Ziff Davis, Inc. Q4 FY2020 Earnings Call

Good day, ladies and gentlemen. And welcome to J2 Global’s Q4 and Year End 2020 Earnings Call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator instructions were provided. 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 begin.

Thank you. Good morning, ladies and gentlemen. And welcome to the J2 Global investor conference call for Q4 2020. As the operator mentioned, I’m Scott Turicchi, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah. We finish the year strong with a record fourth quarter performance. Notably, we had record revenue, adjusted EBITDA, non-GAAP earnings and free cash flow. It was also our 25th consecutive year of revenue growth. 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’ve not received a copy of the press release, you may access it on our corporate website at www.j2global.com. In addition, you’ll be able to access the webcast from this site. After we complete 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, as usual, you may email us questions at any time to investor@j2global.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-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. We save the best for last, reporting record breaking revenues, adjusted EBITDA and adjusted EPS for Q4 2020. Since the onset of the pandemic, we have strung together exceptional results, which speak to how resilient, focused and creative our organization has been. I could hardly be prouder of our employees around the world and want to express my immense gratitude for their remarkable efforts. Our performance is also indicative of the quality of our diversified portfolio of digital brands, which we continue to believe are very well-positioned for a post-pandemic world. The Digital Media segment had an outstanding quarter, with revenues up 26% year-over-year. We saw strong growth and positive signs at a number of our businesses. In our Gaming business, IGN had a very strong quarter, as the start of the new console cycle unlocked budgets, as we hoped. We view advertising in the Gaming and Streaming Service categories as a nice tailwind going into 2021. At Humble Bundle, we launched 35 skews in 2020, more than doubled last year. Given our continued success in indie game publishing, we were planning to invest in building out our Humble Games team to accelerate the number of titles we launched in the future. Our broadband assets had their best quarter of the year. Ookla set another record, with 1.8 billion tests in the quarter. And in a stat that I find stunning, Ookla’s mobile app installs topped 500 million. Ekahau, which, as you’ll recall, saw its revenues dip in Q2, when WiFi planning work being done in commercial spaces came to a halt, had a strong finish to the year. With particularly robust growth in Asia, which we believe indicates we could see growth acceleration in the U.S. when COVID is better contained. A brand that has emerged with a strong consumer use case is DownDetector, which saw its visits grow 45% year-over-year and is now the go-to site for consumers to report and view website and app outages. We’ve had some good success monetizing the asset with the launch of DownDetector Enterprise, which provides service providers a real-time monitoring dashboard and alert system. The early integration of RetailMeNot has exceeded our expectations. We saw good traction on total retail sales attributed to the platform and have done most of the foundational work for us to start deploying editorial and deal content, which is central to our efforts at growing commission rates. We did see a slight uptick in commission rates in Q4, which mostly had to do with favorable mix. Our margin expansion plan is progressing according to expectations and we internally announced a re-org a couple of weeks ago. As you know, one of the assets inside of RetailMeNot that we’re very bullish about is the Deal Finder browser app, which competes with Honey and others. In Q4 installs grew 160% and our merchant coverage grew 16%, both of which are key drivers of revenue. Given the momentum, we’re also increasing our investments in generating installs and accelerating merchant on-boarding for Deal Finder. The Everyday Health Group continues to realize the benefit of the shift to pharma marketing, away from traditional methods of reaching patients and doctors to digital vehicles. The pandemic simply accelerated what was already a trend. Our health sites continue to see strong traffic and are being recognized in the industry for their trusted content. everydayhealth.com won 13 digital health awards honoring the world’s best digital health resources and PRIME Education won the William Campbell Felch Award, the most prestigious award in the continuing medical education industry. We’ve also dedicated significant editorial resources focused on mental health and racial disparities in healthcare and health outcomes. We welcome Dr. Patrice Harris to Everyday Health as its Medical Editor in Chief. Dr. Harris is the immediate past President of the American Medical Association and a world renowned psychiatrist. BabyCenter celebrated its first year of ownership inside of the Everyday Health Group, and I must say that it was amongst the smoothest and most successful integrations we’ve had. Our pregnancy and parenting platform has an unsurpassed reach of expecting parents and we are proud to have been selected to be a clinical trial recruitment