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j2 Global Inc  (NASDAQ:JCOM)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to j2 Global's Fourth Quarter and Year-End 2018 Earnings Conference Call. I am Michelle, the operator, who will be assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) On this call will be Vivek Shah, CEO, of j2 Global; and Scott Turicchi, President 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 -- President and Chief Financial Officer

Thank you. Good morning, ladies and gentlemen, and welcome to the j2 Global investor conference call for the fourth fiscal quarter of 2018. As the operator just mentioned, I'm Scott Turicchi, President and CFO of j2 Global. Joining me today is our CEO, Vivek Shah.

We finished the year strong with a record fourth quarter performance, across many metrics. Notably, we had record revenue, EBITDA, and non-GAAP earnings per share, as well as free cash flow. The same was true for fiscal year 2018 and it was the 23rd consecutive year of revenue growth for the company. The board has approved an increase in the quarterly dividend by $0.01 to $0.445 per share. We will use the presentation as a roadmap for today's call.

A copy of the presentation is available on our website. When you launch the webcast, there is a button on the viewer on the right-hand side, which will allow you to expand the slides. If you've not received a copy of the press release, you may access it through our corporate website at j2global.com/press. In addition, you will be able to access the webcast from this site.

After we complete our formal remarks, we will be conducting a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question. However, at any time, you may email us questions at investor@j2global.com.

Before we begin our prepared remarks, allow me to read the Safe Harbor language. This call and the webcast will 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've disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we've included as part of the slide show for the 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.

Vivek Shah -- Chief Executive Officer

Thank you, Scott, and good morning, everyone. Today I would like to reflect on our accomplishments in 2018, as well as provide some color on our 2019 outlook. We finished 2018 with great momentum. In Q4, our revenues were up 9.4% year-over-year. Our adjusted EBITDA was up 8.7% year-over-year and our non-GAAP EPS was up 17.9% year-over-year. This was our strongest quarter since the first quarter of 2018, which is particularly meaningful given that Q4 is our largest quarter of the year.

Of particular note, display ad revenues rebounded and were up year-over-year by over 3% in the quarter. As I mentioned in our last call, we were observing signs of improvement in pharma advertising and in fact, that is precisely what we experienced in Q4. Full year 2018, revenues grew by 8%, but if you adjust for disposed assets and patents, we grew by 11%.

If you take the further step and exclude backup, which as many of you know, is in a managed steady decline, then we grew by almost 14%. In a year in which we faced two quarters of meaningful display advertising headwinds, I am very pleased with our results. Over the course of these calls in 2018, I outlined priorities and initiatives for which we have demonstrated significant progress.

In my first call, I spoke of our goal of expanding subscription revenues at Digital Media. Our subscription revenues nearly doubled last year, and we continue to seek ways to build recurring revenue streams across the Digital Media portfolio, both for consumers and enterprises. Almost 25% of our Digital Media revenues in 2018 were subscriptions, which is a key distinguishing characteristic of our business versus others in the digital media industry.

In that same call, I expressed our enthusiasm for our security business, specifically our move into endpoint security with VIPRE, which exceeded our expectations in 2018. I also spoke of the importance of email to marketers not just as a way to deliver messages to customer inboxes, but as a way to unlock identity across a number of platforms. The acquisition of iContact several weeks ago enhances our position in email marketing software and paves the way for the pursuit of a more ambitious MarTech vision.

In the Q1 call last year, I spoke of the healthcare and corporate opportunity for our Cloud Fax business. Our corporate Cloud Fax revenues grew 6% in 2018. And we're continuing to make investments in our product, infrastructure, and organization to deepen our penetration of the healthcare market, where we estimate our share of fax volume is still under 5%.

In the Q2 call last year, I expressed our vision of being the single source of truth, a global standard in the broadband industry. Our position in the consumer market is well known with Speedtest, but we view broadband in the workplace and in commercial spaces, as being an area of expansion. Our acquisition of Ekahau in Q4 provides us a great path into the enterprise with a company that provides software to design, deploy, and manage WiFi networks at work.

Then in our Q3 2018 call, I spoke at length about our approach to acquisitions and capital allocation. We closed on 11 deals in 2018 and our pipeline in 2019 is robust. I am also very pleased that we reintroduced share buybacks into our capital allocation strategy. We repurchased 600,000 shares in Q4, our first open-market share buyback since 2012.

As capital allocators, we're guided by one simple goal, which is to generate exceptional returns for our investors, and we believe repurchasing our own stock represents a very attractive investment opportunity. We believe investors are increasingly gaining a fuller appreciation of the portfolio we own and the value-creating dynamics of the j2 acquisition system.

Now looking forward to 2019. The midpoint of our guidance is $1.31 billion in revenues, which represents 8.5% growth. If you exclude our backup business, our growth would be 10%. Between our two businesses in 2019, we view Cloud Services growing mid-single digits including backup, but high single digits excluding backup, and Digital Media growing in the low teens.

