Q2 2020 j2 Global Inc Earnings Call
Well Gee, you Global's second quarter 2020 Arnie.
I understand all the operator.
Today.
Hi, all participants are any listen only mode.
And then answer session will follow the Wall Street, and he said if anyone should require operator systems. During the conference. Please press star zero telephone keypad.
On this call will be the best shot CEO of seats, the global and Scott <unk>, President and CFO.
I'll now turn the call over to Scott <unk>, President and CFO of Jason. Thank you you may begin.
Thank you good morning, ladies and gentlemen, welcome to the Jay to Global Investor Conference call for Q2 2020.
The operator mentioned I, just got to Ricky President and CFO Jay to global joining me today is our CEO was actually.
We had our best second fiscal quarter ever setting records for revenue adjusted EBITDA.
Non-GAAP earnings per share and free cash flow. In addition to our strong free cash flow generation, we ended the quarter with more than 616 million of cash.
In addition, our board authorized the 10 million share repurchase program through August six 2025.
We will use the presentation has a road map for today's call a copy of the presentation is available at our website.
When you launched the webcast there was a button on the viewer on the right hand side, which will allow you to expand the slides.
Not received a copy of the press release, you may access it through our corporate web site at Jay to global Dot Com.
In addition, you'll be able to access the website webcast from this site.
After completing the formal presentation will be conducting a Q1 nice session.
The operator will instruct you at that time regarding the procedures for asking a question.
However, you my email us questions at any time 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 called the webcast will include forward looking statements such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our various FCC filings, including our 10-K filings. We sent 10-Q filings various proxy statements and 8-K filings as well as additional risk factors that we've included as part of the slide show for this webcast.
Refer you to discussions in those documents regarding safe Harbor language as well as forward looking statements now let me turn the call over to go back for his opening remarks.
Thank you Scott good morning, everyone.
The second quarter of 2020 was the most challenging and disruptive quarter, our economy has ever fish.
With GDP in the United States estimated to have declined an unprecedented 32.9%.
This period presented a test the business resilience, unlike any we've ever seen before.
I'm proud to say that Jay to past.
Fine colors.
On every financial metric.
Revenue adjusted EBITDA, adjusted EPS, and cash flow, we exceeded our expectations and remarkably.
Records.
This is a tribute to the thousands of hardworking and focused employees at Jay to around the world, who continue to demonstrate the ability to surmount challenges.
Three months ago based on April results and trends, we believed we'd see a slight decline in revenues in the second quarter.
Instead based on a significant rebound in May and June total revenues were up 2.7% in the second quarter versus last year.
We saw improvement within the quarter with May that doesn't April.
In June better than that.
We were anticipating that aren't digital media segment revenue would decline in the quarter given the massive dislocation in the AD market.
Instead, we grew close to 7%.
Every single business unit in the digital media segment beat its forecast in the quarter.
We saw advertisers return to spending.
As I said in our last call our AD business has little local travel food and auto exposure.
Our display business is about 40% health care, which continues to show great track.
Everyday health display revenues grew 35% in the quarter.
We're also advantaged by our performance marketing businesses, which exhibited a meaningful recovery in the middle of the core.
The cloud services segment also whether the Q2 storm very nicely.
Revenues were down 1.2% on a year over year basis. However.
If you adjust for Forex and Jay blast, which is a broadcast fax business. We sold in October 2019.
Revenues were flat.
Cloud fax was essentially flat in the quarter notwithstanding a decline in medical record volumes.
Significant reduction in elective procedures in the U.S. directly impacted our paint volumes.
But we're starting to see page volumes return to the cloud fax business as elective procedures are coming back.
[noise] security and privacy businesses grew well SNB enablement declined as we experienced some losses and reductions of larger contracts in a slowdown in customer attached.
Overall, the cancel rate at the cloud services continues to be stable.
Which is you know something we closely monitor.
We continue to be optimistic about our security and privacy portfolio, which is over $230 million of revenues.
[noise], we just announced the addition of a new leader to oversee all three of the cyber security business units.
Well, that's a pill joins us as the group general manager of security privacy and data protection.
Having worked at Norton Lifelock and Symantec, so the past decade.
We're excited to have a back on the team as we look to scale and develop our cyber security suite.
We're also excited that Nick Nelson.
Came to us and the I.P. vanish acquisition and has been a catalyst for a number of growth initiatives has taken on a new role pursuing business development opportunities across the cloud services portfolio.
Even more impressive where the adjusted EBITDA and margin results in the quarter.
Adjusted EBITDA grew 6.1% year over year.
And our margins expanded by 130 basis points to 40.1%.
As I described in our last call, we would decisive actions to manage expenses.
While continuing to invest in our organization.
We have avoided the large reductions in force and more draconian cost reduction measures of many in our industries.
By focusing on better managing our vendor expenses and hiring.
The careful cost management paid off in the core.
Not just with respect to adjusted EBITDA, but also with cash flow.
Our net cash from operations grew 46%.
And our free cash flow grew 35% year over year.
We closed the quarter with $711 million in cash and investments.
This was after purchasing $24 million of J calm shares during the quarter.
And as we announced last night the board has authorized a new 10 million share repurchase program.
For the next five years.
We believe that our own stock currently represents one of the best investment opportunities available to us.
[noise] based on second quarter performance.
<unk> increased confidence in the state of the operating climate, we have reinstated guidance for the year.
Our underlying assumption in our new guidance is that the business environment in Q3 in Q4 will be stable.
But to be clear, we're not contemplating a sharp recovery.
We're assuming more of the site.
On the bottom line, we are estimating an adjusted EBITDA margin of over 40%.
As we continue to be very careful with our expenses.
On the M&A front.
I'm happy to say that our acquisitions machine is back on and we are pursuing a number of interesting opportunities as we had better visibility into the market environment.
