Ziff Davis, Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the j2 Global Second Quarter Earnings Conference call. It is my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global. Thank you. Mr. Turicchi, you may begin.

[Robert Scott Turicchi:]

Thank you very much. Good afternoon, everyone, and welcome to j2 Global's investor conference call for the second fiscal quarter of 2013. As the operator just mentioned, I'm Scott Turicchi, the company's President. And with me today is Hemi Zucker, our CEO; and Kathy Griggs, our CFO. This continues to be a very exciting time for j2. As you can see, a number of records were posted during the second fiscal quarter, which will be elaborated on in greater detail by both Kathy and Hemi. This call will discuss our Q2 2013 results, as well as provide an update on our 2 business segments, Cloud and Digital Media. I would also note that our board has increased the quarterly dividend to $0.2475 per share. We will use the attached presentation for today's call, a copy of which is available at 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 size of the slides. If you had not received a copy of the press release and/or the related financials, you may access it through our corporate website at investor.j2global.com. In addition, you will be able to access the webcast from this site as well. After completing the presentation, we will conduct a Q&A session. At that time, the operator will instruct you regarding the procedures for asking a question. However, you may e-mail questions to us at any time at [e-mail]. Before we begin our remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast does include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as the additional risk factors that we have included as part of the slide show for the webcast. We refer you to discussions in those documents regarding the Safe Harbor language, as well as forward-looking statements. At this time, I will turn the presentation over to Kathy to outline the financial results for the quarter.

[Kathleen M. Griggs:]

Thank you, Scott. Good afternoon, ladies and gentlemen. We are pleased to report that Q2 was our best quarter ever in terms of revenues, earnings, EBITDA, free cash flow and our cancel rate. These results provide us the best evidence to-date that our significant efforts and investments to diversify our business are bearing significant fruit. Moving on to specific numbers for the quarter, yet again we achieved record quarterly revenues. Our Q2 2013 revenues were $141.4 million, an increase of 24.5% over Q1 of 2013 and 58% over Q2 of 2012. Q2 revenues include $12.6 million or approximately $0.17 per diluted share from past damages relating to a $27 million patent license agreement secured during the quarter. The balance of the $27 million is recorded as revenue through June 2018, which is the remaining life of the patents. Q2 revenues were an all-time quarterly record even without the contribution for the patent license due to growth in our Cloud Services and Digital Media businesses, which I will now discuss. Please refer to Slide 5 in our presentation for our Business Cloud Services segment financial results. For Q2 2013, that segment achieved the following

[Nehemia Zucker:]