Within Cloud Services, we see Cloud Fax growing low single digit, backup declining high single digit, and the remaining voice MarTech and security businesses growing nearly 25% year-over-year based on organic growth and the benefit of acquisitions. We're pleased with the progress we're making in these new product categories. Together we expect our non-Cloud Fax businesses to generate about $300 million in revenues in 2019. And they offer core services to small and medium businesses, from soft phone to security, to marketing technology.

Within Digital Media, we see overall advertising growing mid-single digits with display being slightly up and performance marketing driving more of the overall growth. As we pointed out in the past, the advertising business is almost split down the middle between display and performance. We see subscription revenues growing 30% plus with continued organic growth and the benefit of acquisitions.

2018 was the first year in which our Digital Media business surpassed Cloud Services in revenue. And while we've certainly achieved revenue scale in the business, we're still only operating in a few verticals and believe our playbook and business model can be extended to a number of other verticals.

From an adjusted EBITDA margin point of view, we believe we will remain flat in 2019. While I believe, it's best to look at the margins of the two businesses independently, it is true that as Digital Media becomes a larger percentage of the overall business and operates at a margin roughly 15 points lower than Cloud Services, our overall margin comes under pressure.

Second the declines in backup are highly punitive with nearly 100% flow-through to adjusted EBITDA. Third, we are making some important investments in the business that would be expensed this year including starting a project to move to a cloud-based ERP system, investments we're making in cybersecurity and investments to drive organic growth across the various business units. Some of those investments will also come in the form of CapEx which would partially affect our current-year net income and be reflected in our non-GAAP EPS.

Before I pass the call to Scott, I know there have been a number of press reports about layoffs in the digital media industry. Many of the companies involved have been running their businesses for an exit event for venture-like returns, where we have always run our business with a view toward earnings and cash flow. So I believe that many of these businesses, some of which have had solid growth are shifting by cutting expenses to improve profitability.

In addition, we have always run our business understanding that display advertising would not be enough. So we have a Digital Media business where subscriptions and performance marketing make up really nearly 60% of our revenues. Having multiple monetization levers has been a key differentiator for us.

Finally, we operate in verticals tech, gaming, healthcare with audiences that express high-value intent. As I mentioned earlier, we believe there are other verticals where we can have success. And it may well be that market pressures will allow us to acquire those assets at attractive prices.

With that, let me hand this call back to Scott.

Scott Turicchi -- President and Chief Financial Officer

Thanks, Vivek. As I said earlier Q4 2018 set a variety of financial records for j2 including revenue, EBITDA and free cash flow for a fiscal fourth quarter. These results were driven by several areas of strength in our portfolio of companies notably improvement in the display advertising portion of our Digital Media business as well as our continuing strong growth in our media subscriptions despite some currency headwinds. We ended the quarter with approximately $293 million of cash and investments after spending $184 million in the quarter on acquisitions, stock repurchases and dividends.

Now let's review the summary quarterly financial results, which you'll find on slide 4. For Q4 2018, j2 saw a 9.4% increase in revenue from Q4 2017, to $346.1 million. We saw FX affect our Q4 results by $2.5 million versus Q4 2017 and $1.2 million versus Q3 2018. This is the first quarter this year that our results were not meaningfully impacted by the divestitures in 2017.

Gross profit margin, which is a function of the relative mix of our 13 business units, remained healthy at 84% and improved 50 basis points from Q3 2018. We saw EBITDA grow by 8.7% to $154.3 million. Finally adjusted EPS grew 17.9% to $2.11 per share versus $1.79 per share for Q4 2018, positively impacted by our increased operating earnings and lower domestic tax rates.

Moving to slide 5. For the full fiscal year, we saw an 8% growth in revenue from 2017 to $1.207 billion, but after taking into account the three divestitures in 2017, j2 saw its growth in revenues increase by 11%. Our EBITDA increased by 5.7% or $26.6 million to $489.5 million. And our adjusted EPS was $6.35 per share for the year compared to $5.64 per share in 2017 or a 12.6% increase. As you know, we are strong believers in generating free cash flow.

Turning to slide 6, you can see we had a 27.2% increase in our Q4 free cash flow to $95.8 million, a record for a fourth fiscal quarter. For the full fiscal year, we generated almost $345 million in free cash flow a 30.2% increase from 2017 and a 70.5% conversion rate on our $489.5 million of EBITDA.

Now let's turn to the two businesses, cloud and Digital Media, for Q4 as outlined on slide 7. The cloud business grew up revenue approximately 1% to $148.1 million; and was negatively impacted by FX, patent revenues that existed in 2017, but not in 2018 and the decline in our backup business. As you know, we experience seasonal weakness in Q4 in the cloud business due to fewer business days.

Reported EBITDA declined by $1 million to $75.8 million compared to Q4 2017. As we've noted throughout this year, a reclassification of certain corporate expenses to conform with our audited financials for the cloud business impacts the results by $1.7 million for the quarter. So on an apples-to-apples basis, our pro forma EBITDA would be $77.5 million, which is an increase of $700,000 and resulting in an EBITDA margin of 51.2%.

