Q2 2019 Earnings Call

Good morning, and welcome to Jay to Global's second quarter 2019 earnings Conference call.

My name is cloudy or the operator, who will be assisting you today.

At this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation.

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On this call will be vet Shaw CEO of GE to global and Scott Turicchi President of Jay to global.

I will now turn the call over to Scott Turicchi, President and CFO of Jay to global.

Thank you good morning, ladies and gentlemen, and welcome to the J two global Investor Conference call for Q2 2019, as the operator mentioned I'm, Scott Turicchi, President and CFO Jay to global joining me today is our CEO Vic Shaw.

We continue to execute well in the second quarter setting records for revenue EBITDA and non-GAAP earnings per share.

And just missing on free cash flow due the timing and magnitude of some estimated tax payments.

We will use the presentations a roadmap for today's call.

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Jay to global Dotcom Slashed press.

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After completing the formal presentation, we will conduct a Q and a session.

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However, you may email questions to us at any time at Investor Ajay to global Dot Com.

Before we begin our prepared remarks allow me to read the safe Harbor language.

As you know this 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 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 that we've included as part of the slide show for this webcast.

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

Now, let me turn the call over to Vivek for his opening remarks, Thank you Scott and good morning, everyone.

We set yet another quarterly record for revenues adjusted EBITDA and EPS for the second quarter.

Im also really pleased to say that weve been stringing together, some strong quarters and I continue to be optimistic about the outlook for the rest of the year.

A couple of weeks ago, Scott NIE, along with members of our leadership team.

Board of directors and a group of employees, who lungi to achievement Awards, which is the companys highest distinction.

Had the honor of ringing the opening bell at NASDAQ to celebrate the Twentyth anniversary of our IPO.

It was a terrific morning in many regards.

And I'd like to congratulate our organization and thank all of our employees past and present for their great work. These past two decades.

The occasion was also a very clear reminder of our incredible track record and the long term success and sustainability of our model.

We were part of the IPO class of 1999, which was the largest class in the history of the stock market.

546 companies went public that year.

Raising more than $69 billion in capital.

It was an unprecedented year in many regards and smashed every known record.

It was the year of dotcom.

And the very height of one of the biggest bubbles the markets have ever seen.

Scores of companies went public that were unprofitable and commanded astronomical valuations that were predicated on non traditional valuation methods.

Of the 175 tech companies that went public in 1999.

Only 41 or public today.

Many went bankrupt.

Some were sold.

And others just evaporated.

Of those tech companies there are still public today.

Jay to rank sixth and market cap.

I find that remarkable.

And we are the sixth largest publicly traded tech company from the 1999 IPO class.

I doubt anyone could have predicted that 20 years ago.

Even more impressive our price performance ranks fifth.

Amongst those tech peers.

As a company we have weathered the collapse the dot com bubble as well as the collapse of the housing bubble and an unprecedented recession.

In fact, we more than whether those significant market corrections, we have grown revenue every single year since being found in late 1995.

Im not sure of how many companies can make that claim.

To have grown revenues for 23 consecutive years.

Yes in the seven years that I've been here.

And then the 20 years Scott's been here.

We still get questioned about the viability of our model.

Questioned about our ability to sustain the J two acquisition system and therefore, our overall growth.

I believe the past 20 years should resolve any rational observer these questions.

My favorite indicator of our success is the five times ratio of our cumulative acquisition spend divided by our annual adjusted EBITDA.

It demonstrates our ability to spend capital intensity in wisely.

As well as the means to properly integrate these assets once they're in J. toos portfolio.

And we should continue to get better and the allocation of our capital.

We have evolved our management structure.

M&A team and process.

Which has produced more ideas.

Greater deal flow and more managers to integrate deals and create value.

The amount of capital available to US only grows as we continue to increase cash flows and the amount of leverage we can assume without much change to our credit ratings.

Our portfolio has never been more diversified yet our businesses share a common tailwind, which is the ongoing shift from analog to digital.

We've expanded our capital allocation to include share buybacks and we're pleased to have acquired 600000 shares in Q4 of 2018.

And expect to continue to be opportunistic going forward.

We have conviction in our model and hold a firm believer that the next 20 years will be as bright if not brighter.

Then the first 20.

So this sounds a bit like a full throated defense of our model and company.

It is.

We're very proud of what our organization has accomplished over the past two decades.

And there are certain foundational elements that will continue to guide our company.

First we expect to remain an active acquirer of businesses.

We are well positioned to grow our company through strategic and disciplined investing.

Second we will continue to focus on maximizing EBITDA and free cash flow generation.

While investing in tangible organic growth opportunities.

