Q3 2020 j2 Global Inc Earnings Call
Good day, ladies and gentlemen, and welcome to GE to Globals third quarter Twentytwenty earnings calls.
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This call will be says actually CEO of GE to global and Scott Turicchi, President and CFO, Okay too.
I will now turn the call over to Scott Turicchi, President and CFO of GE to global.
Thank you you may now begin.
Thank you good morning, ladies and gentlemen, and welcome to the JV Global Investor Conference call for Q3 2020.
As the operator mentioned I, just got to eat President and CFO Jay to global joining me today is our CEO will that Shaw.
We had an outstanding third fiscal quarter, our best ever despite the ongoing pandemic and question not only the analyst estimates our own internal estimates.
We set records by a substantial margin for revenue EBITDA free cash flow and non-GAAP earnings per share.
In addition to our strong free cash flow generation, we ended the quarter with more than 665 million of cash and investments after spending 12 million for M&A and approximately 150 million for stock repurchases, representing 2.1 million shares.
We will use the presentation as a roadmap for today's call a copy of the presentation is available at our web site.
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If you have not received a copy of the press release, you may access it through our corporate website at <unk>.
Well, you've W.W.J. two global dotcom.
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After completing the formal presentation, we will be conducting a keen when a session.
Operator will instruct you at that time regarding the procedures for asking a question you.
In addition, you may email questions any time to investor Ajay to global Dot com.
Before we begin our prepared remarks allow me to read the Safe Harbor language as you know this call and the webcast will include forward looking statements such statements may involve risks and uncertainties that would cause the actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our various SEC filings, including our 10-K filings recent 10-Q filings various proxy statements and 8-K filings as well as additional risk factors. The we've included as part of the slide show for this webcast.
For you to discussions in those documents regarding safe Harbor language as well as forward looking statements.
Let me turn the call over to go back for his opening remarks, Thank you Scott and good morning, everyone.
Once again, Jay to his demonstrated the fundamental strength of its portfolio and the high quality of its underlying businesses.
We materially exceeded all expectations.
And blew by our records for revenue adjusted EBITDA and adjusted EPS for the third quarter.
I couldn't be prouder of organization and the hard work of our team worldwide.
I remember thinking a few months ago that the second quarter would be a very hard act to follow but Q3 is proven to be special with all of our divisions operating at full tilt.
Well also coming to an agreement to acquire retail me not on the second to last day of the quarter.
As we announced in yesterday's press release.
We used to report that the deal has now officially closed.
More on that later.
There were a number of positives on the revenue side in the quarter.
Our gaming businesses grew approximately 10% organically as we started to see the positive impact of new console cycle on our business.
We're also continuing to enhance our leadership role in the games industry with IDN, having served as lead production partner for the first all digital games come event draw.
Drawing 46 million users across multiple platforms.
Our broadband businesses also grew 10% organically.
Yeah, how business, which as a reminder, cells wife, I design and deployment tools for commercial spaces.
Return to growth after seeing its business negatively impacted in the previous quarter by code.
Not surprisingly we continue to set testing records at speed test with 1.75 billion tests in Q3 up 62% year over year.
Our businesses at everyday health had another fantastic quarter growing revenue by 25% a majority of which was organic.
The professional business at everyday health continues to be a standout anchored by our med page brand, which is up 119% in traffic year over year.
Met page and its sister site recently tied weapon. These network as the most frequently visited medical information web sites in.
In a survey of positions conducted by the decision resources group.
Impressively, 65% of physicians in the U.S. stated that they visit our sites.
We're also one year into our acquisition of Baby Center, which is operationally and financially running well ahead of plan.
On the cloud side, our cloud facts businesses had one of its strongest revenue growth quarters at 4% with a corporate cloud fax business growing over 12%.
While page volumes are now essentially it freed cobot levels.
Much of the quarter was still at below normal volume, making our performance in corporate even more noteworthy.
We believe that our product development and go to market strategies in the health care industry are paying off.
We are winning larger contracts.
I know many investors question, the relevance of our cloud fax business, but I would encourage them to appreciate.
What we really offer which is a cloud solution to secure HIPPA compliant document transfer.
And that solution is fueling $140 million plus corporate business with double digit growth.
Within our cyber security portfolio, our VPN businesses were up 10% organically in the quarter offset by expected declines in our backup businesses.
We continue to be long term bullish on the VPN endpoint and email security parts of this group, while we continue to manage backup for profitability.
We're also excited to announce that we just acquired inspired E learning, which allows us to add security awareness training to our suite of endpoint email VPN and backup solutions.
As strong as our revenue growth was our adjusted EBITDA and adjusted EPS growth were sensational at 14.4% and 18.8% respectively.
Most importantly, essentially all of that growth is organic as we had limited little M&A in general and the acquisitions, we did contribute little in earnings than last year's Q3.
This is an important point as we manage the business for EBITDA and we will take lower revenue growth for higher profit growth.
Well I know many in the market value organic revenue growth with earnings being secondary and in many cases not existed weve.
We view organic earnings growth as the primary goal of our businesses.
To the first three quarters of this year during one of the most disruptive and challenging operating environments imaginable.
We have grown our adjusted EBITDA by 8%.
And our adjusted EPS by 9.1% without M&A impacting those results much.
