Q4 2019 Earnings Call

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At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.

Anybody should require operator assistance during the conference. Please press star Zero and your telephone keypad on this call will be so that shot C.O.G. to global.

And Scott correct, he president Jay.

I will turn the call over to Scott Turicchi, President and CFO, Oh Gee to global.

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Thank you good morning, ladies and gentlemen, and welcome to the Jay to Global Investor Conference call for the fourth fiscal quarter of 2019.

As the operator mentioned I, Scott Turicchi, President and CFO, Jay to global and joining me today is our CEO back shall.

We finished the year strong with a record fourth quarter performance, notably we had record revenue EBITDA and non-GAAP earnings and it was our 24th consecutive year of revenue growth.

We will use the presentation has a road map for today's call a copy of this presentation is available at our website.

When you watch the webcast there was a button on the viewer on the right hand side, which will allow you to expand the slides.

If you have not received a copy of our press release, you may access to our corporate web site at Jay to global Dot Com Slashed press.

In addition, you'll be able to access the webcast from the site.

After we complete the presentation will conduct a Q when a session.

Capital one struck do at that time regarding the procedures for asking a question.

However, you may email is questions anytime at Investor Ajay to global Dot 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 these risks and uncertainties include but not limited to the risk factors do we have 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. The we've included as part of the slide show for this webcast.

We refer you to discussions and those documents regarding safe Harbor language as well as forward looking statements.

Now, let me turn the call over to put back for his opening remarks. Thank you Scott and good morning, everyone. Let me start by saying how excited I am with our fantastic finished 2019.

With revenues up over 17% and adjusted EBITDA up over 14% in Q4, we just delivered our best quarter of the year a year in which we exceeded our original guidance by significant margin.

We generated $1.37 billion of annual revenues in 2019, which surpassed the high end of our original guidance by over $40 million and represented year over year growth of almost 14%.

The stock also performed well in 2019 up nearly 37% and in recent weeks, we have traded as high as $104.

Earlier in 2019, we made the decision to suspend our dividend in order to redirect that capital to acquisitions and investment opportunities, where we believe we can generate better returns for shareholders.

We consummated for important transactions and 2019 eye contact.

I P vanish Baby centre in Spice works for a total of about $400 million.

All four of those acquisitions represent leading brands in their respective categories and strengthen our existing assets in those categories.

We also raised about $550 million to our convertible note offering in November, giving us ample dry powder to continue to pursue acquisition opportunities.

We also made some key additions to our executive team.

Nate Simmons joined US in September to run our cloud services Division.

He came to us from Symantec, where he served as SVP and COO of its 2.4 billion dollar consumer division.

Given our growing emphasis on security and privacy solutions, including Viper, IP vanish and Sugarsync.

His addition should only accelerate our growth in those areas.

We also hired a new global head of human resources, Michelle Devor can who previously held that role at the not worldwide.

As well as our first head of corporate Communications Rebecca right.

Now, let me provide some texture door 2020 guidance.

We're guiding overall revenue growth of between 7% to 10%, which is consistent with how we initially guided revenue in 2019.

As we said in the past we view the low to mid point of our range as excluding any future acquisitions, while the higher end of the range contemplates acquisitions that would take place between now and the ended the year.

Well the M&A pipeline is robust and we spent over $400 million in calendar 2019, we have not closed on a material acquisition in the last four months.

This of course is part of the normal ebb and flow of our acquisition program and we're pleased with the potential of our current pipeline of deals.

At the segment level, we're looking at digital media to grow around 10% at the midpoint.

Cloud services at around 5%.

Midpoint.

Within digital media, we see a handful of growth drivers.

Aiming broadband b to B.

Parenting in pregnancy, and everyday health professional.

In the case of gaming, we experienced solid organic growth from our two principal brands in 2019, IDN and humble bundle.

We are ramping up our humble publishing unit and expect to launch about 20 games in 2020.

We are quickly becoming one of the largest publishers have indeed titles in the industry.

With an expectation of about 40 games in our library by the end of 2020.

Our subscription business humble choice rolled out a new and improved subscription value proposition.

By offering subscribers, a greater selection of games each month, along with some new price tiers.

And I G.N., we had a strong 2019 growing organically, 10% and we're optimistic about 2020 with the new generation of console is launching in Q4, we expect to experience a bit of allow an AD spending in the intervening quarters as games marketers.

Toward their budgets for the next generation of their titles, but once those are released it generally unlocks a lot of marketing dollars.

At broadband revenue growth continues to be strong.

We anticipate the business growing over 20% organically.

Well call. It continues to see its data subscription service speed test intelligence.

Experience high renewal rates and increased ARPA as we enhanced the available datasets.

We've also beta launch speed test VPN in collaboration with our IP vanish team and are seeing promising early results.

All right how business had a terrific first full year of ownership in 2019, and we believe will grow over 30% in 2020 with strong bookings over the past several months.

At the house solutions are viewed as the leading tools for systems integrators as they develop and deploy why find that works for their commercial clients.

In B to B and parenting and pregnancy, we will see the full year benefit of owning Spice works and Baby Center.

