Good day, ladies and gentlemen, and welcome to J2 Global’s Third Quarter 2020 Earnings Call. My name is Paul, and I will be the operator assisting you today. The operator provided instructions on the call. On this call will be Vivek Shah, CEO of J2 Global; and Scott Turicchi, President and CFO of J2. I will now turn the call over to Scott Turicchi, President and CFO of J2 Global. Thank you. You may now begin.

Thank you. Good morning, ladies and gentlemen, and welcome to the J2 Global investor conference call for Q3 2020. As the operator mentioned, I'm Scott Turicchi, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah. We had an outstanding third fiscal quarter, our best ever, despite the ongoing pandemic, and crushed not only the analyst estimates, but our own internal estimates. We set records by a substantial margin for revenue, EBITDA, free cash flow, and non-GAAP earnings per share. In addition, due to our strong free cash flow generation, we ended the quarter with more than $665 million of cash and investments, after spending $12 million for M&A, and approximately $150 million for stock repurchases, representing 2.1 million shares. We will use the presentation as a roadmap for today's call. A copy of the presentation is available at our website. When you launch the webcast, there is a button on the viewer on the right-hand side, which will allow you to expand the slides. If you have not received a copy of the press release, you may access it through our corporate website at www.j2global.com. In addition, you'll be able to access the webcast from this site. After completing the formal presentation, we'll be conducting a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, you may email questions at any time to [email protected]. Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-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 this webcast. We refer you to discussions in those documents regarding Safe Harbor language, as well as forward-looking statements. Now, let me turn the call over to Vivek for his opening remarks.

