j2 Global Communications (JCOM) Q2 2019 Earnings Call Transcript

j2 Global Communications (ZD 4.33%)
Q2 2019 Earnings Call
Aug 07, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to j2 Global second-quarter 2019 earnings conference call. My name is Claudia, the operator, who will be assisting you today. [Operator instructions] On this call will be Vivek Shah, CEO of j2 Global; and Scott Turicchi, president of j2 Global. I will now turn the call over to Scott Turicchi, president and CFO of j2 Global.

Scott Turicchi -- President

Thank you. Good morning, ladies and gentlemen, welcome to the j2 Global investor conference call for Q2 2019. As the operator mentioned, I'm Scott Turicchi, president and CFO of j2 Global. Joining me today is our CEO, Vivek Shah.

We continue to execute well on the second quarter, setting records for revenue, EBITDA and non-GAAP earnings per share and just missing on free cash flow due to the timing and magnitude of some estimated tax payments. We will use the presentation as a roadmap for today's call. A copy of the presentation 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 slides.

If you have 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 completing the formal presentation, we will conduct a Q&A session. The operator will instruct you at that time regarding the procedures for asking a question.

However, you may email questions to us anytime at [email protected]. Before we begin our prepared remarks, allow me to read the safe harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that 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 additional risk factors that we have included as part of the slideshow for this webcast. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements. Now let me turn the call over to Vivek for his opening remarks.

Vivek Shah -- Chief Executive Officer

Thank you, Scott, and good morning, everyone. We set yet another quarterly record for revenues, adjusted EBITDA and EPS for the second quarter. I'm also really pleased to say that we've been stringing together some strong quarters, and I continue to be optimistic about the outlook for the rest of the year. A couple of weeks ago, Scott and I, along with members of our leadership team, board of directors and a group of employees who won j2 Achievement Awards, which is the company's highest distinction, had the honor of ringing the opening bell at NASDAQ to celebrate their 20th anniversary of our IPO.

It was a terrific morning in many regards, and I'd like to congratulate our organization and thank all of our employees, past and present, for their great work these past two decades. The occasion was also a very clear reminder of our incredible track record and the long-term success and sustainability of our model. We were part of the IPO class of 1999, which was the largest class in the history of the stock market. 546 companies went public that year, raising more than $69 billion in capital.

It was an unprecedented year in many regards and smashed every known record. It was the year of dot coms and the very height of one of the biggest bubbles the markets have ever seen. Scores of companies went public that were unprofitable and commanded astronomical valuations that were predicated on nontraditional valuation methods. Of the 175 tech companies that went public in 1999, only 41 are public today.

Many went bankrupt, some were sold and others just evaporated. Of those tech companies that are still public today, j2 ranks sixth in market cap. I find that remarkable that we are the sixth largest publicly traded tech company from the 1999 IPO class. I doubt anyone could have predicted that 20 years ago.

Even more impressive, our price performance ranks fifth among those tech peers. As a company, we have weathered the collapse, the dot-com bubble as well as the collapse of the housing bubble and an unprecedented recession. In fact, we more than weathered those significant market corrections. We have grown revenue every single year since being founded in late 1995.

I'm not sure of how many companies can make that claim to have grown revenues for 23 consecutive years. Yet, in the seven years that I've been here, and in the 20 years Scott's been here, we still get questioned about the viability of our model, questioned about our ability to sustain the j2 acquisition system, and therefore, our overall growth. I believe the past 20 years should resolve for any rational observer these questions. My favorite indicator of our success is the five times ratio of our accumulative acquisition spend divided by our annual adjusted EBITDA.

It demonstrates our ability to stand capital intently and wisely as well as the means to properly integrate these assets once they are in j2's portfolio. And we should continue to get better in the allocation of our capital. We have evolved our management structure, M&A team and process, which has produced more ideas, greater deal flow and more managers to integrate deals and create value. The amount of capital available to us only grows as we continue to increase cash flows and the amount of leverage we can assume without much change to our credit ratings.

Our portfolio has never been more diversified, yet our businesses share a common tailwind, which is the ongoing shift from analog to digital. We've expanded our capital allocation to include share buybacks, and we're pleased to have acquired 600,000 shares in Q4 of 2018, and expect to continue to be opportunistic going forward. We have conviction in our model and hold a firm believe that the next 20 years will be as bright, if not brighter, than the first 20. So if this sounds a bit like a full-throated defense of our model and company, it is.