The integration of both of these brands is going well.

We are realizing synergies consolidating teams applying new revenue models and expanding share of wallet from customers.

Our everyday health professional business.

Which caters to physicians and providers has a shot to have another strong year after growing over 15% in 2019.

All three of our brands in this unit.

Page Prime and healthy careers are performing very well.

Within cloud services, our growth should be driven primarily by our privacy and corporate facts businesses.

We're thrilled to see our thesis on the growing importance of privacy to consumers and businesses proving out.

I P vanishes customer base grew roughly 17% since we acquired the business in early 2019, and our team has embraced opportunities to bundle VPN with other Jay to offerings.

In the fourth quarter of 29 team, we added Sugarsync secure file storage.

IP vanish subscriptions.

Rolled out Viper ultimate security for consumers, combining malware protection with the Viper branded VPN.

And launch that look lets be test VPN I previously mentioned.

We expect our privacy business to grow strong double digits in 2020 from a combination of organic growth plus an additional quarter of ownership.

We also anticipate continued growth in corporate facts, which is 830 million dollar revenue business.

As you know we have increasingly focused our facts offerings on health care I T buyers, who rely on our technology to securely transmit private patient information.

To that end in Q4, our Efax corporate and as fact services earned Hi Trust certification.

Which in essence encompasses HIPPA, an ISO information security standards and is a goal standard for compliance within the healthcare information industry.

We saw solid growth in corporate fax revenue and new bookings from small and medium sized businesses in 2019.

In Q4 over 60% of new bookings came from healthcare customers in our corporate fax business.

Overall, we believe our corporate tax business will grow close to 10% in 2020.

We're also expecting deceleration in the revenue decline within our backup business, which shrink over 8% in 2019.

We believe backup revenue will decline less than 4% in 2020.

As we shift the business from an owned IP model to a premium hosted service provider model.

Powered by our acquisition of off site data sync and 29 team.

This transformation should reduce our declined in 2020.

And put us on track to grow revenues in 2021.

One impact of this new model will be lower margins in this business unit, but still category leading to the backup market.

On the EBITDA aside our guidance is between 5% to 8% growth.

Which is about 200 basis points less than our revenue growth.

200 basis points is about $10 million an incremental expenses.

We have a few things occurring on the expense side.

One near term margin pressure from the acquisition of Spice works and Baby Centre, which were both unprofitable at the time of acquisition.

Two we are making organic investments in some of our businesses, notably humble publishing.

Three the business model shift at backup, which I just described and for continued investments in our financial and information security systems as we look to grow into a 10 billion dollar enterprise value company.

You will see this mostly reflected in the growth in our corporate expenses.

Before I turn the call back to Scott I, just want to inform everyone. Now we're hosting an analyst day, our first in company history on March 4th at the NASDAQ In New York City.

It'll be an opportunity for us to dive deeper into our portfolio and hear directly from members of our leadership team, who you don't usually hear from.

Each of our three divisional presidents, Steve Horwitz, Nate Simmons and Dan Stone will present as well our head of corporate development Sean Alford.

I'm sure will prove to be a worthwhile use of your time and give you a deeper understanding of the company and its businesses.

Thanks for the back.

As I noted earlier Q4, 2019 said a variety of financial records, including revenue.

Adjusted EBITDA and non-GAAP earnings.

These results were driven by several areas of strength in our portfolio of companies, notably strength in our performance based marketing media subscriptions and growth in our VPN business.

In addition.

We continue to work through the integrations are both Baby Center, and Spice works, which contributed to our revenue in the fourth quarter and modestly to our EBITDA.

We ended the quarter with approximately 675 million of cash in investments after spending approximately 5 million the quarter on our two small tuck in acquisitions.

In Q4, we also raised 550 million through the issuance of convertible securities priced at one in three quarters percent interest and the conversion premium of 32.5%.

Now, let's review the summary quarterly financial results, which are outlined on slide four.

For Q4 2019, Jay to saw a 17.2% increase in revenues from Q4 2018 to 405.6 million.

As a reminder, the sequential increase in our revenues from the third to fourth fiscal quarter is due to the holiday seasonality for some of our digital media properties.

These outperformed our expectations, particularly ZIP media group IDN and horrible bundle.

Adjusted gross profit margin, which is a function of the relative mix of our 13 business units remain healthy at 84.3% an improved 30 basis points from Q4 2018.

We saw EBITDA grew by 14.3% to 176.3 million and finally, adjusted EPS grew 12.8% to $2 and 38 per share versus $2. An 11 cents per share for Q4, 2018, despite interest being $3 million higher and non-GAAP depreciation being 2 billion.

Higher and a slight increase in our tax rate.

Moving to slide five.

For the full fiscal year, we saw a 13.6% growth in revenue from 2018 to 1.372 billion.

And as Vince mentioned earlier this was a $40 million increase versus the original midpoint of our 2019 guidance.

Our EBITDA increased by 12.4% or $60.7 million to a record 550.2 million and our adjusted EPS was $7 an eight cents per share for the full year compared to $6. A 35 cents in 2018 for an 11.5% increase.