Thank you, Scott, and good morning, everyone. Once again, J2 has demonstrated the fundamental strength of its portfolio, and the high quality of its underlying businesses. We materially exceeded all expectations, and blew by our records for revenue, adjusted EBITDA, and adjusted EPS for the third quarter. I couldn't be prouder of our organization and the hard work of our team worldwide. I remember thinking a few months ago that the second quarter would be a very hard act to follow, but Q3 has proven to be special, with all of our divisions operating at full tilt, while also coming to an agreement to acquire RetailMeNot on the second-to-last day of the quarter. As we announced in yesterday's press release, we're pleased to report that the deal has now officially closed. More on that later. There were a number of positives on the revenue side in the quarter. Our gaming businesses grew approximately 10% organically, as we started to see the positive impact of the new console cycle on our business. We're also continuing to enhance our leadership role in the games industry, with IGN having served as lead production partner for the first all-digital Gamescom event, drawing 46 million users across multiple platforms. Our broadband businesses also grew 10% organically. The Ekahau business, which, as a reminder, sells Wi-Fi design and deployment tools for commercial spaces, returned to growth after seeing its business negatively impacted in the previous quarter by COVID. Not surprisingly, we continue to set testing records at Speedtest, with 1.75 billion tests in Q3, up 62% year-over-year. Our businesses at Everyday Health had another fantastic quarter, growing revenues by 25%, the majority of which was organic. The professional business at Everyday Health continues to be a standout, anchored by our MedPage brand, which is up 119% in traffic year-over-year. MedPage and its sister sites recently tied WebMD’s network as the most frequently visited medical information websites in a survey of physicians conducted by Decision Resources Group. Impressively, 65% of physicians in the US stated that they visit our sites. We're also one year into our acquisition of BabyCenter, which is operationally and financially running well ahead of plan. On the cloud side, our cloud fax businesses had one of its strongest revenue growth quarters at 4%, with the corporate cloud fax business growing over 12%. While page volumes are now essentially at pre-COVID levels, much of the quarter was still at below-normal volume, making our performance in corporate even more noteworthy. We believe that our product development and go-to-market strategies in the healthcare industry are paying off, as we are winning larger contracts. I know many investors questioned the relevance of our cloud fax business, but I would encourage them to appreciate what we really offer, which is a cloud solution for secure HIPAA-compliant document transfer. That solution is fueling a $140 million-plus corporate business with double-digit growth. Within our cybersecurity portfolio, our VPN businesses were up 10% organically in the quarter, offset by expected declines in our backup businesses. We continue to be long-term bullish on the VPN endpoint and email security parts of this group, while we continue to manage backup for profitability. We’re also excited to announce that we just acquired Inspired eLearning, which allows us to add security awareness training to our suite of endpoint, email, VPN, and backup solutions. As strong as our revenue growth was, our adjusted EBITDA and adjusted EPS growth were sensational, at 14.4% and 18.8%, respectively. Most importantly, essentially all of that growth is organic, as we have little M&A in general, and the acquisitions we did contribute little in earnings versus last year's Q3. This is an important point as we manage the business for EBITDA, and we'll take lower revenue growth for higher profit growth. While I know many in the market value organic revenue growth with earnings being secondary, and in many cases non-existent, we view organic earnings growth as the primary goal of our businesses. To the first three quarters of this year, during one of the most disruptive and challenging operating environments imaginable, we have grown our adjusted EBITDA by 8%, and our adjusted EPS by 9.1%, without M&A impacting those results much. But acquisitions are central to our total-growth mindset and strategy. So I wanted to spend a good deal of time this morning discussing the RetailMeNot acquisition, which, as I mentioned, closed last week. This is a business that I personally studied and followed for over 10 years. In 2010, I was working with private equity to acquire businesses that would form the basis of a digital media company focused on helping make buying decisions. RetailMeNot was a perfect target, but we came up short on valuation. We acquired Ziff Davis instead. Since then, we've carefully followed RetailMeNot, waiting patiently for an opportunity to present itself. As our loyal shareholders know, we play the long game, and this situation reminds me of another asset for which our protracted patience was rewarded, Everyday Health. And today, Everyday Health will generate roughly $100 million of EBITDA. What's been attractive about RetailMeNot for all these years is that it solves two persistent and growing needs. For the consumer, it produces savings through the discovery of deals and discounts. For the retailer, it produces qualified traffic. Think of it as digital foot traffic. In physical retailing, location and agglomeration produces foot traffic. But in the world of online shopping, every retailer has to develop methods for drawing in customers. Working with what the industry refers to as affiliate publishers, online retailers are increasingly looking to them to generate demand and drive conversions. Prior to the pandemic, we were bullish on the long-term shift from brick-and-mortar to e-commerce, but the pandemic, we believe, has dramatically and permanently accelerated that shift, making the timing of this acquisition very compelling. In addition, we believe the relevance of savings for consumers will only grow in a difficult economic climate. We've