Q3 2019 Earnings Call
Welcome to Jay to Global's third quarter 20, <unk> earnings call I am sorry, the afraid it'll be system today at this time all participants are in listen only mode. It question answer session will follow the formal presentation. If anyone should require operator systems during the conference.
Please press Star Zero I know telephone keypad on this call will be the that see Oh Gee to global.
And Scott Turicchi, President Jay too.
Well over to Scott Turicchi, President and CFO of GE to global.
Thank you good morning, ladies and gentlemen, and welcome to the Jay to Global Investor Conference call for Q3 2019, as the operator, just mentioned like Scott Turicchi, President and CFO of Jay to Global joining me today is our CEO back shot we had the best third fiscal quarter performance ever setting records for revenue EBITDA free cash.
non-GAAP earnings per share.
In addition, we completed four acquisitions this past quarter, which will that will address in his opening remarks. In addition, we repurchased approximately 12000 shares of our stock at a price of $80.74 per share we will use the presentation as a road map for today's call.
Copy of the presentation is available at our website. When you launched the webcast. There was 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 to our corporate web site at Jay to global Dot Com Slashed press.
Dish and you'll be able to access the webcast from the site. After we complete our formal presentation that remarks, we will be conducting acuity session. The operator, one structure at that time regarding the procedures for asking a question.
However, you may email those questions anytime at Investor Ajay to global Dotcom.
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 not limited to the risk factors that we've disclosed in our various FCC filings, including our 10-K filings recent 10-Q filings various proxy statements, an 8-K filings as well as additional risk factors that we have.
Included as part of the Slide show for the webcast. We refer you discussions and those documents regarding safe Harbor language as well as forward looking statements now let me turn the call over to vector for his opening remarks. Thank you Scott and good morning, everyone.
This was another terrific quarter across the board.
Revenues were up over 17%, which is the strongest growth quarter. We've had this year.
<unk> services grew 14% well digital media grew over 21%.
We were particularly pleased with our 34% growth in digital media subscription revenues.
And importantly, we continue to see strong growth in free cash flow, which increased over 12% year over year.
We also completed four acquisitions in the quarter and I wanted to use most of my time today to talk about them.
As a reminder, we completed four acquisitions in Q1.
And two acquisitions in Q2, making the total number of acquisitions this year 10.
Generally speaking, we're seeing attractive deals across the markets in categories in which we operate.
Our ability to transact efficiently.
Transparently and reliably and to see and create value where others cannot has allowed us to succeed in an M&A environment that can at times seem frothy.
As you all know we organize the company into 13 business units.
Of the 13 five of the units are below $75 million an annual revenues.
As we continue to grow as a company, it's a priority for us to scale. These units to be north of $75 million and ultimately north of $100 million an annual revenues.
Meeting those marks not only achieved growth goals, but also ensures the kind of diversification, we look for in our portfolio of businesses.
To that end since January 2018.
The 21 deals that Jay to us consummated.
11 were in cloud services and 10, we're in digital media with 11 of our 13 business units closing at least one transaction.
There are a combination of organic growth and programmatic acquisitions, we have more than doubled our revenues and adjusted EBITDA at Jay to over the past five years, making a recalibration of scale important inappropriate.
To the acquisitions consummated in the quarter.
Should put two of RBC is north of the 75 million dollar Mark in the next 12 months.
Let me address the first one which is baby center.
The parenting and pregnancy space is a very attractive one to us it sits at the Nexus of a broad range of digital health extensions.
Including fertility services women's health.
Trials and family Health care and genetic health services.
By owning both baby centre and what to expect.
We believe we have become a global leader in this vertical where users can be served at every stage of the pregnancy and parenting journey.
In the U.S.
Baby Centre, and what to expect register a combined and de duplicated 70 plus percent a pregnancies annually.
The Baby Center, we now also have reach into non U.S. markets.
Maybe center operates 10 international sites, which include five that are non English language.
Maybe center also brings a broader editorial focus which extends beyond pregnancy and the first two years of parenting to include preconception and parenting up to nine years of age.
From a value creation point of view. This is very similar to our past digital media acquisitions.
We see opportunities for business model innovation.
As well as focus is focusing the business on profitability.
On the former we have at what to expect and that many of the Jay to digital media brands, a great track record with performance marketing solutions, where we generate customers and leads for our clients.
Today, The Baby Center business is primarily display advertising, while the what to expect business makes a majority of its revenues from performance marketing.
We believe we can successfully implement performance based solutions that baby center to drive growth.
On the profitability point.
Baby Center was a noncore asset for its prior owner and not run for earnings.
As you all know that's not uncommon in the digital media world, but we've identified synergies and approaches to the business, which we believe we'll make the business solidly profitable and 2020.
We're also very excited with some of the talent, we're picking up in the business, who are both mission oriented and embraced the focus on profitability and profitable growth.
The other acquisition that we expect to allow a business unit to achieve revenue scale is spice works.
We love the information technology industry and over the last several years have acquired assets in the B to B space, such as E media tool box sales, a fight and demand shore.
Spice works is the most established to these brands the deepest roots and I T.
It's a professional network and a true community of I T pros, who look to it for content product reviews and apps.
Its business model is centered on being the marketplace, where tech buyers and sellers come together.
The combination of Spice works with our existing B to B tech assets should position us as a close second to another fantastic public company in the space called Techtarget.