Thank you, Kathy, and good afternoon, everybody. If you remember during Q3 last year, we raised $250 million in bonds. In Q4, with the money, we entered the Media business and expanded j2 to both Cloud and Media. We are very pleased with our -- with the outcome, and I will present you today. Today, Scott was unusually generous with me as he gave me 6 full slides. Let's start with Slide #9. With the expansion of the j2 business, Fax has moved from being 80% class of our business last year to approximately 54% of our run rate now. Fax is still growing and we love it. But with all the pipeline acquisition that we have now, I will not be surprised to see that our Fax business run rate revenue will drop under 50% by the end of the year. And this is due to the growth of the other elements of our business. Our Fax engine now are mostly the corporate, which is the largest contributor in volume; in Japan, which is the fastest grower in percentage increase. I would like to share with you some stats on our eFax Corporate. Year-to-date, the revenue is 9% versus prior-year quarter. We have now 625 DIDs with the corporate segment, 8% versus prior year, approximately 1/3 of our DIDs, Fax DIDs. We have added 500 new accounts in Q2, 35% versus last year. We have now 875 new accounts, accounts not DIDs. 34 enterprise contracts have been added. And those deals are now generating ARPA. ARPA is our average revenue per account, which is north of $500 per month per account and low churn. The chart below demonstrates an index that since 2006, our CAGR on Fax was 14.3%, and it has increased 2.5 fold or times. Slide #10. Slide #10 is what I call my thank you page. This is the way I can thank to all our employees for their dedication of their hard work. To achieve this cancel rate of 2.21%, it's a huge achievement. Everybody here in the company have some aids in achieving it. Needless to say, it's extremely important. It is lowering our cost per customer. It is increasing our profit and EBITDA. And everything else is great here. This is down 33% to 2.21% since 2009, as demonstrated in this beautiful chart. And thank you, everybody. And I will go to Slide 11. KeepItSafe. KeepItSafe is our online backup that we entered as we -- continues to expand our services. The first 2 bullets here are about growth, yes, 52%, 128%. I'm very proud with it. But obviously, it's very easy to have growth rates when the base is small. But while it is still growing, it is not still is growing organically, it is also growing with acquisition. We have several deals that are due diligence and will close soon. We have more deals of backup in the cloud in LOI. We're approaching $10 million of run rate. And this is as is without any significant more acquisitions. We have a unique position in the backup. We have business focus. We have multiple locations. Very important, we have service available for these organizations. They do care, unlike the consumer, about where and under what low is the data had been kept, a copy of the data has been kept. We have service to offer in Europe, in New Zealand, in the U.S. And we are hoping to add soon, Canada, Australia and the U.K. We have also a very unique offer, which caters to corporate users. We cover laptops, which is not as easy as desktop. Mobile users can use us. And we give a full suite of services. Last time, I mentioned that the Miami Dolphins joined us as a customer. We have now added the Carolina Panthers. And if they are going to play against each other, I must go to the game. I have to keep it safe and make sure that they are all safe with KeepItSafe. So let's go to the Digital Media presentation, 12, and then immediately, Page 13. As I started my presentation, we grew from nothing to become a very significant player with the acquisition of Ziff Davis in less than 3 quarters. We are leading in all the verticals. And why is it so important when you lead in Digital Media? When a large advertiser wants to join the campaign or a product wherein he, she, they cannot ignore the largest player in the space. We are the #1 in tech. We were #1 and now #2, close #2 in games and in men's lifestyle. All of this is measured according to the comScore of June 2013. The comScore for our new listeners is an index similar to the one that you see, the Nelson, one that you see on newspaper and TV. comScore is measuring the visitors, the page views and everything else. And we are very happy and very proud to be on top in all of those. Page 14. Page 14, I actually took it from the presentation of our Ziff Davis CEO when he presented it last month in New York together with Scott. Ziff Davis was talking about the significant multilayer growth opportunities. Those are opportunities that we can grow without acquisition. These are the places that we are playing in. And all of them has still terrific growth room for us. For example, we can grow in the traffic by improving our SEOs. Our SEO is free. We do not pay, but we provide a content. It attracts customers. Video advertising, a lot of room to grow. Mobile advertising. Monetizing it is easy. We just have to continue to work in it. We have vertical expansion if you want to grow into other verticals we signed on scale, trouble, auto, et cetera. Ad targeting, we are doing a very good job there. But of course, as you grow, you can do better. And international expansion, while we are players in the U.K. and in Australia and in Canada, there is still tremendous opportunity to grow in this space. Next page, Page 15. Growing in this space is easy for us because we have placed, but with a very defensible position. There are many barriers to entry to come in and compete with us. We have established brands. We have strong organic search position. It's free, not paid. We have a strong social presence. We have unique ability to serve display advertising. And we are leading #1 or #2 position in 3 verticals. So any competitors that want to show up in the game will have a hard time to compete with us. Next slide is my Slide 16. When I will talk about the media highlights. We acquired in May, NetShelter. NetShelter contributions to our quarterly revenue was only half of their capability, as Kathy mentioned. Ziff Davis with the acquisition is now the #1 property in technology with 29 million unique visitors. NetShelter community represents and includes over 150 consumer business and tech sites. Some of the most known one is Mac Rumors and Android Central. Content is King. Content is King. We produce original content . In our combined sites are generating 40,000 articles monthly. This is very important and generates a lot of traffic, delivering 16 billion ad impressions yearly. Now I will go with our Q2 achievements. I want to remind you all that while these achievements are fascinating, Q4 is much stronger. It is seasonally impacted. We have exceeded in the quarter 700 million page views across our owned properties. IGN's YouTube channel surpassed 3 million subscribers. And as far as the integration, the IGN integration is going very well. We still want and will integrate our campaign management and our ad service. That means that we'll put them all in a single engine and will drive even more efficiencies, and will generate better results out of combining them together. Before I pass the presentation to Scott, who's going to talk about the outlook, I wanted to say that our outlook was raised from its original position in less than 90 days ago. And that we do not include and did not include various M&A deals that are in the pipeline. We have some meaningful M&A opportunities when we are in process with bankers, which makes it slower. We have bid on several of them. We have handful additional in due diligence or LOI, smaller but important. But being a conservative company, j2, unless we stated, we did not include any of those M&A opportunities. With that, I'll pass the conversation to Scott.

