 million of free cash flow hits in Q1 from Everyday Health that relate to primarily things like severance, cleaning up some of these contracts that we are getting out of. There are certain exit payments to be made. Although those are non-GAAP from a P&L standpoint, they are not non-GAAP from a free cash flow standpoint. I think that the free cash flow productivity of the business is probably $10 million higher than what we're reporting for Q1.
We felt that the easiest, and the most definitive, and quantifiable is the Tea Leaves payment because as I say, it was known at the time of closing, and it really was part of the overall purchase price, albeit deferred by about 90 days pursuant to the terms of that earn-out.
Okay, got it. We shouldn't expect any more major contingent compensation going forward?
No.
Okay. Got it.
There's none. In fact, we're basically done within all of j2, in terms of the earn-outs that were on the table. We did pay the last Ookla earn-out. Also in calendar year 2016, they earned it. That's been paid. That's behind us. No, unless we do a new transaction that has an earn-out, obviously then we'll have to give you the details of that if that were to occur, but no.
Okay, great. Thank you so much, guys. I appreciate it.
Thank you, Rishi.
Thank you. Our next question comes from the line of James Breen with William Blair. Please proceed with your question.
Thanks, Rishi. Good question. Just want to clarify a couple things, Scott. When you talked about sort of the shrink to grow strategy on the digital media side, of the $200 million, you said about 10%. Does that sort of mean those about $3 million-$4 million impact this quarter, and you'll see that sort of build throughout the year?
That's correct.
Okay. From a margin perspective, with Cambridge and Tea Leaves in there, you're 24%, maybe it's a point higher without them, but where do you guys see the margins in that division going as you work through the remainder of the synergies and get to sort of a more run rate level?
Yeah. Well, as you know, the Q1 is a low watermark for all of our digital media properties, Q4 is the high watermark. Obviously, there's a further complexity this year because you do have things going on in Everyday Health that are rolling out over the four quarters, which I think makes the analysis a little bit more complex than usual. The goal is that by the end of the year, if not for the full fiscal year, if you take Tea Leaves and Cambridge out of the equation, just because they have their own dynamic, that $200 million of revenue we should be getting into, certainly on a run rate basis, if not an actual basis, around mid-30s EBITDA. Now, that's where we see it moving towards as we build additional revenue and get leverage off of the current cost structure.
That leverage will be most notable in Q4 because that's where you have the biggest jump sequentially in revenue would be from three to four, just like we have in the tech and the games piece of the business on the other side of Ziff Davis' business.
Okay, that sort of leads to my next question. I think, prior to Everyday Health, you talked about revenue within that media segment sort of 20% in the first quarter, maybe mid-20s in the second and third quarter, then low 30% of revenue in the fourth. Is that still sort of applicable here, even with Everyday Health on top?
Yes.
Okay. Then on the FX number, the $3 million you talked about, is that year-over-year, or is that sequentially from the fourth?
No, year-over-year. Q1 of 2016 to Q1 of 2017.
Year-over-year.
The biggest component there, you'll see it again in Q2, is the weakness in the GBP that occurred post the Brexit vote in June of 2016. The toughest comparisons currency-wise are Q1 and Q2. The presumption is it becomes more normalized in three and four against where it was last year because the GBP had essentially reset against the USD.
Okay. Then just on the cloud business, you saw some shrinking in the email segment there as you sort of rationalized some things. I think that the total cloud segment was down sequentially, obviously. How do you think about that going forward? Will it be sort of flat to down, maybe up a little bit, over the course of the next couple of quarters?
We are thinking it's going up, not flat to down, of course. We have, as I said, this one time, $2.3 million that we budgeted for, which was the migration from three or four platforms into one platform owned by us. We have M&A pipeline, we have other strong demand on the fax, on the voice. We are optimistic about it.
I think the key thing on the email piece is that the McAfee end-of-life has in fact occurred, that occurred during Q1. I think we have borne the brunt of that impact. That business is, in essence, with a combination of FX and the McAfee end-of-life, has reset to this $10 million a quarter level. Now it has the ability to grow off of that base. It also, I think more importantly than whatever its organic growth may be off that base, is cycles are now freed up to do M&A. Those were basically shut down for the last nine months. If you go back, you'll see, we didn't talk about any M&A for the email security business, that was primarily because those internal resources were-
Occupied
They were occupied with not just the McAfee end-of-life migration, but also the other migrations that Hemi talked about in the presentation. With those behind us now, those teams are available for taking on additional M&A and doing the migrations that will be necessary.
