Ziff Davis, Inc.
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good day, ladies and gentlemen. And welcome to J2 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. On this call will be Vivek Shah, CEO of J2 Global; and Scott Turicchi, President and CFO of J2. I will now turn the call over to Scott Turicchi, President and CFO of J2 Global. Thank you. You may begin.

[Scott Turicchi:]

Thank you. Good morning, ladies and gentlemen. And welcome to the J2 Global investor conference call for Q4 2020. As the operator mentioned, I’m Scott Turicchi, President and CFO of J2 Global. Joining me today is our CEO, Vivek Shah.

[Vivek Shah:]

Thank you, Scott, and good morning, everyone. We save 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, 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. In our Gaming business, IGN had a very strong quarter, as the start of the new console cycle unlocked budgets, as we hoped.

[Scott Turicchi:]

Thanks, Vivek. Before turning to our financial results and 2021 guidance, I’d like to also offer my condolences to Bob’s wife, Mary Beth and his family. I had the privilege of working with Bob for more than 22 years. He was an early believer in the company dating back to the summer of 1998, when I was still an investment banker. His thoughtful guidance and friendship are dearly missed. Before turning to our financial results, I would just like to note that Q4 2020 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 in the quarter on acquisitions and $36 million on share repurchases. 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 outstanding shares at an average price of approximately $73 per share. Now, let’s review the summary quarterly financial results on slide four. For Q4 2020, J2 saw 15.7% increase in 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 20.1% to a record $211.8 million, and finally, our adjusted EPS grew 30.7% to $3.11 per share versus $2.38 per share in Q4 2019.

[Operator:]

Thank you. And the first question is coming from Cory Carpenter from JPMorgan. Cory your line is live.

[Cory Carpenter:]

Great. Thanks for the questions. I had two on RetailMeNot. Vivek, it sounds like the Deal Finder 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 that have been successful in driving this growth, and then more broadly, the opportunity that you see? And then, for Scott, just given your early success with the acquisition, any change to the $80 million EBITDA run rate target you talked about last quarter or just more broadly, it’d be helpful to hear how -- what you’re expecting for RetailMeNot in terms of growth and margins in ‘21? Thanks.

[Scott Turicchi:]

Sure. Let Vivek take the first one and then I’ll dovetail on the B2B.

[Vivek Shah:]

Great. Well, good morning, Cory, and thanks for the question. Yeah. So, look, the RetailMeNot integration has been just fantastic. The team really did exceed our expectations for Q4. As I mentioned, we did see some improvement in take rate and this is before the efforts where we’re going to stage editorial and deal content that we think is going to help drive and accelerate take rate. So that hasn’t yet really happened. On the Deal Finder side, I think we have a couple of things going on. I think just organizational focus -- more focused on marketing to drive installs acceleration on on-boarding merchants. And going in 2021, as we noted, we are making some investments -- incremental investments to plan to help further accelerate installs and further accelerate 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 were shrinking, are actually being offset by higher than expected growth in the core commissions and advertising business. So the fact that, I would shift our view of 2021 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 certainly ahead of plan and I think it is a function of the team’s efforts, the learning that is going on between the RetailMeNot team and the core affiliate commerce teams at 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 discounts and coupons, which we now also do exceedingly well.

[Scott Turicchi:]

And I would just add to that for others on the call, when we acquired RetailMeNot, as Vivek mentioned, it was about $180 million run rate business, and we said, there was some proximately $10 million of very low margin or no margin revenue that we’d be looking to expunge in 2021, as a result, revenues on a pro forma basis may go down by about $10 million. Based on that early success and the commentary that Vivek just gave, I think, we feel highly confident now that RetailMeNot will not have any kind of a decline certainly of the material nature in 2021. We think it will be in that $180 million range, while at the same time having that margin expansion from the low 30s to the high 30s. So when you kind of unpack that, what it needs is a few million more of EBITDA this year and hitting that $80 million run rate slightly earlier than at the end of this year going into 2022.

[Cory Carpenter:]

Very helpful. Thank you both.

[Operator:]

Thank you. And the next question is coming from Daniel Ives from Wedbush. Daniel, your line is live.