And have gained comfort in transacting in a virtual manner.
I continue to believe that our patients will pay off at a higher quality opportunities.
While giving us the time to optimize our current portfolio.
I would hope that our Q2 performance gives our shareholders confidence in that approach.
We continue to focus or M&A efforts and some core themes, including.
Health care embracing digital transformation.
Small and medium businesses seeking cyber security solutions.
Video games emerging as the number one form of entertainment.
And E commerce, becoming the dominant form of retail.
I'd like to take a moment to talk about corporate governance.
Earlier in the year, because we were speaking to shareholders in their proxy departments.
Topic, a board refreshment was discussed.
Oh February Board meeting.
Our board supported the idea of identifying new director candidates for Jay too.
As the company in its recruiters developed a slate.
A potential candidates.
We're very pleased to have announced yesterday that Scott Taylor has been appointed.
<unk> board of directors.
Scott I spent over 20 years working in Silicon Valley, including 12 years as he VP and general Counsel Symantec.
Leader in consumer and enterprise cyber security.
Scott brings a deep understanding of the cyber security industry.
Market that is very important to Jay too as well as extensive legal corporate responsibility and M&A experience to our board.
Scott as more than 10 years of experience, serving as a public and private company director and brings a wealth of governance experiments.
We are grateful to welcome him the Jay to team.
[noise] Scott's appointment does not marketing and of our refreshment efforts.
We're studying policies.
Best practices and approaches to insurance and advancing ongoing board refreshing.
The company has identified a number of highly qualified individuals who would make excellent directors Ajay to.
Bringing fresh new and diverse prospectus to the company.
The board is confident that we will be able to add an additional director in the near future.
[noise] also essential tort U.S.G. framework or diversity equity and inclusion efforts at the company.
Last week.
We publish eight to 2020 diversity report.
Which provides detailed demographic and representation data at the company.
We have unequivocally embraced the business instant seidl imperative that have a diverse and inclusive organization.
I believe that doing is greater than talking.
Especially with diversity equity and inclusion.
Since January 2019, 65%.
All new hires Ajay too well and were women or people of color.
As a result today, 62% of our employees.
Our women or people of color.
We're proud of the progress we've made but we have more work to do especially at ensuring diversity at every level and aspect of the organization.
I encourage you to read the report, which is found on our website to better understand our diversity initiatives and the seriousness with which we are pursuing them.
Our commitment to diversity and inclusion.
Goes beyond the company's walls.
This past quarter.
We leveraged our resources and platforms.
Educational and philanthropic purposes in support of the Black lives matter movement.
We committed $5 million, an advertising to the NAACP.
Counsel and other advocacy organizations to promote messages Oh racial equality.
We raised nearly $4.4 million legal defense fun and race for two or humble bundles fight for racial justice bundle.
We launched the black game developer fun.
Million dollar annual program focused on supporting Black game developers.
We have here Mark a million dollars or annual freelance editorial budgets for journalists of color.
And our publishing brands, including Adrianne, PC Mag National ask man everyday health Baby centre and what to expect.
[laughter] produce great content exploring topics relating to race.
And racial equality.
Before I hand, the call back to Scott.
Just a word about the report recently issued by short seller.
We are confident.
We addressed the unfounded claims made in that report on the day in which it came out.
We also believe that are actual performance and results.
Our health reminders of the company that we are.
With that.
Let me hand, it's called Scott.
So back Q2, 2020 said a number of financial records for Jay to including revenue EBITDA, non-GAAP, EPS and free cash flow.
Despite the cobot environment. These results were driven by resilient topline performance and a focus on cost containment.
We ended the quarter with approximately 711 million of cash and investments after spending approximately 25 million in the quarter, primarily on stock repurchases.
Let's review the summer summary, quarterly financial results beginning on slide four.
For Q2 2020, Jay to saw a 2.7% increase in revenue from Q2, 2000 $19 million to $331 million.
Gross profit margin, which is a function of the relative mix of our business units rose to 83% from 81.3% in Q2 2019 impart due to lower content. These in the media segment.
We saw EBITDA grow by 6.1% towards second quarter record of 132.9 million.
EBITDA margin for the quarter was 40.1% versus 38.8% a year ago due to the aforementioned cost discipline.
Finally, adjusted EPS grew 7% to a dollar and 71 cents per share versus the dollar 60 cents per share in Q2 2019.
Turning to slide five in Q2, we generated a record 115.9 million a free cash flow, which was a 35% increase from Q2 2019.
This was after continue to make significant investments in our businesses where capital expenditure program.
On a trailing 12 month basis, we generated 371.4 million of free cash flow for 66.2% free cash flow conversion on a 560.8 million of trailing 12 month EBITDA.
Now, let's turn to the two businesses cloud in digital media for Q2 as outlined on slide six.
The cloud business saw a slight decline decline in revenue of 1.2% 267.1 million in revenue due primarily to currency exchange rates the elimination of J blast revenue and the lower variable revenue contribution as a result, a fewer elective procedures in health care.
Sure that we've discussed previously.
Reported EBITDA decreased by approximately 5.2% 80.7 million compared to 85.2 million in Q2 2019.
The EBITDA margin is 48.3% after corporate allocations down approximately two percentage points due to higher corporate allocations less variable revenue, which has a high incremental margin and a larger contribution from our VPN business, which also operates at a lower EBITDA margin and 50%.
Our media business grew revenue, 6.9% 263.9 million and produce 54 million of EBITDA for 27% growth.
EBITDA margin increased by 5.2 percentage points from Q2 2019, due to an improved cost structure lower content costs and baby center, beginning to contribute added synergize margins.
On slide seven I'm pleased that we are introducing fiscal year 2020 guidance as you know due to covert 19 in the uncertainty surrounding the economy as well as work from home, we suspended guidance on our Q1 earnings call.