Our media business grew revenue 16.8% to $198 million and produced $79.8 million of EBITDA or 18.6% growth. EBITDA for the quarter exclusive of corporate allocations, not present in 2017, was $81.6 million compared to $67.3 million in 2017, producing an EBITDA margin for the quarter of 40.3%, up 60 basis points from 39.7% in Q4 2017.

Turning now to slide 8, let's quickly review the annual results by business. The cloud business finished the year with $598 million of revenues, a 3.3% increase over 2017 and an increase of 6.1% exclusive of our backup business unit. I am pleased that the fax business unit continued to grow by 2.3%; as well as each of the other business units in cloud, with the exception of backup which Vivek touched upon earlier.

EBITDA was just in excess of $300 million after a $6.1 million charge of corporate overhead allocations. On a comparable basis with 2017, the EBITDA increased despite a significant portion of the backup revenue decline flowing through the EBITDA. The EBITDA margin remained strong at slightly in excess of 50%.

Our Digital Media business showed a 13.1% increase in revenues to $609.3 million, and EBITDA grew to $197.1 million after allocating $5.9 million of corporate expenses. On a comparable basis with 2017, EBITDA grew by 17.9% to $203 million, or a 33.3% EBITDA margin. This was despite headwinds in Q2 and Q3 of this past year in display advertising revenue. Vivek provided some highlights of our 2019 guidance at the beginning of our call.

On slide 10, we've outlined some additional elements to help you understand the midpoint of our guidance range. For the cloud business, we expect a 5% growth in revenue and EBITDA margins consistent with 2018. For our media business, we expect revenue growth in excess of 10% and an improvement in EBITDA margins from 2018.

Also, for the purposes of modeling the quarters, remember that our Digital Media business experiences significantly more seasonality than our cloud business. We expect that only 20% of the annual expected media revenues will be recognized in Q1 and approximately 30% will be recognized in Q4.

Also remember that we have significant fixed costs in the media business, so we experience meaningful EBITDA margin improvement from Q1 to Q4. I would note that we expect to experience higher non-GAAP depreciation this year due to the full year expensing of acquisitions done in 2018 and early 2019, as well as incremental capital investments in our fax and backup business units. We believe that our tax rate will be between 20.5% and 22.5% this year, and EPS will be calculated using an imputed share count of 48.8 million shares.

Finally on slide 11, our guidance for 2019 is as follows: so the fiscal year revenues to be between $1.29 billion and $1.33 billion, EBITDA between $520 million and $540 million, and non-GAAP EPS between $6.65 per share and $6.95 per share. Following our guidance slide are various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalents.

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

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session (Operator Instructions) Our first question comes from the line of Shyam Patil with Susquehanna Financial. Please proceed with your question.

Shyam Patil -- Susquehanna Financial -- Analyst

Hey, good morning, guys. Congrats on the strong end to the year. I had a couple of questions. You talked a little bit about -- do you talked a little bit about toward the end of your prepared remarks just about the shifting digital media landscape and the industrywide layoffs that we've seen. And you touched on a little bit how this can help you with M&A. Can you just elaborate on that just kind of how it can help you with M&A? And then also how that might also help with just gaining ad spend share in the overall industry?

Vivek Shah -- Chief Executive Officer

Yes. So in terms of what's going on in digital media in general is, I think companies and brands that haven't built non-display monetization elements which in our case as you know are our performance marketing and subscription businesses are finding it challenging for all the things we've talked about in the past relative to display.

And so, I think for many of these companies, we represent an interesting option where we can leverage our technologies, our platform our teams to quickly put those revenue streams and those levers in place. Mashable is a great example of that.

So when we look at what we've done with Mashable we have very quickly built an ad-scale performance marketing component to that business. So I think -- as a lot of these companies are thinking through should they raise more funding, should they entertain a transaction, I think we represent an interesting option.

Just on that, in terms of ad spend: I've talked about this in the past. I do think that we're interesting as a vertical player because I think with our vertical focus and in-market audiences where we're tracking people down the purchase funnel that is unique.

And so when we think about assets that we would add to the portfolio they would have to meet those requirements. We would stay away from general interest broader-based general news brands because our monetization playbook doesn't apply as well in those instances. So obviously we always get a lot of phone calls, but we seem to be getting more phone calls these days.

Shyam Patil -- Susquehanna Financial -- Analyst

Great, great. And Vivek one of your initiatives when you joined was expanding the GM structure. Can you just talk about what impact that had on the strong performance and execution in 4Q and kind of the pipeline and just the pace of execution as you head into 2019?

And then Scott just on the midpoint of the guidance range, how much of the 2019 growth is coming from M&A you expect to do this year?

Scott Turicchi -- President and Chief Financial Officer

Okay I'll let Vi go first.

Vivek Shah -- Chief Executive Officer

Yes. So look. I think the general managers are absolutely vital not just with respect to the Q4 performance but to 2019 and beyond. So we have a little over a dozen general managers who are each in charge of very specific business units to have full P&L responsibility and own all aspects of their enterprise. They own product. They own engineering. They own monetization. They own the business.

I view each of them as essentially backable CEOs to use a private equity parlance. They're of that caliber. They're of that strength. And so their ability to operate these businesses well is high, but in addition they are generating a significant amount of pipeline activity when it comes to acquisition.

