Q1 2020 Earnings Call
This time, all participants Arnie listen only mode. A brief question and answer session will follow the wall presentation.
Oh sure should require operator systems during the conference. Please start your only telephone keypad.
I know this conference is being recorded.
Now my pleasure centuries, your host Mr., Scott Turicchi, President and CFO. Thank you Sir you may begin thank you.
Ladies and gentlemen, and welcome to the Jay to Global Investor Conference call for Q1, 2020, as the operator mentioned like Scott Turicchi, President and CFO, Jay to global and I'm joined by our CEO back shop.
Presentation is available for today's call a copy of the presentation is available at our website.
When you launch the webcast, there's a button on the view on the right hand side, which will allow you expand slides.
Not yet received a copy of the press release, you may access it to our corporate website at Www Dot Jay to global Dot Com.
And we'll be able to access the webcast from this site.
After completing the formal presentation will be conducting a QNX session.
The operator will instruct you at that time regarding the procedures for asking a question.
However, you may email us questions any time at investor that Jay to global Dot Com.
Before we begin our prepared remarks allow me to read the safe Harbor language.
You know this call. The webcast will include forward looking statements such statements may involve risks and uncertainties that could cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors, we've disclosed in our various FCC filings, including our 10-K filings. We said 10-Q filings various proxy statements and 8-K filings as well as additional risk factors. The we've included as part of the slide show for the webcast.
For you to discussions and those documents regarding safe Harbor language as well as forward looking statements now let me turn the call over to the back for his opening remarks, Thank you Scott and good morning.
I hope everyone joining us today is doing well under safe and healthy.
Want to start by saying all of J twos employees worldwide.
Their dedication and determination.
I continue to be inspired by our organizations response to this crisis.
And impressed by the tremendous resilience shown by our people and businesses.
We were early in our embrace social distances.
We began shifting our entire workforce, which is more than 4000 people in over 60 locations.
<unk> work on March 10th which was well ahead of local orders.
We're very thankful that our workforce remains healthy.
Our ability to move everyone to remote work seamlessly as we did.
As a tremendous tribute to our technology organization.
And the preparation investments the company has made over the past couple of years.
We've always believed that being a company that produces.
And delivers nearly all of its products and services digitally is an advantage.
Even more so in this environment.
We're pleased with our Q1 results, which were in line with our expectations.
We're closely monitoring every part of the portfolio to evaluate the impact.
Pandemic is having on our businesses.
Our March revenues were up 9.2% year over year, which was a tick under the first two months in the quarter, but in no way represents the kind of revenue drop many of our peers are reporting in March.
Our April revenues are also relatively healthy coming in flat year over year.
As we stated in the business outlook section of last nights press release, we anticipate Q2 2020 revenue to be slightly down and adjusted EBITDA and adjusted non-GAAP EPS to be down single digit percentages.
Versus Q2 2019 based on current performance.
It's important to understand that our decision to withdraw our full year financial guidance in no way reflects a lack of confidence in our business quite the contrary, we feel our portfolio is demonstrating remarkable resilience.
Rather it reflects a reluctance to engage in pure guesswork as to what the world is going to look like starting in July.
It might be helpful. However for me to share some of the broad market trends.
That we're observing.
Let's start on the advertising side of our business.
In any downturn.
The first expense cuts happened within the marketing and advertising budgets of companies.
It's the easiest thing to turn it off is there are few long term non cancelable contracts.
There are few penalties or cost associated with canceling.
And the revenue in pockets felt in future periods.
In this particular market, we have another factor, which is the explosion of AD inventory based on significant increases in media consumption.
That are causing compression on advertising rates.
As a result of all of these trends.
A number of the largest sellers of advertising in the world have reported significant.
Sudden steep declines in revenue.
Hey to however, we're cautiously optimistic that our 510 million dollar annual AD business can perform better in relative terms.
First our advertising business has little local retail exposure in terms of customers.
We have roughly 1100 advertisers who are mostly big companies, while many of the social media companies have millions of advertisers a good number that local businesses.
Been hit hardest by the pent up.
Second we have little exposure to the hardest hit AD categories, So far travel retail food not.
In fact, roughly 40% of our AD revenues fall into the health category, where we're seeing growth from pharma marketers.
As a point of reference to April everyday health has seen organic AD revenue growth of 5%.
Third the last marketing dollar cut is usually the best performing dollar.
And as you know about half of our AD business is performance based meaning cost per click cost per lead or cost per acquisition and the other half which is impression based display is usually measured and optimized on performance outcomes.
We are hopeful. Moreover, that these are mitigating factors for us in a punishing environment frat sales.
On the subscription side of our business, which is about $850 million annually.
We are closely following.
Decryption acquisition and cancellation trends.
We have not yet seen any appreciable slowdown in our subscriber ads.
Were stable in the near term, we believe for a few reasons.
For starters, our services are viewed as more central and they work from home environment.
In fact over the past six weeks, we've seen that adds <unk> effects in North America running about 50% ahead of plan.
A rapid shift to remote work spurred orders, but we expect that will likely return to normal levels.
Our voice businesses, which offer Softphone services are relevant at a time like this and we're seeing meaningful increases in email sand volumes.
Well there are more tech services.
[noise] security and privacy ours important now as it anytime.
Also much of our subscription revenue employs a lighter touch sales model, meaning wed been phone based customer acquisition.
Which had been less disrupted by the pandemic.