We will go to market under the Spice works brand as it is highly recognized admired amongst tech professionals.
There are 18 million I T buyers in the Spice works community.
For IP vendors the combination of our assets will provide them a unified suite of advertising performance marketing and content solutions.
And while the company has done a fantastic job in building true value for its audience and clients.
The venture backed companies Spice works was not focused on profitability.
We see a number of margin expansion opportunities when combining spice works with our other b to B breads, and therefore, a clear path to earnings.
And the Spice works team is onboard and excited to the change in focus.
The third acquisition in the quarter safer VPN as notable as it represents our first acquisition for our privacy business unit, which is looking to be active in the VPN space.
Well it was a very small deal. It is a step forward for the privacy units global expansion.
Safer VPN as localized in 26 languages.
We hope it represents the first of many tuck ins in the VPN space.
Also point out that the businesses looking for ways to offer a broader suite of privacy and security solutions.
For instance, we are working on ways in which we can bundle our VPN offerings with our Sugarsync cloud storage offering.
And our Viper anti virus offerings.
The fourth acquisition in the quarter.
Off site data, saying is in our cloud backup business unit, which as you. All know has been in decline for the last couple of years, but highly profitable.
[noise] Offsite dataset is a market leader in providing backup and higher margin services, such as that disaster recovery based on beam software.
These being based offerings enable us to better serve and retain our customers and to acquiring new customers, both organically and through tuck ins.
Buying businesses is one thing, but when we can buy brands, we tend to get very excited.
A hallmark sign of a great Brad, especially in the Internet business is its ability to indoor and maintain a leadership position in that space.
Baby Center was founded in 1997.
Spice works was founded in 2006 and eye contact which was our first acquisition of the year was founded in 2003.
We believe we have an unparallel track record at our company of enhancing brands and improving their business models.
With that let me hand, the call back to Scott. Thanks for the back Q3, 2019 said a number of financial records for Jay to including revenue EBITDA free cash flow and non-GAAP , yes.
These results were driven by several areas of strength in our portfolio companies, notably strong growth in our media subscriptions continuing growth in our VPN business continuing good display advertising revenue and our relentless focus on cost, resulting in strong EBITDA margins. We ended the quarter with approximately 191 million of cash and invest.
Mens after spending 165 million the quarter on acquisitions and share buybacks now let's review the summary quarterly results on slide four.
For Q3 2019, Jay to saw a 17.6% increase in revenue from Q3 2018 to 344.1 million.
Gross profit margin, which is a function of the relative mix of our 13 business units rose to 82.3% from 81.5% in Q2 2019.
We saw EBITDA grew by 13.2% to a third quarter record of 134.8 million.
EBITDA margin for the quarter was 39.2%, which is strong in light of the fact, the four transactions completed in Q3 contributed an insignificant amount of EBITDA.
Finally, adjusted EPS grew 11.1% $1.70 per share versus $1.53 per share for Q3 2018.
Turning to slide five in Q3, we generated 80.5 million a free cash flow, which was 12.7% increase from Q3 2018.
On a trailing 12 month basis, we generated 366.4 million a free cash flow for 69.4% free cash flow conversion of our 528.1 million of trailing 12 month EBITDA.
Now, let's turn to the two segments cloud and digital media for Q3 as outlined on slide six.
The club business grew revenue, 14% 271.2 million due primarily to growth in our new VPN business unit.
Reported EBITDA increased by approximately 12% to 83.9 million compared to 75 million in Q3 2018.
EBITDA margin is 49% after corporate allocations down approximately one percentage point due to higher corporate allocations and a lower contribution margin from our VPN business exclusive of the corporate overhead allocations EBITDA was 86.5 million for the quarter with a margin of 50.5% can.
Paired to 50.9% in Q3 2018 do once again to the lower margin contribution of our VPN business, which I continue to invest in for future revenue growth.
Our media business grew 21.3% to 173 million in produced 53.5 million of EBITDA or 17% growth.
EBITDA margin declined by 1.4 percentage points from Q3, 2018, due to higher corporate allocations and negligible EBITDA contribution from our two newest media assets Baby Centre and Spice works, we are reiterating a revised guidance range for the year as outlined on slide eight.
To remind you our original high end of our range was 1.33 billion of revenue and 540 million of EBITDA with $6, a 95 cents in non-GAAP earnings per share.
Those of now become the low end of our new range of guidance. We now expect revenues to be between 1.33 billion and 1.37 billion of revenues EBITDA to be between 540 million and 556 million and non-GAAP EPS to be between $6, a 95 cents per share and $7 in 15 cents per se.
They're following her guidance lighter various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent I would now ask the operator to join us to instructions on how to queue for questions.
Thank you if he would like to ask a question. Please press star one I know your telephone keypad, except for me to drill into he your line is in the question kill you Miss Press Star to if he would like to remove your question from the Q for participants using speaker equipment I made the necessary to pick up your hands that before press.
Let's start he is.
Our first question is from.
So I am Patel with Susquehanna. Please proceed.
Hey, guys. Congrats again on another great quarter out a few question.
The <expletive> you talked about.
About.
Yeah, the VPN opportunity in your prepared remarks, just wondering if you could talk a little bit more about kind of how you see the the broader opportunity.
The ability to do M&A.