And so I do think that's been a profound impact. When you think about all the Divisional Presidents, all of the General Managers; Scott, myself and a few folks in corporate, you now have a number of people engaged in sourcing, evaluating, diligencing, ultimately transacting and integrating acquisitions. So I think it's vital to what we're doing. And I think it is starting to show up in our results. I certainly think it showed up in Q4.

Scott Turicchi -- President and Chief Financial Officer

I would agree. And I think it's one of the biggest accomplishments in 2018 for j2. It's getting the structure in place; and people -- the right people within the right structure.

Answering your second question; if you take the guidance range at the midpoint of the guidance there is no further specific M&A contemplated to achieve that midpoint. We did close a deal iContact that Vivek mentioned in his opening remarks in January. So that's been included as part of the cloud business in the mar tech piece of it for the full fiscal year, but no other M&A is assumed.

Shyam Patil -- Susquehanna Financial -- Analyst

Great. Thank you guys. Congrats again.

Vivek Shah -- Chief Executive Officer

Thanks, Shyam.

Scott Turicchi -- President and Chief Financial Officer

Thank you,

Operator

Thank you. Our next question comes from the line of Daniel Ives with Wedbush Securities. Please proceed with your question.

Daniel Ives -- Wedbush Securities -- Analyst

Thank you and excellent quarter. So maybe you can talk just on the Digital Media side in terms of some of the strategic changes obviously like the display. It seems like that headwind is really abating. And more of the move to programmatic in the subscription business even seems, I mean more pronounced in 2019. So maybe can you just talk about your M&A strategy, how that's impacting in terms of the types of deals you're looking at in 2019? Thanks.

Vivek Shah -- Chief Executive Officer

Hi, Dan. So let me start with display and what we observed in Q4 and how we're thinking about 2019. So the strength we saw in Q4 had a lot to do with the pharma ad market and Everyday Health group's contribution to the overall display revenue bucket, which Everyday Health as I said in the past is about half of our display business.

I think one of the things to note is the pharma industry is an interesting place. I think in 2018 pharma -- the FDA approved 59 drugs, which is a record for the FDA. So having a robust pharma pipeline is essential to the long-term growth prospects of the Everyday Health group and specifically the pharma advertising piece. So we feel good about where the pharma industry is and where -- and how we can compete within that industry, which is a key driver to the display business.

On the tech and gaming side, we're also seeing some strength. And I think there we've really tuned our programmatic advertising capabilities and I think we've done a very nice job in driving more performance attributes out of our display business, so the display business is more resembling our performance marketing business where it's driven by return on ad spend.

So now -- and I've said this in the past. I said this I think in the second quarter call. We're -- and third quarter call. The display business can be lumpy and when we saw that, and so when you look at it in its totality in 2018 and you look at the strength in Q4, we're essentially flat year-over-year. So given the size of Q4, generating the growth that we did in Q4 almost offset the declines that we saw in Q2 and in Q3.

On the subscription side, we are now at a run rate on the Digital Media side of $160 million in revenue, so now we're at some reasonable scale on the subscription side of the Digital Media business. And overall for j2 by the way 60% of our 2018 revenues were subscriptions. And as you've heard us talk about frequently in the past, the more we can from a mix point of view be in the highly recurring revenue stream mix of our overall business the better.

The last thing I'll just -- on your question relating to M&A. It's similar to the response I gave to Shyam, which is look we're going to be highly disciplined. There are a number of assets in the marketplace that, we're assessing and I'm sure we'll assess going forward. We just need to be able to replicate what we're doing. And we think there are assets in the existing verticals, but there are a number of verticals that are high-purchase-intent verticals, that have not yet really driven the kind of model that I'm describing that, we would love to get into. We are still really just in three verticals: tech; gaming and one might argue gaming is a subset of tech and healthcare. So I think we've got a lot of room for expansion in other high-value verticals.

Daniel Ives -- Wedbush Securities -- Analyst

Keep it up guys. Thanks.

Vivek Shah -- Chief Executive Officer

Thanks, Dan

Scott Turicchi -- President and Chief Financial Officer

Thanks, Dan,

Operator

Thank you. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

William Power -- Robert W. Baird. -- Analyst

Great. Thanks. Yeah, just a couple of questions. I guess Vivek I just want to come back to the subscription outlook. I think you said, you're expecting 30% growth in 2019. And if that's right, I guess I just wanted to understand the key drivers of that. How much of that was organic expectations versus any M&A impacts?

Vivek Shah -- Chief Executive Officer

Yeah. So we've got a fair amount of growth coming through our Humble Bundle and our Ookla businesses, which just as a reminder for everyone the Humble Bundle business is a consumer subscription business, where you pay each month to get a bundled -- get access to a bundle of games at a steep discount as well as a trove of games that are available to play at any time.