[Daniel Ives:]

Yeah. Thanks. Great quarter to the team. So can you just talk about the backup business in terms of why now -- because obviously, we’ve over the last few years, this has been a discussion? But can you 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 please talk about why now we think about the last few years where there have been some starts and stops potentially?

[Vivek Shah:]

Yeah. Thanks, Dan. Look, I think that, what you’ve seen from us over the last few years, is just a regular process of portfolio optimization. And I think with respect to the B2B backup businesses. Look, I think that, given where we’re trying to take our cybersecurity suite, in the bundling of Viper, IPVanish and other services, it didn’t fit. And so, we see -- now I’ll point out that we are keeping our -- or we are focused on our LiveDrive and SugarSync businesses within that suite, because they are direct-to-customer and match the customer acquisition profile of the rest of our cybersecurity 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, the company 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 the future potential of what an exploration of alternatives can mean for the team and so the business and we are confident that this will end up becoming a win-win.

[Daniel Ives:]

Got it. And then, Scott, just like from an M&A perspective, combined with some of the assets you’ve divested and just more of the offensive. Sort of real quick, could we sort of compare the view going into 2021 versus maybe 2020 from an M&A perspective? Like, does it feel just more on the offensive in terms of going after assets and then tax, like our valuations…

[Scott Turicchi:]

No.

[Daniel Ives:]

… is that a headwind in terms of the way that you guys like to think about M&A?

[Scott Turicchi:]

I think, no doubt, in the last year or so, and I’ll go back to the Analyst Day, almost exactly a year ago in 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 backup and voice business are consistent with that. But it also sharpens the focus on where to look for M&A opportunities. Now, as you know, we took a hiatus as the early stage of the pandemic, really created, I think, two confusion, what would it be for J2, what 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 of closing nine transactions spending just under $500 million in those nine deals, obviously, heavily weighted to RetailMeNot. So I think that the sharpening of the focus within the three divisions and the core areas of that we want to pursue is very helpful for the M&A team that helps them build a pipeline, everything from tuck-ins to more larger, I hate to say, transformative, but larger transactions, that would be of the size of RetailMeNot. And I think in terms of your second question, 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 would fit in this category, tend to be at the smaller end, they’re tuck-in or small deals. 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, the larger deals, yes, you may have, as this market is awash with capital, PE firms, SPACs and other things that are interested in 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 SPAC and hence, we can get a RetailMeNot even in a competitive market environment. And while it’s still early, really demonstrates some important synergies with our own businesses and improvement in both the revenue profile and EBITDA profile. So I feel very good about where we sit from an M&A perspective, and as Vivek mentioned, we’ve got decent cash balances right now and certainly the ability if it were necessary to take on more debt, as we’re modestly levered.

[Daniel Ives:]

Thanks.

[Operator:]

Thank you. The next question is coming from Nick Jones from Citi. Nick, your line is live.

[Nick Jones:]

Great. Thanks for taking the questions. Just two, I guess, on Digital Media, what are you hearing from your partners in terms of the shift towards kind of context and brand safety? That’s a theme that’s growing up in the app community as IDFA gets deprecated, third-party cookies, things like that. I guess, how does that -- is there a potential tailwind for CPMs rising for the properties you have and is that kind of inform maybe where some of the more exciting M&A opportunities are from here? And then a second one maybe for Scott, how are you thinking about the buyback from here as these price levels? Thanks.

[Scott Turicchi:]

Yeah.

[Vivek Shah:]

Thanks, Nick. So, look, I think, you -- your question might have answered itself. Yes, we do think that the disabling of the instrumentation of the interest-based advertising world plays absolutely in the hands of content publishers and contextual sellers of advertising and performance marketing and that’s what we are and we always have 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 you’re seeing from Google, Apple and others in the ecosystem. So context will matter, premium content will matter, trusted brands will matter, affiliations with those brands will matter, and first party data, one of the things we haven’t talked a lot about, but figures into our plan, is take a RetailMeNot, a RetailMeNot sits on a ton of 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 data set with respect to first-party data that can be monetized within our environment. And so, look, I do think that these changes are only tailwinds. But I will point out that we had a monster quarter without that. We had a result in the Digital Media space that I think is fairly unique and really needs to be appreciated ahead of any potential further tailwind from, to say, from IDFA and third-party cookie demise.