partner for one of the COVID-19 vaccine suppliers to help them understand the impact of the vaccine on pregnant women and young children. The Cloud Services segment grew over 3% in Q4, when adjusting for previously disposed assets, with our Cloud Fax business having what can only be characterized as a breakout quarter. Total Cloud Fax revenues grew over 6% and the corporate part of the business grew nearly 17%. This was easily the best year for Cloud Fax in the eight years that I’ve been at the company. It’s a direct result of the investments and focus we’ve made in ensuring strong service delivery, pushing new product features and expanding capacity. Page volumes have fully recovered from their lows in Q2 and were up 22% year over year. Our core cybersecurity suite of endpoint, email and VPN had another nice growth quarter, and we’re beginning to see the benefits of these businesses being organized under a single leader. As we evolve our approach to cybersecurity, and as we stated in our earnings release last night, our Board has approved the exploration of strategic alternatives for our KeepItSafe, LiveVault and ODS businesses, which do not factor in bundling or cross-selling efforts or plans. While we see potential in the B2B backup business, it does not map to our areas of focus. We think the business may more fully reach its potential with a new owner, which is why we are exploring alternatives. I’ll also point out that over the past few years we’ve been consistently optimizing our portfolio. In fact, in our Voice business, we exited our Australia businesses last year and earlier this week, we sold our U.K.-based City Numbers and CallStream businesses. These businesses simply didn’t fit our strategy and weren’t in a position to compete for growth or acquisition capital at J2 and that competition gets stronger each year, as the caliber of organic and acquisition opportunities for many of our businesses continues to rise. For the full year, we generated adjusted EBITDA and EPS of $616 million and $8.18, respectively. What’s most remarkable is that the high end of our pre-COVID guidance was $595 million in adjusted EBITDA and $7.66 in EPS — we grew by the high end of the range for both. Alongside the great financial value creation in 2020 was the company’s tremendous social value creation. For those of you who participated in our ESG non-deal roadshow last month, and by the way, we’d like to have another roadshow for those who couldn’t participate in the first one. You know that we’ve organized our purpose-driven agenda around five pillars: diversity, equity and inclusion, community, sustainability, data, and governance. We’ve made immense progress in all areas and we will continue to drive purpose just like we drive profits. We’ve also learned that we need to provide more disclosures to ensure that the ratings agencies have a fuller appreciation of our activities, policies and approaches. Scott will take you through the build for 2021 guidance, but I wanted to make a few observations about our outlook. First, given the higher organic growth we experienced in the second half of 2020, we believe that the overall organic growth rate for J2 in 2021 will be closer to high-single digits with total growth in the mid teens. Given the organic growth opportunities, we’re increasing customer acquisition spending in a few areas, including cybersecurity, MarTech and RetailMeNot to support future growth. Not a huge investment, but it does probably cost us a point of margin in 2021. I also believe that every single business unit in the company will grow its revenues, which would make this the first year in a while that we do not have any of our businesses posting negative growth. The combination of removing our dilutive businesses, investing in growth opportunities and continuing our acquisitions program should have a meaningful impact on total top and bottom-line growth. On the acquisitions front, we deployed approximately $500 million of capital in 2020, which exceeded 2019 spend of approximately $440 million. The pipeline is strong and we continue to see interesting opportunities for our capital. Our balance sheet continues to replenish with over $300 million of cash and we expect to continue to generate in excess of $400 million in annual free cash flow. We also believe we have room in our leverage ratio to take on more debt, if we so choose. Our powder is dry and the market is full of interesting opportunities. Before I hand the call back to Scott, I’d like to take a moment to remember Bob Cresci, who’s one of J2’s original and longest serving Board members. Bob passed away in December, leaving behind an amazing legacy of achievement and honor. Bob was a tremendous person who loved his family, his country and our company. He was a graduate of West Point, served two tours in Vietnam and earned a Purple Heart and Bronze Star. He was a terrific athlete, having captained the West Point water polo team and developed into a great tennis player. He had a distinguished career as an investor and I’d like to thank him — his investment in J2 over 20 years ago was amongst his favorites. Bob was a great source of advice, guidance and inspiration for me. He was also one of the best storytellers I knew and beamed with pride whenever those stories involved his family. To his wife, Mary Beth, and the whole Cresci family, we’re terribly sorry for your loss. He’s truly missed by all of us at J2.