Lastly, we will opportunistically expand our portfolio, particularly in spaces that we feel are fragmented and would benefit from a capital partner with a proven track record.

This nimbleness resulted in the evolution of J two from being just a digital fax company.

To our current position as a diversified portfolio of over a dozen business units.

All of these tenants give us confidence in our future.

Before I hand, the call back to Scott I wanted to spend a few moments on themes for each of our business segments from Q2.

At digital media, we continue to see growth out of display advertising of nearly 4%.

With subscription revenues up over 30%.

Continuing to be a major driver of overall digital media revenue growth.

In fact, combined subscription revenues at cloud services and digital media now account for 65% of total revenues.

As you know it's been our long held strategy to increase the amount of recurring revenues at J. too.

And we're obviously, making tremendous progress.

Gave a bit back on digital media EBITDA margins, which were down approximately a point year over year, but still up through the first half.

You'll recall that we had some expenses shift from Q1 to Q2.

As well as higher allocations of our corporate overhead.

Our cloud services, we continue to see big opportunities in the security and privacy privacy space.

As you know from the last call, we added VPN technology to our core offerings and are off to a good start in the first quarter of our ownership of IP vanished.

And its related properties.

We have many opportunities for synergies with our email protection endpoint security and backup solutions they were beginning to explore.

I would also note that our cloud services management continues to do a very nice job at managing EBITDA margins.

Our EBITDA margins are a bit better than last years, notwithstanding our investment in personnel and product enhancements.

Also this is one of the strongest revenue growth quarters for cloud services in recent memory with revenue growth close to 13% with the acquisition of the VPN assets being a key driver.

Now, let me hand, the call back to Scott, who will go into greater detail on our results. Thanks for BEC Q2, 2019 said a number of financial records for J, two including revenue EBITDA and non-GAAP EPS. These results were driven by several areas of strength in our portfolio of companies, notably continued improvement in the display advertising portion of our business.

Our continuing strong growth in our media subscriptions as well as the addition of our VPN business unit acquired early in Q2.

In addition, we remain cost conscious resulting in strong EBITDA margins for the first half of the year.

We ended the quarter with approximately 259 million of cash and investments after spending $242 million in the quarter on acquisitions and dividends now let's review the summary quarterly financial results on slide five.

For Q2 2019, Jay to saw a 12% increase in revenue from Q2 2018 to 322.4 million.

Gross profit margin, which is a function of the relative mix of our 14 business units remained strong at 81.5%.

We saw EBITDA grew by 10.3% $225.2 million.

Finally, adjusted EPS grew 6.7% to $1.60 per share versus $1.50 per share for Q2 2018.

I would note EPS growth was impacted by a 21% tax rate in Q2 2019 versus a lower than usual tax rate of 18.5% in Q2 2018, as you know fundamental to our philosophy Ajay to generate strong free cash flow turning to slide six.

In Q2, we generated $85.8 million of free cash flow, which was slightly down from Q2 2018 due to additional tax payments of approximately $5 million versus Q2, 2018 and $9 million in comparison to Q1 2019.

Due to the timing of such estimated tax payments, we believe that it is better to look at the trailing 12 month free cash flow and the conversion of trailing 12 month EBITDA trailing 12 month free cash flow.

On a trailing 12 month basis, we generated $357.3 million of free cash flow for 69.7% conversion.

Of our $512.4 million of EBITDA now, let's turn to the two businesses cloud and digital media for Q2 as outlined on slide seven.

The cloud business grew revenue approximately 12.5% $269.1 million.

Due in large part to the new VPN business unit increased revenue in Martech and the slower rate of decline in our backup business.

Reported EBITDA increased by approximately 12.6% to $85.2 million.

Compared to $75.6 million in Q2 2018.

The EBITDA margin is 50.4% after corporate allocations slightly up from the EBITDA margin in Q2 of 2018.

Our media business grew revenue, 11.4% to $153.3 million and produced 42.6 million of EBITDA or 6.9% growth.

EBITDA margin declined by about one percentage point from Q2 2018 due to certain license fees paid for gains in Q2 2019 that did not occur in Q2 2018, as we discussed on the last earnings call.

We are reiterating our revised guidance range for the year as outlined on slide nine.

To remind you our original high end of our range was $1.33 billion of revenue 540 million of EBITDA and $6.95 in non-GAAP earnings per share.

As we stated last quarter. This becomes the low end of our new range of guidance.

Which we reiterate today, we expect our revenues now to be between $1.33 billion and $1.37 billion of rose.

EBITDA to be between $540 million and $556 million and non-GAAP EPS to be between $6.95 per share and $7.15 per share.

Following this guidance slide our various metrics and reconciliations statements for various non-GAAP measures to the nearest GAAP equivalent.

