Q4 2020 j2 Global Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to J <unk> Global's Q4, and year end 2020 earnings call. My name is Paul and I will be the operator assisting you today.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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On this call will be Vivek Shah CEO of J, two global and Scott <unk>, President and CFO of J to have.
And I will turn the call over to Scott <unk>, President and CFO J to global.
You may begin.
Thank you and good morning, ladies and gentlemen, and welcome to the J two global Investor Conference call for Q4 2020.
As the operator mentioned I'm, Scott <unk>, President and CFO of J, two global and joining me today is our CEO Vivek Shah.
We finished the year strong with a record fourth quarter performance, notably we had record revenue adjusted EBITDA non-GAAP earnings and free cash flow.
It was also our 20 <unk> consecutive year of revenue growth.
We'll use the presentation as a road map for today's call a copy of the presentation is available on our website. When you launch the webcast. There is a button on the viewer on the right hand side, which will allow you to expand the slides.
If you've not received a copy of the press release, you may access it through our corporate website at J two global Dot com in.
In addition, you'll be able to access the webcast from this site.
After we complete the formal presentation, we will conduct a Q&A session.
Operator will instruct you at that time regarding the procedures for asking a question. However, as usual you may email us questions at any time to investor at G. Two 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 could cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors that we've 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 that we've included as part of the slideshow for the webcast.
We refer you to discussions in those documents regarding safe Harbor language as well as forward looking statements now.
Now, let me turn the call over to Vivek for his opening remarks. Thank you Scott and good morning, everyone. We saved the best for last reporting record breaking revenues adjusted EBITDA and adjusted EPS for Q4 2020.
Since the onset of the pandemic, we have strung together exceptional results, which speak to how resilient and focused and creative our organization has been.
I could hardly be prouder of our employees around the world and want to express my immense gratitude for their remarkable efforts.
Our performance is also indicative of the quality of our diversified portfolio of digital brands, which we continue to believe are very well positioned for a post pandemic world.
The digital media segment had an outstanding quarter with revenues up 26% year over year.
We saw strong growth and positive signs at a number of our businesses.
And our gaming business IGN had a very strong quarter as.
And as the start of a new console cycle unlocked budgets as we'd hoped.
We view advertising and the gaming and streaming service categories as a nice tailwind going into 2021.
And humble bundle, we launched 35, Skus and 2020 more than double last year.
Given our continued success and indie game publishing.
We are planning to invest and building out our humble games team to accelerate the number of titles, we launched and the future.
Our broadband assets had their best quarter of the year.
<unk> set another record with one 8 billion tests and the quarter.
And and a stat that I find stunning <unk> mobile app installs topped $500 million.
And how which as you'll recall saw its revenues dip in Q2, when Wi Fi planning work being done and commercial spaces came to a halt had a strong finish to the year with particularly robust growth in Asia, which we believe indicates we could see growth acceleration and the U S.
And Covid is better contained.
A brand that has emerged with a strong consumer use case is down detector.
Which saw its visits grow 45% year over year and is now the go to site for consumers to report and view website and App outages.
We've had some good success monetizing the asset to the launch of down detector enterprise, which provide service providers, a real time monitoring dashboard and alert system.
The early integration of Retailmenot has exceeded our expectations we.
We saw good traction on total retail sales attributed to the platform and have done most of the foundational work for us to start deploying editorial and deal content, which is central to our efforts Petco and commission rates.
We did see a slight uptick and commission rates in Q4, which mostly had to do with favorable mix.
Our margin expansion plan is progressing according to expectations and we internally announced our reorder couple of weeks ago.
As you know one of the assets inside of retail me not that we're very bullish about is the deal finder browser, app, which competes with honey and others.
In Q4 installs grew 160%.
And our merchant coverage grew 16%.
Both of which are key drivers of revenue.
Given the momentum, we're also increasing our investments and generating installs and accelerating merchant on boarding for deal finder.
The everyday health group continues to realize the benefit.
Of the shift of pharma marketing and.
Away from traditional methods of reaching patients and doctors to digital vehicles.
The pandemic simply accelerated what was already a trend.
Our health sites continue to see strong traffic and are being recognized in the industry for their trusted content.
Everyday health Dot Com 113, digital Health awards honoring the world's best digital health resources.
And Prime education, when the William Campbell felt toward the most prestigious award and the continuing medical education industry.
We've also dedicated significant editorial resources focused on mental health and racial disparities and health care and health outcomes.
We welcome Dr. Patrice Harris to everyday health as its medical editor in Chief.
Doctor Harris is the immediate past president of the American Medical Association the a M. A.
And a world renowned psychiatrists.
Babycenter celebrated its first year of ownership and side of the everyday health group and I must say that it was amongst the smoothness and most successful integrations we've had.
Our pregnancy and parenting platform has and unsurpassed reach of expecting parents and we are proud to have been selected to be a clinical trial recruitment partner from one of the COVID-19 vaccine suppliers to help them understand the impact of the vaccine on pregnant women and young children.
The cloud services segment grew over 3% in Q4, when adjusting for previously disposed assets with our cloud fax business, having what can only be characterized as a breakout quarter.
Total cloud fax revenues grew over 6%.
And the corporate part of the business grew nearly 17%.
This capped what was easily the best year for cloud fax and the eight years that I've been at the company.
It's a direct result of the investments and focus we've made and ensuring strong service delivery.
Pushing new product features and.
And expanding capacity.
Page volumes are fully recovered from their lows and Q2 and were up 22% year over year.
Our core cyber security suite of endpoint E Mail and VPN.
Had another nice growth quarter, and we are beginning to see the benefits of these businesses being organized.
Under a single leader.
As we evolve our approach to cyber security and as we stated in our earnings release last night.