Our economic assumptions that the economy will modestly improve from its made you levels. We expect the more they tilted U shape recovery versus a V shaped recovery.
We are expecting to each of our two segments will perform in a similar fashion. In addition, we are divesting or Australia, New Zealand voice assets and the transaction that was announced earlier today in Australia.
We expect the transaction to close by the end of August and it will have an impact of reducing our revenues in the back half a four year by approximately $5 million EBITDA by approximately $2 million.
Our reinstated full year guidance now estimates revenues between 1.3 billion and 1.4 billion adjusted EBITDA between 556 million in 570 million.
And non-GAAP EPS of between $7.17 per share and $7.41 per share.
Following this guidance lighter various metrics and reconciliations statement for the various non-GAAP measures to their nearest GAAP equivalent.
I would now ask the operator to rejoin us to instruct you on how to queue for questions.
[noise]. Thank you well now be conducting a question and answer session and the interest. This time, we I think you. Please limit yourself to one question and one follow up.
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Information tone on the King your line is in the question Q.
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Hi, My first question I'm trying to line I can tell what that's gonna. Please proceed with your question.
Hey, guys. Congrats on the on the great execution during a volatile I'm an economy.
And it on the buyback in the board number I had a couple of.
Well the question.
You talked about yeah acquisition machine being back on I think I think we were all waiting waiting to hear that.
She is just kind of how how are you a protein.
And then a kind of in this environment you know if you're on how you guys looking at it but you know whether it's larger or smaller deals are talking about.
How are you guys approaching M&A.
Oh.
Hi, Good morning, Sean So you know look.
We're wanting our entire business.
Over 4000 people entirely remote.
I think over the last.
Freemont.
Brown confident in our ability to operate in a remote fashion, we have hired ER and Onboarded senior executives I mentioned that capello, even a board member.
Baylor and it was all done virtually so we now feel the same way about M&A that being virtual is no longer a real hindrance and so we are prepared to trend that without physically visiting company in instances, where we can and in locations, where it safe and permissible we'll do so.
But I think that's been a change and I think really when we spoke about this three months ago. We were at the park, where the height of the pandemic I think we're now in an environment.
Where are we think we can transact then look we just sold a company or in this environment that Scott just mentioned so look I think those those considerations are not really considerations or conditions anymore and I also think you know the other thing that we said in that call or was that we thought being.
Haitian wouldn't be beneficial.
You are and so I.
Seeing how the market is settling out anyhow businesses, all responding to the testing. This pandemic is really important information that informs the assets that we choose not to pursue and and the price at which in terms of which we were going to pursue them. So I would say that.
With respect to the size of deals with respect to the categories Nothing's changed I think we as you know we look at deal up a variety of sizes for tuck ins to more substantial deal. We look look at them across all of our business units and operating division divisions, and so I wouldn't say anything that's changed in terms of the nature of the thing that.
Talk about the themes.
In the prepared remarks, you know the areas, where we see the most opportunity so you'll see a lean in on assets that fit against those things.
Thank you that's very helpful. And then I just had to that's all model question. I know you guys. I know you guys don't typically like the died on quarterly basis, but as you guys look out to greet you in Fourq you any geico's you can offer us just in terms of how to think about cloud versus there's a media, but the new.
As well as is always EBITDA.
Sure, let's let's try to unpack the back half of your guidance Sean.
So I think first of all as most people on this call understand to know our media business is very seasonally positive in Q4, you look at the four quarters. So keep that in mind that when you look at the back half of the your guidance. After you take out the first six months, it's by far from being equally weighted on the media side. So.
Secondly, remember that we made and economic assumption, that's generally not things we'd like to do we think that's important in new understanding how we see the economy in the back half the year I call. It the tilted you, meaning not a sharp V shaped recovery, but that legacy you, having some upward slope from Q2 through Q3.
In Q4 that May end up being a conservative assumption, but obviously as we've talked about in out to earnings calls you know things evolve very much in the cobot environment week to week, so with that kind of as the headline then let's break apart. The two segments I think in the cloud piece first thing is it do.
We can be another question if its of interest get into greater detail on the agency sale Australian and New Zealand voice assets that are under contract to be sold.
We assume that will occur between now and the end of August. So the implication is we'll lose about 5 million a revenue in the back half the year in cloud roughly that's going to be 1 million and change in Q3, and three and a half the 4 million in Q4. The exact number would of course be a function of the exact timing of closing.
So that's number one.
The number two we look and unpack Q2.
Really.
In the cloud business as you know it's very sequential.
I think for a lot of businesses, both our cloud nine media April you kind of have to ignore because as the movement work from home and the hitting the economy was the most dramatic we eliminate that it's on the cloud business, we look at.
May in June and we see that after you've adjusted for AMC, There's probably a 1% to 2% decline in revenues versus what I'll call. The pro forma numbers for Q3 in Q4 of 2020 versus 90.
Now, let's turn to the media side the business.
Immediate side the business, we actually think that June of the three months in Q2 was probably the most represented as Matt mentioned, we saw sequential improvement from April to make make did you.
So if we look at the media business, that's going to be a 2% to 3% decline.
Year over year.
Using the June run rate.
Now.
Remember that that's not equally weighted based on my earlier comments between the two quarters also I think you know our own analysis.
We would put more of that decline in Q4 as it degree of conservatism since it is the more important quarter between the two for us in Twentytwenty as it is in most years, but also because the visibility will become clear as we get closer to Q4 and that will have certain implications as to advertise so.
When you roll that all up I think our media business should be roughly flat year over year in Q3, and then down somewhat but in Q4.
Obviously, the things we have a range as you know the things that will move us in that range will be.
First and foremost the underlying economic reality.