Before turning it over to the operator for questions I would like to draw your attention to slide 12, and specifically the cloud metrics.

You will note a 27.5% sequential increase in our cloud customer base and the resulting decrease in average monthly revenue per customer.

This is due to the inclusion of the VPN customer base, which has an average monthly revenue per customer of less than $7.

We include the VPN customer base as if it existed on March 31 for purposes of calculating the average base for the am or per customer measurement.

In addition, the increase in cancer rate is also due to the inclusion of the VPN customer base, which has a somewhat higher cancel rate than the other cloud services.

Excluding our VPN business the cancer remain remained flat at 2.2%.

Finally for our digital media Metrix I would note that the sequential and year over year declines in visits and page views are substantially attributable to declines in our snapshot traffic, which constitutes a minute amount of our digital media revenue.

I would now ask the operator to join us and to instruct you on how to queue for questions.

Thank you.

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One moment, please while poll for questions.

Hi, My first question is from she but deal with Fusco One night. Please go ahead.

Hey, guys. Good morning, Congrats on a great quarter.

Hi, Thank you question.

And if your question.

First.

I guess for you up today or when you look at you know the M&A incentives for for the for the G M.

Or do you see any kind of waiting first half or second half in terms of M&A transactions in a year.

And then a follow up to that is when you look at the M&A pipeline, particularly for visual media subscription deals can you just talk about kind of kind of how that looks you know mid sized deals which is large deals.

Sure.

Show So on the first part of your question in terms of the incentive structure. The general managers, there's two components. So in terms of their annual incentive.

Their bonus compensation. It is entirely EBITDA based it is a function of the EBITDA goals, we set for the business unit at the beginning of the year. When M&A occurs that is incremental to what's in that goal in that target.

That EBITDA contribution will count less a capital charge for the asset and so we look for things that can be immediately accretive.

Vis-a-vis that capital charge and so there really isn't a timing benefit it isn't.

Per se you should do it earlier you had laid it really comes down to can you move your scale and then the second piece of their.

Compensation.

Because they're all shareholders and so not unlike my own.

Equity package. It is a mixture of time based restricted shares as well as performance based shares and so they are incentivized to enhance the enterprise value in and the per share price of the company on the second question around media and media subscription businesses. We really are looking for businesses, where we can leverage our media audience is to drive customer acquisition and really sort of bend the CAC to LTV equation right as you know in all subscription businesses, that's the equation and so if we can.

We can reduce the amount of third party marketing spend that we have then that becomes very interesting and we've seen that obviously in the gaming space and I wouldn't I wouldn't confine. It just immediate subscriptions were also looking for Kraft cloud subscription services that can benefit from having media and media audiences that are relevant and in some ways. You can argue thats what VPN is.

Well.

Good.

Second question.

Interest rates are coming down.

Just wondering does that impact kind of how you guys think about leverage and valuations.

So I think there's two separate elements to that.

As it relates to valuations we have as you know fairly strict parameters that we adhere to irrespective of the market environment, whether it's driven by interest rates or other valuations. So that remains unchanged in terms of what we're looking for in terms of rates of return.

The second or the first part of your question in terms of the lower interest rates.

May give us opportunities to look at our capital structure and lower our average cost of capital.

Now, having said that you know our capital structure really occurs in two separate pieces. So we've got at the parent the converts which got about 22% to 23 months before their first put call date, but they are in the money that's the flow two and a half a three in a quarter.

Downstairs at the cloud business, where we have most of our leverage the 650 of 6% notes are currently non callable.

Their first call date is in a year in July of 2020 at 104, and a half and we have a modest amount of bank debt. The drawn about $100 million that's around a 5% rate that sits on top of that so we have much more limited opportunities downstairs from a refinancing standpoint and of course, we do have an unlevered media business.

Which could take advantage of either the bank debt market or the high yield market, but I would say that.

We remain given our cash flow characteristics.

The cash balances that we maintain and the incremental amount that we have put on the line downstairs. The cloud I think in a comfortable position to meet our M&A needs and our and our other capital allocation.

Thank you and then just my last question.

Scott I know you guys don't guide quarterly but.

Any any color on how we should think about gross margins and EBITDA margins by segment and for the year for.

For Threeq and Fourq you.

As well as.

Kind of where you guys are art I got to thinking about free cash flow for the year as well.

Yes. So you are correct, we don't guide by quarter, but I think the general trends in the margin structure of the two segments remains consistent with the understanding that obviously the media business has dramatic leverage as we move from Q3 into Q4. So we would expect the margins of the media business in Q3 to be roughly consistent with where they have been in the first half of the year.

Same thing with the cloud and then an uptick in the margins in media to the 40% range EBITDA margins in Q4, which would then bring us too close to the mid Thirtys.