[Robert Scott Turicchi:]

Thank you, Hemi. So on Slide 18, we are reaffirming the guidance that, as Hemi mentioned, was raised last quarter to remind you that revenue range for the full fiscal year is between $510 million of revenues and $535 million of revenues. And the associated non-GAAP earnings per share is between $2.78 and $2.98, with the assumption that our tax rate for the year will be between 25% and 27%. Finally, just the mechanics on the dividend on Slide 19. As Kathy mentioned, the $0.2475 is the quarterly dividend rate for the current payout for shareholders of record as of August 19, with the payment date on September 3 to represent approximately $11 million of cash this quarter. And as usual, with that level, it does not impact in any way our operational or M&A activities. Following Slides 20 are a number of supplemental schedules and information. We will not go to in any great detail, although if they're responsive to a question, we'll be happy to guide you to those tables. But I would like to point out for the benefit of our bondholders on Slide 26 that we continue to see an improvement in the various ratios governing our bonds. So specifically, our leverage ratio, which is our total debt of $250 million divided by our latest 12-month EBITDA of approximately $210 million is now our ratio down to 1.19. And our coverage ratio of interest, which is our fixed charge ratio, is now in excess of 10x. With that, I will ask the operator to come back and give you the instructions to poll for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Shyam Patil with Wedbush Securities.

[Shyam Patil:]

First question, just around the 2Q, the patent settlement benefit. I think you said it's $12.6 million for revenue and then $0.17 for EPS. Is that right?

[Nehemia Zucker:]

That's correct.

[Shyam Patil:]

Okay. And how are you thinking about further contribution from that for the balance of the year?

[Robert Scott Turicchi:]

Okay. So what I do is I guide you to Slide 7 in the presentation, where at the top we have 3 streams of revenue, cloud subscription, licensing and media. So you'll notice that there's $15 million of revenue booked for licensing in Q2. $12.6 million of that relates to the $27 million settlement that was booked in that quarter for past damages. $2.4 million though relates to other streams of predominantly patent licensing but there's also some other licensing revenue that flows through there. Now if you look at that number and then compare it over the last, say, 5 to 6 quarters, you'll see a range of anywhere from below $1 million up to, I think, the high watermark was $3.8 million a quarter. So the $2.4 million sort of settles almost in between that range. There's no magic to that because as you know, the reason there is a range from quarter-to-quarter is that it's a function not only of the historic settlements and how they are paying out, but also the number of new settlements that occur within a given period, which are very hard to predict. But I would use those as the goalpost of $1 million on the low end and say, 3 and change on the high end. It just so happens this quarter, x the $12.6 million, kind of falls in the middle. It's very early for us to predict. So...

[Kathleen M. Griggs:]

It can be prophecy.