Then just also just how you think about the revenue growth and margin profile and overtime for this business and then you know just just maybe little broader than that is how you see the cloud business evolving with that with the new had a cloud you brought on I know you talked about security in your prepared remarks that that how you see that focus.
An evolving for that.
[noise] so great questions I'll start on the on the VPN front and.
Talk little bit about the privacy space and you know I think we've talked about this little bit in the past, we think consumers and businesses really do care about privacy everything you see in the news revelations about social media tracking government surveillance are all just contributing to I think market demand for the kind of service that.
The vanish and RVP and offer so we think just from a marketplace point of view, we are well situated to take advantage of those trends specifically IP vanish is really performing well, it's at or above expectations. However, we look at it we're really excited about the team.
Under Nick Nelson.
Who is running that business for us and having our first tuck in done.
For this business unit, it's pretty exciting typically business units that are new.
Jay to it takes a little while for them to consummate their first transaction I think probably broke a record in terms of how quickly they were able to move and part of that have to do with prior to our ownership. They also had done some tuck in acquisitions in the space to get to the scale that they were at so in many ways.
And one of the reasons why we view them as the right.
Acquisition for US originally was that demonstrated track record.
From an M&A point of view long term the way, we often think.
Here is you know you often hear in SaaS.
Companies they talk about the rule of 40, where you take your revenue growth you take your margins and you try to get to that and historically on the cloud side, you know, we would achieve that or more than that by more focus on margin then on organic growth I view, IP vanishes being a little bit different and that it has.
As real organic growth and so there I'd be careful about managing the margin at historic cloud levels and you see it a little bit in our cloud margins for the quarter about 40 basis point drag from the VPN business. So it doesn't make a huge impact in the segment, but we don't want to choke it from a growth point of view.
And then I think your last question, which relates to Nate Simmons. So super excited to have Nate Nate spend with US now for 60 days, Nate and I work together in a prior life at timing. So we know each other well his last and was the COO of semantics multibillion dollar consumer business and so.
When you look at our portfolio and you look at our Viper business and you look at our IP vanish business and you look at our Sugarsync in cloud businesses and even when you look at the cloud fax business.
There are all security business is right that we've talked a lot about cloud facts for instance in house essentially secure document transfer business. So show much of the portfolio fits within that world, having an executive who brings industry perspective was really valuable and then I'd also add that you know.
He's an expert at customer acquisition and retention understands subscription models really from the beginning of his professional career, so having that skill set also at leadership level.
As it was really valuable for us.
Great and on the on the on the digital media side, maybe 10, it looks like a really good deal.
Just wondering kind of how how the M&A environment is now.
And did you need as you look across the key verticals, where you're up we are larger player.
I think if you can be a catch fire in the digital media industry, which we are in historically have been.
I think your advantage I think it say a buyers market they've been a lot of other deals.
In the industry that had been equity deals those are different I think you know because there. It's it's relative valuations its trading stopped for stock.
I think if you are interested in an acid or were interested in an asset and and we're willing to put our cash behind it. We generally are doing well and so I think that is in this environment and advantage for US and you know we're very excited for Baby Center, we're very excited for Spice works in its industry.
It is similarly, well known and respected and establish so look I think as we said in the past the market and I said in my prepared remarks, he can be frothy, but I think the proposition, we often present as a buyer in whatever space. We're looking at can be attractive and then the volume the deal.
Flow that we're seeing with all the general managers in place with the divisional presidents in place with corporate in place continues to be pretty pretty vibrant.
I mean, we've deployed left.
Over 400 420 million this year the nine months.
And I had one last question Scott.
Could you talk about just how to think about the.
Margins for the segment.
Not just before Q, but they don't framework at high level, it's going forward and also for Fourq you.
Are you guys thinking about the various opex line, particularly sales and marketing.
Okay. So in general, let's talk about the EBITDA margins by segment before corporate allocations, because I'm starting to see that and the reason we do the corporate allocations I think as you know is because of our bond structure at the cloud business and the fact that we have separate audited financials and as a result, we have to impute a fully loaded.
Cards to the cloud business and as a result, we do the same to the media business one of things I'm observing and you'll see it even the sequential numbers from Q2 to Q3 is an increase in corporate allocations, albeit the total corporate expense was roughly the same the reason for that is that you're seeing as we've talked about both in the prepared remarks.
In the first question now.
An increase in revenue for these deals without a commensurate current increased EBITDA, but it is triggering more corporate allocations to be sent down to both the cloud in the media business units. So I think that target margins for the segments before allocations continued to be around 50 per.
Our sense for the cloud business.
It was slightly higher than that in the quarter and the target margin in media is about 35%, it's a little bit under that target margin that's it.
That's a trailing 12 month or an annualized margin because to your point in the fourth fiscal quarter, we will generally see our media business perform in excess of 40% EBITDA margin not uncommon for to be 41 ish and the cloud business really is not so much impacted by.
The fourth fiscal quarter seasonality and to the extent it is it actually is negative so there tends to be some.
Dampening more on the topline if we look sequentially from Q3 to Q4 I would expect all those trends to be true in this fiscal year.
One of the things that has changed though.
In the last year.
Is that in the cloud business it was comment.
Around the middle of November to pull back on sales and marketing and so that was a compensating offset for the fact that there was less business days and it as a result, less revenue generating opportunities and that would not only sustain the margin in Q4, but sometimes even elevated a bit that's something we began to reverse.