EBITDA margin for the media business for the year and right around 50% EBITDA margins for the cloud business.

In terms of free cash flow.

We continue to you know.

Look at our EBITDA conversion ratio very close to 70%, which would get us right that that 375 to 380 range of free cash flow.

And as I pointed out in the in the prepared remarks, we do have some timing differences that affect the quarterly productivity of free cash flow. We had some benefits in Q1 that reversed out in Q2 based on the timing the magnitude of some estimated tax payments and that's why as I said in the prepared remarks, we always encourage you to look at the trailing 12 month free cash flow and the conversion of that free cash flow from its EBITDA.

Which is basically right around 70%.

On the trailing 12 months through the end of June 2019.

Great. Thank you guys and congrats again.

Thank you.

Our next question is from Daniel you sit with Wedbush Securities. Please go ahead.

Yes, Thanks, and great quarter. My question is on.

On the digital media business, maybe just talk about the pipeline that you're seeing on the advertising side for health care pharma I know, sometimes you have pretty good visibility into next three six months or even longer maybe talk about that first.

Yes, so the pharma market continues to be pretty strong for us.

As I think I might have.

I mentioned in the last call the call before that the pipeline at the FDA has never been stronger and so the volume of drugs that are getting approved or have been approved and therefore have marketing budgets attached to them are pretty substantial and so we are certainly a beneficiary of that and we're continuing to see that both on the direct to consumer side, where pharma is looking to market its drugs to patients, but also on the provider side.

Where it's looking to market to prescribers and so both sides in the market and it's one of the advantages we have I think that the everyday health group is that we reach both consumer.

Patient and provider prescriber, and so we're seeing that strength and then more generally within the market were seeing some interesting things.

In the pipeline, we're thinking about other parts of the healthcare ecosystem, we have health care systems hospitals themselves that are an interesting category for us we have moved into that business with healthy careers, where we do.

Recruiting services for hospitals hospital looking to get doctors.

Physician's assistants, and nurses as as well as our capital Connolly.

Business, where we're rating doctors and that May turn into some interesting opportunities with hospitals and then the payers right to insurers as well as employers who are self insured is another interesting market for us to get into so we like the pharma market. It continues to be strong for us and we are thinking about how we can expand more deeply into other parts of the healthcare ecosystem.

Got it yes.

So it will come the backup business no.

Obviously, we've seen some competitors continue seeing softness.

Any changes in thinking in the backup business in terms of any of the trends or maybe even more aggressive on M&A or the opposite.

Thanks.

Yes. So you know as we've said we back up for US is in sort of the state of managed decline, where we're very focused on EBITDA and free cash flow generation, having said that.

Q2 was actually better than Q1 sequentially.

The decline was less and so we feel good about that we do to your point see some tuck in acquisition opportunities.

That are attractive and fit.

Our.

Our M&A requirements and hurdles. So look we look at it as.

I would say it's it is one of the frankly only drags within the J two portfolio in terms of revenues.

But it's actually.

Possibly finding its bottom, which is which is a positive sign for us.

Thank you.

Our next question is from will power with Robert Baird. Please go ahead Sir.

Great. Thanks, I guess first just congratulations on the 20 year milestone and.

Yes, great perspective there.

Yeah, just a couple of questions first I guess on the VPN.

Assets acquisition, maybe any color on.

How that's performed relative to expectations be great to get any granularity on what the revenue contribution.

I was just kind of the the the outlook there.

And then I guess another piece to that is you know.

What kind of cross sell opportunities are you seeing on the.

The revenue side I think you referenced.

Opportunities for security backup I assume thats early but any further color there would be great too. Thanks, Yeah. So look we're really pleased with the VPN assets.

The core asset is IP advantage we.

I think acquired a very strong business a great leadership team under Nick Nelson.

Who is really made an immediate impact inside of the company and look one I think the VPN and privacy space is just.

The demand just continues to grow I think as there is more consumer and business concern and attention around social media and government surveillance and other forms of privacy violations and breaches I think we just have a natural demand occurring and in fact I would put.

The VPN assets into the category.

Of assets within our portfolio that I would refer to as our high growth assets and so I put well Glenn to that category and I put humble bundle into that category and equity ACA, how into that category and I would put IP vanish into that category, which is exciting.

Particularly for the cloud services side of the house to have something that has that kind of growth potential. It also is a highly fragmented market. The VPN market. There are one hundreds if not thousands of solutions and so we think we have a strong one we think we have one that our antitrust marks which is absolutely vital in critical if you're providing a VPN service. So we see the opportunity I think to be opportunistic in this market.

And then the last thing.