But acquisitions are central to our total growth mindset and strategy.
So I wanted to spend a good deal of time. This morning discussing the Retailmenots acquisition, which as I mentioned closed last week.
This is a business that I personally studied and followed for over 10 years.
In 2010, I was working with private equity to acquire businesses that would form the basis of a digital media company.
Just on helping consumers make buying decisions.
Retail me not was a perfect target but.
But we came up short on valuation.
We acquired sustains us instead.
Since then we've carefully followed retail me not waiting patiently for an opportunity to present itself.
As our loyal shareholders know, we play the long game.
In this situation reminds me of another asset for which our protracted patients was rewarded.
Everyday health.
And today everyday health will generate roughly $100 million of EBITDA.
What's been attractive about retail me not for all these years, because then it solves to persistent and growing needs.
For the consumer it produces savings the discovery of deals and discounts.
The retailer it produces qualified traffic.
Think of it as digital foot traffic.
In physical retailing location and agglomeration produce foot traffic.
The world of online shopping every retailer has to develop methods for drawing and customers.
Working what the industry refers to add affiliate publishers.
Online retailers are increasingly looking to them to generate demand and drive conversions.
Prior to the pandemic, we were bullish on the long term shift from brick and mortar to E. Commerce. The pandemic, we believe has dramatically and permanently accelerated that shift.
Making the timing of this acquisition is very compelling.
In addition, we believe the relevance of savings for consumers will only grow in a difficult economic climate.
We have been an affiliate publisher since our early days and digital media.
In my first presentation to the investment community right after Jay to acquired Ziff Davis we.
We sure to slide outlining our desire to capture consumers in every phase of the purchase journey, which we broke into four steps.
Got her.
Choose.
By end use.
That strategy has been the underpinning of the growth in our performance marketing revenues.
Of the $250 million of performance marketing revenues, we do any year almost.
Almost half falls into the affiliate publishing category.
It's been a key differentiator between our publishing business model.
And those of others.
We started in the discover and choose spaces.
Leveraging our reviews and buying guide content at PC Mag IDN and later with National everyday health, what to expect and Baby Center.
We then moved more into the choose and by phases with the acquisition acquisitions of offers dotcom blacks.
Black Friday Dot com and a series of other Black Friday sites.
While our efforts have made us a top affiliate publisher in the industry driving.
Driving approximately a billion dollars of retail sales the acquisition of retail me now puts us at an entirely new level.
He told me not website mobile App and browser extension draw 650 million annual visits and drive $4.3 billion of retail sales about four times, our existing retail sales.
On a trailing 12 month basis, we told me not to revenues were about $180 million and their EBITDA margin percentage was in the low thirtys.
Our new colleagues have done a fantastic job at establishing retail me not as a favorite brand amongst shoppers and a leading source of traffic and sales for retailers.
We believe our combined portfolio of affiliate Commerce assets will create value in four areas.
Okay great.
Margins try.
Traffic and future acquisitions.
On take rate, our current affiliate publishing business enjoys about a 10% rate.
While retail me not as around 4%.
The Delta is largely due to the difference in payments for demand clicks versus conversion clicks.
The former will earn a higher commission as the affiliate publisher is viewed as driving incremental traffic, while the latter earns a lower commission as the affiliate publisher is viewed as driving conversion.
Preventing cart abandonment and generating incremental traffic or a valuable combination.
We believe our skills and experience at producing content that drives demand clicks when distributed on Retailmenots platforms.
Will allow us to start improving retailmenots overall take rate.
Every point uptake rate improvement would be worth $43 million of annual revenues.
On the margin front, our current affiliate publishing portfolio operates at about 10 points higher than Retailmenots, but.
Retail me not has historically had margins as high as those as well.
We believe that together, we can return to those margins and apply our well defined and successfully executed shrink to grow strategy.
In the case of retail I mean, not the company has pursued noncore projects such as gift cards and in store that have not only harmed margin, but also distracted from the core affiliate publishing business.
Our traffic retail me not has seen challenges both in terms of aggregate traffic and then the shift from desktop to mobile.
On the former we believe investments and editorial content, especially the type that will drive demand clicks.
Will help to grow traffic.
In addition, we believe that the deal signed or browser plug in is a huge opportunity.
It competes with pay Pal Honey, which is ahead of deal finder in installs, but together they have less than 1% penetration of internet connected devices.
In other words, it's very early days and we think Theres room for a few players in the browser extension market.
And we believe we can lever ceight twos media audience of several hundred million worldwide to drive adoption of deal finder.
I'm also happy to report that the patent litigation that existed between pay Pal and honey with retail me not has all been resolved.
That had been an overhang for a while and we're glad to see that dealt with.
On the shift from desktop to mobile.
We believe reorienting the mobile strategy to focus on mobile E commerce as opposed to the mobile device being used for in store coupon redemption.
To help in closing the monetization gap.
Finally, we believe that the J two acquisition system continued to be leveraged in the affiliate commerce space.
The acquisitions prior to Retailmenots of offers dotcom and our black Friday size have generated amongst the highest IR ours in our acquisition history.
We believe we've acquired retail me not at an attractive EBITDA multiple and within 12 to 24 months expect to operate at an annualized EBITDA run rate of $80 million.