They started with these three small acquisitions.
We did three. They weren't very big. We did three small ones in Q1. It shows you they're back. They're back open for business.
They started to grow organically also, especially in the U.S. I see weekly reports. They're growing organically now.
That actually leads into my last question, which is around the M&A side. Can you tell us how much you spent in the first quarter for those five transactions?
Yeah, about $25 million.
About $25. Last year was a little bit of a strange year from an M&A perspective, obviously, because you had the auction mid-year, then you had Everyday Health at the end, which sort of came right on the heels of the auction.
Right.
Are we getting back to sort of a more normal cycle for you guys in terms of more equal spending throughout the year to get to that sort of $200 million-$300 million range on the M&A side?
Well, look, it's very tricky because.
We are opportunistic. If it comes, and it's good.
Yeah, because we have spent the energy, and you noted two of the examples, Gawker on the media side, which we didn't ultimately win, and then, of course, Everyday Health, which we did. There's a lot more lumpiness, if you will, when you look at deals of that size because, A, they will generally attract some degree of competition, even if it's limited, as in the case of a Gawker. All it takes is one who's willing to pay more. I think that you've got kind of two things going on here, maybe three. A number of small to maybe low-end mid-size deals that cloud can execute against that are not terribly influenced by the market conditions, meaning where the stock market's at, things like tax reform or any of these other exogenous variables. That's what we saw in Q4 of last year.
It's what you saw in Q1 of this year for the cloud. I think on digital media, by design, there's been somewhat of a hiatus, although we still look, because we're in that important phase right now of the integration of Everyday Health. As Hemi noted in the presentation, a number of new ideas being pushed through the different Everyday Health properties, making the decisions that we need to about Cambridge and Tea Leaves, whatever those may be. We've not been terribly aggressive on the media front. I believe as we get into the latter portion of this year, the Ziff Davis management time necessary for executing against Everyday Health will lessen, and as a result, cycles will open up for M&A. Of course, we budgeted none. I don't know what will be available as we get into Q3 and Q4.
You have a third bucket, which are medium to larger-sized deals for either the cloud business or the media business, where I would say right now, we're very enthusiastic, particularly on the cloud side, because the management teams are available for the integration. It really comes down to one of pricing. In some of those cases, we've seen it. We've been involved in situations over the last few months where, in fact, larger assets a la an Everyday Health size traded away to other companies who are willing to pay a much bigger premium than we were for those same assets. Those, I put into a bucket of very hard to predict. Obviously, if we pull one off, it changes the dynamics, and it changes the spread of how we're spending our capital over the four quarters.
I think if you limit yourself to only bucket 1, which are basically small deals, the answer is, yeah, you spend $25 million-$75 million a quarter. Over four quarters, because it's not perfectly linear, you probably spend $200 million in the year.
Okay, great.
A medium or a larger-sized deal can tip that scale pretty quickly and pretty easily in favor of a specific quarter. Obviously, that was not the case in Q1.
We have the appetite for a larger deal. We tried several times last year outside of Everyday Health. We are now raising capital. We are getting ready. Last year, we missed two very large deals, and the buyers are not doing very well. We are continuing to look and hope to tell you once we find something. Actually, the media deal happened when we raised capital. Some of the sellers, we got attention of some people, and this deal actually happened. Maybe it'll be the same again.
Okay, great. Thank you very much.
Bye.
Thank you. Ladies and gentlemen, that's all the time we have for questions today. I'd like to turn the floor back over to management for closing comments.
All right. We thank you all for participating in our Q1 earnings call. We will be making a presentation at a conference on Wednesday, which will be the Jefferies conference. Stay tuned for that presentation, which will be webcast, as well as a release for the upcoming investor conferences that we'll be at in the month of June. We would expect to have our Q2 earnings call the first week of August. Look in mid-July timeframe for the release that gives you the specific date and time, and mode for participating. Thank you.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.