Our board has approved the exploration of strategic alternatives for our keep it safe libel and ods businesses.
Which do not factor and we're bundling or cross selling efforts or plans.
While we see potential and the B to B backup business. It does not map to our areas of focus.
We think the business make more fully reach its potential with a new owner.
Which is why we are exploring alternatives.
I'll also point out.
And that over the past few years, we've been consistently optimizing our portfolio.
In fact, and our voice business, we exited our Australia businesses last year and earlier. This week, we sold our U K based city numbers and call screen businesses.
These businesses simply didn't fit our strategy and work and a position to compete for growth or acquisition capital at J too.
And that competition gets stronger each year.
And as the caliber of organic and acquisition opportunities for many of our businesses continues to rise.
For the full year, we generated adjusted EBITDA, and EPS of $616 million and $8.18 respectively.
What's most remarkable is at the high end of our pre Covid guidance was $595 million and adjusted EBITDA and $7 and 66% and EPS, we blew by the high end range.
For both.
Alongside the great financial value creation, and 2020 was the companys tremendous social value creation.
And for those of you who participated in our ESG non deal Road show last month and by the way we'd like to have another road show for those who couldn't participate and the first one.
You know that we've organized our purpose driven agenda around five pillars.
Diversity equity and inclusion.
Community.
Sustainability.
Data and governance.
We have made immense progress and all areas and we will continue to drive purpose just like we drive profits.
We've also learned that we need to pride more disclosures to ensure that the ratings agencies have a fuller appreciation.
Of our activities policies and approaches.
Scott will take you through the build for 2021 guidance, but I wanted to make a few observations about our outlook.
First.
Given the higher organic growth, we experienced and the second half of 2020.
We believe that the overall organic growth rate for J, two in 'twenty and 'twenty, one we'll be closer to high single digits with total growth in the mid teens.
Given the organic growth opportunities, we're increasing customer acquisition spending and a few areas, including cyber security Martech and retail me not to support future growth.
So not a huge investment, but it does probably cost us a point of margin in 2021.
I also believe that every single business unit and the company will grow its revenues, which would make this the first year and a while that we do not have any of our businesses posting negative growth.
The combination of removing or dilutive businesses.
Investing in growth opportunities.
And continuing our acquisitions program should have a meaningful impact on total top and bottom line growth.
On the acquisitions front, we deployed approximately $500 million of capital in 2020, which exceeded 2019 spend of approximately $440 million.
The pipeline is strong and we continue to see interesting opportunities for our capital.
Our balance sheet continues to replenish.
With over $300 million of cash.
And we expect to continue to generate in excess of $400 million and annual free cash flow.
We also believe we have room and our leverage ratio to take on more debt. If we so choose.
Our powder is dry and the market is full of interesting opportunities.
Before I hand, the call back to Scott I'd.
And I'd like to take a moment to remember Bob Cressey.
Who is one of J twos original and longest serving board members.
Bob passed away and December leave.
And behind and amazing legacy of achievement and.
And honor.
Bob was a tremendous person who loved his family.
His country.
And our company.
He was a graduate of West point.
Served two tours and Vietnam.
And earned a purple heart and bronze star.
He was a terrific athlete.
Having capped and the west point water polo team and developed and to a great tennis player.
He had a distinguished careers and investor and.
And I'd like to think that as investment and J to over 20 years ago.
Was amongst his favorites.
Bob was a great source of advice guidance and inspiration from me.
He was also one of the best Storytellers I knew and beamed with pride whenever those stories involved his family.
To his wife, Mary Beth and the whole cressey family with terribly sorry for your loss.
He is truly missed by all of us at J too.
Thanks, Vivek before turning to our financial results in 'twenty and 'twenty, one guidance I'd like to also from my condolences to Bob's wife, Mary Beth and his family I had the privilege and working with Bob for more than 22 years. He was an early believer and the company dating back to the summer of 1998, when I was still an investment banker.
Thoughtful guidance and friendship our dearly missed.
Before turning.
On to our financial results I would just like to note that Q4, 'twenty and 'twenty set a variety of financial records, including revenue adjusted EBITDA non-GAAP earnings and free cash flow.
These results were driven by strength across our portfolio. In addition, we got off to a great start with one of our most recent acquisitions retailmenot.
We ended the quarter with approximately $340 million of cash and investments after spending 455 million and the quarter on acquisitions and 36 million on share repurchases.
And I'm pleased to announce that for the year, we were able to repurchase approximately $3 6 million shares of our stock or more than 7% of our outstanding shares at an average price of approximately $73 per share.
Now, let's review the summary quarterly financial results on slide four for.
For Q4, 'twenty and 'twenty J, two saw 15.7% increase and revenues from Q4 2019 to a record $469 2 million adjusted gross profit margin, which is a function of the relative mix of our businesses remained healthy at 87, 2% and improved over 300 basis points from Q4 2019.
We saw EBITDA grow by 21% to a record $211 8 million and finally, our adjusted EPS grew 37% to $3.11 per share versus $2 38 per share in Q4 2019 movie.
Moving to slide five for our fiscal year, we saw on eight 6% growth and revenue from 2019 to 1.49 billion.
Our EBITDA increased by 11, 9% or $65 5 million to a record $615 7 million and our adjusted EPS was $8.18 for the year compared to $7.08 in 2019 for 15.5% increase.
I would reiterate what Vivek said earlier and the call, which is that both our EBITDA and EPS exceeded the high end of our pre Covid guidance issued in February 2020.
Turning to slide six we had a record free cash flow for Q4, generating $102 9 million up more than 25% from Q4 2019 for the full fiscal year, we generated $407 7 million of free cash flow of 16, 3% increase from 2019 and for the first time and our history, we generated more than 400 million.