And then our own response to that reality in terms of the margins, we actually expect in both instances Q3 in Q4, our margin profile to continue what we've seen in Q2 and to be an improvement over Q3 in Q4 2019.
So you'll see at the midpoint of the range.
EBITDA is up notwithstanding the fact that revenue is expected to be down the back half of the year.
Great. Thanks, guys great quarter guys.
Thanks, John.
Thank you aren't why sometimes in the line up the cat Holly I with Barclays. Please proceed with your question.
Okay, Great Hey, good morning, guys. Thanks for taking my questions here.
Morning.
Oh that maybe maybe just to start with you you know you touched on this in your prepared with <unk> remarks, but I'd love to just double click on the board composition comments you made maybe the question is can you just talk maybe broad brush how the board could look in the next one to two years and justice.
Importantly, how is that composition or you know important flash relevant for the business.
Yeah. So look I think as I said in the in the prepared remarks, we're committed to ongoing refreshment. So so we we've appointed Scott who is a fantastic appointment for the Jay to board brings a great cyber security perspective, as I mentioned, we had a $230 million and growing.
Cyber security business, it's very important to the company and having that kind of you know industry perspective, and expertise is really valuable so that will be something as we think about future appointments, making sure that we align industry experience against the businesses. We're in so one for instance.
But I would tell you is that health care, we would like to see some more health care experience within our board and that's an area that that we are very much looking at you know I think the other thing is just skill sets that aligned with the businesses that were in a subscription marketing skills got M&A in France.
The actual skill sets Oh really important.
Got to having at the board and if the board level and then diversity you know I spent quite a intentionally a lot of time on my prepared remarks around the company's diversity equity and inclusion initiatives. They matter a lot to me personally and they frankly matter a lot to our business. They are essential and we are dealing thing.
Up and down the organization, including at the board level to make sure that that are out that all workforce norbord represents the audiences and the customers that we serve.
Diversity is absolutely an important part of it and I would tell you even more broadly.
We have a goal at the company to be a top rated yesterday company and so we're gonna do you're going to see a lot from us not just around <unk> initiative, but also our climate sustainability initiatives look our entire business is predicated on shifting up from analog to digital which really.
Shifting from carbon heavy to carbon friendly so all of those things I think will come together into a larger yes G set of activities and communications initiatives and strategy designed to really make us a top names and a leader in this space. So look I think we're excited.
We're excited by what we've done and we are really excited about what's coming.
That's great. That's that's super helpful. Maybe for my follow up fruit.
For the detail on on the seasonality a across those two businesses to keep in mind, maybe just to just to dig a little deeper into the digital media business can you just remind us the split performance versus display and and maybe the Oh, maybe just a question for both of you how is that changing if at all.
In this new backdrop.
Yes, so the first of all let me let me begin by just saying if you just to remind everybody leverage off of the previous question.
On digital media irrespective of display performance were subscriptions.
There's a much heavier weighting to Q4 than Q3, so if we look at the full fiscal year.
Q4 exclusive of any M&A will be 31, 32% of work total reps that obviously reverses out in Q1 Q2 in Q3 tend to be in most years somewhat similar so that's just one.
Back to it I think as it relates to your question, we're starting to see a convergence when you look at the advertising between performance in display on any given quarter. One may have a slight leadership over the other so I believe that in Q2 for example, about 38% of our advertising revenue what's display 35 per.
It was performance in Q1 of this year that was actually flipped what performance had a slight edge over display. So I think you should be thinking that all things being equal they're starting to converge and they're getting close to 50 50 from an advertising perspective, then of course, the subscriptions would be on top of that.
You know the only thing second I would add to what Scott just sat is that.
If there was never a question about our AD business I would tell you that this is as high quality an AD business was you can have I mean, frankly this environment for advertising businesses is incredibly punishing and here, we are doing really well with the advertising business up 10% year.
Over a year I think you've got three factors number one and we talked about this but the performance orientation of our advertising business, which is not just the whole for performance marketing creation of it did even arc display business behaves like performance marketing in other words, <unk> bought and judge based on its ability to Joe.
On the rate return on AD spend and performance.
You know performance really stands out performance oriented advertising does well in markets like this too I think our category mix given favorable, particularly with the health care piece I mean, as I said, you know that you everyday health display business from 35% quarter. So we feel really good about the mix, we have between health Tech and.
And and gaming and then finally, you know like brands I think over time, we've assembled between Makeable and IDN Baby centre in everyday health and PC Mac well, they great collection of brands and brands do matter and brand sometimes matter more in markets like the where I think prior.
So the pandemic I think you had a lot of lower quality AD inventory in the marketplace that was trading.
What about posture and monetizing effect I think that shaken out and as a return to quality and so you sell quality.
Makes a lot a sense thanks for taking my questions guys.
Thank you.
<unk>.
Thank you. Our next question comes in a line of Daniel.
Securities. Please proceed with your question.
[noise], Hey, <unk>, so maybe just talk in.
On the digital marketing side.
What are you guys doing anything different with customers.
Pricing just given the environment.
In terms of just making sure especially than on some of the programs are facing headwinds to make sure.
That you contain any risk.
As much as possible.
Hey, Dan do you do you mean.
From a performance market do you mean.
Cloud services customer acquisition in marketing and on the media side.
Yeah, No look I think again I think that the focus it's just been on a in this market trying to drive leads transaction and sale.
And that's where we're finding our customers have a lot of appetite spend and lean into and I think data you've got a recognized it if you weren't of the online retailer on online seller before.
You are today, maybe what the pandemic had done using cell it's accelerated the embrace.
Digital marketing.
Digital transactions, recognizing that right now physical retail physical sales even more challenging.
And so to US I think it's just you know the shift in the market just favre essentially our capability.
And our value proposition.
Great and just on the M&A I mean kinda like the first question just a 'cause your own tool.