About a year ago, obviously, that's something that May is studying right now in terms of the amount of marketing we should put in these businesses, but clearly as you've heard the that talk both as it relates specifically to the VPN assets, but I'd say more broadly the cloud where there are opportunities to spend money, we should do it if there is profitable.
Growth to be had we should do that even if it means some slight degradation in the margin for the port.
I would expect I wouldn't make one further comment about Q4 I do expect our corporate expenses on allocated to increase as they normally do from three to four because we're now in the heart of the period from an audit standpoint for the filing of what will ultimately the 10-K in February .
We have 2020 and so it is typical that we have a several hundred thousand dollar increase sequentially in our corporate expenses from Q3 to Q4 as the Sarbanes work is done and the audit work is done in various tax work is done.
Got it thanks, guys Congrats again.
Thank you.
Our next question is from Nick Jones with Citi. Please proceed.
Good morning, Thank for taking the questions first one on that I think he's done a a in the prepared remarks that.
11 to 13 units close at least one transaction.
Can you talk about the ones that did not close on transaction or there's something specific to those units that is more challenging and the pipeline.
No it's right. So the two units that didn't.
Transact.
We're our gaming unit, which is I Chan and humbled bundle, which is doing very well and growing very strong and so we.
You know, we're really focused on the organic opportunities that exist there and actually from a capital allocation point of view one of the thing that we're doing at humble bundle is really building out our humble publishing business. So this isn't the subscription service. This is where we serve as.
The publisher with an indie game developer and we right now have 47 games that we've either launched.
Our in development that will be humble games and so those games get released in the normal cycle and channels of game releases, we have participation as the publisher.
In the revenue generated from those games and then the ability to include those games in our subscription service, which obviously has great advantages since we have an economic interest in those very games. So we're putting capital to work there from a game development point of view the other business unit, where we.
Haven't done a transaction is actually clawbacks and so.
There I think I would also save a lot of the focus has been on the corporate fact side, where we continue to see solid growth and continuing to pursue that that isn't to say that we wouldn't be interested in what facts deals. We are there just aren't as many of them today as they've been historically and so our equation history.
Currently was a sort of maintain the business through acquisition of wet facts and bring those subscribers on what we're doing now is really growing the corporate business.
To sort of manage any other pressures were feeling on the web fact side. So those are the two or where we haven't done a deal in the last little bit.
No it kind of on M&A is there.
It's kind of the AD business is really seems to be really focusing on audio and video I mean, a a those verticals are areas that you guys would like to monetize that kind of on your radar for acquisitions.
Well a video is is a key part of how we monetized properties today inside of our advertising business.
He has got a substantial video business Nashville has got a substantial video business everyday health.
As a video business. So video has been part of our advertising mix for a while we don't do as much in audio we you know it's the space, we'll we'll look at but remember in our advertising business I say a couple of things number one is the display business continues to grow.
And it's been growing for four consecutive quarters. After it was a period of time, we were having some challenges. So we feel very good about that and then the customer generation performance marketing components of what we do we're not selling CPM advertising cost per thousand display advertising.
But we're selling cost per click cost per lead cost for acquisition that is sort of.
That is what the marketplace is really looking for so when you put format. Aside what they really want is can you generate customers for us and you get us.
Measurable ROI where were fitting into their CAC LTV equations, that's where we do our back and so any format that can produce those outcomes we're interested in.
But we're really focused on being able to drive those outcomes.
Got it and then just one last one given kind of the size of the deal of.
Okay to global done this year is there any kind of color you can give us.
Organic revenue growth.
Yes, So look I think our view on organic growth in our perspective is unchanged. We still look for you know.
Mid single digits on the digital media side kinda low flat to low single digits on the cloud side and then the balance really coming.
From from the acquisition activity, but as I've said in the past you know, it's one of those things where we look at it as.
Whether on putting marketing dollars to worker staff dollars to work at the income statement level.
To drive top line, which we will do or I am putting cash from our balance sheet to work to acquire businesses, where we can generate more cash.
We'll do that too and so we kind of look at it as.
How do we put our capital to work to generate the best returns and that changes over time. It also changes on the portfolio, yes, it's very much business unit by business unit absolutely.
Great. Thanks for taking my question.
Thank you.
Our next question is from Willpower with Robert W. Baird and company. Please proceed.
Well you line is live.
I'm sorry to hear me now, yes yep.
Okay, Great Yeah, I guess, a couple of questions maybe Scott just starting.
What guidance.
Framework, you had some nice upside and revenue in particular in the quarter here or how we think about full year guidance trunk show with activity I'll have a full quarter in Q4. The recent acquisition. So all right now one of a start without that have a second question sure. So I think it's good place to start because obviously, we only had a par.
I will impact to the four deals in Q3, and I think as we've highlighted the media deals Baby Center in Spice works were.
You know meaningfully more larger than the two deals on the cloud side and this particular quarter. So I think that if you look at our full year guidance range, which we reaffirmed.
We do expect that on the revenue side, we should be trending towards the very high into that range, which if you recall is 1.370 billion for the year.
However, given the fact that Spice works in Baby Center, a very much in transition in terms of gaining profitability both of the EBITDA on the bottom line from an EBITDA and EPS perspective, I expect us to be around the midpoint of those ranges. So that's 548 as exact midpoint of the revised increase.