And free cash flow and a fiscal year.
For the full fiscal year, we experienced a conversion rate of 66% of our EBITDA to free cash flow.
Now, let's turn to the two segments cloud and digital media for Q4 as outlined on slide seven.
The cloud business grew revenue approximately one 2% to $171 4 million and three 3% when adjusting for the a M. Z voice businesses that were sold in Q3 of 'twenty and 'twenty reported EBITDA was up slightly to $83 4 million with a 48, 7% EBITDA margin.
A modest decrease of 50 basis points from Q4 2019.
And this was due as we began to accelerate our investment opportunities in Q4.
2020, which you will hear more about in our guidance our media business grew revenue, 26.1% to $297 9 million and produced $141 3 million of EBITDA for nearly 40% growth the EBITDA margin expanded by 470 basis points.
Turning to slide eight let's quickly review the annual results by segment. The cloud business finished the year at $678 5 million of revenues two 5% increase over 2019 it.
It grew three 3% when adjusting for the asset disposals previously mentioned.
EBITDA was just in excess of 336 million up slightly from 2019.
The digital media business showed a 14, 2% increase and revenues to $811 1 million and EBITDA grew to $317 million or 29% increase from 2019.
EBITDA margins expanded by 440 basis points during the year and achieved 39%.
Vivek provided some highlights of our 'twenty 'twenty one guidance at the beginning of our call on slide 10, and we have outlined some additional elements to help you understand the midpoint of our guidance range. As we stated in our press release, we are guiding fiscal year 2021 exclusive of our b to b backup assets and.
And comparing to 'twenty and 'twenty, excluding sold assets of ANZ voice and certain UK voiced assets as well as our <unk> backup assets.
For the cloud business, we expect a 3% growth and revenue and adjusted EBITDA margins between 48, and 49% consistent with the margins for Q4, despite allocating almost 150 basis points and incremental investment and a cyber security and Martech businesses.
For the media business, we expect revenue growth of approximately 25% and and EBITDA margin of between 38 and 39% also for the purposes of modeling the quarters remember that our digital media business experiences significantly more seasonality than our cloud business. We expect that approximately 20% of the annual expected media revenues will be recognized and.
Q1, and approximately 32% with Brexit and recognized in Q4.
Also remember that we have significant fixed costs and our media business. So we experienced meaningful EBITDA margin expansion from Q1 to Q4.
I would note that we expect to experience higher non-GAAP depreciation by approximately $13 million. This year due to the full year expensing of acquisitions done in 'twenty and 'twenty as well as incremental Capex spent in 2020 that we will begin to depreciate.
We believe that our interest expense net of interest income will be approximately $63 million.
We believe the tax rate will increase somewhat from 'twenty and 'twenty due to changes and our global tax structure, and some shifts and sourcing of our income to higher tax jurisdictions. Therefore, we expect the tax rate to be between 22, and 24% this year and EPS will be calculated using an imputed share count of $44 6 million shares.
Now, let's turn to slides 11 and for our guidance.
And as Vivek mentioned earlier in his remarks, we have been optimizing our portfolio.
Based on the voice assets sold last year in Australia, and New Zealand the voice assets recently sold and the U K and the exploration of alternatives for our B to B backup assets, we are providing guidance exclusive of these assets to better compare to fiscal year 'twenty and 'twenty, we have provided a pro forma analysis.
Are excluded assets produced 68 million and revenues in 'twenty, and 'twenty $26 million and adjusted EBITDA and contributed approximately 38 cents and non-GAAP earnings per share.
This yields pro forma 'twenty and 'twenty results of 1.422 billion of revenue 590 million of EBITDA and $7.80 and non-GAAP EPS.
For 'twenty and 'twenty, one on a comparative basis, we expect revenue between 1.63 billion and 1.676 billion EBITDA between $646 million, and 666 million and non-GAAP EPS between $8 and 93 per share and $9.27 per share.
At the midpoint. This represents 16.2% revenue growth, 11.2% EBITDA growth and 16.7% non-GAAP EPS growth.
This midpoint of the guidance range does not include any future M&A, which we believe would give us the ability to move higher and the range.
Finally on slide 12, I thought it would be useful to look at the last four years of performance and the midpoint of our guidance for 'twenty and 'twenty, one when excluding the assets, we've disposed of as well as the BTB backup business.
It is an impressive 14% CAGR and revenue, 13%, CAGR and adjusted EBITDA and more than 17% CAGR in non-GAAP EPS.
Even though we have recently hit an all time high and our stock price I would note that at the midpoint of our 'twenty 'twenty. One guidance. We are trading at approximately 9.6 times 'twenty 'twenty, one EBITDA and less than 12 times, our midpoint of non-GAAP EPS valuations that we believe remaining credibly attractive.
Following our guidance slide on various metrics and reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalents.
I would now ask the operator to rejoin us to instruct you on how to queue for questions.
Thank you we will now be conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one question.
If you would like to ask a question. Please press star one on your telephone keypads and.
A confirmation tone will indicate your line is and the question queue.
You May press Star two if you would like to remove yourself from the queue for.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And the first question is coming from Cory Carpenter from J P. Morgan Cory Your line is live.
Oh, great. Thanks for the questions and.
At 200, and tell me not that it sounded like the deal and then you'll find your browser extension business has accelerated quite significantly since the acquisition. So could you just talk more about some of the efforts you've made here and had.
And then successful in driving this growth and then more broadly the opportunity that you see and then.
And.
And for Scott just given your early success with the acquisition any change to the $80 million EBITDA run rate target and you talked about last quarter or just more broadly it would be helpful here and what youre expecting for retail and not in terms of growth and margins in 'twenty one thanks sure.