been an affiliate publisher since our early days in digital media. In my first presentation to the investment community, right after J2 acquired Ziff Davis, we shared a slide outlining our desire to capture consumers in every phase of the purchase journey, which we broke into four steps: discover, choose, buy, and use. That strategy has been the underpinning of the growth in our performance marketing revenues. Of the $250 million of performance marketing revenues we do in a year, almost half falls into the affiliate publishing category. It's been a key differentiator between our publishing business model and those of others. We started in the discover-and-choose phases, leveraging our reviews and buying guide content at PCMag, IGN, and later with Mashable, Everyday Health, What to Expect, and BabyCenter. We then moved more into the choose-and-buy phases with the acquisitions of Offers.com, BlackFriday.com, and a series of other Black Friday sites. While our efforts have made us a top affiliate publisher in the industry, driving approximately $1 billion of retail sales, the acquisition of RetailMeNot puts us at an entirely new level. RetailMeNot’s website, mobile app, and browser extension draw 650 million annual visits and drive $4.3 billion of retail sales, about four times our existing retail sales. On a trailing 12-month basis, RetailMeNot’s revenues were about $180 million, and their EBITDA margin percentage was in the low 30s. Our new colleagues have done a fantastic job at establishing RetailMeNot as a favored brand amongst shoppers, and a leading source of traffic and sales for retailers. We believe our combined portfolio of affiliate commerce assets will create value in four areas: take rate, margins, traffic, and future acquisitions. On take rate, our current affiliate publishing business enjoys about a 10% rate, while RetailMeNot is around 4%. The delta is largely due to the difference in payments for demand clicks versus conversion clicks. The former will earn a higher commission if the affiliate publisher is viewed as driving incremental traffic, while the latter runs a lower commission as the affiliate publisher is viewed as driving conversion. Preventing cart abandonment and generating incremental traffic are a valuable combination. We believe our skills and experience at producing content that drives demand clicks when distributed on RetailMeNot’s platforms will allow us to start improving RetailMeNot’s overall take rate. Every point of take-rate improvement would be worth $43 million of annual revenues. On the margin front, our current affiliate publishing portfolio operates at about 10 points higher than RetailMeNot’s, but RetailMeNot has historically had margins as high as those as well. We believe that together, we can return to those margins and apply a well-defined and successfully executed shrink-to-grow strategy. In the case of RetailMeNot, the company has pursued non-core projects, such as gift cards and in-store, that have not only harmed margin, but also distracted from the core affiliate publishing business. On traffic, RetailMeNot has seen challenges both in terms of aggregate traffic, and the shift from desktop to mobile. On the former, we believe investments in editorial content, especially the type that will drive demand clicks, will help to grow traffic. In addition, we believe that the Deal Finder browser plugin is a huge opportunity. It competes with PayPal’s Honey, which is ahead of Deal Finder in installs, but together, they have less than 1% penetration of internet-connected devices. In other words, it's very early days, and we think there's room for a few players in the browser extension market. We believe we can leverage J2’s media audience of several hundred million worldwide to drive adoption of Deal Finder. I'm also happy to report that the patent litigation that existed between PayPal and Honey with RetailMeNot has all been resolved. That had been an overhang for a while, and we're glad to see that dealt with. On the shift from desktop to mobile, we believe reorienting the mobile strategy to focus on mobile e-commerce, as opposed to the mobile device being used for in-store coupon redemption, will help in closing the monetization gap. Finally, we believe that the J2 acquisition system can continue to be leveraged in the affiliate commerce space. The acquisitions prior to RetailMeNot of Offers.com and our Black Friday sites have generated among the highest IRRs in our acquisition history. We believe we've acquired RetailMeNot at an attractive EBITDA multiple, and within 12 to 24 months expect to operate at an annualized EBITDA run rate of $80 million. The affiliate commerce industry is fragmented, and we see an opportunity to continue to consolidate to achieve scale. I'd like to conclude with another update on our ESG initiatives. As I discussed in detail in our last call, we've made a great deal of progress on our ESG efforts, especially in the area of diversity, equity, and inclusion. In Q3, we announced the deposit of $10 million in four Black-run banks and credit unions. These deposits enhance the lending capabilities of these institutions, which serve Black and Brown communities in Los Angeles, New York, and places in between. We also announced an expansion of our partnership with the NAACP, in which we are committing $6 million of advertising over three years to support the messaging of the leading civil rights organization in the US. I encourage you to spend some time with the new responsibility section on J2.com, where you'll see a number of our ESG initiatives outlined. We also welcomed another new board director to J2, Pamela Sutton-Wallace. Pam is a highly accomplished and nationally recognized healthcare executive, who currently serves as Senior Vice President and regional COO of New York Presbyterian, and was formerly the CEO of the UVA Medical Center. Given the importance of healthcare to our company's portfolio, Pam's industry experience and insight will be very valuable to the company. As I've said on previous calls, J2 is committed to advancing board refreshment and ensuring we have the optimal mix of experience and backgrounds on our board. Now, let me hand the call back to Scott.