Finally, our lower ACVC likely make purchasing much easier and larger ticket items, well, we have seen customer acquisition impact.
It's where field sales and or physical contact or necessary.
[noise] larger cloud facts deployments, which require in person sales efforts.
That's how which sells tools for commercial well I fly deployments have seen slowdowns.
We've also seen meaningful reductions in corporate Socs page volumes from healthcare customers.
Who have suspended elective surgeries and therefore have lesser movement of medical records.
On the cancel side, we have not yet observed higher rates of cancellations evidenced by slight decline in Q1 cancel rate from Q4 29 team.
But if past recessions or any indication and we would expect to see increasing cancels its credit card statements and accounts payable ledgers all around the world get even greater scrutiny.
Another headwind, we have on subscription side of sports, which has already cost us a million and a half dollars in the first for much of the year.
All taken together, we are cautiously optimistic that the headwinds and tailwinds will cancel each other out the much depends on the broader environment.
Across the entire company.
We have developed contingency plans to manage expenses.
Including pauses on hiring.
Delays on salary increases delays on certain development projects.
Reducing less productive marketing spend.
Renegotiations with vendors and suppliers.
And reductions in our real estate footprint.
The same time, we have not had to resort to the more draconian measures.
That we're observing by many in the industries in which we operate.
And we're also funding some key growth initiatives at the company.
Given our very strong balance sheet and free cash flow.
And the category of longer term themes that we believe will emerge out of this crisis. We have identified for that are important to Jay too.
The first is our belief that health care will finally embrace digital transformation.
There are two areas in which we believe we can benefit.
The first isn't our cloud fax business.
As we said in the past we estimate that the vast majority of health care faxes are done with machines and servers.
This crisis underscores the need to move from an on Prem cloud solution.
Furthermore, we recently launched a new platform called consensus.
Which combined which combines an improved enterprise cloud Soc solution.
With secured direct messaging and patient record queried capabilities.
We believe that this will be an important platform as health care moves to the cloud.
To learn more about please visit the consensus dot com.
The second area, where we see opportunities and whats referred to as detailing.
In the pharma industry.
Historically, that's meant sending sales reps into feed doctors.
We believe that that will be replaced almost entirely.
Right you detailing.
Which is reaching doctors digitally to web sites.
Email and Webinars.
Everyday health Pro is in this business and our flagship site that page today, so 33% increase in its physician promo revenues in Q1.
Second theme.
As the rise of remote work.
In cloud services, we are focusing our product development marketing and sales at our security privacy and voice businesses on work from home needs.
What might have taken months of development is now being rolled out in weeks.
A prime example of that the voice meat product, which is a fully encrypted.
Video conferencing solution for our customers.
You can try the beta for yourself at meat Dot evil voice dotcom.
The third theme.
It's our belief the video game play will only grow and establish itself as a leading form of entertainment.
The spikes in consumption are evident in our ambition that humble publishing to be the leading indie game publisher is this promising as ever.
We expect the launch 19 games this year and another 60 games or in development for the future.
The fourth theme.
As our belief that ecommerce will become the dominant form of retail.
Prior to the pandemic ecommerce only represented 11%.
Of all retail sales.
Now the entire public is going accustomed to shopping online.
As you know we have long focused on being a driver of qualified traffic to online retailers do our editorial sites, such as PC Mac IDN and national.
As well as our deal sites like offers dotcom and our Black Friday sites.
Now a few words about M&A.
We're pleased to have consummated two transactions in Q1.
While small it's nice to see us get our first cloud facts deal done in a few years.
As well as at a condition specific site to the everyday health portfolio.
The during this pandemic, we are very reluctant to close on transactions without visiting companies.
Right now we're planting a ton of seats.
I'm going to clouds lift we think we're going to be very well positioned strategically and financially to act on some very interesting opportunities.
We're also very focused on building, our cash balance to ongoing free cash flow from our operations.
Before I hand, the call back to Scott, Let me reiterate my most confidence in Jay to and its prospects.
I personally bought a million dollars worth the shares during our open window in March.
The resilience and strength, we're showing convince even our biggest doubters the J twos portfolio.
Operating discipline and capital allocation our special.
Scott.
Thanks for that I will provide us a six overview of the Q1 results on slide four to six to ensure that we have ample time puts you on a.
We ended the quarter with approximately 625 million attached investments after spending approximately 75 million in the quarter on acquisitions and share repurchases.
Now, let's review the summary quarterly financial results beginning on slide four.
As the back mentioned in his opening remarks, we had a solid two one which was inline with our expectations and saw an 11% growth in revenues to 332.4 million up from approximately 300 million in a year ago quarter.
EBITDA grew 2.6% 216.8 million.
The slower EBITDA growth, which was anticipated was due to lower margin revenue contribution from Baby Center in Spice works, coupled with the timing of certain humble bundle payments in 2019 that shifted out of Q1 2019 into Q2.
Earnings per share was flat at $1.40 cents aided by the higher operating income and lower share count offset by higher interest expense due to the one in three quarters percent convertible notes issued last November as well as a modestly higher tax rate.
We completed two tuck in acquisitions during the quarter and if we purchased 1 million shares of our stock since the beginning of this year.
Turning to slide five in Q1, we generated 95.2 million a free cash flow, which was an 8.7% decrease from Q1 2019.
The decrease was due to receivable collections anticipate in March that shifted the April of approximately $5 million and higher capex of approximately $40 million versus Q1, 2019, and it's been funding variety of projects over the last year as well as the implementation of various corporate systems.