And I take the first one and then I'll dovetail on the beam great well good morning, Corey and thanks for the question. He asked to look on the retail me not integration.
And has been just fantastic the team really did exceed our expectations for Q4.
As I mentioned, we did see some improvement and take rate and this is before the.
And the efforts, where we're gonna stage editorial and deal content.
That we think is going to help drive and accelerate take rates. So that hasnt, yet really happened on the deal finder side I think we have a couple of things going on I think just organizational focus.
More focus on marketing to drive installs acceleration on Onboarding merchants and going in and in 'twenty and 'twenty. One as we noted we are making some investments incremental investments to plan to help further accelerate installs and further accelerate Merck merchant coverage on the deal finder side. So we continue to be.
Very excited for that and the other thing to point out is the shrink to grow is happening. So the parts of the business that we're shrinking are actually being offset by higher than expected growth in the core commissions and advertising business. So the fact that you know I would shift our view of 'twenty.
'twenty, one from being a margin expansion opportunity to being margin expansion and some stability in the revenues. So I think that's all very good. It's it's certainly ahead of plan and.
And I think it is a function.
Of the team's efforts.
The learning that is going on between the retail me not team and the core affiliate commerce teams.
And the Ziff media group.
And I also think it's just the acceleration of E. Commerce I think when you think about.
How consumers make purchase decisions they rely on professional and editorial reviews, which we do as a company exceedingly well, but also on deals.
And and discounts and coupons, which we now also do exceedingly well.
And I would just I would just add to that for for others on the call. When we acquired retail me not as Vivek mentioned.
It was about $180 million run rate business, and we said there was some approximately $10 million of very low margin and no margin revenue that we'd be looking to expunge in 2021 and as a result revenues on a pro forma basis may go down by about $10 million.
Based on that early success and the commentary the Vectren gave I think we feel highly confident now that retail me not will not have.
Any kind of a decline certainly of a material nature and 2021, we think it will be and that $180 million range. While at the same time, having that margin expansion from the low <unk> to the high threes. So when you kind of unpack that what it needs a few million more of EBITDA this year and.
And hitting that $80 million run rate slightly earlier than at the end of this year going into 2022.
Very helpful. Thank you both.
Thank you and the next question is coming from Daniel Ives from Wedbush, Daniel Your line of Slash Yeah, Thanks, great quarter.
Okay.
The team.
So can you just talk about the backup business in terms of why now because obviously and we've over the last few years and and discussion, but can you just drill into that a bit in terms of is it the market opportunities and non strategic the other areas that are really just accelerating could you could we just talk about why now and we thank them.
The last few years, where there have been some starts and stops potentially.
Yeah. Thanks, Dan.
You know look I think that what you've seen from us over the last few years.
It's just a regular process of portfolio optimization, and I think with respect to the <unk> backup business is look I think that given where we're trying to take our cyber security suite.
In the bundling of Viper, IP vanish and other services.
It didn't fit and so you know we see now I'll point out that we are keeping our or we are focused on our live drive and sugar sync businesses within that suite, because they are direct to customer and and match the customer acquisition profile of the rest of our cyber security.
Suite, so it didn't fit and I also think that.
Look as a company our portfolio continues to grow.
And we are as excited about other parts of the portfolio you know the company.
And really does have not infinite capital and it has a number of businesses that need capital and can put that capital to really great work. So look we're excited.
For that team and and the future potential of what <unk>.
And exploration of alternatives can mean for the team.
And for the business and we are you know we're confident that this will end up becoming a win win.
Got it and then Scott just like from an M&A perspective, combined with some of the.
So as you've divested and and just more of the off into sort of real quick.
And to compare the view.
Going into 2021 first maybe 2020 from an M&A perspective.
Does it feel just more on the offensive in terms of going after assets.
And then tax and like our valuations.
That a headwind in terms of the way that you guys like to.
To think about M&A I think no doubt you know in the last year or so and I'll go back to the analyst day, almost exactly a year ago and March just before the pandemic really hit.
I think our division presidents laid out some very defined themes about which we're taking the divisions the business units something like divesting pieces of the backup and voice business are consistent with that and it also sharpens the focus on where to look for M&A opportunities and as you know we took a hiatus as the early stage of the pandemic.
Really created I think confusion what would it be for J tube and would it be for the targets, obviously that we got through that period by the May timeframe.
Began to focus on M&A and actually had a very good year closing nine transactions spending just under $500 million in.
And those 99 deals obviously heavily weighted to retail.
So I think that the the sharpening of the focus.
Within the three divisions and the core areas that we want to pursue is very helpful for the M&A team.
That helps them build a pipeline of everything from tuck ins to more larger I hate to say transformative, but larger transactions that would be of the size of retail and me not and I think in terms of your second question as.
And as we've said before it's very much a function of the size of deal.
Most of our deals as you know and of the nine last year eight within this category tend to be at the smaller and they're tuck in or small deals and and generally those are much less competitive.
Things you may be referring to like Spacs and whatnot are not competitive in those situations now when you do go upstream to larger deals. Yes, you may have as this market is awash with capital P firms Spacs and other things that are interested and certain of those assets, but I think one of the advantages we bring to the table.
Is the management teams, we have the assets, we have that allow us to do more with those than say a spec and hence we can get a retail me not even and the competitive market environment and you know while it's still early really demonstrates some important synergies with our own businesses and improvement in both the revenue.
File and EBITDA profile, so I feel and feel very good about where we sit from an M&A perspective, and as Vivek mentioned, Oh, we've got decent cash balances right now and certainly the ability if it were necessary to take on more debt as we are modestly levered.
Thanks.
Thank you and the next question is coming from Nick Jones from Citi. Nick Your line is lives.
Great. Thanks for taking the questions just two I guess on on.