[Robert Scott Turicchi:]

For those that are conservative, I'll tell you what we do. We go to the lower end of that range because we just -- it's very hard to know exactly the timing, the magnitude and exactly how such a settlement will be booked. So certainly, to be conservative, I would move to the lower end of that range. But that's to each discretions, each one's discretion.

[Nehemia Zucker:]

I want to add, Shyam, that with this deal, it became more predictable because some of the revenue is just recognizing revenues as what we collected. But the new one is still something that has to do with settlements and things that have not happened yet. So there is an element there that is just safe and just recognition of past settlements.

[Shyam Patil:]

That's very helpful. And now the free cash flow, it was very strong this quarter. Was the $12.6 million, was that included in the $66 million and -- or a portion of that after-tax? And what is the free cash flow number after you back that out if it was included in that...

[Robert Scott Turicchi:]

So what I would do there is the answer is yes. But the $12.6 million would be tax-effective at a 40% tax rate. So you'd end up with about $8 million of net benefit.

[Shyam Patil:]

Okay. And the other point for the, I guess, the larger $27 million, was that -- will that flow in future quarters to the cash flow? Or was that...

[Kathleen M. Griggs:]

No, not in your free cash flow, no.

[Robert Scott Turicchi:]

No.

[Kathleen M. Griggs:]

It will show up in your cash when it's received, but it's not in your free cash flow.

[Shyam Patil:]

And the entire amount, just the $12.6 million after-tax was included in that $66 million?

[Kathleen M. Griggs:]

Right.

[Robert Scott Turicchi:]

Yes.

[Kathleen M. Griggs:]

That's correct.

[Nehemia Zucker:]

And as you know, this is the first half. But the second half with the media being strongest in Q4, we expect to go to the higher level of the cash flow.

[Shyam Patil:]

Got it, okay. And then just a question about large M&A. I wonder if you could just talk about how you're thinking about kind of large acquisitions by segment and geographically. And if you comment also on what you're seeing in terms of valuations right now.

[Nehemia Zucker:]

So first of all, the deal that we have both -- mostly in cloud and both international and locally, one of them is -- also has a potential to expand our Cloud Services into new spaces that we did not play into now. But I'm not comfortable to discuss more. Being conservative, I can just tell you that the deals are in all the fields. Actually, everything we have, some smaller deals, some bigger deals and from a quantity standpoint, many of them are internationally not from quality, but quantity. Did I answer you?

[Shyam Patil:]

Yes, that's helpful. And how about the valuation? Are they more reasonable internationally than they are domestically?

[Nehemia Zucker:]

That's an excellent question. So when we go and we acquire a business in the field that we are already be in, the valuations are low because we know the business. We are not in need to buy our way in, to buy in to reticket. We just supplement what we have. When we go after deals that are new fields, we are -- it's important for us to be significant with management team to have the know-how. Then similar to the Ziff Davis, if you remember the Ziff Davis, when we bought Ziff Davis, the multiple was much higher than the deals that we did later when we rolled in other assets. So valuations tend to be a bit higher when we enter a space and lower when do roll up into an existing space.

[Operator:]

Our next question comes from the line of James Breen with William Blair.

[James D. Breen:]

Just a couple of questions. One, can you talk about organic revenue growth for both Ziff and for the Cloud business in the quarter? And then, secondly, you also reported -- last quarter, you talked about page view growth on the media side. I was wondering if you can give us that metric again?

[Robert Scott Turicchi:]

I missed your last question, Jim. You faded out.

[James D. Breen:]

Page view growth on the media side?