Now, let's turn to our two segments cloud and digital media for Q1 as outlined on slide six.
The club business grew revenue, 11.5% 269.8 million with EBITDA growing 4.3% to 78.4 million after corporate allocations. The digital media segment saw growth of 10.1% 262.6 million with a slight decline in EBITDA of 2.1% to approximately 40 million dollar.
Hours due to the shifting of timing of the humble bundle payments referenced earlier.
I would note that absent corporate allocations the digital media segment had a slight increase in EBITDA over Q1 2019.
Finally, before going to work question and answer session I would like to turn your attention to our business outlook on slide seven.
As noted in the press release, we are withdrawing our previously issued financial guidance due to cope with 19 and the uncertainty of the macroeconomic environment. However, based on our current performance and expectations. We expect Q2, 2020 result to be slightly down for revenues and adjusted EBITDA and non-GAAP, yes to be down thing.
Did you percentages from Q2 2019.
No. The Q2 2020 will benefit from acquisitions that are not contributory did Q2 2019 financial results.
The revenue contribution from those acquisitions represents approximately six percentage points of year over your growth in the quarter.
Given the nature of this macroeconomic environment and the need to evaluate operations on a short term basis, we have limited visibility at this time into Q3 in Q4 financial expectations.
Following our business outlook slide or various metrics and reconciliation statement for the various non-GAAP measures and the nearest GAAP equivalent I.
I would now ask the operator do we join us to instruct you on how to queue for questions.
Thank you we will now be conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one question. If he would like that's the question. Please press star one on your telephone keypad confirmation tonal indicate your line is my question can you might start to if you'd like some of your question from the Q.
[laughter] eager equipment, maybe necessary to pick up your hands that before passing the Sarkies. One moment. Please we pull for your question.
Our first question comes from the line Cory Carpenter JP Morgan. Please proceed with your question.
Okay. Thanks for the questions on everyone's doing well, maybe one and then a follow up if I could so that can Scott I. Appreciate the color on the March and April trends very very helpful. I guess my question is any signs of stability you're seeing in the first few weeks. It may from a trend perspective, and then may.
He kind of pulling it all together could you talk about digital media in cloud services, maybe the revenue and EBITDA assumptions embedded within your chips you Guide you.
Hi, Good morning, Corey. Thanks for the question. So with respect you know I know there I mean, we're only 12 days and but that May looks just like April does so essentially flat.
Across the board I do want to point out with what Scott said in his prepared remarks, which is adjusting for M&A that contributes to this year that was not present last year. That's about six point, so on an organic basis.
Trending about six points down in a in April and May and that's our expectation for Q2 and look I think considering the environment in which we're operating where essentially every business is feeling a the negative impacts of the virus, particularly media business is not based businesses, we think that.
Really outstanding and then they reflect the strength of the portfolio a minute risk that reflects the strength of these are the brands and so I think at this stage and as I said.
Scott reiterated really the reason why we're not gonna really speak beyond Q2 is we have no idea with the operating environment is gonna be it has nothing really to do with our businesses. Our businesses are showing I think a fair amount of strength and resilience in this period.
But it's really as I said pure guesswork to figure out what's going to happen starting in July and the rest of the year I keep saying all forms of different recovery a notions I think this morning was the Swift recovery. So again I think everyone's trying to understand what's happening in the marketplace not just us.
And I would just follow up on that Corey that in terms of the two segments.
They look similar in their operating performance in the first five six weeks of Q2, meaning a flattish this on both but as a vectrus mentioned the media business does benefit from some M&A in Q2 that was not present in Q2 two.
2019, where that's not the case for the club business.
To any material degree.
Okay. Thank you very helpful. And then just a one one follow up and you touched on it some on the call as well, which hoping you can expand some I'm on your Fourq you call you layout your investment areas in 2020, I could you speak to how the current environment changes your plans if at all maybe what do you continue.
You are plan to continue investing or are you need and and then any areas where are you may go back.
No. So I don't think it changes our investment themes and where we would like to put capital to work I think it changes are climbing and I think it changes valuations in something from a timing point of view as I said.
We're holding back right now and it it and it is holding back thinking that you know we would prefer to be in an environment, where we can actually visits companies.
Before we transact and so that's something that that you know, we'll see how long that's going to be our reality, but that's that's the timing issue, it's not about availability of ideas and availability of opportunities per se and then in terms of valuation I think that particularly in the media.
Oregon in the digital media World I think seller expectations have come down appreciably Ah and not surprising on so we think we're going to benefit from being patient here in the Meanwhile, we're going to continue to add to our balance sheet and continued to add to our buying power, but I think when the time comes for us to.
Brands I think we're gonna see some very very interesting opportunities.
Thank you. Our next question comes from the line a sticky Holly out with Barclays. Please proceed with your question.
Okay, Great Hey, Thanks for taking my questions guys and thanks for having me on the call here.
Absolutely good morning, absolutely. Good morning, Good morning, Hey that maybe maybe just to start with you.
You know understanding to your point, it's really hard to think about the back half of the year here you know in terms of the pieces recovery et cetera, So definitely not looking for any sort of quantitative forecast here, but maybe the question is.
What are you hearing from advertising advertisers here.
For the latter part of your and what are some of the leading indicators here that maybe or informing your thought around how how the back half the year could sort of transpire for your advertising business does that make sense.