It's been a great business for us and highly synergistic with IGN and we've been very pleased and continue to see great growth characteristics in that business. And I think you're hearing, a lot of about gaming subscription as the next evolution in the gaming industry going from selling of units to subscription so we feel good about the space we occupy there. On the Ookla side, this is more of an enterprise subscription business. It's a Data as a Service a DaaS business where we're able to aggregate the intelligence that we can gather across hundreds of millions of these tests that are conducted every period and provide insight into the state of networks for carriers and for fixed broadband providers and they can benchmark against each other so that ultimately we get faster and better Internet to as many customers as we can. So, both of those are real drivers to the subscription business.

We've added from an acquisition point of view Ekahau which I spoke about briefly in the call, but I'd like to elaborate a little bit about that business, because we're really excited for it. So Speedtest is very popular among consumer's 300 million devices. We get really great insight into fixed broadband and wireless networks where we felt we needed to build our presence. And our penetration is in the workplace, where as everyone knows fast reliable Internet is table stakes and it is absolutely vital to every business and to every industry.

What Ekahau offers is software and actually hardware that enables workplaces and commercial spaces to design and deploy and manage WiFi networks and that to us is in and of itself a great business. And then the ability to leverage that data I think is going to be interesting for us; the ability to take the technology at Ekahau and integrate that into the Speedtest consumer application so that the Speedtest consumer application is not just testing your speeds, but actually figuring out where to place your routers, where to place your repeaters, how to set up or how to configure those devices so that you get better WiFi at home.

So really strategic acquisition for us. And you'll see we did some smaller deals within this business last year Downdetector and Mosaik. So you'll see us continue to be aggressive in this whole broadband intelligence space. So really it's the organic growth coming out of the existing businesses and our expectations of driving organic growth in the Ekahau business to be very clear. It's more the organic growth in the Ekahau business that is going to contribute to our growth expectations for subscription than Ekahau itself.

William Power -- Robert W. Baird. -- Analyst

Okay, yes. That's helpful. And maybe Scott, just on the free cash flow outlook for 2019. Can you walk us through kind of the puts and takes there? I know you've referenced some CapEx initiatives. How do we think about the free cash flow outlook?

Scott Turicchi -- President and Chief Financial Officer

Well let me start by saying obviously 2018 was a very strong year. As we've talked about in the past, we normally target conversion of EBITDA to free cash flow in the 66%, 67% range. We actually did over 70% flow-through in 2018. We don't necessarily expect that to repeat. There were some benefits from the tax reform act that are onetime in nature. Obviously the tax rate is a more permanent benefit that we do believe will flow through. So I think that targeting in the 66%, 67% range on the $530 million of EBITDA is a reasonable estimate. Some of the things that we will see an increase on the CapEx side which we've noted is some investments that we are making that will be in the form of capital in both the fax and the backup business. There is also some additional although it will be expensed investment that we are making in an ERP system that we will bear the costs at corporate, but you obviously see that run through the P&L. And that's already taken into account in both the EBITDA and the EPS estimate.

William Power -- Robert W. Baird. -- Analyst

Okay. Great. Thanks.

Operator

Thank you. Our next question comes from the line of Rishi Jaluria with D.A. Davidson. Please proceed with your question.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Hi guys. Thanks for taking my questions. Nice to see a bounce back on media side. I guess just starting on the Digital Media subscription business A, from a housekeeping perspective, what percentage of Digital Media in the quarter was subscription? And B, as you think about building out more recurring revenue streams within Digital Media -- I know Ookla you've talked about extending it to other areas. And Humble Bundle is obviously doing well. Are there any other areas of Digital Media that you've been able to get into that subscription bucket? And what other parts of Digital Media do you think that you can expand as subscription offerings or convert there? And then I've got a follow-up.

Vivek Shah -- Chief Executive Officer

So when we think about -- Rishi when we think about subscription in the Digital Media business there are two dynamics at play. So one is where do we have a large consumer audience that we can leverage from a marketing point of view to sell subscriptions into right? So I think what a lot of digital media companies do is create paywalls to charge for the very content that historically has been free. We don't do that. And I understand, why certain news organizations do it. And it seems to work well for them. We choose instead to find an asset like a Humble Bundle which is a serious appeal to an existing consumer audience and a content audience and try to leverage that audience and sell our subscription offering into them, which has a huge advantage. Because, as you know, in nearly every subscription business that you find, the marketing budget and the cost per acquired customer is the single largest line item.

And so, when you have the ability to reach hundreds of millions of people a month, which we do, finding subscription services we can sell to them is the name of the game. And so we're thinking that through on the healthcare side. We have a small subscription business there in the Mayo Clinic Diet, but what other areas of healthcare can you see a subscription offering?

We're thinking about that on the technology side as well. What other services can we acquire through our acquisition program and generate that crossover? And the second category of subscription is, how do we take, let's just call it, the exhaust that comes out of our content businesses and our tools businesses and package that up as data insights.

So that's what Speedtest is. It is a consumer application that generates a high volume of intelligence. And so we think that's also a very interesting model for us. And so, we're thinking through research businesses, survey businesses, businesses where our audiences can generate insights that are sellable on a subscription basis to clients. And so in some ways we're moving into that with our PRIME acquisition, which does continuing medical education in the healthcare space. So that's generally how we're thinking about the subscription piece. In terms of, Scott...