[Robert Scott Turicchi:]

Yes. The page view growth you will find on Slide 22. You'll see that now. You will see it consolidated. And just like in the Cloud, we don't intend to break out by various property other than what you can find from comScore in terms of either visitors or page views. So you will see a jump in our reported metrics from Q1 to Q2, in part because we have a full quarter of IGN versus 2 months in Q1. And we have about a month and a half of NetShelter in Q2 versus none in Q1. So it actually makes your first question very hard to answer. And I have not looked at trying to peel back the organic versus non-organic because you all know our philosophy in view on the nature of that question, which is something -- it's something we do not focus on. I would say that on the Cloud side, of the 7.5%, is probably a somewhat greater bias to the M&A than the organic. But we'd have to do the calculation.

[Nehemia Zucker:]

And on the deal side, on the Cloud side, we grew 34,000 DIDs net this quarter. Those mostly came organic. Many of them came organic from the acquisition of MetroFax. So what do I mean organic? We bought MetroFax, but we are maintaining very strong telesales line there. And we are selling into MetroFax. So we have seen the MetroFax as brand with new accounts. So it's fully organic. We just have -- leverage the fact that they have an attractive offer. Also, from a dollar standpoint, we have now MetroFax full quarter. But the 34,000 and the gross adds and the net adds that we have are mostly coming through the lines of telesales and corporate sales and on fax and non-voice organic.

[James D. Breen:]

And obviously, churn continued to get better this quarter. Any color there on what you think is working and pushing that down?

[Nehemia Zucker:]

Yes. First of all, there was the reason I think everybody, our finance team has done a further improvement to our ability to collect declined credit cards. Our corporate customers have further -- continue to sign customers on longer-term contracts. And also, when we do less as less, I'd say glitzy advertising, the people that come to buy from us are serious. They meant it. So all of those together plus the improvement in -- I mean, everywhere. As I say, churn is the result of anything, everything. But I can say that the services that we are providing in a solid base are really needed. We are still not replaced, even 99 -- even 1% of the total fax machines in the world. People just come now, later doctors. And they tend to be more stable, more matured about it. And later, doctors are usually more conservative. So they impact our churn rate.

[James D. Breen:]

I was just going to say and just lastly, I was wondering about growth geographically, you saw any thicker, the areas of strength?

[Nehemia Zucker:]

Yes. So Japan is our, percentage-wise, a faster grower internationally. And all the other countries are growing a bit faster than the U.S., but not significantly. And by size, it is corporate and it is U.S. And we have launched recently in Europe also corporate sales by having salespeople on the ground. Plus, we started to generate leads, some with Ziff Davis, some want leads for corporate potential sales. It's a start, but it's very encouraging. Now I think that Kathy wants to...

[Kathleen M. Griggs:]

Yes. Ladies and gentlemen, let me correct the previous statement I made. I indicated that the free cash flow did not include the balance of the $27 million. In fact, it does. Net cash provided by operating activities includes any changes in your assets and liabilities, of which deferred revenue has a significant change in the period, which accounts for the additional deferred revenue associated with those patent licenses. So all $27 million is in.

[Nehemia Zucker:]

So we collected the settlement, but what you are seeing is the recognition of past, present, future at...

[Kathleen M. Griggs:]

In 2 different buckets.

[Nehemia Zucker:]

Yes, yes.

[James D. Breen:]

So to clarifying that, so it's $27 million tax effective at 40%. So to do the math on that, maybe $15 million or so is in that number? So if we're looking apples-to-apples on a year-over-year basis, we back $15 million out of the $66 million?

[Kathleen M. Griggs:]

What is tax, affect the whole $66 million? It's very tax effective.

[Nehemia Zucker:]

No, you said $27 million minus 40% tax affected.

[Robert Scott Turicchi:]

Right now, there'll be no tax on a cash, cash basis.

[Kathleen M. Griggs:]

No. Cash, cash. In the P&L, there's a recognition of the tax provision for that portion of...

[Nehemia Zucker:]

There is provision in the P&L, but the tax was not paid yet, I guess.

[Robert Scott Turicchi:]

That's correct. We got the full $27 million dollar per dollar from free cash flow.