But from a.
From a side in terms acquisitions, you when we think about tuck in versus more game changers.
And everyday health because it I mean that do it's you're still on the table right in terms of this environment. Just two were clear in terms of going forward that even the larger.
Potentially other sort of pillar deals are still on the table despite the environment.
Look I think everything's on cable as it always has been we are very open minded about situations. We have a very clear set of criteria threshold. This weekend.
Uniquely create value.
We can generate cash on cash returns in excess of 20% we have a high level of confidence in our you don't know our abilities to execute against our plan. We're gonna do it whether it's a small deal already laagered yet so nothing again changes I think that that has been historically.
Lee consistent.
What you should recognize.
That opened at the most of the Dealmaking does happen at the business unit level right. So that denotes a certain size has expanded the number of business units and the number of general managers against those business unit, you're going to continue to see more deal flow there.
And so I think if you looked at it a function of deal flow.
The kinds of deals that fit inside the business units will typically be the most likely deals that ultimately get done.
Great. Thanks.
Thank you. Our next question comes from the line up well powered with Robert W. Baird <unk> Company. Please proceed with your question.
Okay, great. Thanks, Yeah, congratulations on the results and I appreciate the boarding diversity comments on I guess back maybe just coming back to digital media and you just trying to drill down into some of the upside drivers in the quarter again, it sounds like everyday health.
I was a big piece of that particularly display, but I wonder if you could comment on what you're seeing in <unk> and attacked the gaming verticals. Another big questions for some time with respect to you know the console timing and how that would impact advertising trends and then secondly, what do you see another subscription fraudsters you look at humble bundle and ER and who claims that continued at the same.
I'm a recent trend line, what kind of its actually was saying from cobot, if any on that front.
So just in terms of advertising as I said were up 10% year over year on the quarter organic strong organic growth that everyday health and <unk> clock, we did up the benefit of baby centre in Q2 versus last year that offset declines in IDN and ends if media, which.
Which is the tech advertising now that the the gaming piece, we were anticipating even before the pandemic would be down just given the timing.
The new Playstation next lots going into Q4. So we were season seasonality. We were experiencing are expecting to experience the seasonality ship anyway based on the timing of console releases and then on the flip side, there's still a little bit of pressure there.
And you know that that is not surprising, though again that you start to look into June you're starting to see.
So nice recovery, one thing I'll point out about display.
Is that we've had seven consecutive quarters of growth in display I.
I think that's important for people to understand because I think.
They can be a perception at times and that display is under a lot more pressure then it really it art display is different from other display and I think that's one of the distinction we're trying to make here and how people under understand now in terms are you asking a little bit about the.
The subscription business I think we are up organically high single digits in subscription revenues, but we do you have a couple of tailwind. So number like a couple of had was number one is yet to how business, which deploys Wi Fi networks in commercial space to sell software subscription based software to do that did see a contraction in it.
Q2 revenues as a result of coated so the planning being done in commercial spaces. You know obviously was under a lot of pressure in Q2, we're beginning to see some reversal of that in in Q3, but that's really tied to.
When our when our workers Gonna go back and offices and went on there I keep departments going to focus on why installations and an upgrade so we do have some some pressure there we have seen a deceleration in our humble bundled subscription business.
In the quarter, we had weaker games and weaker IP in the quarter. We've had some competition in the gaming subscription business, but then the humble publishing business, where we are published for game is doing very well I think in a prior call I think it was in the last call maybe two calls prior to that we talked about having.
20 games.
On the slate for 2020 were we released 11.
Either entirely new games or new platforms.
So we are on pace and usually I could argue were ahead of pace, usually Q4 is heavy game or leap quarter, and we should see that too.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from your line of Corey Carpenter with JP Morgan. Please proceed with your question.
Hi, This is rider on for Corey Thanks for taking my questions.
So you mentioned that you mentioned that your full year guidance implies EBITDA margin expansion in 2020, despite the headwinds can come in 19.
Could you talk about some of the drivers of the margin expansion specifically are there any expense savings you uncovered that may be carried through bianco, but 19 or any changes to the investment levels you plan to making some of your growth initiatives and then stepping back as we come up the other side a pandemic has there been any change to your thoughts on.
Longer term organic growth for margin opportunity in either of the two segments.
Thanks.
[noise], so I think that the up in terms of the overall cost structure as we outlined beginning.
A quarter ago, when we were obviously right in the midst of it we initiated a number of projects.
To improve our overall cost structure, but leaving sort of three things intact number one first and foremost was the employee base.
Number two was to preserve good sales and marketing spend and the third piece was our capital expenditure program and all three of those actually have been at levels that we would consider to be consistent with where we were.
The Cohen.
Having said that we did look at the other portion of our cost structure, which on a cash basis or a non-GAAP basis represents about 40%.
Oh for total cost structure, and we have we negotiated terms and conditions. We have eliminated a number of activities that pre kobin were thought to be not necessary, but now are deemed luxuries and so a lot of those are gonna be permanent.
I believe even our TV will be lower hurt from the levels that it was pretty cold, but even once we're in a post cobot world. The other thing that we're working on that actually has no current benefit to the Q2 financials and for that matter is not expected to impact Q3 in Q4 is our whole real estate program.
But I would just note we're working right now on negotiating the exit of certain of our leases.
You'll actually see in Q3 on a GAAP basis, a charge as we exit some of our real estate because we no longer happen in a subsidy for given what will become the work from home environment, you don't want to kinda or hybrid basis for a portion of our employees.
So I think we feel very good that while there will be some flexing the cost structures, we look out.
A large percentage Oh, what we have accomplished so far should carry forward I think in terms of your second question.
Well as you know, we don't generally get multiple your guidance or in large part because of the M&A that is you know yet to be done I think that in a post cobrand world whenever that occurs two things will have benefited us one we will be stronger as a company with a better cost structure.