I would just say is that while the Q2 cloud.

Revenue growth 12, 12.5% was very strong and and driven in large part by the by the VPN assets. The rest to cloud did very well and voice in Martech in particular had pretty strong year over year quarter. So it is certainly a driver of what we saw in Q2.

But I don't want that to discount some of the strength, we're seeing in other parts of the yeah I would just add to that that we actually experienced in Q2 better performance in what I'll call. The rest of the cloud business exclusive of VPN than we did in Q1, you remember that was a little under 2% growth in Q1, and then the second piece to take into account and it's something we're actually still working through is we do have deferred revenue haircuts for any.

Set of customers that we acquire in a subscription business in the VPN space.

It is more typical than in some of our other spaces to have more than month to month contracts, some even going out as long as three years. So there's a larger base of deferred revenue than we would experience in other deals of similar size, but also a higher discount rate since on the margin there aren't as many costs to attribute to servicing those customers. So we have a fairly big.

Reduction in the book of revenue that we acquired this year and to a lesser extent next year through the deferred revenue haircut, which is to say we're still working through we've got an estimate for this quarter. I think is very solid, but we work with third parties to actually nail that down and that will be finalized this coming for the quarter were in Q3.

Okay, all right I appreciate that okay.

I guess, maybe just second question just coming back to I guess of other growth drivers are the digital media side. Thanks.

Humble bundle I think Youve got back referenced growing north of.

30% anything of particular you'd call out there or is it just the same trends moving for one of those assets before a burden to the others are just continue to see kind of full steam ahead on both fronts.

Yes, I think they are both executing according to plan, we feel very good about where they are I might just point out within the broadband assets. The ECA, how asset which is still relatively new for us is performing really well lots of product enhancements lots of pushes looking at pricing models and ways in which we can.

Generate more value from from the customer base and so that's doing very well for US and then the other thing is I would just say in the humble bundle business Theres three parts to the humble bundle business you have the subscription business, which we've talked about and continues to be a nice business for us the store business, which is more single unit sale transaction business and then.

The publishing business and the publishing business is one that.

We are leaning into where we work with indeed developers to provide financing to publish their games to market their games put them in there in the normal distribution channel, where PC games are sold and we're making a very nice return on our investment just do those revenues and then have the ability to include those gains within our subscription service.

Some months down the road and Thats also attractive because now we're including our own game versus licensing a third party games. So that is something that we're going to we're going to look to invest in more.

We've got a nice pipeline of games, but I think this is an area that we see real opportunity in these sort of indie games that aren't really on the radar of the larger game publishers were looking for AAA franchises that have multi year value and are very different part of the market. So thats thats, maybe a new element to the humble bundle business for you to consider.

Great. Thanks for the color.

Our next question is from Nick Jones with Citi. Please go ahead.

Hi, Thanks for taking my questions.

Just one on.

Thats kind of holes in your product portfolio I think you can acquisitions help.

Perhaps just some of the web security are there any other areas that are really obvious for improvement or some holes and products.

And then secondly on kind of.

Spending this cat LTV equation.

Not a lot of these pipelines for potential acquisition generated from where you are generating most of the time.

Going to targeted advertising or how should we think about how.

Resets of acquisitions.

Targeted or sorry.

Yes. So just on the first question in terms of the product portfolio and components that are missing I think in in each of the market spaces. We're in.

We like the assets, it's fairly complete but there are always opportunities for us to.

Add components and one thing I Didnt answer on an earlier question, but as related to this.

We are having success in bundling now and that's been something that historically, we haven't done as much on the cloud services side, but now the ability to bundle our endpoint security, which is under the Viper brand, our file sync and and backed up on the consumer side, which would be sugarsync and IP vanish and the ability to give you one price for all three services make assert make it a great value proposition and make it incredibly sticky and in fact, we have moved the management of the Sugarsync business from out from under the backup unit and put it actually into the VPN unit, because it's very consumer driven whereas the rest of the backup assets are more.

Business customers and enterprise customers and so it's a different customer sets. So we see opportunities in doing that on that question relating to.

How do we leverage media audiences for subscriptions it can be sponsored posts it can be.

Targeted advertising it can be E. Mailed, let's just think of it right. We get paid a lot of money by other providers to market their services, we essentially become our own customer right. So we are able to do for ourselves the things that that we do for third parties, but at very little if no marginal cost to us and really no opportunity cost. It's not like we are shifting inventory that would have been monetized with a third party to to us and losing that revenue. So it is truly all incremental.

Got it. Thank you one quick follow up.

I guess, we've refocused on.

No global acquiring but how should we think about.

Potential divestitures are there any kind of areas or any way you guys think about business.

Well look I think I think the answer is in and we saw this.