Scott Turicchi -- President and Chief Financial Officer

The percentage, it was about 22% of revs in Q4 and a little bit higher for the full fiscal year.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Got it. Thanks. And I'm sorry. That's 22% of total revenue or 22% of Digital Media revenue?

Scott Turicchi -- President and Chief Financial Officer

Digital Media's revenues.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Okay. Got it. Thanks.

Scott Turicchi -- President and Chief Financial Officer

So, roughly, cut it in half for the company as a whole.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Perfect. That's helpful. And then, we saw cloud growth kind of deceled in the quarter. I know backup has its issues. Was the growth that we saw in cloud just primarily a function of the drag from the cloud backup business? Or were there other contributors that led to kind of cloud growth going down?

Vivek Shah -- Chief Executive Officer

Yeah. So look, I think, we have -- the backup business continues to be a drag. In Q4, it performed relatively worse than the other quarters in the year. Having said that, though, we do actually see signs of a deceleration in the decline going into 2019, as some of the investments we're making in account management and in infrastructure are yielding retention of logos that should help us going into -- will help us in 2019. And we're seeing that.

The other big issue we had on the cloud side, which is more of a cloud issue than a Digital Media issue, is the FX, bad guy that really weighed in to the tune of...

Scott Turicchi -- President and Chief Financial Officer

A little under $2 million.

Vivek Shah -- Chief Executive Officer

$2 million...

Scott Turicchi -- President and Chief Financial Officer

That's Q4 2017 to 2018. But it also hit us sequentially.

Vivek Shah -- Chief Executive Officer

So we've had really those two main challenges...

Scott Turicchi -- President and Chief Financial Officer

The third year-over-year is basically the elimination of patent revenue.

Vivek Shah -- Chief Executive Officer

That's right.

Scott Turicchi -- President and Chief Financial Officer

That would have been booked in Q4 of 2017, but under ASC 606, disappeared in 2018. So those are the three big drivers of Q4 2017 to Q4 2018.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Got it. That makes sense. And then last one and I'll jump off, but I just want to understand your commentary around CapEx. So sorry. It sounds like you need to talk about other increased CapEx and in fact some backup. I get the fax side. You've talked about wanting to accelerate organic growth on the fax business.

What was the CapEx in the backup business? I'm a little curious about that, given that that's a kind of a declining business and one that's been underperforming. And what those investments went to.

And then just as we think about CapEx for next year, how much of that increase in CapEx on the fax side was maybe one-time in nature versus ongoing? Thanks.

Vivek Shah -- Chief Executive Officer

Yeah. So look, I think on the backup side, while it is a declining business, we think we can stem that decline by retaining customers by improving our back end and our infrastructure. Remember the interesting aspect of backup is that when you retain a customer, it typically yields increased revenue because their data expands every period, right?

So retention has even more value in a backup business than in a typical subscription business where the ARPA or the ARPU stays reasonably flat. Here it grows, because of data growth.

So from our point of view, as we modeled the CapEx investments we would make in backup, and the return we would get on the incremental revenues related to the retention of customers we would otherwise lose without those investments, it made complete sense. And the paybacks are pretty quick.

To be clear: These investments are 2019 investments. They haven't happened so they're prospective. They're not past investments.

And then just on the fax side, the enterprise market particularly in healthcare continues to be attractive. And we feel that we are best of breed, but there are certain things we want to develop that we think will be somewhat breakthrough in the healthcare market and are investing against that.

Rishi Jaluria -- D.A. Davidson. -- Analyst

Okay. That's helpful. Thank you, guys.

Vivek Shah -- Chief Executive Officer

Thank you.

Scott Turicchi -- President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Walter Pritchard with Citi. Please proceed with your question.

Walter Pritchard -- Citi -- Analyst

Thank you. Two questions on my end. One just on the Digital Media acquisition environment, I mean, Vivek you alluded to there's been layoffs across the industry certainly a tougher landscape probably for your peer set than 90 days ago. I'm wondering how you think about M&A. And is it time to get more aggressive there? And is that part of your -- it sounds like not part of the guidance necessarily, but is that -- how much of a chance is that as we look into 2019? And then I just had a follow-up on BCS.

Vivek Shah -- Chief Executive Officer

Hey, Walter, so look, I think again, one of the things we'd like to be able to do is, look, if we can make digital media content brands, digital media sites and businesses more successful then that's attractive, right? And so we think we can. We've demonstrated that. Look at our history. It started with PCMag, which had just come out of bankruptcy. And we followed that up with IGN, followed that up with Everyday Health, and now with Mashable, a pretty consistent track record of taking businesses that were in some state of trouble or problem and being able to create value pretty quickly and sustainably.

So we don't think these are coincidences. We think these are things that can play themselves out. Yes, there is more volume of inbound discussion and inquiry into whether or not we'd be the right home for those brands. We will continue to be selective and choose right because that's important that they can be brands that we are absolutely clear of our ability to create value. We don't want to buy other people's problems. That's not something that strikes us as a good business choice.

And so -- and we think there are a number -- as I mentioned in response to an earlier question, there are a bunch of verticals we'd love to get into. So it is an interesting time for us, and we're in a fairly good capital position to transact if and when we see things that are clear value creating opportunities.