The affiliate Commerce industry is fragmented and we see an opportunity to continue to consolidate to achieve scale.
I'd like to conclude with another update on our SG initiatives.
As I discussed in detail in our last call.
We've made a great deal of progress on our SG efforts, especially in the area of diversity equity and inclusion.
In Q3, we announced a deposit of $10 million in for Black run banks and credit unions.
These deposits enhance the lending capabilities of these institutions, which serve black and brown communities in L.A. and the New York and in places in between.
We also announced an expansion of our partnership with the NAACP.
In which we are committing $6 million of advertising over three years to support the messaging of the leading civil rights organization in the U.S.
I encourage you to spend some time with the new responsibilities section on Jay do Dot com, where you'll see a number of our SG initiatives outlined.
We also welcomed another new board director to Jay to Pamela Sutton Wallace path.
Pam is a highly accomplished and nationally recognized healthcare executive.
Currently serves as the SVP and regional COO of New York Presbyterian and was formally the CEO of the Uva Medical Center.
Given the importance of health care to our company's portfolio Pam's industry experience and insight will be very valuable to the company.
As I've said on previous calls J, two is committed to advancing board refreshment and ensuring we have the optimal mix of experience and background on our board.
Now, let me hand, the call back to Scott.
Thanks for that Q.
Q3, 2020, so the number of financial records for which we are quite proud given the continuing pandemic, including revenue.
Adjusted EBITDA free cash flow and non-GAAP EPS.
These results were driven by better top line performance and an improved cost structure.
We ended the quarter with approximately 675 million of cash and investments.
After the quarter closed we spent about $420 million to acquire retail me not and replaced our 6% cloud notes due 2025 with new 10 year, four and five 8% notes at the JV to global parent.
Let's review the summary quarterly financial results on slide four.
For Q3, Twentytwenty Jay to saw a 3.7% increase in revenue from Q3, 2000 $19 million to $357 million, which exceeded our expectations gross profit margin, which is a function of the relative mix of our business units rose to 84.7% from 82.3.
Percent in Q3 2019 in part due to lower cost and the media segment.
We saw EBITDA grew by 14.4% with third quarter record of $154.1 million.
EBITDA margin for the quarter was 43.2% margin I might note, we usually see only in Q4.
39.2% a year ago due to the improved gross margin as well as cost containment in our operating expenses.
Finally, adjusted EPS grew approximately 20% to two hours in two cents per share versus $1.70 cents per share for Q3, 2019, driven by the aforementioned increases in EBITDA and a reduced share count.
Turning to slide five in Q3, we generated a third quarter record 93.7 million of free cash flow, which included $14.5 million of estimated tax payments usually do in Q2 that were deferred and paid in Q3.
An approximate 20% increase from Q3 2019.
This was after continued to make significant investments in our businesses through 20.7 million of Capex.
On a trailing 12 month basis, we generated 387 million of free cash flow for 66.7% free cash flow conversion of our trailing 12 month EBITDA of $580.2 million.
Now, let's turn to the two businesses cloud and digital media for Q3 as outlined on slide six.
The club business was flat revenue for Q3 2020 at a $170.2 million of revenue compared to the same quarter a year ago remember that during the quarter, We divested Australia, New Zealand voice assets, which cost the cloud business approximately $1 million in revenue during the quarter.
The improvement in revenue from Q2 was due to improved usage from our healthcare customers as well as new sign ups across our various cloud services.
Before turning to EBITDA since we no longer have debt at the cloud business, we will not be allocating corporate expense to the two segments as we did previously.
This was done so that our cloud segment financials would conform to the Standalone cloud financials that are audited each year we.
We believe that this allows for a better comparison of the operational results since the two business segments do not control corporate expenses, nor their allocations.
EBITDA increased by approximately 1.6% for our cloud business to $87.8 million compared to $86.5 million in Q3 2019, after removing corporate allocations.
The margin of 51.6% is up about one percentage point from Q3 2019.
Our media business grew revenue, 8% to $186.7 million and produce 75 million of EBITDA or 33.2% growth after removing corporate allocations compared to Q3 2019.
EBITDA margin increased by 7.6 percentage points from Q3, 2019 to 42 point, 40.2% due to incremental high margin revenue lower costs and an improved opex cost structure.
On slide seven I am pleased that after reintroducing guidance only last quarter, we are raising the guidance for 2020 based on the strong Q3 results as well as the inclusion of we told me not for two months.
Our reinstated full guidance.
Now estimates revenues for the year between 1.447 billion and $1.462 billion adjusted EBITDA between 595 million and 605 million and non-GAAP EPS of between $7.85 per share and $8 per share. This.
This employ lies at the midpoint an increase in 2020 revenues adjusted EBITDA and non-GAAP EPS of 4.6%, 6.6% and 8.7% respectively compared.
To the guidance previously issued.
I would also note that the low end of our EBITDA and non-GAAP EPS estimates exceed the original high end pre cobot guidance of $595 million of EBITDA and $7.66 of non-GAAP, yes.
Finally, before turning the call back to the operator for today I want to address our current trading multiple.
Last quarter of effect noted the Jay to believe it was an unprecedented time to buy Jay to stock and we acted upon it if.