In in 2017 2017 is we're certainly open to it right. So it's a portfolio and our view isn't we're just we're only buyers were certainly willing to entertain.

Offers that value these businesses in excess of what the market may be valuing and where we may not feel it's strategic or we may not feel we have future growth opportunities or we may not feel.

We can execute the M&A program as well so we're open to it.

We get we get calls from time to time, So we're certainly and I do think thats, a little bit of a shift I do think our openness and willingness to do it but I don't.

So right now I wouldn't say, there's anything active and I wouldn't say there's anything.

Meaningful going on.

Got it thank you for taking my questions.

Thank you.

Our next question is from James Breen with William Blair. Please go ahead.

Thanks for taking the question just following up on the VPN business, obviously, the the ARPU is lower in the turns a little bit higher but can you talk about some of the economics. There and also is this give you sort of a footprint in that space to do more M&A are there other companies out there.

We can add customers to your current platform. Thanks, Yeah I'll have Scott talk on just some of the metrics because they show up a little bit in our customer accounts and ARPA.

But then the second piece, absolutely and I do think that the VPN space.

Is fragmented has many subscale providers, who were going to find it difficult to compete with the likes of us and they are fairly straightforward migrations from up from a technology and customer experience point of view and so we see.

Pretty interesting opportunities from an M&A point of view the other thing is.

We also have a white label.

Version or portion of our VPN business, where there are entities, who may be interested in launching their own VPN for their own customer group and we're able to provide that in power that in there we just get paid.

License fee or a per seat type fee.

From that provider. So we can come at the market that way and that's a nice competitive advantage for us but on the so on the metrics most of the customer base that we acquired and as you know it occurs under four or five different brands would be at the smaller into the spectrum, meaning they're either individual users or sohos in a b to B case, and so they've got an ARPU and there's different programs and as I mentioned to an earlier question there are month to month.

Subscribers there annuals, there's two year three year subscribers.

Based upon that mix, we're going to get an ARPU on a net net basis somewhere between six and $7 per month.

So that's a lower ARPU than we've historically gotten in the rest of our cloud business and that's why you see the $16 average ARPU in Q1 come down to 14.

In Q2.

And so that will move around a little bit based upon as we move forward.

The relative mix between that Soho customer versus the B to b on the one hand and the different packages on the other.

And from a profitability standpoint, EBITDA margins for that business are in line generally with the cloud business around that 50% are they better.

No the actual theyre actually somewhat lower.

They it's a strongly profitable business and actually I would I would give as Vivek mentioned earlier a lot of credit to.

The the incumbent historic cloud business, because the margins actually went up in Q2. Despite the fact, there was some quote unquote drag from the VPN business, because that's a business that right now added scale is more around 40% EBITDA margin.

Great. Thank you.

I look at them and the other thing I am just can also point out is it's a growth business and so we are going to be aggressive in investing to generate future growth. While its goal is not necessarily to drive at the 50% target in the near term.

Okay. Thank you.

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

Hey, guys. Thanks, Thanks for taking my questions.

Couple ones here.

First I wanted to dig into some of the VPN assets, and maybe particularly IP vanish.

I think can you, especially since since we can see the impact on metrics from.

On the cost front on ARPU side, just help us understand directionally is for VPN business primarily.

Actual SMB or is there a bigger consumer.

Can you see that business because my understanding is that most of your current cloud business is that same day rate.

Relatively low consumer exposure. There is this maybe a little bit about all the different markets focused.

It is it is absolutely much more a big consumer value proposition, having said that there are smbs and we are developing solutions for even larger companies. We've we've got a brand called encrypt me where companies can buy VPN.

For their teams and for their organizations, which they really ought to do because when you consider about how many endpoints in the world that are business endpoints are those be laptops or.

Phones that are connecting to.

In flight Wi Fi.

Airport Wi Fi Hotel Lifeline, all of that's on 600 coffee shops, thats unsecured it's a risk.

To the enterprise and those risks should be resolved. So we see an opportunity, but with respect to the business that is as it is today. It is consumer however.

Where I think we are leveraging our collective expertise is that.

About 60% of cloud services subscriptions are generated online and so the discipline of online marketing online customer acquisition understanding sources of traffic drivers of conversion different testing of different funnel experience is that that's a common thing whether it's the facts whether its IP vanish, whether its line to also our understanding of how to sell through on mobile devices and through App stores is also sort of a common experience so while a little bit of a different market for sure I think a common set of marketing practices in dynamics.

Okay got it that's helpful. I think just I understand I mean, how do you have any other.

Cloud business says that you can.

Possibly can bring some experiences from or is there something that you can bring from what you've done with the Oakland humble bundle. Some best practice from that into kind of adapting your go to market and sales motion with the VPN assets.