Thanks, Vivek. Q3 2020 set a number of financial records, for which we are quite proud, given the continuing pandemic, including revenue, adjusted EBITDA, free cash flow, and non-GAAP EPS. These results were driven by better topline performance and an improved cost structure. We ended the quarter with approximately $665 million of cash and investments. After the quarter closed, we spent about $420 million to acquire RetailMeNot, and replaced our 6% cloud notes due 2025 with new 10-year 4.5% and 8% notes at the J2 Global parent. Let’s review the summary quarterly financial results on Slide 4. For Q3 2020, J2 saw a 3.7% increase in revenue from Q3 2019 to $357 million, which exceeded our expectations. Gross profit margin, which is a function of the relative mix of our business units, rose to 84.7% from 82.3% in Q3 2019, in part due to lower cost in the media segment. We saw EBITDA grow by 14.4%, with a third-quarter record of $154.1 million. The EBITDA margin for the quarter was 43.2%, a margin I might note we usually see only in Q4, versus 39.2% a year ago, due to the improved gross margin as well as cost containment in our operating expenses. Finally, adjusted EPS grew approximately 20% to $2.02 per share versus $1.70 per share for Q3 2019, driven by the aforementioned increases in EBITDA and a reduced share count. Turning to Slide 5, in Q3, we generated a third-quarter record $93.7 million of free cash flow, which included $14.5 million of estimated tax payments usually due in Q2 that were deferred and paid in Q3, an approximate 20% increase from Q3 2019. This was after continuing to make significant investments in our businesses through $20.7 million of CapEx. On a trailing 12-month basis, we generated $387 million of free cash flow, for a 66.7% free cash flow conversion of our trailing 12-month EBITDA of $580.2 million. Now let's turn to the two businesses, cloud and digital media, for Q3, as outlined on Slide 6. The cloud business was flat in revenue for Q3 2020 at $170.2 million of revenue, compared to the same quarter a year ago. Remember that during the quarter, we divested our Australia and New Zealand voice assets, which cost the cloud business approximately $1 million in revenue during the quarter. The improvement in revenue from Q2 was due to improved usage from our healthcare customers, as well as new signups across our various cloud services. Before turning to EBITDA, since we no longer have debt at the cloud business, we will not be allocating corporate expense to the two segments as we did previously. This was done so that our cloud segment financials would conform to the standard cloud financials that are audited each year. We believe that this allows for a better comparison of operational results, since the two business segments do not control corporate expenses nor their allocations. EBITDA increased by approximately 1.6% for our cloud business to $87.8 million, compared to $86.5 million in Q3 2019, after removing corporate allocations. The EBITDA margin of 51.6% is up about one percentage point from Q3 2019. Our media business grew revenue 8% to $186.7 million and produced $75 million of EBITDA or 33.2% growth, after removing corporate allocations, compared to Q3 2019. The EBITDA margin increased by 7.6 percentage points from Q3 2019 to 40.2%, due to incremental high-margin revenue, lower costs, and an improved OpEx cost structure. On Slide 7, I’m pleased that after reintroducing guidance only last quarter, we are raising the guidance for 2020 based on the strong Q3 results as well as the inclusion of RetailMeNot for two months. Our reinstated full guidance now estimates revenues for the year between $1.447 billion and $1.462 billion, adjusted EBITDA between $595 million and $605 million, and non-GAAP EPS between $7.85 per share and $8.00 per share. This implied at the midpoint an increase in 2020 revenues, adjusted EBITDA and non-GAAP EPS of 4.6%, 6.6%, and 8.7%, respectively, compared to the guidance previously issued. I would also note that the low end of our EBITDA and non-GAAP EPS estimates exceed the original high-end pre-COVID guidance of $595 million of EBITDA and $7.66 of non-GAAP EPS. Finally, before turning the call back to the operator for Q&A, I want to address our current trading multiple. Last quarter, Vivek noted that J2 believed it was an unprecedented time to buy J2 stock, and we acted upon it. If we look at our own historic trading multiples based on revenue, EBITDA, free cash flow, and earnings, we believe we are significantly below our averages, and well below our highs, notwithstanding the company having more revenue, EBITDA, and EPS than any time in our history. By way of example, on a trailing 12-month basis, we traded 2.7x revenue, 7.1x adjusted EBITDA, 9x non-GAAP EPS, and 10.4x free cash flow, which are between 30% to 40% of our average multiples and over 50% off of our highs. I would now ask the operator to rejoin us to instruct you on how to queue for questions.