Turning to slide six you can see that due to about 25 million in timing differences due to working capital in our digital media businesses similar to 2017, we had a 14.3% decrease in our Q4 free cash flow to 82.1 million.

The collections in Q1, 2020 will bias, our quarterly free cash flow and our free cash flow conversion in Q1.

For the full fiscal year, we generated 350.4 million in free cash flow a modest increase from 2018 due to the reasons that impacted Q4 2019.

For the full fiscal year, we experienced the free cash flow conversion of approximately 64% of our EBITDA. However, when adjusting for the timing of the 25 million of digital media working capital, we see a conversion rate in the high Sixtys, which is in line with the levels that we indicated throughout the year and that we expect.

Now, let's turn to our two businesses clouded digital media for both for Q4 as outlined on slide seven.

The club business grew revenue approximately 14.3% 269.3 million despite the seasonal weakness in Q4 due to fewer business days. The growth was driven primarily from the VPN business unit, which we acquired in April 2019.

Excluding our VPN business cloud revenue still increased over last years levels.

Reported EBITDA increased 6.5% 80.7 million with a margin of 47.7% after the allocation of certain corporate expenses.

The moderation of our EBITDA margin is due also in part to our VPN business, which is growing having a lower than 50% EBITDA margin.

Our media business grew revenue, 19.3% to 236.3 million and produced 98.2 million of EBITDA or 23.1% growth once again after certain corporate allocations.

Turning to slide eight let's quickly review the annual results by business. The cloud business finished the year at 662 million of revenues for a 10.7% increase over 2018 and there was the first double digit year revenue growth since 2016.

Again, this increase was primarily but not solely driven by the unbudgeted benefit of owning the VPN business for three fiscal quarters.

EBITDA was just an excess of 325 million after 9.7 million of corporate overhead allocations.

Our digital media business showed a 16.6% increase in revenues to just over 710 million and EBITDA grew to 235 million after allocating 10.6 million of corporate expenses.

When excluding baby centre in Spice works, our two most recent digital media acquisitions, we still had approximate revenue growth of 10%.

Perfect provided some highlights of our 2020 guidance at the beginning of our call on slide 10, we've outlined some additional elements to help you understand our guidance range as well as the midpoint of our guidance for.

For our cloud business, we expect revenue growth of approximately 5% at the midpoint strong EBITDA margins in line with 2019 before corporate allocations.

For our digital media business, we expect revenue growth in excess of 10% in an EBITDA margin before corporate allocations of approximately 34%.

Also for the purposes, the modeling the quarters remember that our digital media business experienced a significantly more seasonality than our cloud business. We expect that only 20% of the annual expected media revenues will be recognized in Q1 and approximately 30% would be recognized in Q4.

Also remember that we have a significant fixed costs within our digital media business. So we experience meaningfully higher margins in Q4 versus Q1.

By way of example is typical that our Q1 EBITDA margin for digital media will be in the mid Twentys and in Q4 in excess of 40%.

I would note that we expect to experience higher non-GAAP depreciation and by approximately 6 million. This year due to the full year expensing of acquisitions done in 2019 as well as incremental Capex spent in 2019 that will begin to depreciate.

We believe the interest expense net of interest income will be similar to 2019.

Further we believe that our tax rate will increase slightly from 2019 due to changes in our global tax structure and will be within the range of 21% to 23% this year.

And EPS will be calculated on an imputed share count a 48.7 million shares.

Finally on slide 11, we outline our guidance for revenues adjusted EBITDA and non-GAAP EPS.

We expect our revenues this year to be between 1.465 billion and 1.505 billion, which translates into a 7% to 10% growth.

EBITDA, we expect to be between 575 million in 595 million.

With a growth between five and 8%.

Finally, our non-GAAP EPS, yes, we expect to be between $7.36, a share and $7.66 a share which at the midpoint indicates an increase of about 6%.

Following our guidance lighter 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 clusters.

Thanks, Gary if he would like to ask your question. Please press star one on your telephone keypad confirmation tell indicate you line is in the question Q you May press star too if you.

Your question from the Q and for participants using speaker equipment, maybe necessary to pick up your headset before pressing your start he is.

Our first question is from Daniel Ives with Wedbush Securities. Please proceed.

Yes, Thanks, obviously great year.

Seen team.

So when you think M&A, just obviously with the convert and just given conditioner strengths are you thinking about it like we're looking for larger deals no ones that maybe you know rivals some of the biggest you've done or it's more in.

The number where we're going to do it across the across the group obviously depends on what's out there, but I was wondering here that thanks.

All right. Thanks, Dan good morning.

So I think it's across the board you know all 13 of our business units are actively engaged in deals that would sit within those business unit. Three parent did three divisions are also looking at deals if Davis everyday health group and cloud services and then the parent is also looking at deals. So this is probably.

I characterize as robust and M&A pipeline as I've seen in my time at the company. There's just a lot out there for us to assess and process. It has been four or five months since we've done something needy and so we anticipate that there will be some media opportunities for us.

In the not too distant future, but we're also going to continue to do our tuck ins and continue to do.

The smaller deals that are turnkey that are either subscriber acquisition deals or traffic acquisition deals, which are platform can integrate pretty pretty easily.