[Nehemia Zucker:]

I am very sorry, but because we entered the media business, all those things, it makes it harder to predict because we have higher accounts receivable in the media business. We have the patent that came off of the -- but altogether, the answer is that we did collect the settlement.

[James D. Breen:]

Okay. So I guess that just begs the question of if you take the $27 million out of there, the free cash flow was basically similar to what it was last quarter, a little bit ahead of what it was last quarter. And that's just mainly because the media business is using some capital right now on a year-over-year basis?

[Robert Scott Turicchi:]

For both, actually.

[Kathleen M. Griggs:]

Both of us, yes.

[Robert Scott Turicchi:]

You'll see that. Or sequentially, CapEx is up from $2 million in Q1 to over $4 million in Q2.

[Nehemia Zucker:]

Yes. I didn't mention this even though the guys at the business asked me to. We have now consolidated our -- or we are consolidating our callers to improve the deliverability. So in the past, if we have a caller in New York, and the New York carrier was down, the Fax or the Voice business was down. Now we're using SIP technology that basically enables us, even if the connection to our caller is down, it enables us to move numbers and calls to other call locations, meaning keeping higher reliability of the service. This required us to invest in larger but less callers, which is once done, will improve our profitability. It furthers up more. But most importantly, we'll increase the reliability because we will be able to move through SIP technology calls from place-to-place. And all the calls are big enough to basically take significant volume from another site.

[Operator:]

Our next question comes from the line of Greg Burns with Sidoti & Company.

[Gregory Burns:]

On the media business, the EBITDA margin was roughly, I guess, 15% this quarter and last quarter despite the uptick in revenues. I was expecting to see, I think, a little bit more leverage. Is that just a function of NetShelter and that being lower margin business?

[Robert Scott Turicchi:]

That's generally correct. If you remember, too, it depends whether you're looking at earnings or EBITDA, the whole group has significant amort expenses of about $0.035 for the quarter. So the media contribution was about $0.02 for the quarter on a non-GAAP basis, but that's inclusive of $0.035 of noncash amort expense. And those expenses will continue given the nature of how we got into the business, which were 3 M&A transactions. But to your point, NetShelter is not as high-margin a business in part because it's not owned and operated on the content side. It's the management of third-party content. So the plus side of that is we don't have any of the direct costs of creation of the content. On the other hand, we don't fully control that content. And then as advertising revenue is generated, there is a split done between us, who are -- is facilitating that and the actual content providers. But the different -- it's quite a different model, but it gives us additional inventory within the technology vertical.

[Gregory Burns:]

Okay. And on the Fax side of the business, obviously you're highlighting the growth on the corporate side. In terms of, I guess, the consumer end of the business, is there any color you can give us there? Is that still growing, flat and declining?

[Nehemia Zucker:]

No, it is growing. As I said, our activity in Japan is consumer only. Our activity in Europe is mostly consumer. I mean, sorry, we don't like to call it consumer, not consumer. People don't use fax. They're smaller businesses. Consumers is not really -- fax is, all about business, is smaller businesses. When was the last time you faxed your girlfriend?

[Operator:]

Our next question comes from the line of Mark Murphy with Piper Jaffray.

[Mark R. Murphy:]

Any thoughts on Jeff Bezos' purchase of the Washington Post just in terms of the transfer of print advertising to digital? What do you suspect he's going to do with it?

[Nehemia Zucker:]

I was going to buy it for $249 million. He just beat me.

[Robert Scott Turicchi:]

[indiscernible] Use of j2 cash to enter the news business in terms of physical print media.

[Nehemia Zucker:]

Well, actually, I'm not competing on low EBITDA with him.

[Mark R. Murphy:]

But in all seriousness, what do you think he's going to do with it? And what do you think it signifies for the industry?

[Nehemia Zucker:]

So I didn't think about it too much, but I can tell you what I was reading. And I see it in other places, in smaller countries. Multibillionaires buy to impact the readers, i.e. politicians and other. Amazon is so big that if they can write the right news and impact the right decision-makers, maybe it makes sense to them. But when somebody who's so wealthy, they do things for laugh, not only for profit.