If we look at our own historic trading multiples based on revenue EBITDA free cash flow and earnings. We believe we are significantly below our averages and well below our highs notwithstanding the company, having more revenue EBITDA and EPS than anytime in our history.
By way of example on a trailing 12 month basis, we trade at 2.7 times revenue 7.1 times adjusted EBITDA nine times, non-GAAP, EPS, and 10.4 times free cash flow, which are between 30% to 40% off our average multiples and over 50% off of our highs I would.
Now ask the operator, we join us to instruct you on how to queue for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
And your first question is coming from Cory Carpenter from JP Morgan Korea. Your line is lives.
Great. Thanks for the questions.
That may be one for you on rates I mean, not in now have a follow up for Scott as well.
So appreciate the color you provided on the call and congrats on the closing.
I was hoping you could just unpack a bit more on some of the strategic benefits you see that we told me not brings across your digital media portfolio, maybe how it fits within your existing businesses such as offer dot com.
And then also some of the synergies that you're expecting.
Well thanks for the question Corey and good morning, So look as I said in the in the earlier remarks.
This is a space that we had been in for a while the affiliate publishing space and the affiliate Commerce space. We know it exceedingly well two offers dot com and our black Friday sites as well as our content sites, such as PC Mag and IDN. So it's a space we've done well in we've got a great track record, we've got great platforms and retail me not the leader in.
This space and so we think combined the opportunities in the areas I talked about take rate and margins and traffic growth and future M&A are pretty pretty robust. So this is one that.
We are really excited about its one that that I personally tracked for a while and I think we can do something really special with it and we're excited to welcome our colleagues mostly down in Austin to the company.
Great and then maybe Scott just to follow up on the updated 2020 guide on could you just help impact your your expectations for revenue and profit maybe.
Maybe it digital media.
Verse Cloud segment and then also one question we've been getting a lot of just how you're expecting.
How much you're expecting retail me not to contribute to the quarter. Thank you. Yes. So let me let me. Thanks, Corey let me try to put all that together in a sort of one comprehensive answer.
I thought you did a pretty good job last night in your note as the Vac mentioned you know the trailing 12 month revenue, we tell me not as 180 million operating in the low Thirtys EBITDA margin will get one six of that in our.
Our current fiscal year or Q4 as you noted there is seasonality so we'll get a little bit more than that percentage and we should do better on the overall margin as you normally would see in our own digital media businesses also remember that we are going to lose about $3 million to $4 million in the cloud business because of AIDS.
The voice not being in the revenue for a full quarter versus.
Q4 of 19 it was in the quarter Q3 for about two months and then we also I'd just remind people we have some degree of negative seasonality in the cloud sequentially from Q3 to Q4 as we lose a few business days, although the Vac mentioned, we've been having positive trending on usage.
May compensate for some of that at least on a sequential basis.
Then in terms of the overall margins, but we expect that for the rest of the business.
As we've guided them to be essentially flat there could be a little bit up that could be a little bit down. The influencers. There are going to be the following we remain one cautious because of the continuing pandemic and the talk of a second wave and how that might impact the economy and two I would just remind you that in the year ago quarter.
Baby Center, and Spice works with recently acquired and as part of the shrink to grow they'll be revenues not in Q4 2020 that were in Q4 2019, the offset to that though is we expect our EBITDA margins see about 200 basis points better than last year, so they'll be up not only year over year Q.
Four to Q4, but also sequentially from Q3 to Q4.
Thank you.
And the next question is coming from Schuester crusher, yet from RBC capital markets shoot into your line is last.
Okay. Thanks, let me try to flee.
Could you please talk about your what composition.
Should we should investors be expecting any further changes.
[noise] satisfied with the changes you've made and then the second one is can you. Please talk about the trends you saw with Daniel said.
Through the quarter, so sequential trends from July to August.
Denver and that how what you're seeing early on in the fourth quarter. So far thank you.
Thanks, Sean let me take the first ones Scott and maybe you take the second one so let me start by saying that we have.
We think a fantastic board that brings a diverse set of perspectives and skills to the equation over the last few months. We've added two fantastic New Board Directors, Scott Taylor, who was formerly the general counsel at Symantec and brings a just a great cyber so.
Security perspective, amongst other things, but cyber security as you know is an important part of our portfolio and then as I said in our earlier remarks, Pam Sutton Wallace has just recently joined the board. She brings as the current regional COO of New York Presbyterian and former CEO of the Uva Medical Center just to.
Fantastic view into health care, and the health systems, which is really relevant obviously to our health media businesses that everyday health group as well as our cloud services businesses, particularly our corporate cloud facts. So the new perspectives. We think are great. At the board is now 10. Its expanded we think its the appropriate group to her.
Bob.
Around the table and so we're excited about it and I think ongoing we're going to continue to look for opportunities to refresh to bring in new perspectives and to ensure that the skill sets aligned with the evolution of the portfolio.
Thank you.
The next question.
All right all right Andrew Scott.
Second question.
Yeah. There was I think she had a second question. So let me address that.
So in terms of the digital media progression I'd say follow a similar path to what we talked about in Q2, which was sequential improvement throughout.
Throughout the quarter from.
June when we ended Q2 through September each month was better than the previous and so far based on the early evidence I would say that's tracking balsam fir October just remember that in Q4, our most important months our November and December really beginning in.