Thanks, Vivek. Before turning to our financial results and 2021 guidance, I’d like to also offer my condolences to Bob’s wife, Mary Beth and his family. I had the privilege of working with Bob for more than 22 years. He was an early believer in the company dating back to the summer of 1998, when I was still an investment banker. His thoughtful guidance and friendship are dearly missed. Before turning to our financial results, I would just like to note that Q4 2020 set a variety of financial records, including revenue, adjusted EBITDA, non-GAAP earnings and free cash flow. These results were driven by strength across our portfolio. In addition, we got off to a great start with one of our most recent acquisitions, RetailMeNot. We ended the quarter with approximately $340 million of cash and investments, after spending $455 million in the quarter on acquisitions and $36 million on share repurchases. I’m pleased to announce that for the year we were able to repurchase approximately 3.6 million shares of our stock or more than 7% of outstanding shares at an average price of approximately $73 per share. Now, let’s review the summary quarterly financial results. For Q4 2020, J2 saw a 15.7% increase in revenues from Q4 2019 to a record $469.2 million. Adjusted gross profit margin, which is a function of the relative mix of our businesses, remained healthy at 87.2% and improved over 300 basis points from Q4 2019. We saw EBITDA grow by 20.1% to a record $211.8 million, and finally, our adjusted EPS grew 30.7% to $3.11 per share versus $2.38 per share in Q4 2019. For our fiscal year, we saw an 8.6% growth in revenue from 2019 to $1.49 billion. Our EBITDA increased by 11.9% or $65.5 million to a record $615.7 million and our adjusted EPS was $8.18 for the year, compared to $7.08 in 2019 or a 15.5% increase. I would reiterate what Vivek said earlier in the call, which is that both our EBITDA and EPS exceeded the high end of our pre-COVID guidance issued in February 2020. We had a record free cash flow for Q4, generating $102.9 million, up more than 25% from Q4 2019. For the full fiscal year we generated $407.7 million of free cash flow, a 16.3% increase from 2019 and for the first time in our history, we generated more than $400 million of free cash flow in a fiscal year. For the full fiscal year, we experienced a conversion rate of 66% of our EBITDA to free cash flow. Now let’s turn to the two segments, Cloud and Digital Media for Q4. The Cloud business grew revenue approximately 1.2% to $171.4 million and 3.3% when adjusting for the ANZ voice businesses that were sold in Q3 of 2020. Reported EBITDA was up slightly to $83.4 million with a 48.7% EBITDA margin, a modest decrease of 50 basis points from Q4 2019. This was due as we began to accelerate our investment opportunities in Q4 2020, which we’ll hear more about in our guidance. Our Media business grew revenue 26.1% to $297.9 million and produced $141.3 million of EBITDA for nearly 40% growth. The EBITDA margin expanded by 470 basis points. For the fiscal year, the Cloud business finished at $678.5 million in revenues, a 2.5% increase over 2019, growing 3.3% when adjusting for asset disposals. EBITDA was just in excess of $336 million up slightly from 2019. The Digital Media business showed a 14.2% increase in revenues to $811.1 million and EBITDA grew to $317 million, a 29% increase from 2019. EBITDA margins expanded by 440 basis points during the year and achieved 39%. Vivek provided some highlights of our 2021 guidance at the beginning of our call. We are guiding fiscal year 2021 exclusive of our B2B backup assets and comparing to 2020 excluding sold assets of ANZ voice and certain U.K. voice assets, as well as our B2B backup assets. For the Cloud business, we expect a 3% growth in revenue and adjusted EBITDA margins between 48% and 49%, consistent with the margins for Q4, despite allocating almost 150 basis points in incremental investment in our cybersecurity and MarTech businesses. For the Media business, we expect revenue growth of approximately 25% and an EBITDA margin of between 38% and 39%. Also, for the purposes of modeling the quarters, remember that our Digital Media business experiences significantly more seasonality than our Cloud business. We expect that approximately 20% of the annual expected Media revenues will be recognized in Q1 and approximately 32% will be recognized in Q4. Also, remember that we have significant fixed costs in our Media business, so we experience meaningful EBITDA margin expansion from Q1 to Q4. I would note that we expect to experience higher non-GAAP depreciation by approximately $13 million this year, due to the full year expensing of acquisitions done in 2020, as well as incremental CapEx spent in 2020 that we will begin to depreciate. We believe that our net interest expense will be approximately $63 million. We believe the tax rate will increase somewhat from 2020 due to changes in our global tax structure and some shifts in sourcing of our income to higher tax jurisdictions. Therefore, we expect the tax rate to be between 22% and 24% this year, and EPS will be calculated using an imputed share count of 44.6 million shares. Based on the voice assets sold last year in Australia and New Zealand, the voice assets recently sold in the U.K. and the exploration of alternatives for our B2B backup assets, we are providing guidance exclusive of these assets. To better compare to fiscal year 2020, we have provided a pro forma analysis. Our excluded assets produced $68 million in revenues in 2020, $26 million in adjusted EBITDA and contributed approximately $0.38 in non-GAAP earnings per share. This yields pro forma 2020 results of $1.422 billion in revenue, $590 million of EBITDA and $7.80 in non-GAAP EPS. For 2021 on a comparative basis, we expect revenue between $1.63 billion and $1.676 billion, EBITDA between $646 million and $666 million and non-GAAP EPS between $8.93 per share and $9.27 per share. At the midpoint, this represents 16.2% revenue growth, 11.2% EBITDA growth and 16.7% non-GAAP EPS growth. This midpoint of the guidance range does not include any future M&A, which we believe would give us the ability to move higher in the range. I thought it would be useful to look the last four years of performance and the midpoint of our guidance for 2021, when excluding the assets we’ve disposed of, as well as the B2B backup business. It has an impressive 14% CAGR in revenue, 13% CAGR in adjusted EBITDA and more than 17% CAGR in non-GAAP EPS. Even though we’ve recently hit an all time high in our stock price, I would note that at the midpoint of our 2021 guidance, we are trading at approximately 9.6 times 2021 EBITDA and less than 12 times our midpoint of non-GAAP EPS, valuations that we believe remain incredibly attractive. Following our guidance slide of various metrics and reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalent, I would now ask the operator to rejoin us to instruct you on how to queue for questions.