It does I mean look I think.
It's category dependent so if you look at the categories in which we operate you have different things going on and you have different ideas amongst our advertising clients and let's start with pharma pharma as I pointed out in my prepared remarks continues to grow and it grows both on the direct.
Tumor side, but even more so on the direct a provider side. So far more advertisers have historically had messages for patients and messages for providers and so we are seeing some pretty healthy trends, particularly on the provider side and I think part of that asked to do with this notion of.
Physical detailing a sales rep going into C. physician is essentially a isn't happening right now and I think it's a little effect or permanent shift there are some.
Exceptions, so if there's a drug that has a there any concerns about a negative interaction between that drugs and the virus they've gone to art. So we have seen a few drugs go dark from a marketing point of view, which I think it's understandable.
And the gaming and the gaming area, we have something entirely different going on and prior to covert 19, I believe I mentioned this at the at the Analyst day. In early March is we were anticipating that many gaming advertisers and publishers, we're going to hold their spend.
To support the next generation of councils, both you know Sony and Microsoft councils that are coming out during the holiday season in 2012, and so we saw that already happening and then after that demand for game play is so high it's probably a notion among some of the publishers are they don't.
Really need to advertise right now because demand is coming yes.
But again I think what the console cycle.
It's still comes in in the fall.
I think we're we're gonna see some some budgets release and then on the tech side again, it depends if your direct to consumer you're trying to feed online sales, where we are well position.
You know if you are enterprise in orientation right now you may not value lead you can't follow up on and having in person call. So it really is there isn't one answer in the categories in which we operate and you know I don't know if it's we're lucky or were good but the things were not dealing.
There are what many people are dealing with which our travel in auto and these affected categories as well as having you know the longer tail of advertisers. We don't have that we have mostly enterprise buyers of advertising. So that's a that's kind of you know it's it's it's not one neat answer.
But you know as we often do were unpacking it based on each of these different categories.
Got it that makes a ton of something that's super helpful. Maybe for my follow up for you Scott just maybe digging into the digital media business, just a little bit more.
How do you think about the subscription component of that business right I think that's going to include.
In parts of business as a like like parts of measurement, maybe some components of health care as well you know I think that was down sequentially. How do you think about that sort of a seasonally I'm in a in a quote unquote typical year.
Yeah, and I think that's an interesting point, because our subscriptions in digital media Jude behave differently than the typical subscriptions in the cloud business, which is very sequential in nature.
And for those of Us and I know sackett Youre relatively new to Jay to you go back to Q4 2018, you want it 2019, you'll also see a sequential dip in subscription revenues in digital media.
As you know they're heavily weighted into the Ziff Davis business unit into the first two categories, you mentioned, which is a humble bundle on the game side. It looked like in the broadband division.
And they each behave somewhat differently, but let's take the games pizza business, we tend to see a surge of activity later in the year in the second half of the year, particularly in Q4 that was noticed in Q4, 2019, which had not even relative drone expectation about 10% output.
Warrants in that quarter.
The interesting thing about humble bundle is people a lot to pause there subscriptions, which is very calm and as we exit Q1 go into Q1. So we generally expect to see sequential declines in the humble bundle subscribers and then as the year goes on.
<unk>.
We we amalgamate that well and then even go beyond that.
The little bit different in that it tends to be a very small number of subscribers that very chunky, so the timing on which they subscribe and what they subscribe tends to influence Oh, the total revenue we book.
Those two also seem to be a little bit weighted from Q2 to Q4 versus Q1, and it's also a function of the package. They buy so some are very short term in contract relationship maybe not measured in a matter of a few months, but some come at higher levels than others. A lot. It has to do with the types of data that they are.
Subscribing to so I think if you looked at our total.
Oh.
Subscription revenues on a year over year basis for Q1 were up 12.5% I would say that if you looked at the one rate the way we look out for the business once again with some you know.
Degree of caution as we look at the back half the year, we think that's tracking to about 10% year over year growth.
Got it very helpful I'll get back in queue. Thanks, guys alright. Thanks Saket. Thank you. Thank you. Our next question comes in a line of Daniel with Wedbush Securities. Please proceed with your question.
Yeah. Thanks.
So when you're.
When you're talking about your Q, and obviously being down so far it's been flat you can you just maybe talk about like assumptions and some of the businesses for my high level.
As you're thinking about the quarter.
Yeah, So I think I'll start and then and Scott jump in but so.
Yeah, and when we're looking at it segment level.
We look at cloud being essentially you know a flat to slightly down with really no M&A in that mix and and remember against last year, you have a full quarter of ownership for IP vanish business.
And then within that if you just look within sort of the areas that we talked about at the.
Analyst day security and privacy and corporate Fox continue to be very strong and strong organic growers offsetting a little bit of decline or on on the web Soc side and a little bit a decline on the backups.
In the digital media segment again, we're saying revenues on a reported basis will be flat year over year, but did benefit in the advertising ports and from babysat <unk> and Spice works on the revenue side are being in our Q2 20 numbers are not dark you too.
2019 numbers and so on that basis.
Really a that six points of M&A really all falls within within the digital media segment.
And so at the segment, it's down at let's just say if you want to see what did the organic decline in the digital media second at six point.
Got it.
That's great.
Could you and maybe it's Scott good on the expense.
Areas, but for me from media perspective can you talk about like day to day, what you're doing in terms of.