Digital media.
And what are you hearing from your partners in terms of the shift towards kind of context and brand safety. That's a theme that is growing.
Kind of and the community of the idea of Vegas Deprecated third party cookies.
Things like that I guess, how does that.
Is there a potential tailwind for CPM is rising for the property that you have and is that kind of inform maybe where some of the more exciting.
And a opportunities are from here and there and then the second one maybe for.
And for Scott how are you thinking about the buyback from here at these price levels.
Sure. Thanks.
Nick So look I think you your your question.
Might've answered itself, yes, we do think that the disabling of the instrumentation of the interest based advertising.
World plays absolutely and the hand of content publishers and contextual sellers of advertising and performance marketing and that's what we are and we always had been that and I've said this before.
I can't say that we didn't anticipate that this was coming we understood the privacy issues that underpin the decisions that youre seeing from Google Apple and others in the ecosystem, so context will matter and premium content no matter trusted brands will matter affiliations with those brands will matter and first part.
Arty data one of the things, we havent talked a lot about but figures into our plans is take a retail me not a retail and me not sits on a ton.
First party data relating to what people are looking to buy or what they're actually buying so we believe that we have a great dataset with respect to first party data that can be monetized within our environment and so look I do think that these changes are only <unk>.
And but I will point out that we had a monster quarter.
Without that we had a a a result in the digital media space that I think is fairly unique and and really needs to be appreciated.
Ahead of any potential further tailwind from the debate from idea Fei and and third party cookie demise.
And in terms of your second question Nik absolutely share repurchase remain on the table. Our philosophy is consistent as we've discussed in the past that we're really looking at.
Our alternative uses of capital M&A being one share buybacks being the other and the relative rates of return between the two so even though the stock has run up as I mentioned in my prepared remarks, we still are trading at a rather modest multiple of 2021 EBITDA. So I think as we look out over 'twenty and 'twenty, one we'll see how the store.
<unk> performs we'll see about on alternative investment opportunities from an M&A standpoint that Dan just asked about and the previous question and obviously, we'll have to balance between the two of them, but they're they're not off the table just because the stocks and the multi mine.
Great. Thanks.
Thank you.
Thank you and the next question is coming from James Fish from Piper Sandler James Your line is lives.
Hey, guys congrats on a great day.
On a year here.
I wanted to get them to the digital media business, a little bit more the monetization rates appear to be your strongest ever on.
And just based on some tailwind across the board I guess, how sustainable do you think those kind of rates are.
What we're really kind of rank order drivers.
And also within digital media you know how much did retail me not actually contribute and Q4 and Scott. If you could provide an update on the annual advertising versus subscription versus kind of others mix and digital media.
Sure sure. So let me start Jim. Thanks for the question, we had a number of drivers and the short answer is yes, we do believe they're sustainable we believe that fundamentally what the pandemic has done is simply accelerate trends that were already in place and we think will be permanent.
And then very specifically, we had some things and some of our market segments.
That'll beneficial and enduring will take IGN and the console cycle refresh as we had talked earlier and the year, we were anticipating that the launch of the new consoles and Q4 would unlock budget. It did but its not a one time event a bunch of IP starts to now come out games start to come out which are all games.
Games that will end up being marketed on IGN and so we think the console cycle refresh and we've been through two of these before has some nice enduring effects. We think that you know uccle continues to be as relevant as it's ever been and some of the statistics.
And I listed in the prepared remarks are really astonishing when you start to really look at them and particular, the install base that we have it's entirely organic by the way, we don't pay per cost per install.
And <unk> and then the after how businesses returned to growth you'll recall that in Q2.
And with with what was going on in the commercial and the commercial World. There was no Wifi planning that that is coming back and then Wi Fi six is going to be a significant we think tailwind for ACA, how in the future everyday health.
Just had a sensational quarter, but again it is a function of the change and the way pharma markets and we think that change.
Is permanent so the things that are that have driven the company. We don't believe we believe our long term trends and these are things that we've been organized around.
And we.
We think will continue to contribute attractive growth.
And Jim in terms of your second question as you know, we don't break out pieces of business units much less.
Things like that but having said that I know that at the time and the deal on a number of analysts like him review and one of them estimated about $40 million and <unk> contribution in Q4.
We were able to do somewhat better than that and better than our expectations. So I think that gives you a feel for the contribution of retail me not in the fourth quarter and then what I would note is that almost all of that revenue and there will be two true perspective, we look at 2021 is performance based marketing.
So as you know we've been talking for a number of years now about the near parity between our display video on the one hand, and our performance marketing on the other that is now decisively flipped in favor performance based marketing so for the quarter remember the quarter.
Q4, only has two months on.
Retail me not contribution.
We acquired very late October so for the quarter display advertising was about 38% of our revenue performance marketing heavily coming out of Ziff Davis from a number of categories was 44% and net does dilute the subscription piece down to about 17%. So those are the rough estimates of the total.
Media revenue in Q4 broken down by type.
Very helpful guys. Congrats again.
Thank you. Thank you.
Thank you and the next question is coming from socket Kania from Barclays. So I catch your line is lives.
Hey, guys. Thanks for taking my questions here.
Scott maybe maybe first for you. Thanks, Thanks for time and for the full year guide kind of comparing apples to apples with the divestitures, maybe just to go one level deeper on 'twenty. One can you just give some broad brushes on how youre thinking about digital media.
Revenue growth segment revenue growth for digital media and it and cloud services.
To help us tweak our models a bit.
Yeah, I think let's.
I think the place to start really is in the organic area and I think as Vivek mentioned in his opening remarks, we've seen some real opportunities.