Clearly there will be certain competition that will be eliminated through this process and so I think that our general view would be that the growth rates, certainly aggregated growth rate and margins would be consistent one the case a margin somewhat better than what we've articulated in the past.
Yeah, you know the only thing I might add to what Scott said is that as you know.
We run a decentralized operation, where we try to push as much authority CNL product and business authority down into the business units. We believe that ultimately that's how they'll perform better one of the disadvantages of that is that you don't have the ability to.
Aggregate often your spend to command better rates and so during the pandemic are really right prior to it we identified it as an opportunity and established a procurement function at the corporate level never existed before at Jay to that procurement function has worked across the organization.
To extract far better deal with vendors. So we don't change our mindset around look you know the vendor selection and partner collections can happen at the business unit level, but we're going to run it through corporate procurement to attract the greatest value and that's been very successful and will be.
A minute to Scott's point I also think you should recognize that we've got some favorable mix.
As the advertising businesses continue to do well the advertising flow through is very strong and it is one of the great benefit there's a lot of operating leverage in our advertising business as we don't have much in the way of traffic acquisition costs, which is another a unique feature of our advertising business.
Great. Thanks, guys.
Thank you.
Thank you. Our next question comes in a line of game actually Piper Jaffray. Please proceed with your by said.
Hey, guys congrats on a great quarter glad to hear your all doing well.
How are the early bundling efforts on the cloud services bring going is that what helped kinda monthly churn rate go lower at all and is there anyway to kind of just aggregate between the T.I.D. and the non VIP services in terms of churn. This this quarter. Thanks.
Yes, so so just with respect to bundling or it is a significant opportunity I wouldn't say it was a top priority in Q2, we were really just focused on maintaining.
Strong surplus levels and delivery and support you know removing the entire organization to work from home a lot of our customers are you know had questions that we wanted to manage so retention program for the top priority and I think you see that in our cancel rate slightly improved actually quarter over.
Quarter, which is I think sensational and so a lot of what we focus on should we put a few of the bundling initiatives on the back now with the back of pills appointment overseeing the cyber security set a business unit. We think we can accelerate those going in the back half the year and look at.
Ladies and which we can combine RVP and.
Or private endpoint or backdrop, our fall, saying, our endpoint email security and put those pieces together.
Got it and then maybe Walt lower on security, obviously with covert VPN its material product category and cyber security, but why is why is your VPN solution, having as much success with a lot of the competition out there and is there.
Our way to think about the stability and the overall business cloud services ARPU versus what the impact of the V. P on asset as having because for marine go it looks like on an organic basis ex the VPN business, it's actually been relatively stable outside of that VPN impact just having a lower price point.
Yeah, that's right so to the you're seeing that.
You know in India, the ARPU numbers as VPN is priced lower but to answer. Your first question I look I think that the VPN space is a rising tide lifts all boats space I think there are a number of quality brand in the personal DPN space. We we believe IP vanishes amongst the leaders.
There and so I think we continue to feel that will do well, we think the market's going to do well. We think this is one of those.
You know these one of these markets that have really strong I tell with the part of the market, where we not yet have a significant a toehold, but we would like to is really around the b to b side, which is corporate VPN such as remote secure access into networks and.
And so that is where encrypt dot me, we think can be really compelling and part of a watch it by the way upbringing these units under above that couples.
Leadership is that what we need to ensure that encrypt taught me does well, it's actually have channel and salesforce distribution that the VPN business unit didn't happen Dps business unit.
Consumer marketing business unit. It does a fair amount of customer acquisition online in order to succeed in the corporate market. The b to b market within CWIP dark meat unique channel and you need salesforce.
Alan Channel and Salesforce exists for instance, at all Viper business and so leveraging the various distribution channel. It is another almost sort of think of it as an extension to the bundling question or that we think we're gonna be able to pursue with the back a that couples appointed.
That's that's great color that vaca, congrats on a quarter and.
Take care.
Thank you.
Thank you. Our next question comes from the line of Jane Green with William Blair and company. Please proceed with your question.
Great. Thanks for taking my question I'm, just with respect to cash flow, obviously, a strong quarter, there and you talked a little bit about the margin structure and some team so being down can you just talk about maybe the relationship between EBITDA and cash flow and how you see that are trending from here and then maybe if you can remind us a little bit about <unk>.
You touched on it briefly the impact of the video game platform recycle.
Some of the boxes coming out.
In the back after this year and how that generally come close to the business that's.
Right. So let me let me address your question Jim on the free cash flow I would just note for everybody on the call that.
Free cash flow is not linear nor perfectly correlated with the timing of the earning of EBITDA. So you'll note both in the prepared remarks. It. If you go back into prior transcript, we tend to focus on the trailing 12 month, EBITDA and trailing 12 month free cash flow that tends to smoothed out, particularly things like that.
Timing of estimated tax payments and their magnitude so in the specific quarter. It was a phenomenal quarter, particularly from the cash from operation standpoint up 40% year over year.
That's cash collection quarter, the company has ever had in its history.
That's after and then free cash flows. After we spent 23 million in capex in the quarter still produced a record free cash flow of almost 116 million no I wouldn't note.
That talking about tax payments.
There is a timing difference that happens to slip into Q3. This year of some estimated tax payments of about 14 and a half million.
But even if we had pay those in Q2, it's still would have been the best second fiscal quarter for free cash flow. If we look at the trailing 12 month conversion worried about a 66% conversion of EBITDA free cash flow and that's within the range of our expectation. So don't look at the 85% conversions in the quarter.
The spot conversion right because I'd say there are things that can influence that and we do see variation. If you just look at the quarterly.
Contribution of free cash flow from EBITDA.
And then and I just on the other okay I just thought on the gaming piece.