Well its going again I think on the on the customer acquisition side, Yes, I think that it is the same.

You know, whether it's paid search organic search content recommendation engines affiliates.

I wouldn't make such a big nuance between the SNB buyer and the consumer buyer because they are buying online. So I think thats still just people who are buying online and so there is a lot of collective experience. They also think on the customer service side, we have a fair amount of customer service infrastructure and knowledge across the company in a sharing lots of best practices around the customer service and then obviously, yes on the media side, you know the humble bundle subscription businesses entirely a consumer subscription business and so I think there are learnings there that we can we can we can apply.

Got it okay. Thanks, that's helpful and then speaking of the media subscription business.

It looks like we have been.

Kind of in the mid to high Twentys range as percent of the total media business.

I know thats, obviously been a focal point as growing that now that was 13%.

Year, and a half ago.

Looks like it's kind of been in the same range for a while now.

Just just help us understand I mean is this kind of the steady state of where should we should expect that or.

Is there kind of a other levers to seeing that kind of business as as a percentage of total media business kind of continue to grow from here.

Well look I mean, I think if the portfolio were to stay unchanged you'd continue to see the subscription portion of it be larger and larger now I will also point out the nonsubscription pieces are growing nicely and so you have got that in the in the proportional.

Question, but I think as we acquire in media were to be very clear. We're we're interested in a full range of assets, including displayed dependent assets that outperformance marketing components to it.

Also performance marketing driven assets that we want to add to our performance marketing portfolio and subscription so it's a little hard to answer without.

So being able to know over the next 12, 24, and 36 month, which of those assets and it and then what proportion.

They are going to be so I don't I don't want to leave the impression that the performance marketing and display pieces are pieces that were not interested in a growth growing and acquiring into we are.

But subscriptions as well.

Okay got it that helps that's helpful.

Wanted to turn to OTV I, you know it looks like to get about 37 million and investments there and in terms of actual capital call last year about 10 million in Q, along and we'll see what the one on the 10-Q comes out Alex and Q2, but maybe just help us understand.

Extend that you can share where where are those investments going and.

Maybe or your sort of outlook on that.

Yes, So I think you pull the information from the queue. So I think your.

Pretty pretty close to the amount we have invested you will see some additional investments that we made during Q2, what I would note is that now that the fund has been up and running for a while they are starting to see some monetization events. So in terms of their their base of investments.

They've got about eight of them they range from life Sciences to mobile payments.

So it's really a broad array of one of the company that they invested in went public.

About two three months ago called precision bio sciences, and you'll notice.

Both in our financials and you will see it also we file the Q at the end of this week that Theres a gain posted.

In previous quarters, you will see that when we mark to market Theres losses on the portfolio primarily for the fees that we pay in this quarter, you're going to see thats not only reversed out that there is a gain now that's not a realized gain.

Because there is a lockup period, and we don't control the disposition of those shares LCB does but one company has already gone public.

I believe that there is you know at least one of the situation will there will be a pending transaction that will also create a monetization event. So right now I'd say for where they are at in the life of the fund to have.

At least two of their situations already bearing fruit in terms of a return.

Even if not fully realized to us in cash I think is positive the other investments.

Given the state of their app or not quite right for either are going public. We're a monetization event, but I think that from our standpoint, we're going to start to see some return of capital from these investments.

I still budget that we will expand about $50 million a year in terms of the investment into owes CV to get to our full $200 million commitment. We spent a little bit under that last year, because they just didnt have the breadth of deals and capital calls.

We may.

I think be probably a little bit under that number again this year, but that will be in part a function of what they have in their pipeline between now and year end.

Great. Thanks, and then last one from now I'll hop off but from a housekeeping perspective, Scott any any impact on or drag from currency on growth rates in the quarter.

No FX had very little impact.

In the quarter.

All right great. Thanks.

All right. Thanks, Scott Thanks for that.

Thank you.

Our next question is from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, guys. Thank you for taking my questions and again congrats on the strong performance in the past 20 years and the quarter.

First of all can you talk about how the fax business are formed and maybe break out the enterprise. There's a smid perform excuse me SMB performance and how your efforts to penetrate healthcare and enterprise it progressing.

Yes. In fact revenues were up a couple of million dollars sequentially, which was nice from Q1, the corporate business was up about 7%.

For the quarter and that's mostly in the health care space and so.

Things are going according to plan, we're we've deployed and continuing ploy salespeople in the field to.

Have the discussions to convince health care.

Clients to shift from their analog solutions to cloud it takes a while theres a fair amount of.