For organic growth and as we noted even investment to further aid that growth now as you know organic growth is always tricky and J tubes at the M&A and how you take things in and out to normalize them, but I wanted to give you a few factors to set up the organic piece, obviously, the delta and the total growth would be.
And from acquired assets, so for 'twenty and 'twenty as a whole the.
On the media business was up mid single digit up four and a half ish percent organic grower cloud 2%.
But remember Q2 was under severe stress, particularly for digital media. So.
So we look at the fourth fiscal quarter, we see our media business in the high single digit eight plus range and cloud just under 3% so that inform.
Our view of 2021, and as we look out to 'twenty and 'twenty. One we expect the media business to be a high single digit organic grow and maybe 10%.
And the cloud at a low single digit and.
And so that will combine and give us as vivek mentioned in his opening remarks.
Somewhere in the upper portion of the high single digits for the company as a whole obviously, we're talking about 16% growth total so the delta between that and the <unk> would be from the acquisitions that would be annualized in 2021 versus 2020.
Got it that's really helpful and if I could squeeze on a follow up.
Vivek I mean.
I agree with you and in terms of what you said on on the on the fax business really ending on a high point there.
Uh huh.
I guess and maybe this is a true maybe this is for both of you, but could you just talk about that split between corporate and.
And maybe we will call the high velocity.
The business and and how you think about sort of that overall fax business and 2021.
Well I mean listen you know.
The performance of this business in Q4 was sensational.
So.
Ill address this so the critics of the business you find me a business that growing 17% and health care.
Has the market perception that that business seems to have.
And youre not going to find it so look we've talked about it for years, we are organized around the health care opportunity, we've put in place and enterprise grade set of solutions, a wonderful sales organization and it's working.
That's the corporate fax business, it's working it's health care and it's going to continue to work and we're very confident and on.
And on the website.
The declines are very low single digits, theyre actually better and what we have said in the past and where we modeled so that to me is is a great story.
And it's.
Fantastic shareholders should be excited for it.
And I believe it continues well into the future. So we're very bullish on it we think it's a we think it's a great business, we always have.
And hopefully we can start to change the mines and and I would just add to that that I think analytically, we're getting to the point, we're not quite there will probably be not this year, but next year, we will see a crossover between we call that corporate piece of the business, that's having that high single to double digit growth.
Surpassing what we call the web business, which has the low single digit declines so they're getting very close to parity and they're not quite there about $330 million of revs last year high.
Hi, 170, <unk> in favor of the web little over $1 50 for the corporate.
Very very helpful. Thanks, guys.
Thank you.
Thank you and the next question is coming from will power from Baird. We'll your line is live.
Okay, great. Thanks, Yeah just.
A couple of additional questions I wonder if well first congratulations on the strong results to finish the year.
Yes, and maybe just circle.
Maybe just circle back to the cyber security segment and the opportunity there I'd love to kind of get your thoughts on growth prospects as we move into 'twenty, one and a <unk>.
Particularly what's the M&A environment looks like there I mean, given obviously the focus on cloud security and higher multiples, obviously for bigger entities and what have you seen on the M&A pipeline with them within that segment.
Really great question and it and it dovetails to something I did want to make sure we hit on which is.
Both with our cyber security and Martech businesses, they've been run really for stasis, where essentially the level of marketing for customer acquisition was basically.
Equal to offsetting any customer loss and so when we looked at the LTV to cap equation.
Lifetime value to customer acquisition equation, we had a lot more room to invest in generating ads well in excess of the net adds that we're generating today. So for both cyber security and Martech and we are investing in 2021.
Sept up levels of marketing for customer acquisition, which we think will start to drive some really interesting growth in both of those businesses to the point, where look if if there aren't acquisitions to do I think these businesses show a ton of organic potential individually and then and the cyber security World.
Bundled together point is that we see as much organic opportunity in the space because of the market interest in it and as we do possibly on the M&A front look on the M&A front.
We're still very focused on solutions for F N b.
Don't tend to have the kind of unrealistic valuations of some of the enterprise.
Level solutions, and that's where I think a lot of the market fees.
And that kind of frothy valuation, but again I think we think Viper.
IP vanish.
Sugar Sync live drive we think these are great brands that in and of itself will grow without acquisition.
And and I would just note that talking about acquisitions in that space and certainly the headline deals having big valuations.
And they look a little bit lost in Q4, even though we had the Q3 call that we did make an acquisition in that space I yell that adds to our overall stack.
A modest sized business, but important piece of the overall portfolio and we want to deliver in cyber security and consistent with once again, what we talked about back in March of last year at the analyst day, So assets are out there.
It's just not going to be necessarily the big headline ones that are that will gain more attention, but that's fine for us.
Yep, Okay, and if I can just sneak in one other.
And so some great stats on the on net Uccle front and I wonder.
And just trying to understand how enduring some of those trends could be is it feels like you've got some some tailwind and I guess I'm just.
And just how much of a benefit do you think just the work from anywhere work from home environment has been to that business versus these rollout of <unk> networks and any sense for kind of.
And what Youre seeing on the <unk>.
Testing front, and what maybe that could mean for you and moving forward.
Well I think that's just going to add a lot of fuel to that fire no I think its very sustainable I think look I think.
It's not like work from home is going to and I think you are pretty much every.
Major employer.
And with the point of view that there'll be at some hybrid and some will be remote first so I don't think those drivers go away at all I would also point out that test volumes don't necessarily translate directly and our revenue. So our performance is on test volume based view, it's more those providers of broadband services and those networks.
Are very focused on making sure that day of high quality and speed is the demand and expectations.
Quality and speed and connectivity continue to go up and I think the demand on our broadband networks. If I were to frame. It as what is going to be the enduring pieces. The demand on broadband networks isn't going to go away. It's only going to go up and therefore, those networks are going to continue to need and rely on our data.