We're very proud of what our organization has accomplished over the past two decades, and there are certain foundational elements that will continue to guide our company. First, we expect to remain an active acquirer of businesses, we are well positioned to grow our company through strategic and disciplined investing; second, we will continue to focus on maximizing EBITDA and free cash flow generation while investing in tangible organic growth opportunities; lastly, we will opportunistically expand our portfolio, particularly in spaces that we feel are fragmented and would benefit from a capital partner with a proven track record. This nimbleness resulted in the evolution of j2 from being just a digital fax company to our current position as a diversified portfolio of over a dozen business units. All of these tenants give us confidence in our future.

Before I hand the call back to Scott, I wanted to spend a few moments on themes for each of our business segments from Q2. At digital media, we continue to see growth out of display advertising of nearly 4% with subscription revenues up over 30%, continuing to be a major driver of overall digital media revenue growth. In fact, combined subscription revenues at cloud services and digital media now account to 65% of total revenues. As you know, it's been our long-held strategy to increase the amount of recurring revenues at j2, and we're, obviously, making tremendous progress.

We gave a bit back on digital media EBITDA margins, which were down approximately one point year over year, but still up through the first half. You'll recall that we had some expenses shift from Q1 to Q2 as well as higher allocations of our corporate overhead. At cloud services, we continue to see big opportunities in the security and privacy space. As you know from last call, we added VPN technology to our core offerings and are off to a good start in the first quarter of our ownership of IPVanish and its related properties.

We have many opportunities for synergies with our email protection, endpoint security and backup solutions that we are beginning to explore. I'd also note that our cloud services management continues to do a very nice job at managing EBITDA margins. Our EBITDA margins are a bit better than last year's, notwithstanding our investment in personnel and product enhancements. Also, this is one of the strongest revenue growth quarters for cloud services in recent memory with revenue growth close to 13% with the acquisition of the VPN assets being a key driver.

Now let me hand the call back to Scott who will go into greater detail on our results.

Scott Turicchi -- President

Thanks, Vivek. Q2 2019 set a number of financial records for j2, including revenue, EBITDA and non-GAAP EPS. These results were driven by several areas of strength in our portfolio of companies, notably continued improvement in the display advertising portion of our business, our continuing strong growth in our media subscriptions as well as the addition of our VPN business unit acquired early in Q2. In addition, we remain cost conscious resulting in strong EBITDA margins for the first half of the year.

We ended the quarter with approximately $259 million of cash and investments after spending $242 million in the quarter on acquisitions and dividends. Now let's review the summary quarterly financial results on Slide 5. For Q2 2019, j2 saw 12% increase in revenue from Q2 2018 to $322.4 million. Gross profit margin, which is a function of the relative mix of our 14 business units, remained strong at 81.5%.

We saw EBITDA grow by 10.3% or $125.2 million. Finally, adjusted EPS grew 6.7% to $1.60 per share versus $1.50 per share for Q2 2018. I would note EPS growth was impacted by a 21% tax rate in Q2 2019 versus a lower-than-usual tax rate of 18.5% in Q2 2018. As you know, fundamental to our philosophy at j2 is generate strong free cash flow.

Turning to Slide 6. In Q2, we generated $85.8 million of free cash flow, which was slightly down from Q2 2018 due to additional tax payments of approximately $5 million versus Q2 2018, and $9 million in comparison to Q1 2019. Due to the timing of such estimated tax payments, we believe that it is better to look at the trailing 12-month free cash flow and the conversion of trailing 12-month EBITDA to trailing 12-month free cash flow. On a trailing 12-month basis, we generated $357.3 million of free cash flow for 69.7% conversion of our $512.4 million of EBITDA.

Now let's turn to the two businesses, cloud and digital media for Q2 as outlined on Slide 7. The cloud business grew revenue of approximately 12.5% to $169.1 million due in large part to the new VPN business unit, increased revenue in martech and a slower rate of decline in our backup business. Reported EBITDA increase by approximately 12.6% to $85.2 million, compared to $75.6 million in Q2 2018. The EBITDA margin is 50.4% after corporate allocations slightly up from the EBITDA margin in Q2 of 2018.

Our media business grew revenue 11.4% to $153.3 million and produced $42.6 million of EBITDA or a 6.9% growth. EBITDA margin declined by about 1 percentage point from Q2 2018 due to certain license fees paid for gains in Q2 2019 but did not occur in Q2 2018 as we discussed on the last earnings call. We are reiterating our revised guidance range for the year as outlined on Slide 9. To remind you, our original high end of our range was $1.33 billion of revenue, $540 million of EBITDA and $6.95 in non-GAAP earnings per share.