Walter Pritchard -- Citi -- Analyst

Got it. And then just on the enterprise commercial side, you've got a number of -- you've got some new businesses there, the business that you just bought in the Wi-Fi space. Is there any change to how you're going to market there? Do you unify the sales force? Do you have to make more investments there? That would be -- it sounds like maybe some of that is part of the guide for this year, but would be helpful to understand in more detail.

Vivek Shah -- Chief Executive Officer

Yeah. Look, so I would say we are investing in both field force sales as well as account management across the board. Historically on the cloud side, most of our customer acquisition was either online through channel or through phone.

As we build out our enterprise offerings both -- mostly in fax, you need a field force. And so we recently hired a very strong person to run the enterprise fax business, Johnny Hekker. We're excited to have him under John Nebergall who was recently joined as the Head of the Cloud Fax business. And they are building a really strong sales force in that space.

And then on the Digital Media side, which has always been field force driven because when you think about the advertising business or at least the RFP insertion order part of the business versus the programmatic part of the business those have always required feet on the street. And so leveraging that skill set against Ekahau, which has been mostly channel. So Ekahau has been mostly through the channel. We are investing on feet on the street direct to clients and seeing some really good traction.

Walter Pritchard -- Citi -- Analyst

Great. Thank you.

Vivek Shah -- Chief Executive Officer

Thanks, Walter.

Operator

Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng -- CJS Securities -- Analyst

Hi, guys, really nice quarter. I hopped on a little late so I apologize if you've addressed this already. Just to clarify, you mentioned declines in backup in 2019, maybe slowing from what you saw in 2018, but just don't invest in there given that economics work. Can you recover in the out-year? What is the longer-term strategic plan for this business?

Vivek Shah -- Chief Executive Officer

That's hard to say. Look, I want to be cautious and it's been my -- it's my style generally --

Scott Turicchi -- President and Chief Financial Officer

I'm more optimistic.

Vivek Shah -- Chief Executive Officer

Look. My view is we can decelerate and we can get to some stasis. Whether or not we can get to growth will entirely rely I believe on whether the M&A landscape for backup assets changes where we can transact at reasonable pricing. Remember the whole thesis around backup, which worked for its first few years, was that there was such fragmentation in this space that you didn't need to invest in sales to drive new logos. You could certainly just acquire companies and the logos that came with them and pretty much migrate those customers over with your existing infrastructure. And that worked beautifully until the assets became unapproachable from a value point of view. So I don't think until that changes do you get to growth but I think you can get to stability.

But Scott do you want to share your optimism?

Scott Turicchi -- President and Chief Financial Officer

Well, I'm a little more optimistic on the M&A front. I think two things are going to occur, although you might not see the impact until 2020, which is why we've guided in a -- I'd say conservative fashion in 2019. One is as Vivek mentioned earlier in the call, these capital investments are ongoing now, so we will not get the full year benefit of them in this calendar year. They will bleed over into 2020, although, I think we'll get some benefit throughout the course of this year.

And I'm a little bit more optimistic that at least in certain situations, there is M&A that we can transact. I don't think it's going to be very large. I think that plays to the historic sweet spot of that business of doing tuck-in deals, but I think if we can do a couple of those this year, we have a chance of outperforming our conservative expectation. And I'll leave it at that. And I'm not usually the more optimistic one in the room.

Jon Tanwanteng -- CJS Securities -- Analyst

That's helpful. And then can you talk a little bit about iContact and Castle Connolly just more detail on what you paid and what revenues and margins look like and where they can get to under your management?

Vivek Shah -- Chief Executive Officer

Yeah. So I'll talk about iContact first in the context of a broader vision for MarTech. So our thesis is that small and medium businesses when they become marketers, they start with email, because it is the most fundamental form of marketing. When they build a list, when we start communicating, it's the freeway "freeway of marketing." You're not paying for the media.

We want to build our position in that space. iContact allows us to do that, add more SMB customers to the Campaigner business, which does a very similar thing. Long-term though, we'd like to be able to move into other earned media marketing spaces; start to think about social media management, reviews management, SEO all of the things that a business looks to do before they get into buying ads and doing true paid advertising. We think having that MarTech suite starting with email as kind of the anchor and the customer base, which we can cross-sell all of these other services.

So very strategic in that. And we have a great team at Campaigner, a great team at iContact. We just brought in a terrific executive in Michael Pepe, who was actually a mentor of mine, back in my Time Warner days. And so we really have some great leadership organized around that.

Castle Connolly is the beginning of our attempt at the Everyday Health group to seriously get into the reviews and ratings business in healthcare. And we think as consumers are confronted with more provider choices, they want to be informed as to who to see and where to go. And Castle Connolly in its work in reviewing and creating top doctors is a leader. It is a tiny business today. Think of it more as a service, but something that we think we can leverage or something very large.

Scott Turicchi -- President and Chief Financial Officer

And the answer to your other question, we're under an NDA, so we're not at liberty to disclose purchase price for iContact.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Fair enough. And then finally just a little more detail on the fax and voice businesses if you could, I thought DID revenue was down both year-over-year and quarter-over-quarter, but you said fax grew 2%. Was voice weak? Or was there something else going on?