About 10 days.
Through through about Christmas time, but so far we continue to see improved.
Improving and firming trends in our digital media businesses.
Okay. Thanks for taking my question.
Certainly the next question is coming from Nick Jones from Citigroup, Nick Your line is lives.
Great. Thanks for taking the question I think maybe this one's for you but.
I guess can you talk about how you know when you talk about you know discovery I discovered shoes buy and use other opportunities within the health care business to do this.
When I look at varied cast is property Theyve Rx favor. We recently saw good Rx go public kind of doing the same thing but for pharmaceuticals. There's telemedicine marketplaces is there any way or opportunities to kind of bridge or know how at retail to kind of the health care space or is there kind of a different dynamic there that makes it more difficult.
For like an SCR perspective, or marketing perspective, or any thoughts there would be helpful.
Thanks, Nick It's a great question. So let me let me start by saying that we actually do a fair amount of affiliate commerce within the everyday health group, the parenting and pregnancy space with Baby Center and what to expect as you can imagine, we do very well and since in categories such as baby registry.
Cord blood.
And things that attach themselves to families that are expecting so we see a fair amount of transaction volume and compensation, there and we continue to view that as a growth area within within the the other health properties, we do have categories, including.
Including wellness and diet and meditation subscription businesses, where we are compensated.
For driving transactions and we see opportunities there.
The pharma discount space.
Which is getting a lot of attention given the success of good Rx is a space that we have started to dip our toe into that water. There are complexities. There were essentially a lot of the affiliate players are really ppms pharmacy benefit managers themselves and that might be a level too far for us.
Yes, we don't know we'd have to look at that I think more appropriately I think everyday health has an opportunity to work with the good Rx is of the world, which we've done and the share cares and other entities in the space to be drivers of their businesses. So that would probably be more appropriate place for us to say it but we do we view any category.
Bear where consumers are looking online do as we say discover the product they want choose buy and use it and where we can get compensated for driving that transaction. So the health category is absolutely one.
Great. Thanks for taking my question.
Thank you and the next question is coming from Shyam Patil from Susquehanna Sham Your line is less.
Thanks, Hi, guys I had a couple of questions.
Our retailing not thanks for the color on the trailing 12 month revenue and margins as well as the.
That did get your run rate.
But I was just curious with with the stream to grow strategy.
As well as just your overall strategy for the business and are there any guidepost you can offer in terms of how to think about revenue for retail me not for next year as well as EBITDA and also is there anything we should keep in mind.
Regarding seasonality for both revenue and EBITDA, specifically for we've done the Dod as you try to model out next year.
Yeah, I think that you.
You highlighted an important points. So the trailing 12 month revenue as we noted is 180 million I think that our expectation and we obviously still very much Steven budgeting and not prepared yet to release 2021 guidance. I think you should expect that number to be possibly down somewhat in 2021 is we do shrink to grow the compensating factor.
The margin should be up as the Vac noted we've got about 10 percentage points in margins to gain in that business. We don't think we'll get them. All next year, but certainly as we are exiting 2021 and going into 2022, we should be starting to hit a more normalized margin level. So you got to give you. Some some guideposts in terms of seasonality it's.
Similar to our core digital media businesses.
Where you're getting 30 ish percent of the revenue in Q4.
And a fall off in Q1 so.
So I think you can you can impose a similar seasonality to what you've already been seen in our digital media portfolio.
The only thing I might.
Sean the only thing I might add to what Scott said is.
I think we have a great deal of understanding of the parts of the business that we don't think are promising and therefore might fit the shrink to grow piece, what we need to work on through our modeling and our budget process is how quickly we can achieve growth in the areas that I outlined in my in my early.
Remarks, and depending on that timing you can absolutely see an offset to the shrink to grow. So I think that's the piece that is the unknown, which is the timing around the progress we're going to make against the various pieces.
Look we want to be very focused in the near term, we're moving into Black Friday cyber Monday cyber week. This is the peak shopping period. So in many ways. We don't want to distract anyone I think the company needs to be focused on executing well in the next two months and then I think we will be in a better position to start to put in place.
The various growth.
Strategies and ideas that we have so look give us a little bit of time to to unpack that and I think by the time.
We're issuing guidance next year, we will have a very clean answer.
Thanks, its very helpful. I had one follow up just on the on the fax business.
The growth rate you called out were very impressive.
Can you just talk about that.
That opportunity going going forward and just.
Particular, how do you think about the growth opportunity within facts overall as well as corporate taxes, and then within that just the health care business.
Look I you know I've said it many times I'm not sure anyone ever really registers, it but we have.
Now at 140 million dollar plus corporate fax business with double digit organic growth is not new and it's a fantastic opportunity and I think as more and more of healthcare looks to shift to the cloud.
We're going to be a beneficiary and the fact remains that for HIPPA compliance reasons and inter Operability reasons fax is a preferred method of document delivery and transfer. So we continue to be bullish in that aspect of the business and as I've said I think.
If we had described this is I've got an H.C.I.T. business growing double digits organically at a $140 million operating at ridiculously high margins trying to solve healthcare interoperability.
It probably be that'd be worth more than all Jay too.
But when we say its facts for some reason the what I, just said and what preceded.
That somehow gets for the.