Thank you. Operator instructions were provided. And the first question is coming from Cory Carpenter from JPMorgan. Cory, your line is live.

Great. Thanks for the questions. I had two on RetailMeNot. Vivek, it sounds like the Deal Finder browser extension business has accelerated quite significantly since the acquisition. So could you just talk more about some of the efforts you’ve made here that have been successful in driving this growth, and then more broadly, the opportunity that you see? And then, for Scott, just given your early success with the acquisition, any change to the $80 million EBITDA run rate target you talked about last quarter or just more broadly, it’d be helpful to hear how you're thinking about RetailMeNot in terms of growth and margins in 2021? Thanks.

Sure. Let Vivek take the first one and then I’ll dovetail on the B2B.

Great. Well, good morning, Cory, and thanks for the question. The RetailMeNot integration has been just fantastic. The team really did exceed our expectations for Q4. As I mentioned, we did see some improvement in take rate and this is before the efforts where we’re going to stage editorial and deal content that we think is going to help drive and accelerate take rate. So that hasn’t yet really happened. On the Deal Finder side, I think we have a couple of things going on. I think just organizational focus — more focused marketing to drive installs acceleration and on-boarding merchants. And going into 2021, as we noted, we are making incremental investments to help further accelerate installs and merchant coverage on the Deal Finder side. So we continue to be very excited for that. And the other thing to point out is, the shrink-to-grow is happening. So the parts of the business that were shrinking are actually being offset by higher-than-expected growth in the core commissions and advertising business. So I would shift our view of 2021 from being a margin expansion opportunity to being margin expansion and some stability in revenues. So I think that’s all very good. It’s certainly ahead of plan and I think it is a function of the team’s efforts, the learning that is going on between the RetailMeNot team and the core affiliate commerce teams at the Ziff Media Group. And I also think it’s just the acceleration of e-commerce. I think when you think about how consumers make purchase decisions, they rely on professional and editorial reviews, which we do as a company exceedingly well, but also on deals and discounts and coupons, which we now also do exceedingly well.