You know we saw the cancellation of major.
Live events like the Korean comic con, which within the video game industry.
You know that that's like the Super Bowl being cancelled they are moments where are you see large marketing activations and you see just a lot of economic opportunity and so we have to weather. The cancellation of these live events, but I will tell you. The IDN team did really an.
Extraordinary job they stayed something called the summer of gaming, which was a virtual event that the gaming industry really came around and we sort of took the place of those events that were canceled we generated or something like 600 million content views tour 80 million video views 45 million glow.
The life screens and it was a big deal and while it helped drive an kind of Q2 traffic I did help support.
Some of the monetization.
It really just laid the foundation for the future because I think we're going to see more of these virtual of that and even possibly you know post pandemic, we still may find that virtual events for other reasons are compelling. So I just feel like the brands not very nice job in responding and.
You know adjusting to the realities of the market.
Now with Q4 with new costs coming out that you're free up dollars and that that is we do anticipate that will come into play in Q4 it'd be helpful. The IDN business and then I think I also said that Q4 should create strong release quarter for Hubble game, well see the ready for that until 2021, but we think it.
Is gonna be a strong game release a window for us.
Great and then just one follow up you reauthorized the share buyback.
Yeah, I think you bought back shares in the low Seventys in April.
You generally around sort of 8.5 times for EBITDA can you just kind of refresh your best with your thoughts on that and how you think about buying back shares.
Look I.
You know my view is it is part of the capital allocation tool kit.
And as far as we're concerned or the company right now at these levels represents a great buying opportunity and I also want to tell you that you know we want to support our shareholders internally and externally we have a very popular I employee stock purchase plan a lot of our employees are our shareholder shareholders.
And when we see the ability to generate returns in excess of what we could do otherwise whether through capital investment.
With the M&A, we're gonna do it which doesn't mean that we don't have capital investment and M&A opportunity, we absolutely do but it should sit alongside though.
Within within the within the what's a bit in terms of uses of our capital as you all know and many of you have reported a word historic lows right now or in terms of the valuation of the company.
Great. Thanks.
Thank you. Our next question comes from the line ups My Sexagenarian with RBC capital markets. Please proceed with your question.
Okay. Thanks, let me try to please Vicki you pointed to 10% year over year growth and needed. This that's maybe I misheard you I I see 7%, what what does that 10% refer to that was advertising, but that was the advertising fortune.
Great.
And.
Can you can you. Please quickly talk about you know some of the key strengths that you saw that Ah that largely be your expectation to every unit came in ahead of their expectation that which ones where are the key outperformed that you would like to call out and then in the back half. The guide assumes a scott thanks for giving the color for that.
Back half, even the Catholic off could you could you provide.
Some color on you know what does it mean for organic growth rate for the back half I mean is it fair to say that you are assuming a U shaped recovery stable to improving assumptions for going forward with Q2 being the worst get stream. Thanks.
Okay.
So maybe Scott I'll, just start with respect to to the Q2 questions with that so yeah look I think that.
Again, you know this was when we were talking about this and in May we really only at April and April was the really the height.
The dislocation in the aftermarket we quickly start some recovery basically by the middle of May and then into June and again I think it's the factors I spoke about which is performance marketing and orientation that as dollar shifted from brand advertising in the marketplace to perform.
And then we're going to advertise marketers and said look we need to generate a ROI and real return on assets than it does benefit that we are significantly in the farmer add pharma adverse to pharmaceutical advertising market at the everyday health group, which was very very helpful. Overall at the very well.
Long category and a major driver of that.
Talked about four which is the marketing that's done to physicians within the industry exceeds the spending on marketing to patients and consumers has gone from a physical process sales reps visiting physical doctors offices to entirely a digital prop.
That and on that page today and associated assets our leaders in that space. So so that movement was a big driver in the overall pharma in health care performance, Oh component and then just the retail.
Performance marketing, where we get compensated.
But driving traffic to online retailers, we then pass a percentage of the ensuing transaction.
In that business, what we were seeing early in the quarter, where a number of retailers thing look we can't take the demand don't send us the traffic we can't fulfill those supply chain if people fully resolved.
After than we thought.
And so that came back entirely that rebounded in its entirety and we're optimistic about it for the rest of it for the rest of the year.
Thank you. Our next question comes from the line I read huge malaria with D.A. Davidson. Please proceed with your question.
[laughter], how does it make it Scott. Thanks. Thanks, so much for taking my questions nice to see continued resiliency in the best nest wanted to start by digging a little bit more entered the divesting of the aim Z voice assets I'm, Scott, you're you're kind of directional guidance.
Guidance implies it's about a $15 million run rate business about 6 million run rate EBITDA, assuming it does cause end of August I guess, you know a why why what's the impetus for divesting the assets and then B. If we think about this along with the context of a another heavier relatively recent divestments, which as well.
24 that was all seven Australia business is there just something directionally in the AMC market. That's leading you to you know two divestments here is it just kind of a coincidence that both of these divestments happened to be kind of in the same area geographically and I've got a follow up.
So I think there's a few things, though rishi first of all our easy business on the voice side has been in a state of revenue declined for several years now so we actually probably will hit this year somewhat lower EBITDA number that you just referenced a in U.S. dollars.
So we think we got decent price for about six times EBITDA [noise].
But as they say, it's it's one that's been in decline and likely to continue to do. So then if you go back to the analyst day, and you remember needs a unpacking Oh, the cloud business I think when you look at our SMB enablement, what we do in Australia, New Zealand from a voice perspective really is not a bit on a going forward basis. So the core of our voice.
Services or the second line service and the virtual PBX, we have different services down under in Australia, New Zealand I think the third element is just the management allocation of time.