Yeah.

Got it maybe just a follow up like on digital media specifically in terms. The M&A pipeline why do you think that is now obviously look at it your background for decades, but just why do you think.

M&A perspective, its is robust and where do you think Luis you're hearing from some of the potential.

Candidates.

Yeah, you know Dan I think it has a lot to do with our business model and approach to monetization. So in areas, where we see the opportunity to deploy affiliate Kommersant performance marketing lead Gen type revenues inside of the content business that is one of our specialties and so we'll find opportunities.

Where they don't have the know how this technology and the team to unlock those and we do and so we're in a position to create value around the performance marketing business model in other instances, it's our ability to marry a consumer audience for content with a subscription service, which is what we've done obviously in the.

Gaming space with IDN and humbled bundle and then finally, what we have proven.

With U club business is our ability to monetize data and to create data analytic products that are meaningful and so I think we are a far more first of all.

Digital media company.

We have the ability to operate multiple spaces technology space healthcare space the gaming space.

In the shopping space, So I think.

No I think it that combination of having a fairly broad portfolio, but also very specific ways in which we can unlock value and then I think the other thing I will say is that many of the digital media companies come out.

Neither of venture backed situation Unicorn type situation. There were they were trying to be something.

They really werent denim ecomm and were able to sort of rationalize it and added to our portfolio and have it be a nice contributor within the mix like a slice works like a spice worse.

Yeah, great insight thanks.

Our next question, it's from Sean Patel with Susquehanna Financial Group. Please proceed.

Hey, guys good morning, great great quarter in year.

Uh-huh out a few question.

The Vic.

Last couple of years. It seems like every time you entered a year you had one or two.

Kind of key things that you focused on I know initially it was the GM structure next getting better at executing on M&A across the business. What do you look at 2020, what are the one or two kind of big things are key things that you're focused on.

Yeah, I'll do it I'll go by a go by operating divisions on the cloud services side I think we are knitting together between IP vanish and sugar sake.

And Viper and some of the other associated brands really interesting security and privacy bundle that I think we'll be defining for how we approach 2020 and beyond will inform our internal activities, our organic growth initiatives as well as our M&A, So I think security and privacy and by the way I would throw the corporate.

Fax business into that we have a 130 million dollar business on the corporate tax side that is all about the secure transmission of documents or whether we're protecting.

Patient information or protecting devices are we're protecting privacy. This notion of protection I think is kind of a very important organizing principal fund eight centers in the cloud services team I think on that if David side is the continued execution of performance marketing and the.

Subscription generation, both in the data subscription business its feet dust intelligence as well as the.

Humble bundled business. The one thing I'll underscore I mentioned it in the prepared remarks, and I don't want. It lost is we are very bullish on the humble publishing business. This is where we are the publisher of games and we have the ability to I think duty inside of what we see through our subscription service identify winning gains the of.

Relative to market those games through our various channels, including the humble still war and then ultimately being able to include those games in our own subscription service humble choice. There is a really interesting flywheel effect that those into play. So we're excited about that and then I think on the on the health care side.

The professional part of that business has done extremely well and it had a very strong 2019 were optimistic about 2020. This is our met page business.

Well, we're providing news and information to physicians Prime business, which is continuing medical education for physicians and our healthy careers business, which is a recruitment business for hospitals, we like all of those businesses. They work well together and you know I've said this I think in the past that when you look at the million physicians.

In the United States. They are quite literally the most valuable media audience in the world given that they are writing billions of dollars of prescriptions for pharmaceutical drugs every year. So a hard to reach invaluable audience I'll also say.

That we are excited about the idea or on our parenting and pregnancy side with with what to expect and Baby Center, we own number one and two in the space.

It's a great space to be in and so I think we're just beginning to scratch the surface of what that power is going to look like so each one there are you know two to three organizing principle that are driving the various operating divisions.

Great Thanks and.

No. There's no I'll talk in industry about you know changes that that chrome is making.

It seems like you're going to make some now and then in a couple of years iOS is constantly updating too.

Limit tracking these are tracking and targeting.

Just curious I mean as you look out you know in the near term and kind of intermediate term.

You see much impact from these on our digital media or do you think it's mostly noises what are your thoughts on on the industry changes yeah. No I think it's a real subject and I think that the business model that rely on.

Data collection for AD targeting are going to be challenged now the good news is that is not our business model our business model is placing advertising and links and.

Legion activity contextually. So I think if you are playing a contextual game, where you're producing in market content to then put in market advertising and marketing in market marketing services, I think you're going to do well. So I think there is a shift to the contextual targeting versus behavioral and interest.

Starting the second thing I will say and I've said this in the past and I think this is going to be has been approved to be pressured.

I think email matters and I think having registered users, which we had across all of our brands large registered users.

User database is where we had email address email is in many ways identity and so the and it's the one piece of identity that generally never changes right. Your personal an E mail address or addresses or the addresses that you've had probably for the last.

The last decade, and so we are.

Very focused on on building or E mail databases, we have an entire part of our portfolio. Our market that is dedicated to building email database is for for its clients. So I think those that have.