The operator provided instructions on how to ask questions. Your first question is coming from Cory Carpenter from JPMorgan. Cory, your line is live.

Great. Thanks for the questions. Vivek, maybe one for you on RetailMeNot, and then I'll have a follow-up for Scott as well. So, appreciate the color you provided on the call, and congrats on the closing. I was hoping you could just unpack a bit more on some of the strategic benefits you see that RetailMeNot brings across your digital media portfolio, maybe how it fits within your existing businesses, such as Offers.com, and then also some of the synergies that you're expecting.

Well, thanks for the question, Cory, and good morning. As I said in the earlier remarks, this is a space that we have been in for a while—the affiliate publishing and affiliate commerce space. We know it exceedingly well through Offers.com and our Black Friday sites, as well as our content sites such as PCMag and IGN. So it's a space we've done well in. We've got a great track record and great platforms, and RetailMeNot is a leader in this space. We think combined the opportunities in the areas I talked about—take rate, margins, traffic growth, and future M&A—are pretty robust. This is one that we're really excited about. It's one that I personally tracked for a while, and I think we can do something really special with it. We're excited to welcome our colleagues, mostly down in Austin, to the company.

Great. And then maybe Scott, just to follow up on the updated 2020 guide, could you just help unpack your expectations for revenue and profit, maybe in digital media versus cloud segment? And then also one question we've been getting a lot of, just how you're expecting—how much you're expecting RetailMeNot to contribute to the quarter. Thank you.

Yes. So let me try to put all that together in one comprehensive answer. As Vivek mentioned, the trailing 12-month revenue of RetailMeNot is $180 million, operating in the low-30s EBITDA margins. We’ll get one-sixth of that in our current fiscal year or Q4. As you noted, there is seasonality, so we'll get a little bit more than that percentage, and we should do better on the overall margin, as you normally would see in our own digital media businesses. Also remember that we're going to lose about $3 million to $4 million in the cloud business because of Australia and New Zealand voice not being in the revenue for a full quarter versus Q4 of 2019. It was in Q3 for about two months. Then I’d remind people we have some degree of negative seasonality in the cloud sequentially from Q3 to Q4, as we lose a few business days, although, as Vivek mentioned, we've been experiencing positive trending on usage, which may compensate for some of that on a sequential basis. In terms of the overall margin, what we expect for the rest of the businesses is they've been guided to be essentially flat; they could be a little bit up or a little bit down. Influencers there will be the following. We remain cautious because of the continuing pandemic and the talk of a second wave and how that might impact the economy. Also, in the year-ago quarter BabyCenter and Spiceworks were recently acquired, and as part of the shrink-to-grow, there'll be revenues not in Q4 2020 that were in Q4 2019. The opposite to that though is we expect our EBITDA margins to be about 200 basis points better than last year. So they’ll be up not only year-over-year from Q4 to Q4, but also sequentially from Q3 to Q4.

Thank you. The next question is coming from Shweta Khajuria from RBC Capital Markets. Shweta, your line is live.

Okay. Thanks. Let me try two, please. Could you please talk about your board composition? Should investors be expecting any further changes? Are you satisfied with the changes you've made? And then the second one is, can you please talk about the trend you saw within your media segment through the quarter? So, sequential trends from July to August, August to September, and then what you're seeing early on in the fourth quarter so far. Thank you.

Thanks, Shweta. Let me start by saying we have, we think, a fantastic board that brings a diverse set of perspectives and skills to the table. Over the last few months, we've added two fantastic new board directors: Scott Taylor, who was formerly the General Counsel at Symantec and brings a cybersecurity perspective, among other things, and Pamela Sutton-Wallace, who has joined the board and brings a deep healthcare perspective as the current regional COO of New York Presbyterian and former CEO of the UVA Medical Center. Given the importance of healthcare to our portfolio, Pam's industry experience and insight will be very valuable. The board is now ten members; it's expanded, and we think it's the appropriate group to have around the table. We will continue to look for opportunities to refresh, bring in new perspectives, and ensure that the skillsets align with the evolution of the portfolio.

The next question is coming from Nick Jones from Citigroup. Nick, your line is live.

Shweta had a second question about digital media progression; let me address that. In terms of the digital media progression, it followed a similar path to what we talked about in Q2, which was sequential improvement throughout the quarter from June through September. Each month was better than the previous. And so far, based on the early evidence, I would say that's tracking also through October. Just remember that in Q4 our most important months are November and December, really beginning in about 10 days through about Christmas time. But so far, we continue to see improving and informing trends in our digital media businesses.

Great. Thanks for taking the question. I think maybe this one is for you, Vivek, but when you talk about discover, choose, buy, and use, are there opportunities within the healthcare business to do this? When I look at other properties, there is RX savings and GoodRx—are there opportunities to bridge your retail know-how to the healthcare space? Is there a different dynamic there that makes it more difficult from an SEO or marketing perspective? Any thoughts would be helpful.

Thanks, Nick. Great question. We do a fair amount of affiliate commerce within the Everyday Health Group, the parenting and pregnancy space with BabyCenter and What to Expect. We do very well in categories such as baby registry, cord blood, and other products that attach to families expecting; we see transaction volume and compensation there and view it as a growth area. Within other health properties, we have categories including wellness, diet, meditation, and subscription businesses where we are compensated for driving transactions. The pharma discount space that GoodRx operates in has complexities: many affiliate players are essentially PBMs—Pharmacy Benefit Managers themselves—and that might be a level too far for us. We will have to evaluate it. More appropriately, Everyday Health has an opportunity to work with companies like GoodRx and other entities in the space to be drivers of their businesses, and we've already done that. So the health category is absolutely one where we see opportunities across the discover, choose, buy, and use funnel.