Better tune their networks and that's really the driver I think the test volumes are great.
It just speaks to I think our market position.
Where we are.
I think statistically speaking the dominant and definitive.
Testing.
Brand out there.
Alright, thank you.
Thank you.
Thank you and the next question is coming from James Breen from William Blair. James Your line is nice.
Thanks for taking the question I was wondering just a couple of things on the gaming side can you unpack a little bit you talked about budgets opening up and have that sort of manifest itself.
Cross your platform, whether it be IGN or humble and then just on the cloud side customer count was down and churn was up a little bit and the fourth quarter.
How much of that was.
Conscious decision by you guys around sort of who your customers are versus.
Some of the economic impacts and how do you see that trending as we move into 2021.
Thanks, Jeff Thanks for the questions. So on the gaming side look I think as I said it will fuel advertising.
Demand for IGN, which we think is very good.
It will also fuel demand for games and so one of the evolutions.
That and it's been taking place at the humble bundle business, which remember it's three businesses, it's a store.
It's a publisher of games and.
And it's a subscription monthly subscription service.
And the store and certainly the publishing of games has become really important to that business.
40% plus growth.
In Q4, if I'm not mistaken from those pieces and so we want to feed the demand for gains by producing indie games and continuing to be what we believe we are going to be soon that the big player.
In the in the indie publishing space, we want to be.
You know we want to be the top of that part of the gaming space. So I think we see it on both sides, we see it as a game publisher.
And we see it as a recipient.
Games advertising.
And Jim on your question and I'm glad you asked it about the the metrics from the cloud business, So let's deal with the customer count.
Half of that decline from Q3 to Q4 comes from what we call. The excluded assets. Obviously ANZ voice was eliminated as of the end of Q3, but the UK voice piece and the backup continues to be a drag and customer count the remaining piece and if we go back to the earlier questions on the whole conversation about the fax business.
The web fax business does have a modest decline it tends to have a high customer count and low ARPA and it's being replaced by a low customer count high ARPA corporate business. So those two.
Pretty much deal with net.
Pretty much they deal completely with not only that sequential trend, but also that would be if you will pro formats that would be.
Flattish this to some degree of growth cancel rate is a little bit different story.
First I would note that subsequent to the acquisition of IP vanished back in early Q2 of <unk> 19.
Because it is a more consumer oriented business and the cancel rate has a normalized range of two and a quarter or two and a half so we remain.
Comfortably within that range, but specifically in Q4 of 19, we ran certain programs within the IP vanish business that were highly promotional and they had very low renewal rates in Q4 of 2020, So 20 basis points of that movement comes.
From just the IP vanish and promotional activities and Q4 of <unk> 19, So it gets us on the two two range which is.
Not only comfortably within our band, but actually near the low end.
Great and then just two quick follow ups one of the larger acquisition did last year was and the VPN space. Just wondering if you use update there on sort of how that.
I think a little bit of a shrink to grow strategy, there and how you move through that and then just lastly, looking at your outlook for 'twenty, one adjusted EBITDA margin on the digital media side 38, 39% I think we went back a few years you were sort of talking about mid thirties, we're trending almost a 40 now.
What's what do you think the potential is there given the traffic you are seeing and given sort of the larger revenue across our fixed asset base.
And I always want more.
I think we're very happy with where the digital media margins have gone and are certainly ahead of our own expectations. So I'm going to let that stand on its own.
On the VPN business know that that's been a growth business and it's been a growth business double digit growth from from the beginning and it's been and it's been a driver of the overall cyber security growth so that hasnt been.
Strength to grow.
Proposition.
And remember that was acquired in 2019.
And not in 2020.
On April one and Hilton.
<unk> great.
Great. Thank you.
Thank you.
Thank you.
And the next question is coming from Shyam Patil from Sig charm. Your line is live.
Hey, guys. Thanks.
<unk>.
This one's for you if you look at the IPO market right now its very robust we're seeing smaller companies go public.
And Scott referenced devaluation being depressed and at least a couple of times on the call today.
Does that influence kind of how you're thinking about potentially monetizing digital media or everyday health or any other businesses and the portfolio, maybe just taking advantage of the public markets right now their receptivity as well as just the overall valuation of the of the overall business.
Well look I think.
We are public.
And so I think it's more about making sure that the marketplace has a fuller appreciation for what we're doing look.
You know.
This was an unbelievable quarter.
There is no other way to look at it the last couple of quarters have been unbelievable, we'd be by 31 centered on EPS.
I can't even imagine that and given our guide and what we're talking about high single digit organic mid teens total lots of capacity on the balance sheet.
Fleet people will see that and and I think that that will start to unlock value because it's here.
It's not not here and so I think our jobs.
Our to ensure that people understand this and I think this is going to hopefully be a quarter that has a lot of people who have been watching on the sidelines jumping in.
Great and then just a follow up for Scott.
Scott I know you guys don't provide quarterly guidance and the segment.
And I was very helpful. But I was just wondering and.
In terms of just overall EBITDA and overall EPS and your kind of framework for how to think about kind of those by quarters as we kind of model out kind of the fiscal year.
Yes.
And it's heavily weighted to digital media and digital media becomes a larger share of overall J two it becomes more Q4 centric so I'm looking at.
Close to actually a little bit more than a third.
Of the EPS coming from Q4, given the proportionality of the two segments and as a result, we're talking about a little less and 20% maybe 20% coming in Q1 and.
And then the two middle quarters.
We do expect there will be a sequential positive trend from one to two two to three but particularly digital media, sometimes they can be flattish two to three all depends on the timing of certain events that take place and whether they slip into one quarter or the next but hopefully that frames. It for you and that 20% and 32% that we talked about as.