Scott Turicchi -- President and Chief Financial Officer

Yeah, voice was down a little bit, I think, both year-over-year on a sequential basis. We've got a portion of that business primarily down in Australia and New Zealand that has shown weakness over the last probably number of quarters. Also there's an FX component that does affect the voice business as well as the fax business, although the vast majority of it goes to the fax business as it relates to the DID.

The other thing is that you may remember Q4 of 2017 was somewhat of an anomalous quarter for the fax business. We don't normally expect to see sequential growth from Q3 to Q4 in large part because there is a decline in business days which both affects the usage component of revenue, but also the number of selling days so gross adds. That was not the case in Q4 of 2017. That was more of the case as we would traditionally see from Q3 to Q4 of 2018.

And I think as it relates to Q4 of 2017 there were some experiments and things going on in the marketing program that juiced the gross adds and the revenue in that quarter, but that was not necessarily sustainable long-term revenue.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. Thank you very much.

Operator

Thank you. Our final question comes from the line of James Breen with William Blair & Co. Please proceed with your question.

James Breen -- William Blair & Co. -- Analyst

Thanks for taking the question. Just a few. On the backup side just wondering how large that is now. And do you think there's a level or point at which you reach some stability there in terms of declines? And then you -- so EBITDA was up about $25 million year-over-year, free cash flow was up $80 million. Is this a new sort of free cash flow yield level sustainable over the long-term? Thanks.

Scott Turicchi -- President and Chief Financial Officer

So, in terms of the backup business it closed the year as we expected right around $101 million of revenues. I think in terms of the answer to stability, you might get a little bit of variance between Vivek and myself. We're not expecting if you mean stability to be flatness in 2019. It's not been budgeted that way.

I'll say I'm a little bit more optimistic that as we head into 2020 a combination of the CapEx investment and some tuck-in M&A, we have I think a chance of bringing that business to stability if that's defined as flattish revenue in 2020. But we've got a lot of work to do between now and then, so let's revisit that question maybe in a couple of quarters.

As it relates to the free cash flow generation, obviously, it was a phenomenal year. I will just remind you if we go back a year, we commented that about $20 million of the free cash flow that we generated in Q1 of 2018 "really belonged to 2017." And the reason for that is some timing differences and collection patterns, particularly in the Digital Media side where we yield a very strong Q4. You earn the money, but you collect the vast majority in the following quarter.

That's starting to normalize a little bit as the media business is a bigger component of overall j2. So, the variances are less. But if you look at 2017 versus 2016, there was a big jump up in large part, because of Everyday Health. So, I would kind of normalize the free cash flows and maybe pull $20 million out, throw it into 2017 that helps to normalize it a little bit, but also don't underestimate the impact of the tax reform act that probably brought us $25 million to $30 million of real tangible benefit in 2018.

Having said all that, there was still very strong flow-through on the incremental EBITDA of about $25 million, in fact more than I would normally expect a flow-through free cash flow. But some of that is based on timing of collections timing of investments from a CapEx standpoint. So that's why for 2019, I'm looking at a more normalized conversion rate for the course of the full year, not necessarily for any one quarter, but there is some variability of about 66% to 67% of the projected midpoint of $530 million of EBITDA.

James Breen -- William Blair & Co. -- Analyst

Great. Thanks. And then just one housekeeping issue. With respect to the guidance, you say about 48.8 million shares went through in the EPS guidance for year. Does that include any expected buybacks this year?

Scott Turicchi -- President and Chief Financial Officer

No. What it does include is the effect of the 600,000 shares we did repurchase in Q4. It does assume what I'll call the normal ranking cycle of j2, which will come up over the next few months for the executives for new hires and promotions, but it does not assume any further buybacks.

James Breen -- William Blair & Co. -- Analyst

Great. Thanks a lot.

Scott Turicchi -- President and Chief Financial Officer

You're welcome.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Turicchi for any closing remarks.

Scott Turicchi -- President and Chief Financial Officer

Well, thank you very much. We appreciate your time and attention today for our Q4 2018 Earnings Call. As you can see, there is a lot of exciting things going on at j2. We're very enthusiastic about not only the way we finished the year, but as we're beginning 2019. I would note, if any of you have follow-up questions we are available. You can call or email us. Also there will be a release out probably in the next couple of days about upcoming conferences, specifically toward the end of this month in San Francisco. There will be two of them. And there'll be other conferences following between now and our next earnings call, which will be scheduled for sometime in early May. Thank you very much.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

Duration: 58 minutes

Call participants:

Scott Turicchi -- President and Chief Financial Officer

Vivek Shah -- Chief Executive Officer

Shyam Patil -- Susquehanna Financial -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

William Power -- Robert W. Baird. -- Analyst

Rishi Jaluria -- D.A. Davidson. -- Analyst

Walter Pritchard -- Citi -- Analyst

Jon Tanwanteng -- CJS Securities -- Analyst

James Breen -- William Blair & Co. -- Analyst

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