Great. Thanks for taking my question.

The next question is coming from Shyam Patil from Susquehanna. Shyam, your line is live.

Thanks. I had a couple of questions on RetailMeNot. With the shrink-to-grow strategy and overall strategy for the business, are there any guideposts on how to think about revenue for RetailMeNot next year as well as EBITDA? And is there anything to keep in mind regarding seasonality for both revenue and EBITDA for RetailMeNot as we model out next year?

You highlighted an important point. The trailing 12-month revenue is $180 million. Our expectation, and we're still deep in budgeting and not prepared yet to release 2021 guidance, is that number could be down somewhat in 2021 as we do shrink-to-grow. The compensating factor is that margin should be up. As Vivek noted, we've got about 10 percentage points in margin to gain in that business. We don't think we'll get them all next year, but certainly as we exit 2021 and go into 2022, we should be starting to hit a more normalized margin level. That'll give you guideposts. In terms of seasonality, it's similar to our core digital media businesses, where you get roughly 30% of the revenue in Q4 and a fall-off in Q1. So you can impose similar seasonality to what you've been seeing in our digital media portfolio.

The only thing I might add is that we have a great deal of understanding of the parts of the business we don't think are promising and might fit the shrink-to-grow piece. What we need to work on through our modeling and budget process is how quickly we can achieve growth in the areas I outlined in my earlier remarks. Depending on that timing, you could see an offset to the shrink-to-grow. I think the unknown is the timing around the progress we'll make on the various pieces. We want to be very focused in the near term; we're moving into Black Friday and Cyber Week—the peak shopping period—and we don't want to distract anyone. The company needs to be focused on executing well in the next two months. By the time we're issuing guidance next year, we should have a very clean answer.

Thank you. One follow-up: on the fax business, the growth rates were impressive. Can you talk about the opportunity going forward, particularly within corporate fax and the healthcare business?

I've said it many times: we now have a $140 million-plus corporate fax business with double-digit organic growth. This is not new, and it's a fantastic opportunity. As more of healthcare shifts to the cloud, we're going to be a beneficiary. For HIPAA compliance reasons and interoperability reasons, fax remains a preferred method of document delivery and transfer in many contexts. We continue to be bullish about that aspect of the business. If we had framed this as an ACIS business growing double digits organically at $140 million operating at high margins solving healthcare interoperability, it might be valued differently. But when we say it's fax, sometimes that perception doesn't fully capture the value. We're bullish; it's a great business.

Great. Thanks, guys.

The next question is coming from James Fish from Piper Sandler. James, your line is live.

Hey Vivek and Scott, congrats on a great quarter and closing RetailMeNot. Really impressive results. Scott, this is the largest buyback larger than the last seven years combined that we've seen. Is it that you're seeing less opportunity in M&A closures, or just more opportunity in your own shares, which based on your commentary and valuation would suggest the latter? And while we're thinking about it today, if we do have a blue sweep, is there any impact to how your taxes might change here?

You answered your own question, Jim, in that the beauty of our capitalization is we were able to do both. We closed a few small deals in the quarter and now closed our second-largest transaction in company history with RetailMeNot. At the same time, we were able to buy back in excess of 2 million shares for $150 million. This was driven by the chart on Slide 8 showing our valuation discount across revenue, EBITDA, free cash flow, and earnings. We find buybacks to be very compelling versus investing in assets at this time. Because we generate high free cash flow and our capitalization affords us the ability to do both, we will continue to look at both capital allocation activities. Regarding the so-called blue wave and taxes, the Biden plan has a lot of unanswered questions and details left out. The headline suggests corporate taxes could rise from 21% to 28%, a seven-percentage-point increase, but the details depend on what happens to mechanics from 2017 tax reform—GILTI and other provisions—and international tax structure considerations. Right now, the plan is too sketchy to know the precise impact other than that aggregate taxes would likely be higher than current levels, but the magnitude is unknowable.

Understood. It's still Election Day after all. A housekeeping item: can we get a breakdown within the digital media business between advertising and subscription, and any update on cross-selling programs in cloud services? Any bundles working well?