[Robert Scott Turicchi:]

And I don't think it has any impact, good or bad, positive or negative, on what we're doing in our Digital Media space, which as you know is really technology, games, and then lifestyle-oriented. So it has no overlap with things like the Washington Post or the New York Times or the Boston Globe. And if you noticed, when we look at vertical extensions within the media, on that slide in the deck, and it's also available on the media day on July 9, what I call broad news and politics is actually one area that is explicitly missing from our view of other areas that might be of interest in terms of expanding beyond the technology vertical.

[Mark R. Murphy:]

Okay, great. Yes, that makes a lot of sense. And I wanted to ask as well, just how are you feeling about the data management platform that is towering the media side of your business? Do you feel that that's something that's fully feature-complete? Or is it still evolving? And also, just in terms of the targeting logic, do you think that's something that's advancing and enabling some better performing ads for you?

[Nehemia Zucker:]

Yes, yes. There is a reason I mentioned, on Page 14, the potential of growth in our business without additional acquisition. This is an excellent question. When you buy assets like NetShelter and AES, they might come with a lower EBITDA. They add significantly to your ability to recognize visitors when they come to any of your assets. So advertising basically is based on the ability to serve the visitor relevant advertising. The more viewers, the more assets that you have, the better you can manage your database against who is coming and what to present. And when you are becoming more relevant, you can also ask and get more money for each exposure. So definitely, this element of our business is critical. And as I said, in the integration of IGN, everything is on the way to be consolidated to one platform, one data, this database. And as we implement it, I'm definitely forecasting a better efficiency on -- ability to collect more money, ability to be relevant, ability to find for every advertiser the kind of viewers that they are looking for.

[Mark R. Murphy:]

Okay. And, Scott, I have a couple of financial questions. Is there any way you can ballpark the purchase price and the revenue run rate for NetShelter? Or sorry, Scott, that might not be for you.

[Robert Scott Turicchi:]

Well, entering the ballpark of the purchase price in that -- as Kathy mentioned, we expanded $20.5 million of cash during the second fiscal quarter. A little over $10 million of that went to the dividend. And the only other expenditure in the quarter was the purchase of NetShelter at least of any significance. So you can infer from that, that we paid less than $20 million. And from our other comments, which are inclusive of IGN, but also meant independently, we've been buying assets subsequent to Ziff Davis at less than 1x revenue. So that will give you a sense.

[Mark R. Murphy:]

Right. And obviously, and just so -- just to clarify, was the NetShelter was already factored into the full-year guidance that you had raised fairly recently?

[Nehemia Zucker:]

We knew about it.

[Robert Scott Turicchi:]

Yes. We did know about it. So we raised the guidance. I can't remember which day in May. And we closed the NetShelter deal a few days later. So it was known.

[Mark R. Murphy:]

Okay, got it. So and then, I guess, my final question is you do have here in Q2 a pretty substantial revenue upside versus consensus in what was being modeled. And you're reaffirming the full-year guidance rather than increasing it. And I do understand, you had increased it materially fairly recently. But did you look at this and say that we now have an extra $10 million worth of cushion or upside potential, relative to this year? Or do you really look at this and say that the street had kind of under-forecasted Q2 and over-forecasted the back half of the year a bit in terms of revenue?