Just wouldn't now begin the businesses look obviously all the different business has their own was running their own businesses, but just maybe talk specific one digital media.
What you're doing almost day to day with clients with the business.
Navigate this store things yeah. It's a great question I mean, I think we're staying in constant contact with all of our clients. It's interesting in this remote work environment, they're almost seems to be more of a willingness for clients to engage I think everyone finds themselves with no working hours in and let's try.
The one commuting hours and an interest in having these discussions so I think the quality of the engagement between us and our clients is very strong lots of discussions about future plans. So I do think it's very healthy that way and it from an operating point of view and I'll say that for all of Jake too and I said. This is my prepared remarks, but his remark.
To me how quickly it early we were able to get into this into this new environment and I think the productivity levels at the company haven't been higher and I'm pretty amazed that the product development work, that's going on I'm I mentioned, a couple of the things that that we've rolled out in the first quarter, but the.
Pipeline has very strong and the product road map is very strong. So that is a mindset that the company has right now which is look you can't control the external environment, but we can certainly control are pacing development and our pace of innovation and that shows up a little bit any expenses up she the first to tell you that you know the driver expenses year over year as compensation.
Okay and that has to do with the organization that we've built to pursue the opportunities that we see in front of us and those aren't chain. So we have not engaged in any sort of large scale reductions in force or layoffs. We don't believe that our businesses are it anywhere close to.
To feeling the effects that other businesses in our industry are feeling and have gone to those and so we feel very fortunate at this point that we can keep this team in place and pursue all of the things that that we are pursuing and so.
No whether it's the everyday health group, Ziff Davis or or cloud you know each one of those each one of those divisions and inside of each of those business, that's a pretty ambitious or you know projects on their plants.
Thank you. Our next question comes from the line I Shan pedal what stuff. The Honda. Please proceed with your question.
Hey, guys good morning.
Good morning buying savvy.
Yes, the big at your Analyst day, you talked about having larger deals sounded like in the middle of the funnel. It sounds like there could be somewhat of a pause now given the the problem restriction.
But can you just talk about 10 out how you feel about those deals coming out. It is and you know if you expect M&A to be weighted more toward lower larger deal during the recovery, maybe just talk about that.
Yeah, you know, China, it's always hard to predict but I will tell you that what might have been.
Larger a couple of months ago, just got smaller.
On the very same target potentially so that we recognize which is which is making sure that we understand the right price on pre existing assets things that we've been working on and then you asked that start to come into view right. I mean, so so we do have those dynamics going on but you know I'll give you the answer.
I always get because it is the true.
It really isn't it it's about putting capital to work to get maximum returns and if that and with bill could do a series of small thing or even larger things and so like you know to me it it's going to come down to what are the best available opportunities when we're in a position to transact that.
The key is that that's the unknown is when are we going to be in a position to feel comfortable to transact and where we ever get comfortable transacting without ever actually seeing a company physically. It's a question then debate we have right now.
Right now my view is I think that's a hard thing to do but again, depending on on how long. This you know this reality is in place you know with something that will at least have a healthy debate about.
Okay, and then just a quick follow up first dot dot.
In terms of gross margins overall and bought or by segment and the offsets by the by the bucket.
Any any color you can give it comes out it popped up as for QQ and just conceptually how you're thinking about that those for the rest of the year.
Yeah, well I think a a little my comments the Q2, just in general because of they say the the uncertainty of the macroeconomic outlook for the balance of the year. Although I think some of these trends you know how have a likelihood of persisting in terms of the cost structure really that's more of a would probably have revenue question in Q2, specifically.
I would say that the gross margins, they're not moving around a whole lot oh within each of the two segments.
I think that those trends you saw in Q1 are likely to continue into Q2.
In terms of the EBITDA margins I would expect that our EBITDA margins to be somewhere between where we were in Q1, which was 35% EBITDA margin and what we were in Q2 of last year, which was 39.
You the midpoint of that just so you know as a guardrail.
And a lot of where the margin comes in in Q2 will be a function of a couple of things as the Vac mentioned at the beginning as we said throughout this call. This is very much of a week to week analysis, primarily on the topline so incremental revenues that come in or don't come in relative to our current expectation will generally have a great.
Hi flow through to EBITDA, most of that's going to come because there's not a lot of opex associated with that incremental revenue there might be 15 to 20 points of Cogs, that's about it and the second thing is that a number of these initiatives that but back outlined at the beginning of it is call and answered. Some degree on the question that was just asked by Dan.
Is really a timing issue. So we're tracking independent of the revenues all of the savings that are coming in from things like lack of TV, Although I wouldn't say that it's absolutely zero or things like you know where there are elimination of certain cost you previously thought were necessary.
Turning now to be more of a luxury so those things are coming in during Q2.
I think the good news is they will more fully benefit the back half of the year. Then they will Q2. So that's why there's going to be some I think range of EBITDA margin regarding Q2, but I think of the say kind of it's a four point Dan.
Well, which in which you should be thinking.
And then I would just I would just bring you're not asking the question, but I'd like to bring it to the bottom line.
For Q2, you one of the things that we had going into this year was.
You know relative to the last several years, a decent interest rate environment. So.
Because of the convertible note offering in November of last year, we have significant cash balances and their growth. So even more than you see a reported at the end of March which is about 525 of the 625 of cash and investment.
Well, we were getting on a portion of that catch a good portion close to 1.5% interest which was offsetting some of the incremental interest expense that has pretty much vanished or we are still getting some yield but I would say its conservatively you know down 100 basis points, we're now getting in that.