Falls away. So we're bullish we think it's a great business I've always had spread business.
Great. Thanks, guys.
Thank you and the next question is coming from James Fish from Piper sensor James Your line is less.
Hey, good luck and Scott Congrats on a great quarter and closing re told me not really impressive results.
Scott This is the largest buyback.
Is larger than the last seven years combined we've seen is it that you're seeing less opportunity in M&A closures or just more opportunity in your own shares, which which based on your commentary on valuation I would suggest the latter.
And while we're kind of thinking about it today, if we do have a blue sweep is there any impact to how your taxes might change here.
So I think you you kind of answered your own question, Jim and that and the beauty of our capitalization is we were able to do both obviously, we closed a few small deals in the quarter now closed what will be our second largest transaction in the company's history. We told me not at the same time, we are able to buyback in excess of 2 million shares $150 million.
Collars and really it's driven by that chart on slide eight that I put up which is the tremendous discount when you look at the average multiples of J, two or the highs and we'd argue probably the highs would be more relevant than the averages.
To be very compelling and very competitive with investing money in assets. So.
No.
Because of how we are high free cash flow oriented because our capitalization is such that afford us the ability to do both.
We will continue to look at both sets of capital allocation activities in terms of the Blue wave and taxes, you know the the Biden plan Theres a lot of unanswered questions and and details that are left out.
Certainly the headline is that corporate taxes would go up from the state at 21%, 28%. So you can.
One level look at a seven percentage point increase having said that though.
Details are really the function of what happens to the mechanics.
So what happened in 2017, there's there's things like guilty and deep that were put in place do those remain because they come out we still maintain our international tax structure, so might that become more relevant again to the extent that the rates go up and provide some degree of offset right now the plan is for two sketchy.
It's so far too high level to know what the impact would be other than it's likely that the taxes in the aggregate, where you've sort through at all would be higher than they are under the current 2017 tax Reform Act, but the degree of magnitude is really unknowable.
Yeah understood its still a told me election back today after all and that just some housekeeping items can we get a break down within the digital media business I know it's in the Q2.
Tween advertising and subscription and then any update as the cross selling programs that have been going on in cloud services and if there are any bundles that are especially working well.
Sure. So the first one you're going to see that it's about.
74% for the quarter of performance based marketing and display advertising display advertising and video having a slight will.
Lead over performance based marketing about 26% of subscriptions, you'll see that on the Q, which hopefully be filed either Friday or Monday, and Fivex you may want to address what's been going on in cloud with some of the bundles.
Yeah. So so the we've been doing a fair amount of testing between our backup endpoint email and VPN packaging, we've seen some really good success.
In sum ARPA increase as well as just what we think will be improved retention. It's still early to really understand that because it's you kind of need a whole contract here.
To go buy I'll also say that.
We're continuing to look at acquiring.
New solutions that can be built into the suite. So I mentioned.
Inspired E learning, which closed yesterday.
We just security awareness training and so securities are awareness training I'm sure everyone. On this call has done it.
Your company provides to a third party like ideal training around basically not clicking on tap links.
In emails and on the web and so.
Packaging that in we also think it's going to be an interesting upsell and cross sell opportunity and it was a piece of our suite that we were missing the people we compete with.
Particularly in email security.
Have all done acquisitions in this space and so we're excited to have that as well within line up.
Understood Congrats again guys.
Thank you. Thank you.
Thank you and the next question is coming from Daniel Ives from Wedbush. Daniel Your line is lives. Yeah. Thanks could you talk about especially on health care Pharma I think you tend to see six nine months in advance on the advertising front could you just maybe talk about some of those trends.
You're seeing obviously stable to strong, but just maybe talk about that.
Yeah, Hey, Dan.
So so the pharma market continues to be very strong it it's as I've said in the past it's in two markets. There is the direct to consumer market DTC.
And then there is the direct to provider market DPP on the consumer side I think increasingly pharma are shifting dollars from traditional television to digital and so that's why we're seeing double digit organic growth in our consumer business.
As I've said in the past, we're seeing the same dynamic, possibly even more profoundly in our professional business anchored by met page, where the traditional marketing vehicle or mechanism was worse pharma sales reps visiting pharma that fitted visiting physicians office.
Is that really has stopped or come to a pretty significant to us to a low to a small call. It.
Now, they're looking for digital solutions to reach positions and I as I pointed out in our prepared.
Remarks, our position at 10.
Penetration of physicians is really remarkable.
Were neck and neck.
With wet with Medscape, which has always been the market leader and so we feel very very good about that so we continue to feel bullish.
Bullish about the pharma market, which is material for our media business.
Great.
And then maybe Scott you could it doesn't obviously.
[noise] when condemning first started and there was a perception from an M&A perspective.
That was really going to school you guys down just given the typical model, especially on larger deals.
Obviously, we've seen a deal this quarter, but could you maybe just talk about that I mean going forward in terms of bigger M&A due diligence the way. The team is have you guys. Adjusted now it seems to.
A new norm that wouldn't stop you from larger much more significant M&A.
I think the answer but that may want to chime in the answer is absolutely yes to that as you know and as we pointed out in Q2, we thought it was prudent given all of the uncertainty in both work from home for our own company and employees as well as how it would impact not only our own businesses, but target business. We were look at looking at to put a pause.