Health care move slowly, but when it moves it kind of moves in big ways. So we like the size of some of the opportunities that are in front of us. So it continues to be a pretty good growth businesses at about 7%.

And then on the on the Web fact side I would say that we haven't done a transaction.

25 months it fits us 25 months. So in summary, two years two years, we haven't done one and so that's still held together reasonably well without M&A historically, the wet fact side has grown entirely through M&A, but we've been very focused on.

Better customer acquisition better customer attention and interesting dynamic is the actual search query volumes.

When you look at facts and facts related terms is up so we're seeing that if thats a sort of proxy for interest in.

The solution in the service that we provide so were happy and the margins continue to be very strong John never goal, who runs that business for us in a very nice job and they are investing so he's investing yet finding ways to improve margins in other places.

Great. Thank you for that color and then just going back to the topic of the margins. The VPN business work in those goes you bolt on assets and what appears to be a target rich environment or the same.

Scaling opportunities and migration economics as in your traditional cloud businesses.

Yes, I'd just add I think they're very very similar to what.

We see we've seen in other cloud space, but again I just think one of the things I want to continue to stress is.

This is a business we talked about this where we see tangible organic growth opportunities, we are going to invest and so we're not looking at a magic margin percentage, we're really looking to feed our growth engines and we view this as an engine.

Okay Fair enough and then finally can you just give us a little more color on the scope and quality of M&A opportunities for second half and into 2020, I know you've done about.

$270 million of deals is what looks like to close by year end and kind of what does the mix look like in the pipeline as a more cloud and VPN or is there a bigger balance towards media.

No. It's it's a mix look I think we've got close to half of the business units participating.

In perspective, M&A right now so we've obviously had a run in the first half of the year Thats been dominated by the cloud. Although there was a small media deal done in Q2.

That goes into ours, if media group.

We have a balance on both sides I think it's very hard to predict.

Now what the total outcome will be but as I said in the last earnings call I feel very confident that we will spend.

Clearly more than the free cash flow, we will generate this year, which as I said earlier is about 375 to 380 million.

Whether that comes in a series of smaller deals spread across five or six be used or is more concentrated as a function really of which deals get to the finish line and at what point in the year, but.

I think you're going to see a mix of deals between now and year end.

Great. Thank you and congrats again.

Well thanks.

Our next question is from Pat Walravens with JMP Securities. Please go ahead.

Oh, great. Thank you very much.

And thank you for the 20 year perspective, none of the company's I covered Backbenchers film business.

[laughter], that's one indication.

The best So I have two big picture questions. The first is just.

When you look at the M&A pipeline.

Do you feel like sellers' expectations earn a reasonable point at a reasonable point these days.

Yes look I think it depends right you've got the range and so.

The great thing about us is.

We'll look at all situations and we keep an open mind and we look for a path to value creation and I think some buyers.

May not have that we have the ability to take a growth asset leverage both our balance sheet and the assets within the company to accelerate that and so we'll look at those assets, but we'll also look at assets, where there is a profitable core and we need to shrink the asset to get to that profitable core and then look to grow it from there and I don't know if if all buyers could do both of those things for instance, and so weve got versatility as a buyer I think we also have a very solid reputation for moving decisively and quickly. So the degree to which speed and certainty is valued by a seller than where the bar where it comes to.

No.

Someone's looking for the greater full.

That's those aren't those arent processes were ever going to win and those will always exist in I've been in markets up I've been in markets down and you will always find assets like that but.

I think the high level is that we are not seeing a shortage of interesting actionable opportunities for us.

All right Great and then my second question is.

Are you guys seeing any changes in sort of the macro economic environment.

Either on the media or the cloud services side.

No I mean, I, just I feel like the macro things that happen often have nothing to do with our business, but we get swept into it.

We're not we don't have much of a business and in China, It's de Minimis for us, but that wouldnt that doesn't stop us from getting pulled in.

To that time, so I think the larger things often if one took a closer look at what we do and where we make our money and how we make our money don't apply to us, but it has an impact obviously.

On the company's stock price right, but beyond that.

I actually think.

The areas that you know with display having had challenges in the past we feel good three consecutive quarters.

Display growth, which we feel good about so.

No I don't see things specific to our businesses and our industry is in our markets that worry me, we just worry about the larger market, which we can't control.

All right all right great. Thank you.

There are no further questions registered at this time I would like to turn the floor back over to Scott Turicchi for closing comments.

Thank you Claudio we thank everyone for participating today in our Q2 earnings call as usual look for a press release soon about upcoming conferences.

Some beginning as early as next week, then obviously there is a hiatus in the latter part of August and then there is a series of conferences beginning right. After labor day in September and we'll look forward to communicating again, our Q3 results sometime in early November .

Thank you.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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