[Scott Turicchi:]

And in terms of your second question, Nick, absolutely, share repurchases remain on the table. Our philosophy is consistent, as we discussed in the past that we’re really looking at 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 2021, we’ll see how the stock performs. We’ll see about alternative investment opportunities from an M&A standpoint that Dan just asked about in the previous question, and obviously, we’ll have to balance between the two of them. But they’re not off the table just because the stocks at an all time high.

[Nick Jones:]

Great. Thanks.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from James Fish from Piper Sandler. James, your line is live.

[James Fish:]

Hey, guys. Congrats on the great end to the year here. I wanted to get into the Digital Media business a little bit more. The monetization rates appear to be your strongest ever, obviously, some tailwinds across the Board. I guess, how sustainable do you think those kind of rates are? What were really the kind of rank order drivers? And also within Digital Media, how much did RetailMeNot actually contribute in Q4? And Scott, if you could provide an update on the annual advertising versus subscription versus kind of others mix in Digital Media?

[Scott Turicchi:]

Sure.

[Vivek Shah:]

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 in some of our market segments that are beneficial and enduring will take IGN and the console cycle refresh. As we had talked earlier in the year, we were anticipating that the launch of the new consoles in Q4 would unlock budgets, it did. But it’s not a one-time event, a bunch of IP starts to now come out, games start to come out, which are all games that will end up being marketed on IGN. So we think the console cycle refresh and we’ve been through two of these before had some nice enduring effects. We think that Ookla continues to be as relevant as it’s ever been and some of the statistics 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 for cost per install at Ookla. And then the Ekahau business is returned to growth. You’ll recall that in Q2, with what was going on in commercial -- in the commercial world, there was no WiFi planning, that is coming back and then WiFi 6 is going to be a significant we think tailwind for Ekahau in the future. Everyday Health just had a sensational quarter. But again, it is a function of the change in the waveform of markets and we think that change is permanent. So the things 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 think will continue to contribute attractive growth.

[Scott Turicchi:]

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 of the deal, a number of analysts, I can’t remember if you were one of them, estimated about $40 million of revs 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 RetailMeNot in the fourth quarter. And then what I would note is that, almost all of that revenue and it will be true prospectively as 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 of performance-based marketing. So for the quarter, remember, the quarter, Q4 only has two months of RetailMeNot 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 that 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.

[James Fish:]

Very helpful, guys. Congrats again.

[Scott Turicchi:]

Thank you.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Saket Kalia from Barclays. Saket, your line is live.

[Saket Kalia:]

Hey, guys. Thanks for taking my questions here. Scott, maybe first for you. Thanks. Thanks a ton for the full year guide, kind of comparing apples-to-apples with the divestitures. Maybe just to go one level deeper on ‘21, can you just give some broad brushes on how you’re thinking about Digital Media revenue growth -- segment revenue growth for Digital Media and Cloud Services? Just to help us tweak our models a bit?

[Scott Turicchi:]

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, again, it goes always tricky in J2 because the M&A and how you take things in and out to normalize them. But I want to give you a few factors to set up the organic piece, obviously, the delta and the total growth would be from acquired assets. So, for 2020 as a whole, the Media business with a mid single-digit of 4.5%-ish organic grower, Cloud 2%. But remember, Q2 was under severe stress, particularly for Digital Media. So we look at the fourth fiscal quarter, we see our Media business in the high single-digit 8% plus range and Cloud just under 3%. So that inform our view of 2021 and as we look out the 2021, we expect the Media business to be a high single-digit organic grower, maybe 10%, and the Cloud at a low single-digit. 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 16% would be from the acquisitions that would be annualized in 2021 versus 2020.

[Saket Kalia:]

Got it. That’s really helpful. And if I can just squeeze in a follow up, Vivek in -- I agree with you in terms of what you said on the fax business, really ending on a high point there. I guess -- and maybe this is a two -- maybe this is for both of you, but could you just talk about that split between corporate and maybe we’ll call the high velocity, the -- business and how you think about sort of that overall fax business in 2021?