You'll see on the 10-Q the quarter breakdown: about 74% for the quarter was performance-based marketing and display advertising (display advertising and video having a slight lead over performance-based marketing) and about 26% subscriptions. That should be filed Friday or Monday. Vivek can address cloud bundling.

We've been testing packaging between backup, endpoint, email, and VPN and have seen really good success in some ARPA increases and what we think will be improved retention. It's early to fully understand because you need a contract year to evaluate retention. We're also continuing to look at acquiring new solutions to build into the suite. I mentioned Inspired eLearning, which closed yesterday and adds security awareness training. Packaging that in gives us an upsell and cross-sell opportunity; it was a missing piece in the lineup. Competitors in email security have acquired in this space, so we're excited to have it as part of our portfolio.

Understood. Congrats again, guys.

The next question is coming from Daniel Ives from Wedbush. Daniel, your line is live.

Yes. Thanks. Could you talk about healthcare pharma? I think you tend to see trends six to nine months in advance on the advertising front. Could you talk about those trends you're seeing? It sounds stable to strong, but some color would be helpful.

Hey Dan. The pharma market continues to be very strong. It's in two markets: direct-to-consumer (DTC) and direct-to-provider (DTP). On the consumer side, pharma is increasingly shifting dollars from traditional television to digital, which is why we're seeing double-digit organic growth in our consumer business. In the professional business anchored by MedPage, we've seen this dynamic even more profoundly. Traditional pharma sales reps visiting physician offices have largely stopped, and pharma is now looking for digital solutions to reach physicians. As I pointed out earlier, our position and penetration among physicians is remarkable—we're neck and neck with Medscape. We feel very good about that and remain bullish about the pharma market, which is material for our media business.

Great. Scott, when the pandemic first started, M&A was expected to slow. You've done a large deal in RetailMeNot. Have you adjusted diligence and processes so larger M&A won't be stopped by pandemic constraints? Do you feel comfortable pursuing larger deals now?

Absolutely. During Q2 we paused prudently given uncertainty. As we saw success working from home and maintained productivity, our M&A team refocused, first on targets we had previously looked at, and then went full bore. We are completely engaged in M&A. We did a few small tuck-ins during the quarter and closed RetailMeNot. On a going-forward basis we have three types of M&A: small tuck-ins (garden variety, easy to execute), mid-sized deals (similar to BabyCenter and Spiceworks), and larger opportunities (RetailMeNot-sized or larger). The probability is lower for the largest deals due to competition or diligence outcomes, where we may not agree on price with sellers, but we are actively pursuing across the spectrum.

Great quarter. Thanks.

The next question is coming from Saket Kalia from Barclays Capital. Saket, your line is live.

Excellent. Hey, guys. Vivek, maybe to start, you mentioned $43 million in incremental revenue per point of take-rate improvement. Could you walk through that math again and why you think there's room for upside on the take rate? And reconcile that with shrink-to-grow: there seems to be incremental revenue opportunity yet you also talked about shrinking parts of the business—how should we think about that?

Thanks, Saket. The math is straightforward. RetailMeNot’s current annualized retail sales are $4.3 billion, and RetailMeNot receives about a 4% commission. So each point of take-rate improvement on $4.3 billion equals roughly $43 million of additional annual revenue. Our properties produce about $1 billion of retail sales and enjoy a roughly 10% take rate. The difference largely comes down to being viewed as producing demand clicks versus driving conversion or cart-abandonment clicks. There's a difference between a user at checkout applying a coupon—which creates a conversion event—and a consumer seeing a deal on a product they weren't otherwise considering where the deal drives the purchase. That's demand. Our existing assets have evolved to drive demand, and we've been able to evolve assets like Offers.com similarly. We have confidence in our ability to evolve RetailMeNot. Regarding shrink-to-grow and incremental revenue, it's a timing issue. The things we'll pull away from can happen quickly—the non-core, low-margin initiatives can be deprioritized. The initiatives that grow traffic and take rate—creating editorial content, distributing it, negotiating new rates with retailers—take time. Give us 12 months and I believe we'll have reduced unprofitable revenue and started seeing the upswing from growth initiatives. We've done similar transformations before and are confident in execution.