Was on.
But then as we saw our own success in working from home and the productivity actually remaining very strong.
The M&A team began to we focus first on things that we have looked at in the more recent past. So we had some knowledge of it but now they've they've gone full bore I mean, so we are completely engaged in M&A. Obviously, we did a few small tuck ins during the quarter that we already announced as part of an earlier release course, we've talked a lot about we tell me.
Not but I think on a going forward basis.
We're really theres just the three types of M&A that remained very prevalent. So we have those small deals that are tuck ins that you saw us do in Q3 those are very much garden variety easy to execute almost in any environment I'd say, we have a very nice pipeline of the mid sized deals think of the baby sensors. The Spice works, we did last.
Year, and then we have a group of the more we tell me not size deals some a little larger some little smaller.
As I always caution people theres always a lower probability on those deals some of them are competitive and some of them when we get into diligence you know we just.
Cannot affirm the price that is being expected by themselves.
Great great quarter. Thanks.
Thank you.
Thank you and the next question is coming from Saket Kalia from Barclays capital. So I catch your line is live.
Excellent Hey, guys. Thanks for taking my questions here.
In fact, maybe just to start with you a lot a lot of talk about retail may not so far so started beat a dead horse, but I thought the math that you walked through earlier was was interesting I was wondering if you just recap a little bit.
Hi level I think it was about 43 million in incremental revenue per point of take rate improvement can you just walk through that math again and kind of why you think there's there's room for upside there or not take rain and maybe as part of that sort of reconcile that for me with the commentary around shrink to grow.
So it feels like Thats theres incremental revenue opportunity, but we've talked a lot about shrink to grow. So you just recap what parts of the businesses are shrinking.
Where where it seems like a part of the business might actually grow.
There's not there's only makes sense yeah.
Yes. It does thank you saket for the question and it's a good one so the way we get at every point equaling $43 million of annual revenue is that retail me not current annualized retail sales for which it receives a 4% Commission is 4.3 billion.
So that simple math and so the idea is and as I said, our properties, which produce.
Got a billion of retail sales, so far less than retail me not enjoy 10% take rate and the difference really comes down to are you viewed is is as is producing demand or are you viewed as preventing cart abandonment and the way to shift up market from.
Cart abandonment to demand and by the way both are very valuable. So don't get me wrong, we want to do both and we're excited to have both but it doesn't mean that you can't at retail I mean, not store to present deals versus presenting coupons and that's the difference there is a difference between a user.
At a checkout experience, saying you know what I'm going to apply a coupon and it creates a conversion event.
Versus a consumer seeing a deal on a product that they weren't otherwise considering and the fact that the product is a quality deal and a quality product drives them to purchase and that and that's more of what our existing assets have accomplished they didn't start that way we evolve.
Mmm offers dot com one lot like a retail me not coupon driven we've been able to evolve that asset. So we have confidence in our ability to evolve retailmenots.
Then your question about well, if that's getting generate incremental revenue, but then they're going to be certain businesses that you.
Start to pull away from as I said, it's a timing issue the things we're going to pull away from you can do pretty quickly right. The things we're gonna grow into take time and so it's just a matter of what is that timing going to be when we say hey, listen in store isn't that attractive for us, let's dial that back.
That can happen immediately.
The process by which generating content distributing content negotiating new rates with retailers that takes time that doesn't happen overnight. So in my mind, you give us 12 months on this and I think we're going to get to a very interesting place, where we have eradicated the revenues that.
Generate no earnings generate losses and at the same time, we start to see the upswing on our growth initiatives and this is precisely what we've done in this space a couple of times before so we have a lot of confidence in it.
Got it very very clear and helpful.
Scott maybe for you for my follow up.
Maybe looking at the organic business EBITDA in the digital and digital media in particular was better I think you mentioned a point earlier that 40% margin relief and seen outside of a queue for the.
I really want to dial into sort of the gross margin piece.
Because I think that's been up and sort of approaching this 90% level for a couple of quarters now and so the question is.
Is this maybe related to some of those baby Center synergies for example, shining through or is there something related to pricing.
I guess I'm trying to understand if if we if we feel that gross margin excluding retail me out of course.
If it's sustainable organically in your view.
Yeah, I think and I. Appreciate the question there. So the answer is sort of yes, yes across the board as Vik mentioned and I think we talked about last quarter Baby Center achieve its integration in terms of its financial integration status earlier than expected that's only improving so we're getting the full benefit of that.
In Q3.
Also though go back to what we talked about in Q2 in terms of the various programs. We put in place that affected both cost of goods sold as well as opex and so it had to do with.
In essence completely renegotiation of all of our contracts. So that did affect Cogs, we did not to just remind people do a rep. So it did not affect the employee.
Component of that but it did affect the vendor piece of it and then so we do think that.
All or substantially all of it is sustainable as it relates to the core business. Obviously, there will be work to be done to bring those state programs to retailmenots.
Got it very helpful. Thanks, guys.
Thank you.
Thank you and the next question is coming from James Breen from William Blair James Your line is less.
Hi, Thanks for taking the question just a couple on can you just talk about sort of the revenue breakdown the digital media side between.