40 to 50 basis point range, so just to make it clear to everybody I'm looking at our interest expense net assuming no currency translation adjustments in other income of 16.3 million for Q2, I think that's likely to sustain itself each of the following quarters and our non-GAAP depreciation right around 15 million.
As you saw in Q1 or tax rate came in consistent with our budget, which is right around 22%.
And then one last thing because I normally get asked it is we have the share buybacks.
Technically they built into the second quarter, what does a practical matter, we actually execute all the trades in Q1, but we paid for about 350000 to those shares in Q2.
So that's why I referenced earlier, we repurchased a million shares there was a partial benefit of that the effective share count for Q1 that will be fully realized in Q2. So if you look at the P. S. The effective share count in Q4 last year was 40 half million.
Q1 of issue was 41, we're expecting it to be in Q2 around 47 to 47 three.
Yes.
Thank you. Our next question comes from the line of net Jones with Citi. Please proceed with your question.
Great. Thank you for taking my questions I'm could you dive in a little bit err on the cloud services side and what you're hearing from U.S.M.D. is and you know.
<unk>.
Broad coverage there of the types of abusers any additional color there would be helpful. Thanks.
Yeah. Thanks, So again I think the question that everyone's asking really is on the cancel side are you seeing the kind of cancellations that others that are SMB focused or are experiencing an answer to that to this point is no actually canceled as I think I mentioned in my remarks in Q1 weren't improvement over.
Q4, and in the early goings of Q2, we haven't seen any indication of it.
It's got does remind me that a in past recessions, we had seen increasing canceled you know we were very different product portfolio. There. We were largely websites. So it'll be interesting to see how the non web tracks portion, which is <unk>, which is larger than the websites fortune within cloud will behave I think you've got a couple of things going on I think number.
One is.
No I don't think you know, we're not selling very high price point products I believe that the products that we're selling if you already going concern and business or products that you need in are somewhat essential to what you're doing I mean, you look at our email marketing business I was surprised by this with the sand volumes are even bigger and that's because if you are a retailer and.
We're trying to drive online sales, you're going to use email marketing cost effective and then with the turn on tools I guess it shouldn't be that surprising on the AD side, you know again because of most.
Most of our acquisition customer acquisition is done on the phone or on the web those have been on affected in some some could argue had been more effective in this environment then other forms of customer acquisition.
Where we are seeing challenges as I as I mentioned is we are seeing significant page volume decreases it's not a huge fortunately the overall revenue, but we are seeing fewer sends among health care enterprise customers, where we do get a marginal amount of we got an incremental amount of revenue on on voice.
But we think that will return when elective surgeries and and non coded care start to kick in arden across our customer base.
I wouldn't I can only at the only other thing sorry, sorry to the only other thing is I would say that you know just on the health care. Pete. This is a huge part of the cloud.
Customer World I really really do believe that this event is going to trigger a lot of change and I think that change is going to be helpful to us and you should spend some time on consensus because I think you'll get an appreciation for the interoperability solution that we're building. So I just I'm I'm bullish about that.
Yeah, obviously again I can't tell you when health care will return to some form of normalcy, but I do believe that the solutions that we're building here are important. So you know in many ways. These are health care solutions that are a big part of the cloud business.
And what I wanted to follow up on Nick was that.
Now.
When but that said that the product mix is substantially evolved from say the great recession of all eight or nine.
I'll be a little bit more I think a definitive on that that really the business. If you look at a later weight early on nine timeframe, because what we called the web Baxter that was a outlined at the analyst day by nature.
And so that was heavily really soho weighted at the time not even a we've now called SMB system the mix between Soho SMB and enterprise is substantially different today than it was back in a way to nine and just to give you a benchmark.
Going into the great recession in terms of the peak a the cancel rate increased about 50 basis points per month. It started at a higher rate. It was a 3% versus the current two three to four and it peaked at 3.5%.
Great.
And your next question comes from the line of game, that's with Piper. Please proceed with your question.
Hey, guys. Thanks for the question you guys actually I've asked with most of mine, but just one for you you know one thing that was not addressing the analyst day was was the prior cross all programs I think are important in the cloud business, but which didn't work out in the past in the past cycle. When you guys try to do it under the old management team, but I guess, what's different this call and how are the early.
Cloud cross sell programs going with this environment.
Yeah. Thanks appreciate that question. So we're doing a few things so we and we might have talked about this I can't remember at the at the analyst day, but so we started to bundle sugarsync and IP vanish that really is a retention play so same price both products together and it's early.
Okay. Because you know we're not in that many renewal cycles. The month to month look good, but we haven't yet hit an annual cycle, but from a retention point of view that seems to be working and we're seeing some good early positive side. We've also bundled VPN with Viper, we've done a viper being our endpoint product and then we've created a Viper VPN left.
Bridging our white label VPN technology inside of the security and privacy business and there were trying to drive more average revenue per user and there were seeing some good progress and solid numbers double digit growth in revenues on that bundle.
Then we got to speak about the Pant, which is actually a digital media and cloud services collaboration where we're leveraging the footprint of the native application speak tap and building side of it a white label speed test TPN that for the beginning with risk free with some data limits and now we've added a monetization layer to the.
That in the early results are good where if you get a certain when you hit the usage cap you have to convert in to a paid subscriber if you want to continue to use the speed test VPN.