Yes range of EBITDA.
And a 705 any yes.
Okay. That's helpful. I think I think makes good sense I guess the second question is just coming back to babysit or and Spice works any.
Any color with respect to how you're thinking about either revenue contribution or revenue growth trends for gear and how kind of the normal shrink to grow kind of.
Fits into that just trying to get a sense for contribution kind of growth rates going forward and I guess, just oh, yeah, but that could you maybe tied to babysit or what are the display trends there look like yeah, because it sounds like that's the bulk of the business is that business still growing two or how do you think about transitioning that how fast.
As marketing Yeah. It's a great question look the first order of battle here and it it is consistent with what we've done in the past whether it was national lives and even PC magazine. The beginning is to really get to profitability as Scott said and as I mentioned earlier. These are not profitable businesses, we believe they will be profitable business.
As we've seen as I've said, we've seen these scenarios before it will be a combination of the two things you mentioned in the case a baby centre for instance.
Building in the performance marketing revenue streams that lead Gen and affiliate commerce revenue streams that that are nascent or non existant. There that are a majority of what the what to expect business does will unlock new revenues and likely offset some of the challenges that do exist in the display business.
On the Baby Center side, they've had some they've had some challenges there, but again I think as we add in these new revenue streams as offset those challenges and I think we can also probably bring.
Some of our skill set on the display side, but then really on the cost side the business.
You know wasn't.
Run for earnings it just wasn't the purpose of that business inside of its you know inside of the prior company and obviously for us or having earnings assets and cash flowing assets is is critical and central to what we do so it is a bit of the shrink to grow it is a revenue diversification and I think it's also Chuck.
That being clear about what's successes and what the goals are for the business, which I will say the team that is the go forward team absolutely embraces and understands.
Okay. No <unk> helpful from that standpoint, I mean, any other color you're able to right at this point in terms of how to think about general growth trajectories sorted out is it does a fit within the broader digital media framework in terms of what they've been generating over the last 12 months.
In terms of growth rates.
Yeah look I think they'll be I think they will look like the other businesses that have gone through the process that I just described in July and and I actually think.
Particularly in the in the parenting and pregnancy space it could be even more attractive you know this is a space. If we have leadership positions in a lot of different categories. This could be our strongest leadership position from a digital media point of view. It it's sort of reminds me of the position we have in our broadband world.
GLA and some of its some of its assets. So it has those characteristics.
Okay. Thank you.
Our next question is from me C.G., Laura with D.A. Davidson. Please proceed.
Thanks for taking my question.
Babies.
Concurrently.
You plan on developing performance marketing down the line.
Do you see an opportunity to monetize it has a subscription offering.
Yeah, It's a great question and obviously building the subscription business inside a digital media is a focus what we may more likely see is that I think we can be an engine for other subscription services within the broader space in either become a market place.
Therefore get compensated for driving subscriptions to various services for instance, we do that's today in the cord blood industry with what to expect where we are a pretty significant provider customers for what is essentially a subscription service that last quite literally the life.
Some of the.
Of the.
Cord blood that is bank from the baby. So that is an example, where no we would likely not be a cord blood bank ourselves, we would much rather be in the business generating subscribers for that I think they may have the other instances, where if it's a subscription service that feels like that.
Turning to subscription service, we can either that we could operate either build or acquire that is closer to what we do then that might be something that we would we would spend up to leverage the media audience like we've done with he had an album.
But if the question is what I charge for what.
Currently free the App the pregnancy tracking the tools no we wouldn't do that.
Okay, Great that's helpful.
Could you talk about <unk> performed in the quarter in the quarter and I think you previously mentioned integrating.
I was wondering where we are on that.
Yeah sure check out doing great. It's you know its bids that strong double digit organic grower will continue to be that it is primarily right now its market our systems integrators, who.
Use the software and the sidekick hardware too.
Design deploy and managed Wi Fi networks, and commercial settings, and Wi Fi and commercial settings is is very important right any business any entity. If their internet is not working or is not working at the level they'd like it to work its a real problems from a productivity point of view so.
That market continues to to be great. We do see opportunities in other ways of looking at this market more from a monitoring point of view versus more the front end of of design in deployment and so we are starting to see some interesting traction there and then the.
Integration right now.
Or building of a product in speed test that essentially allows you to do at home.
What what after how allows you to do in commercial places is on the road map. It has taken a little bit of a backseat to things that we're doing in the VPN space between IP vanish and speed test that is presented itself as a.
More pressing and more interesting opportunity and so we'll be launching.
A new product.
A collaboration between speed test, an IP vanish in the fourth quarter.
Great. Thank you guys.
Our next question is from James Breen with William Blair. Please proceed.
Thanks for taking the question just one clarification did Scott I think you said that you spent 420 million through the first nine months on M&A is that correct that's correct.
I think you're at 270 through the first six months so.
If you look at what you spent the 150 this quarter.
Any sort of guidance in terms of the relative size those deals and maybe you know the the general multiples have they been inline with what you've done historically and they are not it that's exactly right now so yeah, the 150 million to spend although it was across obviously different.
Business units and the two segments.
We are consistent with as you know the multiples, we historically pay I'd say on a revenue basis, although as you know that's not how we buy these businesses, but you can think of it in that in that way obviously.