[Robert Scott Turicchi:]

Well, I think that -- first of all, you have to comment analyst-by-analyst and then by the aggregates. I'll tell you what our logic was. When we raised the guidance a quarter ago, we had knowledge of NetShelter. And at the time, we had a belief that the amount of past damages related to the settlement was $10 million. So we mathematically raised our then range of revenues by $10 million and by an equal amount, on an a tax effective basis, the bottom line. Now it turns out that $10 million is $12.6 million. So there's $2.6 million of additional revenue than what was anticipated a quarter ago from the settlement. And that probably translates into $0.03 in bottom line earnings. That is not material enough for us to cause us to change the range because our philosophy on range is in an ideal world, we would never raise a range once we put a range out at the beginning of the year. However, there are circumstances. The settlements of the patent was one of them that caused us in evaluating at the time the revenues and EPS to say we are highly likely to exceed the top end of the previous range of revenues and EPS. Therefore, we should adjust the range accordingly. So as we review the balance of the year, we believe we will, subject to what Hemi said about some M&A that is not factored in, we believe we will operate within that range of both revenues and EPS. And hence, don't change the range, don't intend to change the range unless some clear evidence comes forward that will cause us to believe that not to be true.

[Nehemia Zucker:]

And also, we are very conservative. The media business is new to us. It's supposed to be significantly larger in Q4. We just don't know what we don't know. So we kept it all within our range. And the range is wide enough so -- and the company is big enough to not necessitate an increase of the range. But as we get closer to -- more comfortable with the media business and its unique spike in Q4, we will do a better job later on.

[Robert Scott Turicchi:]

Before we go to the next live question, we had a few questions coming by e-mail. So well, the operator, if you could hold any live questions for just a minute. One of them has to do with our ARPU, which was on the DID-based business, the fax and voice up sequentially from Q1 to Q2. The reason for that is that Q2, as you do know, is a seasonally strong quarter for the DID-based business. It's usually the seasonally strongest. But there also is some mechanical elements in the way that the ARPU was calculated for the ease of having third party be able to calculate it on their own, such as yourself. So when we acquired MetroFax, which was approximately mid-March, it did effectively in all of Q1 and are biasing down the ARPU because there's only 15 days of revenues, but there's, on average, 45 days of the DIDs.

[Nehemia Zucker:]

You mean Q2, not Q1.

[Robert Scott Turicchi:]

I meant Q1. In Q2, we have a full 90 days of benefit of revenue, but we also have 90 days of the DIDs. So that tends to happen when we acquire DID-based businesses depending on the timing of the acquisition because our denominator for, let's say, purposes of all of you being able to calculate it as well, is the average of the ending base of the prior quarter and the ending base of the current quarter. So depending on when companies that are acquired that are DID-based, it may, on the margin, influence the ARPU in the current quarter that the company is acquired and the subsequent quarter. And so that is also occurring with respect to the ARPU. I think at the end of the day, the whole magnitude of this is relatively small. We're talking about a change in ARPU of about $0.20. One last thing on the, before we go to any other live question, there has been a series of questions that have come in on the patent settlement. So let me try to go through this again. And hopefully, this will clarify the situation. For the purposes of our financial statements, GAAP and non-GAAP, $12.6 million is recognized for past damages. And there is an associated tax accrual, which flows through to the $0.83 of non-GAAP earnings. As a result, as a deferral on the balance sheet of the remainder, which would be $14.4 million. From a cash flow standpoint, those taxes have not yet been paid. So $27 million flowed in during the quarter are in both our cash coffers and in our free cash flow calculation. Obviously, the cash portion on the taxes will go out. We make our estimated tax payments, which will be a Q3 event. And then we will recognize, on a GAAP basis, the remaining $14.4 million over approximately the next 19 quarters. Okay, any other further live questions?

[Operator:]

There are no further questions at this time.

[Robert Scott Turicchi:]

Okay. Well, we thank you all for joining us on the Q2 call. And we will be, particularly in the month of September, at a couple of investor conferences in New York. You will see a press release probably in early September to announce the specific dates and times of those engagements. And then depending on the nature of any other announcements, if we do not have a reason to have a call prior, we will then expect to speak to you in early November to report the Q3 results. Thank you.

[Nehemia Zucker:]

Thank you, everybody.

[Kathleen M. Griggs:]

Thank you.

[Nehemia Zucker:]

Bye-bye.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.