[Vivek Shah:]

Listen, the performance of this business in Q4 was sensational. So, I’ll address this show the critics of the business. You find me a business that growing 17% in healthcare, that has the market perception that that business seems to have. You’re not going to find it. So, look, we’ve talked about it for years. We are organized around the healthcare opportunity. We’ve put in place an enterprise grade set of solutions, a wonderful sales organization and it’s working. So that’s the corporate fax business. It’s working, its healthcare and it’s going to continue to work and we’re very confident in it. On the web side, the declines are very low-single digits. They’re actually better and what we have said in the past and where we’ve modeled. So that to me is a great story. 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 great business. We always have. And hopefully we can start to change the minds.

[Scott Turicchi:]

And I will just add to that, that I think analytically, we’re getting to the point, we’re not quite there, it’ll probably be not this year, but next year, we’ll 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 parody. They’re not quite there, about 330 million revs last year, high $170s in favor of the web, a little over $150 for the corporate.

[Saket Kalia:]

Very, very helpful. Thanks, guys.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Will Power from Baird. Will, your line is live.

[Will Power:]

Okay. Great. Thanks. Yeah. Just a couple of additional questions. I wonder, well, first, yeah, congratulations on the strong results to finish the year.

[Vivek Shah:]

Thank you.

[Will Power:]

Maybe just circle -- yeah. Maybe just circle back to the cybersecurity segment and the opportunity there. I’d love to kind of get your thoughts on growth prospects as we move into ‘21. And particular, what the M&A environment looks like there. I mean, given obviously, the focus on cloud security and higher multiples, obviously, for bigger entities. What are you seeing on the M&A pipeline within that segment?

[Vivek Shah:]

Really great question and it dovetails to something I did want to make sure we hit on, which is, both with our cybersecurity and MarTech businesses, they’ve been run really for status 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 ads that we’re generating today. So for both cybersecurity and MarTech, we are investing in 2021 stepped 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 there aren’t acquisitions to do, I think, these businesses show a ton of organic potential individually and then in the cybersecurity world bundled together. Point is that, we see as much organic opportunity in the space because of the market interest in it as we do possibly on the M&A front. Look, on the M&A front, we’re still very focused on solutions for SMB, that 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 sees that kind of frothy valuation. But again, I think, we think Viper, IPVanish, SugarSync, LiveDrive. We think these are great brands that in and of itself will grow without acquisition.

[Scott Turicchi:]

And I would just note that, talking about acquisitions in that space, and certainly, the headline deals having big valuations. I think if you look, a little bit lost in Q4 even 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 we want to deliver in cybersecurity 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 will gain more attention, but that’s fine for us.

[Will Power:]

Yeah. Okay. And if I could just sneak in one other, some great stats on the Ookla front, I wonder, Vivek, just trying to understand, how enduring some of those trends could be, it feels like you’ve got some tailwind. I guess I’m just curious 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 5G networks. Any sense for kind of what you’re seeing on the 5G kind of testing front and what maybe that could mean for you moving forward?

[Vivek Shah:]

Well, I think that’s just going to add a lot of fuel to that fire. No, I think it’s very sustainable. I think -- look, I think, it’s not like work-from-home is going to end. I think you have pretty much every major employer with the point of view that there’ll be 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 into revenue. So our performance is not a test volume based view, it’s more those providers of broadband services and those networks are very focused on making sure that they have high quality and speeds as the demand and expectations for quality and speed and connectivity continue to go up. And I think the demands 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 to 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.

[Will Power:]

Thank you.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from James Breen from William Blair. James, your line is live.

[James Breen:]

Thanks for taking the question. I was wondering just a couple things on the Gaming side unpack a little bit. You talked about budgets opening up and how that sort of manifests itself across your platform, whether it would be IGN or Humble? And then just on the Cloud side, customer count was down and churn was up a little bit in the fourth quarter. How much of that was -- conscious decision by you guys around sort of who your customers are versus sort of some of the economic impacts and how do you see that trending as we move into 2021? Thanks.

[Vivek Shah:]

Thanks, Jim. 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 have been taking place at the Humble Bundle business, which remember is three businesses, it’s a store, it’s a publisher of games and it’s a subscription -- monthly subscription service. 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 games by producing indie games and continuing to be what we believe we are going to be soon the -- the big player in the indie publishing space. 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 games publisher and we see it as a recipient of games advertising.