We don't have we're not giving specifics by deal or even by business unit. We don't we don't report that way, but I think if you take the aggregate and as I mentioned earlier that 150 million to spend is heavily weighted to the media segment versus the cloud segment in this particular quarter. The to 70, though that was spent in the.
First six months was all cloud.
Okay, All right and then just look at through your supplemental stats looking at cash flow.
And to see a pretty good bump up in the fourth quarter.
Yeah. It looks like you have to be up north of 110 range to be sort of in that 375 level that you were talking I've been talking about previously.
Is that given the M&A this year and despite some of the increased expense in the fourth quarter. It still seems you can be in that 370 375 rate for the full year.
Yes, I think Thats I think thats correct.
I think maybe a little high on what we needed book in Q4, but you are in the ballpark and I think the yes that is a would be consistent with our expectations in terms of the EBITDA generation in Q4 now you know the Q4 EBITDA and media part is collected in Q4.
A larger chunk is collected in Q1 of the following year. So a lot of cash flow that will collect in Q4 will be basically all of the EBITDA generation on the cloud side and a fraction from the media side.
I think that if you look what we did last year you look at the kind of growth rates were having that maintains that remains achievable.
Okay, and then just one on the buyback.
Yes, yes, some of the details there and then how you guys structurally thinking about that.
So in the quarter, we bought just under 200000 shares at about $80.74 a price as you know in Q4 last year was 600000 shares at right around 71. So we're in about 800000 shares since we've evolved the program at about $73 a share. So it's worked very well the fun.
Also being I think the evolution in our thinking on buybacks.
And this even predated the cessation of the dividend, although I think now in hindsight you can see the value in in eliminating the dividend given the capital. We've deployed this year. The 420 in M&A plus almost 20 million on buybacks. So we have I'll call. It an algorithm.
That we come up with a price, where we can say internally to our business units in division presidents that if we're going to take this capital and go into the market and by our stock. We believe it will have a competitive return versus if we gave it to your business units to go do a deal and so the good news is having bought eight.
1000 shares and 73 the stocks at 95.
Point has been validated.
Within that 800000 buyback. So that's how we do it every 90 day window. They don't mapped to calendar quarters, there offset a little bit, but every night and when do we cover the price and at that prices hit during the quarter as it was in Q3, we buy when the stock then probably above that price we don't buy.
And so I think given the history in what's been almost a year now under this program I think our judgment is it is working I think in hindsight, which would have bought some more shares.
At these prices, but you know, we do need to spread the capital around so.
We will continue under this program no doubt that will be I think as we look forward some tweaks to it.
We as next year in February it's in February of every year that we look at the total size of the buyback program. We've been operating under a program that was started several years ago with 5 million shares. We've just been degradation that as we bought shares back I think now we're close to a million shares left under that program. So one of.
The questions in February will be the size of the program on a going forward basis, but that's that's for a few months from now.
Okay, and then just strategically measure of act as you as you look across a 14 business units are there any that you feel maybe underscaled here.
As an opportunity get bigger through M&A, obviously, and then some drive just better margins profitability.
Yeah, you know look I mentioned earlier.
Earlier in the call there were five units that haven't yet met the 75 million annual revenue threshold.
That was the pregnancy and parenting unit and art.
To be unit Ziff Davis side with those strategic acquisitions, we move those.
Above that hurdle.
The three that are still not there our voice business are more tech business, and our and our endpoint security business, though I could say on the endpoint security business depends on how you define things because if I attached the multiple of our security brands together.
We would certainly be at that scale. So those are areas, we would like to see.
You know some traction we've done some interesting things, obviously martech, we bought the eye contact.
Brand, which we like a lot.
Invoice couple of years ago, we bought line two really good product.
We just need scale it as a business. So those are probably some areas, where we would like to see some activity.
And in terms of the pipeline, obviously, you guys stepped up the M&A this year and a big part of what you spend your today was that you can't transaction, but.
Do you feel like without sort of that level of transaction.
You can sort of could maintain this.
400 million dollar kind of.
Run rate over the next couple of years are enough deals out there.
It May look I think again I think it is first I'll I'll say I think there are a lot of.
Interesting acquisition opportunities for us right now and I think.
Again, depending on on where the markets are in and what the business climate is there may be even more so I'm I'm I'm optimistic from an acquisitions point of view in terms of what the next.
12 to 36 months will look like I'll start there within the portfolio. We have we have a number of high quality organically growing businesses, where we see runway and that's our broadband businesses will do Glenn that down Thats, our gaming businesses with IDN.
Humble, it's our everyday health group, which continues to grow organically.
High single digits, possibly lows in double digits.
On the.
On the corporate fact side on VPN, So there's a number of things that.
We feel very good about within the portfolio of businesses and then look I think you know as you know historically, we've probably generated about $3 billion of cash since.
Since we became cash flow positive since the company became cash flow through 2002, and we probably spent about $3 billion on acquisitions and so it's kind of what we internally referred to as the cast flywheel, we generate cash from these operations, we deploy them to generate businesses that that we get optimized to generate cash.
That will allows us to go back and continue to do that so I think you should expect and from my perspective, that's what we do and and I think you know the markets are aligned for that I would just had one comment I think in the last couple of years.
He.
I'll call it the system.
Of acquisition and Jay to has been refined and evolve.
And.
Part of it is the structural elements of the M&A team the size of that I think bringing it to corporate it not having a fraction between clouded media.