So that the voice business is not that big of business and yet it's very geographically dispersed between Australia, New Zealand on the one hand, United States Encana and the other and then western Europe. So for all of those reasons.
Independent of the decisions that were made in 17 prior to need joining us on the web 24 side. It was determined that hey, those were not core assets and two we could take that cash and better redeployment.
Got it Scott that's really helpful. And then I wanted to go back to an earlier question on on free cash flow conversion. So sounds like you know I recognize we look at us on a trailing 12 month. So you know about 66% trailing 12 month EBITDAC conversion to free cash flow, which is a a nice uptick from <unk>.
Last quarter, how should we be thinking about just the free cash conversion on a full year basis, this year and without getting into very strict free cash flow guidance should we expect it to be directionally up from last year, our they're gonna be some level of co bid or related headwinds that comes to pay.
And then and maybe some some delays on there and changes in accounts receivable that would lead us to be down any started a directional color on how to think about yeah. So conversion for the full year biggest.
So far the answer that question really on the collections is no I mean, obviously, we have a number of different accounts and yes on a case by case basis, there have been somebody had been stress.
Some weve accommodated with you know more favorable terms, but in general we have not seen stressing collections that we did see and I reference a quarter ago certain collections from media side of the business that would have normally occurred in March that did slip into April I think that was more just a function of the conversion to the work from home.
Environment, both for us on the collection side as well as our Counterparties, but that money came in in April so under our sort of tilted U shaped recovery thesis I don't expect that we would see any material change in our ability to collect so as a result of that I think that we are in a.
Fairly tight range on a trailing 12 month basis of conversion.
It's not 66 is not an absolute definitive you know point estimate you could look at it as you know 64 to 67, 68% on a trailing 12 month basis. The one thing I wouldn't know is remember when we say free cash flow that's after capex.
And as I referenced earlier.
As long as we can justify that spend.
We intend to continue to make that spend very similar to in the operating personnel as long as we can justify the returns from a marketing perspective, we will continue to spend the marketing dollars. It's not an area that is targeted for cutting.
So I think we're in that that range on a trailing 12 month basis for this year honestly I don't think under our economic assumption there was much friction coming from collection issues.
Alright, great. That's helpful. Thank you so much.
Thanks Richard.
Thank you. Our final question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking my questions I'm not very nice quarter. My first one just can you talk about be health care facts that one of the most profitable segments of your business.
I still like to surgeries had an impact or in the second quarter, but you know given the surgeon authorization can we expect more of the same a third quarter I'd expect that there's it's a run you know what's built into your assumptions there Ah yes, so the time being.
Yeah. Thank you for the question I think it's it's very important so the the overall club pack business with essentially flat in the quarter when when you adjust for Forex and the J glass disposition corporate factory was up 7% notwithstanding the issues, we add on page volumes, so actually corporate faxed or had a very strong.
Growth organic growth quarter, notwithstanding the fact that we were seeing page volumes in April that were down 22% versus the Jan fab baseline. So so we did see a significant drop in a page volumes may.
Proved to be better than April back down 14% in paid volumes and now we're looking in July.
Numbers look like about down 3%. So this is page volumes in July down, 3% again kind of the pre cobot, a baseline, which make us a which are which are which are great which are great for us and and we think could mean some some you know leads to a stronger numbers for the second half and.
I would just just follow on to quantify it that decline in the page usage related primarily or almost exclusively the health care had an impact on the facts business variable revenue about $2 million in Q2, So I think actually a very strong quarter that was offset by new ads.
And the fixed revenue that comes with that so if these trends continue to improve.
In terms of the usage, then that gives a little bit a tailwind to the facts business relative to its performance in Q2.
Right. Thanks for that color and then but that's just to maybe jump back. The M&A topic. You started with I was just wondering how did that landscape has changed compared to pickup in terms of beat the number of opportunities you're seeing the quality of them.
And at valuations have come up or down in kind of what what sectors have shuffled around it you know compared to a but before the end done or what's more available what isn't at this point.
I don't you know look I think you're seeing a little more the digital media space, because I don't think Oh, many of them, but many of whether the ER. The Kogut storm the pandemic storm as well so I think those that.
I have advertising based businesses that have not done well, obviously, all looking for strategic alternatives.
I think also the businesses that.
Liquidity issues, and you know the and whether or not the right answer for them is to seek more financing or maybe see some transaction.
And then I think we're hearing from a lot of companies that have you know they have similar businesses.
Hours feel like it needs to be scaled and put in combination with something that's equal side and that access to future capital to continue to invest against the business through M&A and cap that we're having those conversations I think people have taken.
No our balance sheet position.
And it's encourage them to say look a you're better positioned to help drive our businesses in combination to a higher level, let's talk about that so really all of those situation for presenting themselves.
Got it thanks, and the size of pipeline itself.
Sorry, I get come again John.
I said the site I plan itself as a chunk or is it does it you know relatively the same.
No I mean, I think it's just it's as strong as it's been I mean, I think you can measure if you measure it.
In deal value, it's probably a strong as it's ever been in number of deals I'd have to look at that and check that but it's wrong.
Got it great. Thank you very much got congrats on quarter. Thank you. Thank you.
Thank you we have reached the end of our question and answer session I'd like to turn the conference back over to victory for any closing remarks [noise].
Thank you Michelle and we appreciate all of you joining us today for our Q2 call. It did run a little bit longer I think it was important to take everybody's questions. We did have a release put out in this environment. We have some a virtual conferences and virtual non deal Roadshows actually beginning tomorrow, then they'll be a bit of a break a and then they reengage.
Page post labor day, so look for the release coming out a little later this month to announce our September conference slate and then we will expect to have another quarterly call in November to discuss Q3 results. Thank you very much.
[laughter].
Thank you. This concludes todays teleconference. You may disconnect your lines at the time. Thank you for your participation have a wonderful day.
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