[Scott Turicchi:]

And Jim, on your question, I’m glad you asked it about the metrics for the Cloud business. So let’s deal with the customer count. A 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 U.K. voice piece and the backup continued to be a drag in customer count. The remaining piece, and if we go back to the earlier questions and 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 ARPU, and it’s being replaced by a low customer count high ARPU corporate business. So those to pretty much deal with that -- pretty much they deal completely with not only that sequential trend, but also that would be, if you will perform it, there would be laddishness to some degree of growth. Cancel rate, it’s a little bit different story. First, I would note that subsequent to the acquisition of IPVanish back in early Q2 of ‘19, because it is a more consumer-oriented business, the cancel rate has a normalized range of 2.25, 2.5, so we remain comfortably within that range. But specifically, in Q4 of ‘19, we ran certain programs within the IPVanish business that were highly promotional. They had very low renewal rates in Q4 of 2020, so 20 basis points of that movement comes from just the IPVanish promotional activities in Q4 of ‘19. So it gets us in the 2 range, which is not only conformably within our band, but actually at the low end.

[James Breen:]

Great. And then just two quick follow ups, one of the larger acquisitions you did last year was in the VPN space, just wondering if you can give us update there and sort of how that -- there was a little -- 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 ‘21, adjusted EBITDA margin on the Digital Media side 38% to 39%, I think, we went back a few years, you were sort of talking about mid 30%s, we’re trending almost a 40% now. What do you think the potential is there, given the traffic you’re seeing and given sort of the larger revenue across a fixed asset base? Thanks.

[Scott Turicchi:]

Always want more.

[Vivek Shah:]

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, no, that’s been a growth business and it’s been a growth business double-digit growth from the beginning and it’s been a driver of the overall cybersecurity growth. So that hasn’t been a shrink to grow proposition. And remember, that was acquired in 2019 and not in 2020.

[Scott Turicchi:]

April 1, April 2 of ‘19.

[James Breen:]

Great. Thank you.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Shyam Patil from SIG. Shyam, your line is live.

[Shyam Patil:]

Hey, guys. Thanks. Vivek, this one is for you. If you look at the IPO market right now, it’s very robust. We’re seeing smaller companies go public. And Scott referenced evaluation being depressed, at least a couple of times in the call today. Does that influence kind of how you’re thinking about potentially monetizing Digital Media or Everyday Health, or any other businesses in their portfolio, maybe just taking advantage of some of the public markets right now, the receptivity, as well as just the overall valuation of the overall business?

[Vivek Shah:]

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, this was an unbelievable quarter. There is no other way to look at it. The last couple of quarters have been unbelievable. We’d beat by $0.31 on EPS. Like 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. Hopefully, people will see that. And I think that that will start to unlock value, because it’s here. It’s not here. And so, I think, our jobs are 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.

[Shyam Patil:]

Great. And then just to follow up for Scott. Scott, I know you guys don’t provide quarterly guidance and the segment seasonality is very helpful. But I was just wondering, in terms of just overall EBITDA and overall EPS, and you kind of framework for how to think about kind of those by quarters as we kind of model out kind of the fiscal year?

[Scott Turicchi:]

Yeah. As you know, it’s heavily weighted to Digital Media and Digital Media becomes a larger share of overall J2, it becomes more Q4 centric. So, I’m looking at post two, 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 than 20%, maybe 20% coming in Q1. And then the two middle quarters, there -- 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 framed it for you and that 20% and 32% that we talked about as additional reference for guidance, which clearly relates to Digital Media, because Cloud does not have that same degree of seasonality, it is highly influential, though, of how it flows to EBITDA and to the bottomline.

[Shyam Patil:]

Thank you, guys and great quarter and great outlook for the year.

[Vivek Shah:]

Thank you.

[Scott Turicchi:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Rishi Jaluria from D.A. Davidson. Rishi, your line is live.

[Rishi Jaluria:]

Hey, guys. Thanks for squeezing me in. I wanted to maybe drill a little bit into the margin performance in Q4, really impressive gross margin and EBITDA margin expansion on the Digital Media side year-over-year. Can you talk a little bit about what the drivers were here, was RetailMeNot just immediately creative on the margin side or were there other factors here? And maybe alongside that, I appreciate the granularity on guidance for next year? How should we be thinking about cash conversion from EBITDA next year relative to what we’ve seen historically? Thanks.