It is an important element in the amount of M&A that can get analyzed the other thing is just the sheer diversity of the number of business units in the expansion of the number of business units over the last two to three years, because we've got more you know more eyes in the years out there seeking deals so.
Make and enhance their business units and their divisions and so the combination of those two which I think we've seen cumulate over the last two years is why we're able to spend this level without doing a large transformational deal because I get that question a lot, although chip to do a large deal to perpetuate this.
Turning to spend in this kind of growth I say no no. We've got really 17 different places we can put money if you count the parent is 80.
All looking for deals and those deals with some exceptions, maybe at the parent don't have to be that large.
But they can be very impactful and very meaningful for given business unit four given division.
Great. Thank you very much.
Our next question is from Daniel Ives with Wedbush Securities. Please proceed.
Yep things Scott to your viewpoint that you've talked about.
Just talking about appetite maybe.
Is this something where you could you can lever up more if the right deal where the right number of deals came through just given the success you guys. When having maybe just talk about that and even more leveraged structure in terms on the parent or on media. Yeah. So let's start with where we're at right now so I would say we are.
Now to see leverage as I mentioned earlier, we have somewhat of a unique structure and that all of our debt is not at the parent the bulk of it is at the cloud the media is not a participant or nobile Gore in any way the converts it at the parent. So we look at the structure you know it's interesting both the cloud level and.
Consolidated.
Worried about little over two times.
Gross debt to EBITDA leverage so we take at the cloud level. It will be 650 million of the 6% knows plus 128 million drawn under the line divided by its trailing 12 month EBITDA than we do consolidated we add another flow two and a half at the parent for the converts we bring in the media EBITDA Coincidentally, it's about.
2.12 0.2 times.
We've got about a 100 million a cash in the bank.
We've got about.
72 million of borrowings under the line of credit because while we did.
Bring it up to acquire Spice works and Baby Center, we also intra quarter paid it back down to the 128 level. So we've got between the cash flow we generate every month.
The availability under the line and the cash on the balance sheet for all call our garden variety M&A, what we just did last quarter spend 150 million that's already in house.
Now as we look forward I think theres two opportunities one is and it's not necessarily a indirect relation to your question, but I think we have an opportunity in a low interest rate environment overtime to clean up or capital structure. I think we can make it more efficient I think we'd also lower.
Cost of capital I think in conjunction with that we can also expand though the availability of our access to capital on one of the things that I'm looking for overtime not necessarily imminently is for us to guess will position, where we've got $2 million to $300 million Undrawn lines of credit available specifically for our capital allocation.
Activities.
So that if we do have a larger transaction any given quarter, we borrowed under the line then as cash flow comes and we pay that back down, but certainly from a direct to answer your question the ability for us to take leverage up from two to three times.
Very easy to do in a very accommodative marketplace.
We've told the rating agencies, we pulled the public that we're very comfortable up to three times gross debt to EBITDA. We've also had the caveat that said look under the right circumstances, we might temporarily take at higher than that so I feel very good about our positioning in terms of access the capital markets our liquidity for.
For both what are likely needs bullet might also be our theoretical needs if certain other situations present themselves.
Great that's really insightful dead that's it thanks.
Our next question is from Pat Walravens JMP group. Please proceed.
Oh, great. Thank you and congratulations you guys. So first off you know post the the we work debacle and all the news about that.
Are you seeing the owners of some of these assets thinking that maybe they're more interested in selling.
You know look I I wouldn't comment on a specific situation I do think.
I call it sort of there's an anti unicorn sentiment that seems to be pervading the marketplace I think.
Is benefiting us from a few points of view I think you've got.
Investors, who are or taking a look at our name and our story that may not have in the past and we're having those conversations and that's that's nice to see I think it also in the M&A market I think some of the transactions were doing maybe spent center Spice works I contact these are known brands out of no.
Loan owners and so when you do that that also puts you on some other radar screens look I think we're well known isn't as a buyer.
But I think some of these deals to put us on some other radar screens that we may not have been on so I think that's helped us from an awareness point of view and then generally speaking I think look I think you've got a lot of owners, whether theyre venture owners PE owners a public companies.
That are looking at their futures and wondering.
Would it be better right now to seek a strategic alternative and that's.
That's our wheel asked when you think of the three deals that I've mentioned to work carve outs.
Lark from large public company and not everyone is able to consummate that kind of deal and do it in the way in which we can do it which understands from their point of view what makes the deal a smooth deal.
Alright, great. Thank and then my follow up is what do you guys thing in the and the macro economic environment are you seeing any signs of.
Of change and then can you just remind us and stuff we talked about this when we had you on the road, but can you just remind us or that the last time around what we had an economic downturn. What did you see how long did last and then what happen afterwards tourists I think the answer. Your first question is no I think we continue to see certainly in our core markets, which about 80% of our revenues derived in the U.S.
Yes on the media site is probably closer to 95% on the cloud side, it's around 75%. So really for US you as he can it would be the core marketplace, followed then by Western Europe , where there is and has been some volatility, particularly in the UK more on a currency side around Brexit. So we've seen some tweaking drawing on the GBP.
Yes, dollar, which has had some headwinds in the most recent quarter, particularly on our cloud business, because that's where most of the GBP revenue is coming from within Jay too, but I think in terms of general macro conditions, the U.S. system economic.