You know sort of direct relationships with their audiences will also I think the advantaged in this newsroom cookie free anti tracking world and I'll also say that it just is more.

Tension to the need for privacy solutions like IP advantage.

Great and I've a couple of quick was there Scott.

Got on for guidance.

You guys mentioned at the high end, there's some M&A soon can you just talk about what level of M&A are you assuming it.

Similarly, we saw in 2019 and then.

I know you guys don't guide quarterly, but any color on just how to think about aggregate revenue and EBITDA seasonality just kind of what you went throughout the year burp. So I'll take your first question and the first question on the guidance is one of sort of a philosophical element so to be clear at the mill.

Good point of our guidance.

That only contemplates the assets we own today, so contemplates no M&A in 2020.

So what we're saying is to be at the higher end of the range assuming all other.

Organic and operational activities are as plan that will be driven by M&A now as you can tell you know to go from the midpoint of the high end of the range is not that many dollars in revenue or or EBITDA is only 10 million in EBITDA to go from 585 to 595, So we don't need the volume of.

M&A that we did in 2019 to drive that dealt.

And as you know last year that volume of M&A not only caused us to go above the high end of the range, but actually to reset our guidance to get higher levels. So two different elements are going on it's not as though there is a secondary budget with a certain amount of M&A baked in that says Oh, Here's 10 million of EBITDA, it's more the philosophical bands with the still into.

Mentioned based on all of that said earlier that we will expand all are substantially all of our free cash flow generation. This year in M&A or at least the capital allocation activities, probably heavily weighted M&A, but there could be stock buybacks as well.

In terms of your second question, you're correct, we don't guide quarterly, but as to your point and we have the slide in the deck about particularly digital media the seasonality. So we come off of a very good quarter in Q4.

Generally it represents 30 plus percent of the digital media annual revenue exclusive of any any M&A and as a result, you see some dramatic shift into profit margins on an EBITDA basis between Q4 in Q1. So last quarter Q4 will do in excess of 40% I think was 43% EBITDA margins for digital media.

That will reverse down to somewhere between the.

[noise] call it around mid Twentys, So 20, 425% for Q1.

The reason for that is that there is the seasonal bias and as a heavy fixed cost nature. In addition, you may recall that in 2019, we had some shifting of expenses in our humble bundle business out of Q1 into Q2, which made Q1 look better.

By about three and a half million dollars. So I would expect for Q1 of this year there to be a modest uptick in EBITDA versus Q1 of last year because of some of those cost elements. In addition, as you'll notice.

In the in the slide and as well that talked about in his prepared remarks, we continue to make investments both in our as we evolve some of our systems within Jay too on the finance side and in the Infotech area and some of those costs will flow through corporate throughout the year, but they will you know some of them, we'll be in Q1 or two.

20 versus Q1 of 90, so I would expect a more muted growth in EBITDA and net earnings in Q1 year over year for those reasons.

Got it thanks, guys Congrats again.

Thank you.

Our next question is from James Fish with paper sat and their please proceed.

Hey, guys congrats on the yearend.

Q4, and also the back on the JQ story.

You're talking more about a bundle approach on the beach side.

Historically before.

I understand the product side of it all but what from a go to market perspective are you incurred.

For the bundling to occur given these units operate in silos historically.

Yeah. So today, Jim it's it's a great question. So in the let's just start with the direct business, which is the online.

Channel as the source of acquisition and we're testing a variety of things in some instances, it's one price and you get a suite of services in other instances. It is it is an up sell that comp you you you purchased the product and then we're offering you another product.

At a discount or in eight some kind of trial period and what we're looking for is where can we drive unit revenue and where can we drive retention and so we're testing various ways within the online channel in the online channel is a very very large channel.

It is the main channel for Sugarsync for IP vanish, and the Viper consumer business.

As we move more up market and we start to leverage our inside sales, which is more the Sn b market, we're starting to move into actually some different solutions that so a lot of what you sort of your typical endpoint vpns privacy.

Oh and file storage, but then we're also moving into a remote access VPN sort of of the traditional sense of VPN. When often people think about VPN VP heading into their corporate network. We have a brand called encrypt Dot me, that's precisely that add is far more cost effective and easier to deploy.

Then sort of the legacy on premises.

End solution, so that's where we start to bring encrypt dot me into into the proposition and again, it's the same thing if it's inside sales it it could be a bundle it could be a cross sell it could be an upsell and I think the reason if you take a step back as to why you're hearing us talking about bundling on the cloud.

Side, where we have not historically talked about that is I don't think we ever had like assets I don't think we had fundable assets I think the cloud facts customer was frankly quite different than the Mark tech customer where the need for the use case was different and so bringing those together seemed like an artificial way to bundle well.

These security and privacy really are all protection.

They are all protection services, and they fit well side by side together.

Got it makes a lot of part two quick ones for me.

Hi.

But the impact of a backup transition on gross margins you guys alluded to it.

I'm not scripts and I can we get the differences and the display advertising versus subscription revenue within the digital media business for this quarter, Yes, let me talk a little bit.