And I would just add to that for others on the call, when we acquired RetailMeNot, as Vivek mentioned, it was about a $180 million run rate business, and we said, there was some approximately $10 million of very low margin or no margin revenue that we’d be looking to expunge in 2021. As a result, revenues on a pro forma basis may go down by about $10 million. Based on that early success and the commentary that Vivek just gave, we feel highly confident now that RetailMeNot will not have any kind of a decline certainly of a material nature in 2021. We think it will be in that $180 million range, while at the same time having that margin expansion from the low 30s to the high 30s. So when you kind of unpack that, what it needs is a few million more of EBITDA this year and hitting that $80 million run rate slightly earlier than at the end of this year going into 2022.

Very helpful. Thank you both.

Thank you. And the next question is coming from Daniel Ives from Wedbush. Daniel, your line is live.

Yeah. Thanks. Great quarter to the team. So can you just talk about the backup business in terms of why now — because obviously, we’ve over the last few years, this has been a discussion? But can you drill into that a bit in terms of, is it the market opportunities and non-strategic, the other areas that are really just accelerating? Could you please talk about why now we think about the last few years where there have been some starts and stops potentially?

Thanks, Dan. I think that what you’ve seen from us over the last few years is just a regular process of portfolio optimization. With respect to the B2B backup businesses, given where we’re trying to take our cybersecurity suite and the bundling of Viper, IPVanish and other services, it didn’t fit. We are keeping our LiveDrive and SugarSync businesses within that suite because they are direct-to-consumer and match the customer acquisition profile of the rest of our cybersecurity suite. So it didn’t fit strategically. Also, as a company, our portfolio continues to grow and we are excited about other parts of the portfolio; the company does not have infinite capital and it has a number of businesses that need capital and can put that capital to really great work. We’re excited for that team and the future potential of what an exploration of alternatives can mean for the business and we are confident that this will end up becoming a win-win.

Got it. And then, Scott, just like from an M&A perspective, combined with some of the assets you’ve divested and just more of the offensive. Sort of real quick, could we sort of compare the view going into 2021 versus maybe 2020 from an M&A perspective? Like, does it feel just more on the offensive in terms of going after assets and then tax, like our valuations… is that a headwind in terms of the way that you guys like to think about M&A?

I think no doubt in the last year or so — I’ll go back to the Analyst Day almost exactly a year ago in March, just before the pandemic really hit — our division presidents laid out very defined themes about where we’re taking the divisions and that helped sharpen focus. We took a hiatus at the early stage of the pandemic as we reassessed what it would mean for J2 and targets. By May, we began to focus on M&A and actually had a very good year, closing nine transactions and spending just under $500 million, heavily weighted to RetailMeNot. The sharpening of the focus within the divisions helps the M&A team build a pipeline from tuck-ins to larger transactions. Regarding valuations, most of our deals are smaller tuck-ins and tend to be much less competitive. When you go upstream to larger deals, you may face more competition from PE firms and SPACs. One advantage we bring is the management teams and assets that allow us to do more with acquisitions than many others, and RetailMeNot demonstrates synergies with our businesses that improve both revenue and EBITDA profiles. So I feel very good about where we sit from an M&A perspective, and as Vivek mentioned, we’ve got decent cash balances and the ability, if necessary, to take on more debt as we’re modestly levered.

Thanks.

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

Great. Thanks for taking the questions. Just two, I guess, on Digital Media: what are you hearing from your partners in terms of the shift towards context and brand safety? That’s a theme that’s growing as IDFA gets deprecated, third-party cookies, things like that. Is there a potential tailwind for CPMs rising for the properties you have and does that inform where some of the more exciting M&A opportunities are from here? And then a second one maybe for Scott: how are you thinking about the buyback from here as these price levels? Thanks.