And then in another cloud digital media bundle or we actually use humble bundle and so humble bundle did a work from home bundle that had nonjets you and Jay to products I think we had encrypt <unk> knee, which is our remote access DPN product in that bundle only drugs.
Some good order so for the most part I think the natural bundling that's happened in it and that's mostly in sort of security plus privacy coming together as well as well now exploring some more on the SMB enablement side, which is dorm architect customers want our soft phone services to our saw phone services want more.
So that's that's sort of the next wave of exploration in terms of of ways in which we can cross sell.
But things what color and Oh, good good luck this quarter.
Thank you.
Thanks.
Thank you. Our next question comes in the line of Jane Green with William Blair and company. Please proceed with your question.
Thanks for taking the question just just a couple one right in the next just talked a little bit about Oh.
Ookla, what do you see the trends there team of people working from home lot of people checking their speed and make sure you get the band what they need five remotely and then to just from an M&A perspective, obviously, not a lot happening when you face to face.
What is certainly not not capital while operating from an operating perspective your ability to be multiple deals.
In a single quarter.
Things would open up a bit do a bunch of several onetime yes, what extent you you that across your different operating segments and your different general managers. Thanks.
Yeah, Great question. So just on the on the speed test side, we've seen a volume testing volume increased 25% year over year really for for the reasons that you just described that doesn't.
Necessarily immediately translate into revenue is remember the foundation of the businesses, it's subscription and licensing of data certainly having more data helps improve that product, it's not something we would necessarily charge more for it certainly cements our position.
In measurement in broadband measurements, so well taken its good it doesn't it's not a it's not a a traffic lift is not equate to a dollar for dollar lift in revenue.
And then in terms of the second question look I think as as we said.
In the past given our general manager structure.
As long as the deals are spread generally across the various general managers, we could do a lot at once and so you know because again, we get deals done at the general manager level, we get deal done a divisional level, we get deals done at the corporate level. So when you look across the number of sponsors that you have inside of the company, it's close to 25.
Answers and it really sponsors being individual sponsors to just to clarify so having that many sponsors allows us I think integrate a and to acquire a fair number at the same time, if that's what ends up happening.
[noise]. Thank you. Our next question comes from the line, what Satcom Korea with RBC capital markets. Please proceed with your question.
Great. Thank you could you. Please god talk about how you're thinking about a marketing spend just overall across the business. How we should think about it as a maybe a traffic on some properties and increase and you may want lean into it if pricing is attractive versus nagata. So.
Other businesses, how should we think about marketing spend in Q2, and if you can for the rest of the year. Thank you.
Sure you know that's what Oh, that's that's got not only.
No I was just want to say through the first four month of the year, we've actually increased our marketing spend year over year slightly not not in a significant way largely due to what you. Just described we think there's some interesting buying opportunities as a market or from a customer acquisition point of view. This is entirely on the cloud side right on the media side.
We don't do much in the way of traffic acquisition, but it's mostly organic but on the cloud side and spend marketing to acquire subscribers and as I think I might have mentioned in my call machine for instance, on the web facts side I'm, a nice uptick in in a customer additions at sub adds so we want to lead the main because as others.
We compete with maybe paring back.
There's some interesting prime real estate available for us. So we're going to we're gonna do that having said that we have cut.
Other spend that we just didnt think held the same kind of return to some of this new incremental spend so our ability I hope to manage the marketing budget to being slightly up but getting far more yield out of it is what we're attempting to do.
And what I was I was going to go I think vectrus hit most of the point is this was as we started to look at Q2, but also beyond meaning Q3 and four.
In this environment, you know where should marketing be.
There was a.
There was an implementation in the great recession of Alito nine of I'd say, Oh across the board cuts in marketing.
And we chose to take a different approach. This time because it really is a function of the effectiveness in the yield of that spent so one of the things, particularly with the cloud business, that's where most of that spend originates is to really look at it you know day by day in week by week. So we're monitoring the effectiveness of this.
Then.
We're making judgments about the LTV of the customers acquired and of course.
The important aspect on the marketing is most of that can be moderated positively or negatively very quickly. So that's one of the key.
Items that were very vigilant on as we look forward not just in this Q2 that we're currently in but also for the balance of the year.
But right now as long as the spend is good certainly in those areas that go back mentioned, we would continue to spend the money.
Okay. Thank you Vic Thank you Scott.
You're welcome Q.
Thank you. Our next question comes from the line of will power with Robert W. Baird and company. Please proceed with your question.
Oh, great. Thanks, Yeah, a couple of do I guess, what that it maybe just to come back a follow up on some of the SMB commentary, obviously, encouraging I guess, thus far not to be saying like an increasing and cancel rate. So I wonder if there's anything else you're seeing with respect to preferred pay that certainly higher bad debt.
Or anything along those lines that.
Gives yet there are signs of caution though.
No you know look nothing nothing meaningful nothing appreciable and and again, it's it's early and possibly one thing to think about is.
You know because our price points are relatively low you know and as people start to study their expenses, whether it showing up on a credit farther showing up on an 18 lunch or yeah. We're further down that list so that could be possible a possibility.
The other thing is remember our industry happened to be healthcare legal financial services those seem to be doing better than some other industries and then I think it's important to draw distinction between local retail.
And SMB I think they're completed in a lot of People's minds, and so we're thinking about all of the businesses that have shuttered on main street.
That's not our customer base. So that's another distinction, but again, it's early and that you know the thing that I continue to press internally and externally is.