About the strategy at back up and then maybe Scott and answers on the questions on margins, but generally speaking as you know backup is been a space in which we were challenged to find.

You know compelling M&A valuation that makes sense for us we operated at a very high margin and what we have come to the conclusion is that we are instead of.

Leveraging our own IP and selling our own IP into clients were essentially going to be a value added hosted reseller of various solutions, whether its theme I say or a secret and so by transitioning that way, we find that we don't necessarily need to invest the R&D.

To have the winning technology, which is very hard to do but we can leverage our infrastructure and being able to sell through third party technology.

Doing that.

Introduces a new cost, which is the cost of that third party technology, which in a typical backup business would have offset against our R&D, we weren't investing in R&D in our own IP and so that does introduce new cost base, but it puts us in a position, where we believe and I mentioned in my prepared remarks that the back.

Cup business, we'll get to stability and growth within the next 12 to 24 month, albeit at a different margins I'll pause and just.

Yeah, I would say that the transition we're going through right now from a margin perspective is really one of scale. So.

As we add these additional costs and evolve the business there will be a combination in the gross profit and in the Opex I think combined we're talking about call. It 10 percentage points lower as we move through this transition and then we expect as we scale that margin then to lift.

Back up not necessarily to the 50 or 50 plus percent that that business unit operated at historically, but probably somewhere in the.

Hi, Thirtys to maybe 40% and I'm talking on an EBITDA margin basis.

In terms of your second question the advertising for Q4 for the digital media business, which is the combination of displaying performance was about 75% or the revenue.

And a 24% were subscriptions and there's 1% that other and for the full fiscal year, which I think is a little better way to look at it because of the seasonal bias in Q4, which does bring us additional display advertising. It was about 40% display 33% performance marketing, so 73% advertising 26.

Options and one percentage point other.

[noise] dark thank you.

Our next question is from James Breen with William Blair and company. Please proceed.

Thanks for taking the question just a couple I guess are pretty good trimming back and just talk about he made mention of the growth in Quebec business.

And what's driving that now and heights in that and see where are you thinking it's going and then for Scott into cash flow side, you talked about some of the working capital.

Well, that's happening from fourth quarter into first quarter, you said around the immediate around 25 million.

So just sort of looking at an annualized base rent free cash flow been close to 375 per night.

Does this imply that you will see sort of.

Outside speak asking number in the first quarter.

That would normalize back down to second quarter. Thanks, I'll take that ill, let the that China. The answer. Your question is yes, yes, and yes. Now you will you may remember that similar situation occurred in Q4 2017 and for the full fiscal year 17 relative to 2018, you'll.

See in the slide deck, where we outlined the free cash flow and we've got the history, which is on slide six you'll see that you know 16 to 17 was very muted.

And then 17 day team there was a pop so.

I would expect we'll see something similar in 2020 I can tell you we've had good cash collections in the first 40 days of the year.

So you know, it's just a timing issue.

We're not totally able to influence the rate at which you know these advertisers pay so it's a function of when the actual revenue occurs how late in the quarter and then as you know it's not uncommon that those collections across over the next hundred days. So timing is always going to be I think a little bit.

It tricky in predicting the net cash from operations between Q4 in Q1, particularly when you've got a robust growing sequential quarter to quarter growth in digital media.

And just.

I was just to say the fall to that so sort of think about free cash flow from 19 to 20, assuming certain 19 was around that 375 level will be adjustment.

Given the commentary on 20 about where revenue growth would be along with some additional expense taxes up a little bit.

Free cash flow growing modestly sort of mid single digits.

19 to 20.

Well I think it depends how you deal with the 25 million if you're going to put it back into 19, then yeah you'd have a lower rate of growth from 19 to 20, if you take that 25 million and put in 20, obviously it could be a bigger growth I think this year, even with some of the additional expenses operationally and cat.

Backs.

With that 25 million, we should be you know, we should be somewhat north of 400 million a free cash flow.

Okay, great. Thank you and then does that not just on the strategy sat around the fact thanks.

Yeah look so.

I would tell you that we have a 130 million dollar health care I'd business.

That's growing double digits and has great potential as you know is has talked about in the past healthcare industry send something like 9 billion faxes a year that is growing at a reasonably high clip yet own less than 4% of those are factors that were involved with either on the on.

Send and receive side. So we actually have a real view into market share and so we've got a $130 million business. That's not all health care, but is dominated by health care in a market, where we're still small and the incumbent really is the machine and I think what we're now seeing to our work.

Which is eight you know, it's it's a sales and marketing process is really convincing healthcare organizations to eliminate onsite facts hardware servers and machines in and replacing with cloud based solutions, which yet we have.

The market leading solutions, so I think execution against that I think it takes a while they want to see these machines at end of life, but were long term bullish on the opportunity we're going to be at HIMSS conference.

In March we're gonna on sales and new features and solutions that go beyond facts that really get into more workflow in the healthcare space I think it's going to be very exciting and help accelerate growth in that business.

Great. Thank you.

Our next question is by mix Jones with Citigroup. Please proceed.

Thanks for taking my question I guess I want to piggyback off that last comment.