Yeah.

Nick, I do think the disabling of the instrumentation of interest-based advertising plays in the hands of content publishers and contextual sellers of advertising and performance marketing, which is what we are. We anticipated privacy changes from Apple and Google and believe context, premium content, trusted brands and affiliations will matter, as will first-party data. RetailMeNot sits on substantial first-party data about what people are looking to buy or actually buying. We have a great dataset that can be monetized. These changes are tailwinds, but I’ll point out we had a monster quarter before these changes — our Digital Media results are strong irrespective of potential additional tailwinds.

On buybacks, repurchases remain on the table. Our philosophy is consistent: we look at alternative uses of capital — M&A and share buybacks — and the relative rates of return between them. Even though the stock has run up, we are still trading at a modest multiple of 2021 EBITDA. As we look out over 2021, we’ll balance between M&A and buybacks; they’re not off the table just because the stock is at an all-time high.

Great. Thanks.

Thank you.

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

Hey, guys. Congrats on the great end to the year here. I wanted to get into the Digital Media business a little bit more. The monetization rates appear to be your strongest ever, obviously, some tailwinds across the board. How sustainable do you think those kinds of rates are? What were really the rank order drivers? Also, within Digital Media, how much did RetailMeNot actually contribute in Q4? And Scott, could you provide an update on the annual advertising versus subscription versus other mix in Digital Media?

Jim, thanks for the question. We believe these monetization rates are sustainable. The pandemic accelerated trends that were already in place. Key drivers include the console cycle refresh benefiting IGN and continued relevance of Ookla with strong organic installs. Ekahau returned to growth and WiFi 6 will be a tailwind. Everyday Health performed well as pharma marketing shifts to digital. We think these are enduring changes tied to long-term trends. The drivers we highlighted are structural and we expect them to continue contributing attractive growth.

Jim, regarding RetailMeNot contribution in Q4: we don’t break out pieces of business, but at the time of the deal, analysts estimated about $40 million of revenues contribution in Q4. We did somewhat better than that and better than our expectations. That gives you a feel for the contribution of RetailMeNot in the fourth quarter. Almost all of that revenue is performance-based marketing. For the quarter, remember Q4 only has two months of RetailMeNot contribution since we acquired very late October. For the quarter, display advertising was about 38% of our revenue, performance marketing 44% heavily coming out of Ziff Davis, and subscription about 17%. Those are rough estimates of the total Media revenue in Q4 broken down by type.

Very helpful, guys. Congrats again.

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

Hey, guys. Thanks for taking my questions. Scott, maybe first for you: thanks a ton for the full year guide, kind of comparing apples-to-apples with the divestitures. Maybe just to go one level deeper on 2021 — can you give some broad brushes on how you’re thinking about Digital Media revenue growth and Cloud Services growth? Just to help us tweak our models a bit?

The place to start is organic growth. For 2020 as a whole, the Media business was a mid single-digit organic grower, Cloud about 2%. Q4 showed Media in the high single-digit 8%+ range and Cloud just under 3%. For 2021, we expect the Media business to be a high single-digit organic grower, maybe around 10%, and the Cloud a low-single-digit grower. That combines to an overall company organic rate in the upper portion of high-single digits. The remainder up to mid-teens total growth comes from acquisitions that are annualized in 2021 versus 2020.

Got it. That’s really helpful. If I can squeeze in a follow-up: Vivek, I agree with you on the fax business ending on a high point. Could you talk about the split between corporate and the web/high-velocity side and how you think about the overall fax business in 2021?

The performance in Q4 was sensational. The corporate fax business, especially in healthcare, is growing strongly. We’ve organized around the healthcare opportunity with enterprise-grade solutions and a strong sales organization. Web fax declines are low-single digits and actually better than previously modeled. This is a great story and we’re very bullish on it going forward.

Analytically, we’re getting to a point where you’ll see a crossover over time between the corporate piece — the high ARPU, lower customer count business — surpassing the web business, which has higher customer count and lower ARPU. They’re getting close but not quite there yet. Last year, web was roughly $330 million and corporate a little over $150 million.