You know, we're only two months into this.
Yeah. Okay. Yeah. That's helpful color, Okay, and then I Wonder if you could just touch on you know VPN I mean <unk> realism.
As it turns out I think yeah moving into that business was shale probably timely given the yes, yeah demand for work from home and whatnot. So I know you touched on some of the cross selling initiatives there, but maybe just talk about you had a broader trends you're seeing there they got growth rates would be great.
Yeah, I know, we're continuing on the personal VPN side, we continue to grow organically in that business at night nice growth rates. We think the stay at home orders are absolutely help us where we are very focused I was talking about product development and road map one of our brands called and quick taught me is a remote access the.
10, so think of VPN, both as a privacy tunnel as well as a remote access platform, where more of the former but we have the technology and ambition on the latter and that we think could be a very very interesting.
Opportunity for us, but we have some product development and marketing work that we need to do there were also have a white label VPN business that we've used internally what speed test and Viper, but we also work with other partners, who would want to build TTM technology into their offerings and then we get paid a licensing fee or a huge C and that's.
Also picking up so we're happy to be enough business I agree with you I think you know, we really like the business prior to the to the pandemic, but.
We'd like it even more now it's it's a it's a it's a very relevant and timely proposition [noise].
Right. Thank you.
Thank you. Our next question comes in the line of Rishi Jaluria with D.A. Davidson. Please proceed with your question.
Hey, Scott. Thanks, so much for taking my questions glad you all staying safe out there I just wanted to ask about the two two of the different businesses.
First on the everyday health seismic appreciate that your commentary that advertising revenues up 5%.
In April just what are you seeing out there in terms of traffic patterns are there, especially with the flagship everyday health property and then Scott I'm on Baby Center, you did mention with a lower margin business, which Ah head a little bit of EBITDA growth in Q1 can you just.
Remind us on Baby center, what the EBITDA profile right now looks like and what kind of work needs to be done to get those margins more unwind a with a with the rest of the media business or the breast health care business. Thanks.
I'll start first on the on the everyday health traffic question, So our consumer facing properties everyday health what to expect and Baby center have seen low double digit increases in traffic is obviously more and more individuals go online to search on covisint could relate.
Items.
Where we're seeing a very significant amount of traffic.
He is on the provider side with men page today, where traffic is increased 100% and that's where by the way more of the monetization opportunities exist as I mentioned with more focused on direct provider advertising versus direct to consumer advertising I think they are there are two reasons why why our Medicaid.
Ah traffic is growing one is I think you've got more medical professionals, who are at home who are researching and net page today coverage of of Cobiz 19 has been just outstanding and so we're seeing the provider community come in but I also think we're seeing consumers. We're seeing patients were seeing individuals who want I did.
For medically driven in scientific set of answers and content that maybe historically they haven't looked for so we're seeing the traffic growth we're seeing it.
In consumer far more on the professional side smaller base, albeit but again the it's the congressional side, that's really driving our revenue gains and and you know again not 5% as the organic overall everyday health growth rate is higher than that because the baby center.
In the mix.
And I think you had a question then Rishi on the Baby center or integration, although I would say this is probably going applicable statement also to spice works. So.
He's not are being in the everyday health group Spice works being of course within that Davis.
We are seeing improvement as those assets are being integrated I would say that there's still is.
Probably.
Seven to 10 percentage points gets to be picked up as baby center continues to be integrated into what to expect so and there is some seasonality in that business as well as you know the broader trends in digital media. So that integration is very much on track very much you might expect that we will continue to pick up those point well over.
The balance of the next in real time, probably four to five months.
That was a Q3 2019 transactions that would probably take about a year. Each instance to bring those two target margins.
Right. Thank you.
Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr. carried for any closing remarks.
Thank you very much we did we see one question by email so I'd like to address that before we actually close off the call.
When we're talking earlier about for six weeks acute to the question came in whether we were speaking about its flatness relative to Q1 for Q2 2019, I remember, particularly in digital media the quarter's matter. So sequential really is not what we look at in digital media.
You can look at that in cloud in the case of cloud I would say both year over year and sequentially flat would be appropriate indicates a digital media. We're speaking about the year over year comparison.
And then there was just a question in terms of the mix of our revenues in Q1 of 2020 versus Q1 of 2019, you know media business.
What you want to want to notice that are we did see in Q1 or 2020 actually performance based marketing.
That's slightly eclipse display so display was 35% of the Reds performance marketing was 36 subscriptions were about 28, and if we look at the year ago period, which was Q1 or 2019 that would've been 37% display 34% performance at 27% subscriptions.
So.
I think as we've talked about throughout this call on throughout a number of calls the goal has been to move more and more of that advertising revenue would women's category. We are seeing some shifts in the proportional relationships.
Oh, the operator mentioned this does conclude our earnings call for Q2.
ER normally I would say we will be out there meeting you at a variety of conferences I think they've all converted even through mid June to the virtual format. So we do have a number of those we have a press release out already talking about the two will participate in may including one tomorrow, but they're also in early June.
Or six or seven conferences in the first 10 days of June So I think there's seven or eight between now and mid June and so we look forward for you to reach out to the various brokerage firms hosting this conference is a we will be doing a one on ones in some cases fireside chats as well and then we would look to and.
Now our Q2 Q2 results as we normally do or in the first 10 days of August. Thank you very much.
Thank you. This concludes todays teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.