As we stated last quarter, this becomes the low end of our new range of guidance, which we reiterate today. We expect our revenues now to be between $1.33 billion and $1.37 billion gross, EBITDA to be between $540 million and $556 million and non-GAAP EPS to be between $6.95 per share and $7.15 per share. Following this guidance slide are various metrics and reconciliation statements for various non-GAAP measures to the nearest GAAP equivalent. Before turning it over to the operator for questions, I would like to draw your attention to Slide 12, and specifically, the cloud metrics.

You will note a 27.5% sequential increase in our cloud customer base and a resulting decrease in average monthly revenue per customer. This is due to the inclusion of the VPN customer base, which has an average monthly revenue per customer of less than $7. We include the VPN customer base as if it existed on March 31 for purposes of calculating the average base for the AMR per customer measurement. In addition, the increase in cancel rate is also due to the inclusion of the VPN customer base, which has a somewhat higher cancel rate than the other cloud services.

Excluding our VPN business, the cancel rate remained flat at 2.2%. Finally, for our digital media metrics, I would note that the sequential and year-over-year declines in visits and page views are substantially attributable to the declines in our Snapchat traffic, which constitutes a minute amount of our digital media revenue. I would now ask the operator to rejoin us and to instruct you on how to queue for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Shyam Patil with Susquehanna. Please go ahead.

Shyam Patil -- Susquehanna International Group -- Analyst

Hey guys. Good morning. Congrats on a great quarter. I had a few questions.

First, I guess for you, Vivek. When you look at the M&A incentives for the GMs, do you see any kind of waiting first half or second half in terms of M&A transactions in a year? And then a follow-up to that is, when you look at the M&A pipeline, particularly for digital media subscription deals, can you just talk about kind of how that looks midsized deals versus large deals?

Vivek Shah -- Chief Executive Officer

Sure. So on the first part of your question in terms of the incentive structure for the general managers, there is two components. So in terms of their annual incentive, their bonus compensation, it is entirely EBITDA-based. It is the function of the EBITDA goals we set for the business unit at the beginning of the year.

When M&A occurs that is incremental to what's in that goal and that target, that EBITDA contribution will count less a capital charge for the asset. And so we look for things that can be immediately accretive vis-à-vis that capital charge. And so there really isn't a timing benefit. It isn't per se you should do it earlier, you should do late, it really comes down to can you move your scale.

And then the second piece of their compensation is they're all shareholders. And so not unlike my own equity package, it is a mixture of time-based restricted shares as well as performance-based shares. And so they're incentivized to enhance the enterprise value and the per share price of the company. On the second question around media and media subscription businesses, we really are looking for businesses where we can leverage our media audiences to drive customer acquisition and really sort of bend that CAC to LTV equation, right? As you know, in all subscription businesses, that's the equation.

And so if we can reduce the amount of third-party marketing spend that we have then that becomes very interesting, and we've seen that, obviously, in the gaming space. And I wouldn't confine it just to media subscriptions, we're also looking for cloud subscription services that can benefit from having media and -- media audiences that are relevant. And in some ways, you can argue that's what VPN is.

Shyam Patil -- Susquehanna International Group -- Analyst

Great. Second question, interest rates are coming down. Just wondering does that impact kind of how you guys think about leverage and valuations.

Vivek Shah -- Chief Executive Officer

So I think there is two separate elements to that. As it relates to valuations, we have, as you know, fairly strict parameters that we adhere to irrespective of the market environment, whether it's driven by interest rates or other valuations. So that remains unchanged in terms of what we're looking for in terms of rates of return. The second -- or the first part of your question in terms of the lower interest rates may give us opportunities to look at our capital structure and lower average cost of capital.

Now having said that, you know our capital structure really occurs in two separate pieces. So we've got at the parent, the converts, which have got about 22 to 23 months before their first put/call day, but they are in the money, that's the $402.5 million at 3.25% in a quarter. Downstairs at cloud business, where we have most of our leverage, the $650 million of 6% notes are currently noncallable. Their first call date is in a year in July of 2020 at $104.5, and we have a modest amount of bank debt that's drawn, about $100 million that's around a 5% rate that sits on top of that.

So we have much more limited opportunities downstairs from a refinancing standpoint. And of course, we do have an unlevered media business, which could take advantage of either the bank debt market or the high-yield market. But I would say that we remain, given our cash flow characteristics, the cash balances that we maintain and the incremental amount that we have put on the line downstairs at the cloud, I think in a comfortable position to meet our M&A needs and our other capital allocation needs.