Very helpful. Thanks, guys.

Thank you. And the next question is coming from Will Power from Baird. Will, your line is live.

Okay. Great. Thanks. First, congratulations on the strong results to finish the year. Maybe circle back to the cybersecurity segment and the opportunity there. I’d love to get your thoughts on growth prospects into 2021, and particularly what the M&A environment looks like in that segment, given higher multiples on bigger entities. What are you seeing in the M&A pipeline within cybersecurity?

Great question. Both cybersecurity and MarTech were run with minimal customer acquisition investment historically. We see more room to invest in customer acquisition, and in 2021 we are stepping up marketing investment to drive growth in both categories. Even without acquisitions, these businesses show a lot of organic potential. On the M&A front, we remain focused on SMB solutions that tend not to have frothy enterprise valuations. We believe our existing brands like Viper, IPVanish, SugarSync and LiveDrive have strong organic growth potential and will do well even without major acquisitions.

From an M&A standpoint, headline transactions have high valuations, but assets remain available in the space that fit our strategy. We made a modest acquisition in the cybersecurity stack in Q3 that adds to our capabilities. Assets are out there and we’ll be selective.

Okay. And one other: great stats on Ookla. How enduring are those trends? How much is work-from-anywhere benefiting the business versus 5G rollouts? Any sense of what 5G testing could mean for you?

I think the trends are sustainable. Work-from-home and hybrid work models are here to stay in many organizations, and demand on broadband networks will only increase. Test volumes are great and demonstrate market position, but revenue comes from providers who need our data to tune and improve networks. The demand for quality and speed will keep our data valuable. The 5G rollout will only add more fuel to that demand.

Thank you.

Thank you. And the next question is coming from James Breen from William Blair. James, your line is live.

Thanks for taking the question. I wanted to ask about Gaming — you talked about budgets opening up and how that manifests across IGN and Humble. How does that translate across the platform? Also on the Cloud side, customer count was down and churn was up a bit in Q4. How much of that was a conscious decision around customer mix versus economic impacts, and how do you see that trending into 2021?

On Gaming, the console refresh fuels advertising demand for IGN and drives game releases that benefit Humble. Humble Bundle comprises a store, publisher, and a monthly subscription. The store and publishing parts have been especially important, contributing over 40% growth in Q4 in those pieces. We aim to grow indie publishing and be a top player in that space. On the Cloud side, the web fax business has modest declines, but corporate fax — especially in healthcare — is growing strongly due to our enterprise solutions and sales organization. We’re bullish on that trend continuing.

Regarding the Cloud metrics: half of the sequential customer count decline from Q3 to Q4 comes from excluded assets — ANZ voice was eliminated at the end of Q3, and the U.K. voice piece and backup continued to drag customer count. The remaining decline relates to the shift from web fax (high customer count, low ARPU) to corporate fax (low customer count, high ARPU). On cancel rates, since acquisition of IPVanish, cancel rates normalize in the 2.25%-2.5% range. Q4 of 2019 had highly promotional programs in IPVanish that produced low renewal rates in Q4 2020, accounting for about 20 basis points of movement. Overall, we remain within our normal bands and the trends are as discussed.

Great. Two quick follow-ups: an update on the VPN acquisition and its performance? And on Digital Media margins — you’re guiding 38% to 39% — how do you view potential going forward given traffic growth and fixed cost leverage?

The VPN business has been a growth business with double-digit growth since acquisition and is a contributor to cybersecurity growth. It was not a shrink-to-grow proposition. We’re pleased with its performance.

We’re very happy with where Digital Media margins have gone and they’re ahead of our expectations. We see sustainable margin expansion given the cost programs that began earlier in the year and the leverage in the business.

Great. Thank you.

Thank you. And the next question is coming from Shyam Patil from SIG. Shyam, your line is live.

Hey, guys. Thanks. Vivek, with the IPO market robust, smaller companies going public, and Scott referenced valuation being depressed a couple times in the call, does that influence how you’re thinking about potentially monetizing Digital Media or Everyday Health or other businesses — taking advantage of the public markets and receptivity and valuations?