Formation out this morning on job I think we can we see it to continue to be.
In the good stable category.
And we look at sort of some underlying CPI is our metrics from some of our business units.
And what's you're referring to we go back to the great recession, which is now 10 plus years ago and obviously.
Hopefully they.
Whatever the future recession is not have such a draconian magnitude, but there we were able to see things in some of the underlying metrics. Some number of months ahead before leaving went bankrupt in September about eight which really triggered.
What became very obvious in terms of declining GDP and layoffs spike in unemployment et cetera.
So.
I'm not suggesting that one should use that as an analogy for what might be a future recession, but if you wanted to stress test and say that you know this is.
Sort of at the three standard deviations out there from the norm.
What we saw at that time was and of course, we didnt on the media business. So this is really a cloud perspective were subscription business perspective was an increase in the cancel rate and what tends to happen. There is your smaller customers.
Depending on the severity of a recession and its duration.
Just close shop.
So we saw an increase in the cancel rate over about a two quarter period. It escalated over that six month period of about 75 basis points per month over what was the then norm, but then by March of Onein.
When really the worst had already occurred then the cancer, we started to come down in fact hit new lows lows that had been pretty much sustained within a tight band to the present time and really what happened in the cloud side was those smaller weaker smbs could notwithstanding the recession were gone.
The customer base, the remained with inherently stronger and the new customers added through that period also tended to be stronger hence the lower cancer weighed on the going forward basis. So that gives you some sense of it in terms of.
Now how the business responded under very difficult circumstances of about 10 years ago.
Oh, that's super helpful. Thank you.
Our next question is from Dyna 10 luncheon C.J.S. Please proceed.
Hey, good morning, guys nice quarter first question or does that can you clarify just a bit on the.
Opportunity you said are you seeing I might just for the near time is there more to do this year in Q4 and does the pipeline support kind of the T $40 million run rate you you've done already in 2019.
Yes, I want to speculate on on this quarter right now there's a lot of things are taking place I kind of looked a little bit over longer periods of time. So I think if you look at the next 12 months I think if you look even further out there. This is kind of the run rate I think it's a round equal to.
Our free cash flow. This is this year was a little bit higher I think there can be years, where it's a little bit lower and if you look by year, that's kind of proven to be true in fact, I don't think this even is the year, where we've deployed the most amount of capital.
Thats, probably several years ago that was 60 that was 61 everyday health right. So if there are deals of that magnitude and obviously that can change the capital allocation in a particular year. So again I was just look at it more on on sort of these no longer on these longer views than just the next call.
Over the next few quarters, Okay fair enough and what are your target margin expectations for Spice works on babysat I get they're not contributing or maybe not even profitable and Q4, but did they get to that 35% segment margin yeah.
Yes, no. That's the goal that's the goal now now as you know that margin may not be attached to the same topline because we often fire revenue that can't make that can't make that so we get rid of or empty calorie revenue might be a different way to say it. So we like it highly caloric I guess revenue but.
We do we do anticipate that for both those businesses.
Okay got it within the next year.
Yes, no I guess it may not be for the next 12 months, but that will be the run rate. It takes us a while to optimize it doesn't sound of Lytswitch sure. Okay. Perfect and then finally, just a little bit more until we use on the other side of the business can you update us on the integration of both ACA, how and mosaic you know some really good IP there is there an opportunity.
Ahead of.
The fiveg deployments here in the U.S. and around the world.
Yeah, No look I think they are.
There are big opportunities.
For all the brands and I'd also add down detector, which is another brand within within our broadband family.
That is just launched or re launched a subscription service to help.
Entity see when their services have service interruptions. So I think across the board you know there are there our collaboration sales teams are working together just to be clear. They are individual sales teams, but sales teams are working together.
We go to certain events like mobile World Congress together to look for ways in which we can in which we can support one another's proposition. The buyers are a little bit different just to be clear you know in that state test intelligence side, our DAF data as a service products generally selling to now.
Network.
Buyers at eyes, peas, and carriers to some degree device makers government cell tower companies, whereas in the case ECA. How today is the business is currently constructed it's mostly systems integrators that are hired by commercial tenants or commercial.
Building owners to.
Develop the Wi Fi plan within the structure.
Right, so little bit different but we're also beginning to see is a new body of data that is different than knute consumer initiated testing a short you have it speech at that I think could become an interesting data set within our data as a service business that hasn't happened, yet but that could be.
An interesting new opportunity for us ultimately.
You know in all of these whether its carriers looking fiveg deployment or a commercial tenants looking for the best Wi Fi and to be clear Fiveg is not going to solve Wi Fi within workplace that is not a replacement for if anything is possibly a.
Increase in expectation of the experience you're going to have within your office.
Okay, great. Thanks, guys.
This does conclude the question Seth.
The conference back over to management for closing remarks.
Thank you very much we appreciate everyone for joining us on our Q3 call or we did put out a press release a few days ago announcing are up coming conference activity in November a little later this month, we putting out the conference activity for the month of December I know there are several already slated.
Including the NASDAQ Conference in London Barclays Conference in San Francisco, So stay tuned for that and then our next regularly scheduled coal will be sometime in February two announced Q4 results and provide 2020 guidance. Thank you.
This does conclude today's conference you may disconnect. Your lines at this time and have a window for a day.