[Scott Turicchi:]

Yeah. So, no, RetailMeNot, while, yes, it is accretive to overall J2 in Q4, the margin expansion is actually independent of that. And so we had -- we’ve had actually seen it for a couple of quarters now. Pick up on the COG side in 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 costs, a lot of which we believe are permanent. We talked about even for ourselves, a higher percentage of our workforce being work-from-home, exiting certain real estate, that’s had some modest benefit in the OpEx in Q4, but it does flow through more meaningful way in our guidance for 2021. So it’s really been an across the Board. What I’d say, deep review of the cost structure with the both pieces of the business, to be clear. But I think what we found greater opportunities, and certainly, you see it in the margins is in the Digital Media business and as you can see from what we’re projecting for 2021 those are sustainable.

[Rishi Jaluria:]

Got it. Thank you.

[Vivek Shah:]

Thank you.

[Operator:]

Thank you. And the next question is coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

[Jon Tanwanteng:]

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 maybe at an aspirational level this year, between M&A, buybacks and the organic growth, first part? And the second part, just regarding the backup assets, what kind of value do you get for that and how do the proceeds from a sale or divestiture fit your leverage and capital allocation goes, maybe from a timing perspective as well?

[Scott Turicchi:]

Yeah. No. Look, so I think in terms of deployment -- how much capital we will deploy in 2021? It’s always hard to say. It’s depends on a number of factors in terms of timing of acquisitions and size of acquisitions, as well as our views on the share price. But, look, I think, if you look historically, over the last handful of years, it’s around $4 million a year and that is roughly equivalent to our free cash flow. And so, I think, you can expect that, not built in. We don’t build in certainly not at the midpoint of our guidance any of the benefit of that. So we typically look at the high end as reflecting that. But I think it’ll be consistent with what we’ve seen in the past. With respect to proceeds -- the potential proceeds, probably, not best for us to discuss that on this call. Let us work through our exploration and we’ll see where we come out.

[Vivek Shah:]

And let me just dovetail on that, and actually, I think, Rishi had asked a question, I think, we did not answer, which is the free cash flow conversion expectation for 2021. So if you take the midpoint of our guidance at $656 million, it obviously excludes the backup assets, depending upon the transaction that occurs around them and the proceeds that come in. This would be in addition to. But of that core $656 million, I would still expecting mid 60s conversion rates to free cash flow. And I would remind everybody our free cash flow does not come in ratably over the four quarters. 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 in 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, then we take a little bit of a dip in the middle of the year and then we come back in Q4, which is generally also a strong quarter. So that would get you about $425 million of free cash flow on top of our current balances. And we’re very close to effectuating our line of credit that we had before. But that -- in the process of issuing the 4.58% 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 said, it’s very hard to predict how much we will need this year. But certainly, if you take the 424, you’re looking at the cash balances at the end of the year, 234, 340 roughly, if you include our investments that are not as liquid and then the line, it’s pretty powerful. I mean, we’re in the $700-plus million range, which as you know, is ample even last year. If you look at the acquisitions plus the share buybacks, which were very heavy, it was a year of a little under $750 million of capital allocation and I see that right now just looking at what we have today in 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 with the backup business.

[Jon Tanwanteng:]

Got it. Great color, guys. Thank you very much.

[Vivek Shah:]

Thank you.

[Scott Turicchi:]

Thank you.

[Operator:]

Thank you. And there were no more questions in queue. I would like to hand the call back to J2 Global’s Scott Turicchi to close the call.

[Scott Turicchi:]

Great. Thank you. We 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 roadshows continue to be in a virtual environment and it looks like it will be for some number of continuing months, which actually makes it very easy. We’ll be at a number of virtual conferences over the next several weeks. There will be announcement out, giving you the information of how to participate in those. But also we will do non-deal roadshows virtually, and of course, I think you all know how to reach either Rebecca or myself. Don’t be shy. Happy to talk to you about anything you’ve heard today on the call. Also I want to re-emphasize something Vivek mentioned very early in his prepared remarks, which is the ESG roadshow. We have a deck of our, not only our 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 MDR or a completely separate MDR. And I will tell you, there is enough to unpack there than we did just the ESG and MDR. We had no problems going 45 minutes to an hour just speaking about those initiatives. So thanks again. Our next regularly scheduled call will be some time in May to report Q1 results. Thanks.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today’s J2 Global conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.