We are public, and the focus is making sure the marketplace has a full appreciation for what we’re doing. This was an exceptional quarter and recent quarters have been strong. Our job is to ensure people understand the performance, and hopefully that will attract investors who may have been on the sidelines.

Great. Scott, a modeling question: you don’t provide quarterly guidance, but can you frame how to think about EBITDA and EPS by quarter given segment seasonality?

Digital Media is highly seasonal and as it becomes a larger share of J2, EPS becomes more Q4-centric. We see about 20% of Media revenues in Q1 and about 32% in Q4. Post two segments, roughly a little over a third of EPS comes from Q4, about 20% in Q1, with sequential improvement through the middle quarters depending on timing of events. That should help you model seasonality.

Thank you guys and great quarter and outlook.

Thank you. And the next question is coming from Rishi Jaluria from D.A. Davidson. Rishi, your line is live.

Hey, guys. Thanks for squeezing me in. I wanted to drill into margin performance in Q4 — very impressive gross and EBITDA margin expansion in Digital Media year-over-year. Can you talk about the drivers? Was RetailMeNot immediately creative on the margin side or were there other factors? Also, how should we think about cash conversion from EBITDA next year relative to historical levels?

RetailMeNot was accretive in Q4, but the margin expansion is actually independent of that and has been visible for a couple of quarters. We saw improvements on the COGS side in Digital Media and implemented cost reduction programs starting in Q2, many of which are permanent. Work-from-home led to exiting certain real estate that had modest OpEx benefits in Q4 and will flow more meaningfully in 2021 guidance. We did a deep review of cost structures and found sustained opportunities, particularly in Digital Media. On free cash flow conversion for 2021, take the midpoint of guidance at $656 million excluding backup assets: we expect mid-60s conversion rates to free cash flow, which would be roughly $425 million of free cash flow on top of current balances. Q1 tends to be the highest free cash flow quarter due to collections from Q4 Media revenues, so there is lumpiness in collections.

Got it. Thank you.

Thank you. And the next question is coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

Hey, guys. Great quarter and thank you for taking my question. First, as you look at the pipeline, how much capital are you hoping to deploy at an aspirational level this year between M&A, buybacks and organic growth? Second, regarding the backup assets, what kind of value do you expect and how would proceeds fit your leverage and capital allocation, and what’s the timing?

Historically we deploy roughly the amount of free cash flow annually — about $400 million to $450 million — and that has been the aggregate for M&A and buybacks. For 2021, it’s hard to predict exact deployment; it depends on timing and size of deals and our view of the share price. We don’t build any benefit from future M&A into the midpoint of guidance. Regarding potential proceeds from backup asset transactions, it’s probably not appropriate to discuss specifics on this call while we are exploring alternatives. We’ll work through that and provide updates when appropriate.

To dovetail on free cash flow: if you take the midpoint of guidance at $656 million excluding backup assets, I’d expect mid-60s conversion rates to free cash flow — around $425 million — in addition to our current balances, putting us in a strong capital position. We’re close to re-establishing our credit line. Combining cash, investments and potential proceeds from transactions, we’re in a robust position with significant dry powder for M&A or buybacks as opportunities arise.

Got it. Great color, guys. Thank you very much.

There are no more questions in queue. I would like to hand the call back to J2 Global’s Scott Turicchi to close the call.

Great. Thank you. We appreciate all of you joining us to discuss the fourth fiscal quarter of 2020 and the full year. As you’ve heard, we’re very enthusiastic about the prospects for 2021. The roadshows continue to be in a virtual environment for the near term and we’ll be at a number of virtual conferences over the next several weeks. There will be announcements giving you information on how to participate. We will also do non-deal roadshows virtually, and of course, you know how to reach Rebecca or myself. Don’t be shy — we’re happy to talk about anything you’ve heard today. Also, I want to re-emphasize the ESG roadshow. We have a deck of our initiatives and accomplishments, and areas of further opportunity. We’re happy to discuss those as part of the non-deal roadshow or a separate meeting. Thank you again. Our next regularly scheduled call will be in May to report Q1 results. Thanks.

Thank you, ladies and gentlemen. This does conclude today’s J2 Global conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.