About some workflow processes for health care, there are there a robust pipeline of potential acquisitions for kind of health tuck.

I think a big drive for a lot of medical professionals is the amount of Administrated work. It yeah color that'd be helpful.

It's a great question again, if if if I can attach the health care I T multiple to our 130 million dollar business.

That would be fantastic because it really is hard for us to acquire in Asia.

That would be a space that would be difficult for us to buying and so we're building in that space and we're making investments capital investments.

In developing really on our own there's a partnership that we haven't announced that we are that that is part of this facilitating some of those are the most part it's not going to be a by its going to be a build and rent within healthcare. The valuations are just too high.

That makes sense, then and then one.

A follow up on kind of the changes in Google.

I guess I understand how can impact targeting but it does have a potential impact your ability to assign attribution.

Some of your cost for action or performance marketing and then I guess <unk> could you remind us what kind of the ratios between.

Display of performance.

Yeah. So just to answer that question on a full year basis in a display was about 40% of the digital media.

Unused formats marketing was about 33% so they're almost equalizing in terms of scale. No. You know look attribution to an interesting thing it all in a lot of the if it CPC that doesn't get affected if it CPFL cost per click it doesn't get affected if its cost believed it doesn't get affected if its cost per acquisition or.

Percentage of the car up all of the affiliate networks that sit between publishers and merchants have the ability to map to you or else. So you don't need cookies, even there to get contribution so in our three primary performance marketing PCC PCCP LCP eight.

The cookie lets future doesn't interfere with attribute.

Great. Thanks for taking my questions.

Sure.

Our next question is from Rishi Jaluria with D.A. Davidson. Please proceed.

Hi, guys. Thanks for taking my question principal wanted to maybe touch on the odd cloud EBITDA margin side, you know it sounds like you're guiding to margins being relatively flat I understand the VPN business as limit of a drag on that's on top of actual growth business, maybe help us.

Understand I'll give maybe thinking about vps margin, maybe going beyond next year is it still is there something structurally a bubble VPN business, that's going to make this a lower margin business or is there a path to get that you know can become a 50% EBITDA margin business what would be best Jabil.

No. So two things one and we Didnt highlight this but in the fourth fiscal quarter.

The cloud business, but really most of it was the VPN business with a little bit from eye contact there were as we sort of get through the year of these acquisitions and in some cases third parties meeting the sellers were involved in providing us financial information there were certain true ups of about a million and a half dollars.

Negative to the top and bottom line most of that in the VPN business. So that had about a one point margin impact in Q4 those are nonrecurring, but then nevertheless, they hit the quarter. That's one thing to keep in mind I think in terms of your longer term question. We look at the VPN business. It is a growth business.

I think well that's mentioned his prepared remarks, it's a double digit grow we intend to continue to feed that business and that growth in build that customer base. So the goal is not to take that business unit enforce it to get the 50% EBITDA margins or something in excess of that with no growth, we're going to feed it we're going to continue to market. It so I think that.

You know when appropriate margin level for the VPN business is probably somewhere between the high thirtys. The low fortys could use 40 is kind of an average.

Margin and of course will make decisions over time based upon the M&A that we do in that space. Some of the cross selling activities that mentioned in that were working and experimenting on to see how much either we should moderate some of that feeding or increase that feeding in terms of both personnel and sales and marketing dollars, but.

We do you should not expect that you should not planned for it to be 50% EBITDA margin business. We look at I'd say the portfolio in cloud and given the relative percentage of its contribution today to still on before corporate allocations to be right around 50%, probably a little bit under this year, but right around or hovered.

And your 50%.

Yes. Thanks.

And the release you talk a little bit about the international we are not to get to add on.

The analyst day next month, but maybe you could tell us a little bit about what what what's going on on the international side that that you.

We are going on them.

I'll close to the different business units. So first of all the reorganize nothing to do with the operations of Jay to that's it's all a tax matter. So you may recall, some number of years ago. The European Union put pressure on Ireland to increase its tax rate. So we have operated for 15 16 years under what's.

Known as a double Dutch Irish structure. So we have a fair amount of IP that is outside the United States. There would be two elements to the structure, Ireland itself, where we have substantial presence and Andy Cole Nonresident, Ireland, which for us happens to be the I Love Jersey.

Yeah, I Love Jersey, as we enter 2020 is starting to.

Building more presidents rules, meaning they want more personnel and staff literally on the island and the value of that piece diminishes as the Irish tax.

Ireland moves up and evolves so we transferred the IP.

Within the Jay to system, such that it created this game you may notice that our GAAP tax rate looks very odd this quarter. It's a negative were a benefit.

So we have recognized from a GAAP accounting standpoint of 53 million dollar gain hence the negative tax rate.

Weve eliminated that from our non-GAAP presentation, hence the more normalized tax rate of 21.3%.

From a cash perspective, we will realize that 53 million roughly over the next 15 years.

And then we do see because of the evolution of this structure.

And where we're earning our money in 2020 about a 70 basis point increase in our tax rate on a non-GAAP basis from 21 Threed too.

The day to day operations of our international businesses, most of which on the cloud side.