The different types of advertising subscription et cetera, and how you see that trending much in those draping gaming and then just a couple for Scott you did do a few other acquisitions in the quarter wondering if you could tell us how much you spend on those three and then also how much left on the buyback.
Thanks.
Yeah sure let me one I'd be quick and start just on the on the advertising side advertising was up.
About 10% year over year, we had organic growth at everyday health and and gaming and GLA. We also did have some benefit from from some M&A from prior periods. We do have some challenges on the lead Gen side on the B to B side, that's still not at the level, we'd like it to be I think this has been the.
One area of the advertising business that's had.
Covidien pandemic related challenges I want to point out something very important, though we get little to no election advertising.
And that has been a major boost in the advertising numbers of other digital media businesses. So we are performing at this level. Our display is up 13% as part of the advertising advertising is display in performance marketing.
This is our eighth consecutive quarter.
Growth those who have been around the company a while remember a time when when display was a concern and we have gotten past that and then just on that on the subscription side media subscription side were roughly mid single digits, which.
Which is a deceleration in the media subscription business part of that is kind of some competitive headwinds in.
In the gaming subscription.
Space, but that's been offset.
And it doesn't show up here per se, but in our increased gains publishing and humble that's become a.
It's more material and important part of that business strategy, which is to be a publisher of gains.
This is just a just having the subscription service.
And then Jim in terms of the second question the deals that we closed during Q3, we spent about $8 million on those which told there are small tuck ins.
This does not include obviously, we told me not or I yell, which Rebecca mentioned in his opening remarks, which is close yesterday, which will be Q4 deals.
And then in terms of the stock buyback, we initiated a 10 million share program.
At the end of last quarter, meaning Q2, so weve now purchased 2 million shares under that program. So 8 million shares remain.
Great. Thank you.
<unk>.
Thank you and the next question is coming from will power, calling from Baird will your line is lives.
Okay, great. Thanks, Yeah, I guess I'll try to put it in a couple of questions here, maybe just following up just quickly on the media subscription comment when you're looking at kind of mid single digit.
Growth does that include nuclear or is there a separate from that I guess I'm kind of curious what you're seeing that glut sounds like really good download trends and how can you know fiveg, perhaps positively impact that so just trying to get more color on that piece of business to start.
Yeah. So so the nuclear business is inside and much of the of the businesses inside of that the advertising portion of the business.
He is not inside that you know it's interesting we are.
Seeing extraordinarily high levels of of testing volume, which is not surprising obviously, which improves the dataset it doesn't necessarily convert.
Point for point in terms of revenue, but it is strengthening our already strong market position in terms of data capture and we think that as fiveg rolls out you're going to have the same volume of increased testing and I think it will allow us to produce new datasets for which we can charge.
[noise] incrementally so I do think that will be a tailwind for for the for the business.
And then I think look the one that you didn't mention by the I'm going to mention just because it's related is ACA how.
I can now really was impacted by the fact that you know what it sells really couldn't be used at the height of at least the first wave.
Which was you know office buildings being shut down, but we're seeing a really nice recovery, there and I think an understanding that when people do return to offices, the Wi Fi needs to be as strong as it's ever been as there is still a contemplation that even inside of office is you're going to have high broadband usage.
With video conferencing, you know the video conferencing activity will continue we think to be meaningful not just because people are working from home because I think when you have the mixture of the hybrid which is what we're seeing.
In a lot of businesses, where you people in an office and people at home, they're still Gonna video conference and that's going to put more I think strain on broadband networks and so a business like a house I think will thrive in an environment like that.
Okay makes sense I guess second question.
In fact, you had.
I guess targeted $80 million.
In EBITDA for for retail me not.
In the next.
18 months kind of rough time frame I think maybe just talk about the key drivers of that how much of that's revenue improvement you know take rate or things along those.
Those lives versus cost opportunities share the strength to grow piece. So just trying to get a sense for where the lowest hanging fruit and fruit as they are in kind of the confidence level of reaching that target.
You know well I just say, it's all of that I think that the you know I think we will certainly see margin earlier as we de prioritized low to negative margin businesses I you shrink to grow I think we will start to see the benefits of take rate and traffic, but that's going to take longer that doesn't happen.
Overnight, but it will happen we believe within that 12 24 months timeframe and then the gravy would be future M&A on the platform right. So so in my opinion, you know, there's an order of battle, it's not any different than our typical order of battle and so you you.
Go out and the things that you can de prioritize first and then you build in the other the other pieces and so again I think by February when we have our next call I think we'll have a better sense of.
The pace and timing of the organic.
Opportunities around take rate and traffic.
Great. Thank you.
Thank you.
Thank you I would now like to turn the call back to Scott Turicchi for any closing remarks.
Thank you very much. We appreciate all of you joining us today for our Q3 earnings call Unpacking the results as well as getting a deeper dive on retail me not as usual, we will be at a number of conferences, albeit virtual between now and the end of the year. So look for press releases to announce those conferences.
Also we will be doing a variety of non deal road show activity virtual course, and so if you have any follow up questions or interest. Please reach out to me or to go back four to one of our analyst and we'd be happy to facilitate a conversation and then we would expect our next regularly scheduled earnings call to be Approx.
Currently in the second week of February two announced Q4 results and then release 2021 guidance. Thank you.
Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Yes.
Okay.