<unk> reference for guidance, which clearly relates to digital media because cloud does not have that same degree of seasonality is highly influential though of how it flows to EBITDA and to the bottom line.
Thank you guys and great great quarter, and and great outlook for the year.
Thank you.
Yes.
Thank you and the next question is coming from Rishi a channel Maria from D. A Davidson Ritchie your line is less.
Hey, guys. Thanks, Thanks for squeezing me and wanted to maybe drill a little bit into the margin performance in Q4 are really impressive.
Gross margin and EBITDA margin expansion on the digital media side year over year can.
Can you talk a little bit about what the drivers were here was was retail and me not just immediately accretive on the margin side or were there other factors here and maybe alongside that.
And I appreciate the granularity on guidance for next year, how should we be thinking about cash conversion from from EBITDA next year relative to what we've seen historically.
Yes, so no retail me not while yes. It is accretive to overall J two and Q4 the margin expansion is actually independent of that and so we had we've had actually you've seen them for a couple of quarters now pick up on the Cogs side and digital media and then through a number of programs that I think we've talked about now for a couple of quarters.
Beginning in Q2.
A reduction in cost a lot of which we believe are permanent we've talked about even for ourselves a higher percentage of our workforce being worked from home exiting certain real estate that has had some modest benefit and the opex in Q4, but it does flow through and a more meaningful way and our guidance for 2021, So it's really been across the board.
What I'd say.
Deep review of the cost structure of both pieces of the business to be clear, but I think what we found greater opportunities and certainly you see it and the margins is in the digital media business and as you can see we're projecting for 2021 those are sustainable.
Got it thank you.
Thank you.
Thank you and the next question is coming from John ton, one Tang from C. J S Securities John Your line is live.
Hey, guys great quarter and thank you for taking my question just a two parter here.
As you guys look at the pipeline how much capital are you, hoping to deploy and maybe on an aspirational level. This year between M&A buybacks and the organic growth first part and then second part disregarding the backup assets what kind of value do you can get for that and how does the proceeds from a sale or divestiture.
Leverage and capital allocation.
And maybe from a timing perspective as well.
Yeah, and I'll look and so I think in terms of deploy how much capital, we'll deploy and 2021 you know it's always hard to say, it's it depends on.
A number of factors in terms of timing of acquisitions and size of acquisitions as well as our views on on the share price, but I look I think if you look historically.
Over the last handful of years, it's around $400 million, a year and and that is roughly equivalent to.
Our free cash flow and so I think I think you can expect that.
<unk> built in we don't build in and certainly not at the mid point of our guidance on any of the benefit of that.
So so you know we typically look at at the high and is as reflecting that but I think it'll be consistent with what we've seen in the past.
With respect to.
Proceeds and potential proceeds probably not best for us to discuss that on this call let us work through.
Our exploration and and we'll see where we come out and.
Let me just dovetail on that and actually I think Rishi had asked the question and that it and did not answer which is the free cash flow conversion expectation for 2021. So if you take the midpoint of our guidance of 66.
It obviously excludes the backup assets, depending upon the transaction that occurs around them and the proceeds that come in and this would be in addition to but off that core 656, I would still expect a mid sixties conversion rate to free cash flow and I would remind everybody our free cash flow does not come in ratably over the four core.
There is lumpiness to it.
This Q1 is actually generally speaking the highest free cash flow producing quarter because it is collecting the revenues from Q4 and the media business. So there are collection cycles, where the revenue and the earnings occur in Q4, the bulk of the collections occur in Q1 that we take a little bit of a dip in the middle.
The year and then we come back in and Q1, which is generally also a strong quarter. So.
That would get you about $425 million and free cash flow on.
And on top of our current balances and.
And we're very close to effectuate our line of credit that we had before but that.
In the process of issuing the four and five eights notes and moving it from the cloud to the parent we eliminated the line temporarily.
And so I think we're in very good position whether it is.
As I say, we it's very hard to predict how much we will need this year, but certainly if you take the $4 24.
Looking at the cash balance at the end of the year $2 30 for free.
340, roughly if you include our investments that are not as liquid and then the line it's pretty powerful.
And the 700 plus million range, which as you know is is ample even last year.
If you look at the acquisitions, plus the share buybacks, which were very heavy.
It was a year on a little under $750 million and capital allocation and I see that right now just looking at what we have today and the bank.
A little bit from the line of credit and the prospective free cash flow and then yes, probably some proceeds from the type of transaction that may occur and the backup business.
Got it great color guys. Thank you very much.
Thank you. Thank you.
Thank you and there were no more questions in queue.
I'd like to hand, the call back to J, two global Scott to Rekey to close the call.
Great. Thank you.
Appreciate all of you for joining us to unpack.
The fourth fiscal quarter of 2020, and the full year as you've heard we're very enthusiastic about the prospects for 2021.
The road shows continued to be in a virtual environment and it looks like they will be for some number of continuing months on.
Which actually makes it very easy we'll be at a number of virtual conferences over the next several weeks.
The announcement out giving you the information of how to participate and vote, but also we will do non deal roadshows virtually and of course and thank you all know how to reach either Rebecca on myself don't be shy happy to talk to you about anything you've heard a day on the call also I want to reemphasize something Vivek mentioned very early in his prepared remark.
And which is the ESG roadshow, we have a deck of our not only on initiatives, but things we've actually done.
And then areas that we see even greater opportunity and so we're happy to discuss that either as part of the N D R or as a completely separate and you and I will tell you. There is enough to unpack there that we did just the ESG and India, We had no problems and 45 minutes to and our just speaking about those initiatives. So thanks again and our next one.
And we've scheduled call will be sometime in May to report Q1 results.
Yes.
Thank you ladies and gentlemen, this does conclude today's J two global conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.