Remain unaffected, but people are in London. The people are in Ireland throughout Europe, all of that stays in place.

Okay got it that's helpful.

Turning to the gaming side of equation.

Q2 question.

First you talked about calling out 20 goes publishing this year, which would be almost doubled the size of the discomfort or.

It could be double the size of your portfolio of indie games oversight, maybe you could help us understand the economics.

Bob.

What's sort of competition they expect from that and then second and given given the strength and your gaming business both from the humble bundle side as well on on the idea.

What order.

Opportunities or animal and gaming looking like are there opportunities to grow more properties and extend the person on the advertising sabal other ways to that level.

Level ball publishing side bubbles not just wanted to know I think about M&A again. Thanks.

Yes, so the way the publishing business works is essentially you have a universe of indeed developers who are seeking essentially two things, they're seeking financing and they're seeking marketing in choosing a publisher to go with to publish their game and so well.

We typically do is will write a check in exchange for that check we will get a percentage.

Revenue generated by that game in all channels in which it is sold and distributed as well as depending on the deal have various other Reits, but always including the ability to include it into our subscription service at no incremental charge to us where we're typically paying for non owned games.

A fee for including those games inside of our monthly service and so the economics are what is the return on the investment we make against those games and in all cases, we are looking for positive ROI on the sales of that game and its normal channels. We then have the inquiry men.

Total revenue that comes from sales of that gain through our own channel to the humble store and then ultimately the benefit of having that gain inside of humble choice our subscription product at no cost, but those two other things are pure gravy. The first thing has to be true, which is we invest it acts in the game.

And we're going to see more than that in our returns related to the normal sales of that game.

Now with respect to your question on M&A I think we would be open to a gaming information news that is advertising base like IDN is today, we'd like that space, we want to continue to be in that vertical and into that space I think any sort of technology within the gaming space.

That may enhance our subscription value proposition, we're always thinking about things that.

Make hay humble choice membership even more valuable so we're looking at various things that that would do that you know there would be the possibility of buying a library buying another publishers library.

Gains if it made sense for us and we saw long term value in that library and able to leverage that library within our services. So really all of all of the about.

Got it that's helpful Art. Thank you guys.

Okay. Thank you.

Our next question is from John 10, one Tang with C.J.S. Securities. Please proceed.

Hi, guys. Thank you for taking my questions, a nice quarter I'm, just a little bit more on the humble business, what kind of dollar investment will that be needing a in 2019 as you grow these indie games, which I understand are much smaller and where does that investment go in terms of magnitude or percentage of revenue as that as you go to 48 games in the library and then even beyond that.

Yeah. So look I think you know it is it isn't the single digit millions of incremental expense in 2020 versus 2090. So it is not a significant drag on the overall at the Jay to level, but it is you know it does explain I met.

Second in the prepared remarks, some of the are you know the difference in our EBITDA versus revenue growth rate, but it is not a it's not larger than that now if we see opportunities to put.

More capital to work, we will but we're really limited in our infrastructure on how many games can we actually bring to market based on the team based on our scheduling so that really is more of a limit than anything else.

Okay, Great and then more broadly on the $10 million, an additional either expense or margin drag on a year over year basis.

Could you help us understand the scheduling that is that weighted more towards Q, the first half or if there's any lumpiness.

As it gets Spencer the <unk> you know just like how you.

At the push on spending out to yeah, I would say it was probably a little while there's different elements in that 10 million. So the drag from the acquisition. The Baby Center in Spice works would be more front end loaded because as we said last year, we acquired them. That's a process over a 12 month period of improvement I think in terms of the things like the humbled.

Bundle publishing and the info SEC or the the system element, which occurring corporate.

Those will probably be more ratable over the four quarters.

So I think of different things you have different pacing based upon which of those four items were talking about but I would say that the in the aggregate.

There will be a little bit more on the front end loading side. If you take that 10 million you know.

In its totality.

Got it Okay, and then last one you mentioned the corporate facts growth rate.

Your expectations for this year about 10% growth remind us what the split as again between corporate and on corporate and them you know what your expectations are for growth on the other side of it. It was flatter is growing if you're still think secular declines there yeah. It's about 40% of the overall cloud fax business is in the corporate space I say the other 60%.

Flat to declining historically its been maintain that flat through M&A on the web fact side, we haven't had a wet facts transaction in two plus years in two plus years. So I think you know I view that is kind of a a modest the very modest decline or to flat.

You know depending on the couple of factors, but we don't view that we viewed as stable not growth. If we can find M&A in the space great.

But our focus is really on growing the the carpet business.

Got it and just attack on what more do you see opportunities and corporate or excuse me in fact for M&A at this point and also on the ER Doc upside where are you changing strategy is M&A still in the and the cards. Yeah look I mean, there are deals to be done in both spaces and and you know again, because we have the broad portfolio, we never feel like we need to do a deal in.

Any one particular space, we've had a lot of inbound.

But you know not at prices that were willing to transact that so we'll wait it out.

Great. Thank you so much.

Yes.

Thank you Yeah. We have reached the end of our conference. Thank you for your participation you may disconnect your lines at this time.

Yes.

Okay. Thank you.