Got it. Very clear and helpful. Scott, follow-up: looking at organic business, EBITDA in digital media was better and the EBITDA margin release was impressive. I want to dial into gross margin, which has been approaching this 90% level for a couple of quarters. Is this related to BabyCenter synergies, pricing, or something else? Is that gross margin sustainable organically excluding RetailMeNot?

Yes—good question. The answer is yes across the board. BabyCenter achieved its financial integration earlier than expected, and we're getting full benefit of that in Q3. Additionally, we've implemented programs affecting both cost of goods sold and operating expenses. We renegotiated many vendor contracts which affected COGS. Employee components were not subject to mass reductions in the same way, but the vendor piece improved. We believe substantially all of the improvement is sustainable as it relates to the core business. Of course, there will be work to bring those same programs to RetailMeNot.

Got it. Very helpful. Thanks, guys.

The next question is coming from James Breen from William Blair. James, your line is live.

Thanks for taking the question. Can you talk about the revenue breakdown on the digital media side between types of advertising and subscription, and how that's trended, especially with strength in gaming? Also, Scott, you did a few acquisitions in the quarter—how much did you spend on those, and how much is left on the buyback authorization?

On the advertising side, advertising was up about 10% year-over-year. We had organic growth at Everyday Health, gaming, and Ookla. We also had some benefit from earlier M&A. Lead generation on the B2B side has been more challenged and remains affected by COVID. Importantly, we get little to no election advertising, which has boosted other digital media companies' numbers this quarter. Display was up 13% as part of advertising. This is our eighth consecutive quarter of growth. For subscriptions, media subscriptions are roughly mid-single digits, which is a deceleration. Part of that is competitive headwinds in gaming subscription, but that's been offset by increased game publishing via Humble, which is becoming a more material part of the strategy as a publisher, not just a subscription service.

During Q3 we spent about $8 million on the small tuck-in acquisitions that were announced earlier. That does not include RetailMeNot or Inspired eLearning, which closed more recently and will be in Q4. In terms of buyback, we initiated a 10 million share program at the end of last quarter (Q2). We've purchased 2 million shares under that program, so approximately 8 million shares remain available under the current authorization.

Great. Thank you.

The next question is coming from William Power from Baird. William, your line is live.

Okay, great. I have a couple of questions. First, on the media subscription: when you're looking at mid-single-digit growth, does that include Ookla or is Ookla separate? What are you seeing at Ookla with downloads and tests? How might 5G impact that business?

Much of Ookla is included in those figures, although the advertising portion is separate. We're seeing extraordinarily high levels of testing volume, which strengthens our dataset. Increased testing volume doesn't always convert point-for-point into revenue, but it strengthens our market position in data capture. As 5G rolls out, we expect increased testing volume and new datasets for which we can charge incrementally. So 5G should be a tailwind for Ookla. Another related business is Ekahau, which was impacted earlier by office shutdowns, but it's recovering well. When people return to offices, Wi-Fi needs to be strong given the high broadband usage from video conferencing. The hybrid work environment will likely continue to increase broadband demands, and Ekahau should thrive in that environment.

Okay, that makes sense. Second question: you targeted an $80 million EBITDA run rate for RetailMeNot in 12–24 months. Can you talk through the drivers—how much is revenue improvement via take rate, how much is cost opportunity via shrink-to-grow, and what is the competence level of reaching that target?

It's all of the above. We'll see margin improvements earlier as we deprioritize low- and negative-margin businesses—shrink-to-grow. Take-rate and traffic improvements will take longer to materialize but are achievable within the 12–24 month timeframe. Future M&A on the platform would be additional upside. Our order of operations is familiar: address the de-prioritization first, then execute on growth initiatives; by February's call we'll have a better sense of the pace and timing for organic opportunities around take rate and traffic.

Great. Thank you.

I would now like to turn the call back to Scott Turicchi for any closing remarks.

Thank you very much. We appreciate all of you joining us today for our Q3 earnings call, unpacking the results as well as getting a deeper dive on RetailMeNot. As usual, we will be at a number of conferences, albeit virtual, between now and the end of the year. Look for press releases to announce those conferences. We will also be doing a variety of non-deal roadshow activities, virtual of course. If you have any follow-up questions or interests, please reach out to me or Vivek or to one of our analysts and we'll be happy to facilitate a conversation. We expect our next regularly scheduled earnings call to be approximately in the second week of February to announce Q4 results and release 2021 guidance. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.