Shyam Patil -- Susquehanna International Group -- Analyst

Thank you. And then just my last question. Scott, I know you guys don't guide quarterly, but any color on how we should think about gross margins and EBITDA margins by segment and for the year -- for 3Q and 4Q as well as kind of where you guys are -- how you guys are thinking about free cash flow for the year as well?

Vivek Shah -- Chief Executive Officer

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

And then an uptick in the margins in media to the 40% range EBITDA margins in Q4, which would then bring us to close to the mid-30s EBITDA margin for the media business for the year and right around 50% EBITDA margins for the cloud business. In terms of free cash flow, we continue to look at our EBITDA conversion ratio very close to 70%, which would get us right into that $375 million to $380 million range of free cash flow. And as I pointed out in the prepared remarks, we do have some timing differences that affect the quarterly productivity of free cash flow. We had some benefits in Q1 that reversed out in Q2 based on the timing, the magnitude of some estimated tax payments, and that's why, as I said in the prepared remarks, we always encourage you to look at the trailing 12-month free cash flow and the conversion of that free cash flow from its EBITDA, which is, basically, right around 70% on a trailing 12 months through the end of June 2019.

Shyam Patil -- Susquehanna International Group -- Analyst

Great. Thank you, guys, and congrats again.

Vivek Shah -- Chief Executive Officer

Thank you.

Operator

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

Daniel Ives -- Wedbush Securities -- Analyst

Yes. Thanks, and great quarter. My question is on the digital media business. Maybe just talk about the pipeline that you're seeing on the advertising side for healthcare pharma? I know sometimes you have a pretty good visibility into next three, six months or even longer, maybe talk about that first.

Vivek Shah -- Chief Executive Officer

Yeah. So the pharma market continues to be pretty strong for us. As I think I might have mentioned in the last call or the call before that, the pipeline at the FDA has never been stronger, and so the volume of drugs that are getting approved or have been approved and, therefore, have marketing budgets attached to them are pretty substantial. And so we are certainly a beneficiary of that, and we're continuing to see that both on the direct-to-consumer side where pharma is looking to market its drugs to patients, but also on the provider side, where it's looking to market to prescribers.

And so both sides of the market -- and it's one of the advantages we have I think at the Everyday Health Group is that we reach both consumer, patient and provider -- prescriber. And so we're seeing that strength. And then more generally within the market, we're seeing some interesting things in the pipeline, we're thinking about other parts of the healthcare ecosystem, we have healthcare systems, hospitals themselves that are an interesting category for us. We have moved into that business with Health eCareers, where we do recruiting services for hospitals, hospitals looking to get doctors, physicians, assistants and nurses as well as our Castle Connolly business where we're rating doctors and that may turn into some interesting opportunities with hospitals.

And then the payers, right? So insurers as well as employers who are self-insured is another interesting market for us to get into. So we like the pharma market, it continues to be strong for us, and we are thinking about how we can expand more deeply into other parts of the healthcare ecosystem.

Daniel Ives -- Wedbush Securities -- Analyst

Got it. Yeah. So a look on the backup business. Obviously, we've seen some competitors continue to see softness.

Any changes in thinking the backup business in terms of any of the trends or maybe being even more aggressive on M&A or the opposite, just being in that? Thanks.

Vivek Shah -- Chief Executive Officer

Yeah. So as we've said, we -- backup for us is in a sort of the state of managed decline where we're very focused on a EBITDA and free cash flow generation. Having said that, Q2 was actually better than Q1. So sequentially, the decline was less, and so we feel good about that.

We do, to your point, see some tuck-in acquisition opportunities that are attractive and fit our M&A requirements and hurdles. So look, we look at it as it is one of the -- frankly, only drags within the j2 portfolio in terms of revenues, but it's actually possibly finding its bottom, which is a positive sign for us.

Daniel Ives -- Wedbush Securities -- Analyst

Thank you.

Operator

Our next question is from Will Power with Robert Baird. Please go ahead, sir.

Will Power -- Robert W. Baird and Company -- Analyst

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

And yeah, great perspective there Vivek. Just a couple of questions. First I guess on the VPN assets acquisition, maybe any color on how that's performed relative to expectations? It'd be great to get any granularity on what the revenue contribution was? Just kind of the outlook there? And then I guess the other piece to that is, what kind of cross-sell opportunities are you seeing on the revenue side? I think you've referenced opportunities for security backup. I assume that's early, but any further color there would be great, too.

Thanks.

Vivek Shah -- Chief Executive Officer

Yeah. So look, we're really pleased with the VPN assets, the core asset is IPVanish. We I think acquired a very strong business, a great leadership team under Nick Nelson, who has really made an immediate impact inside of the company. And look, one, I think the VPN and privacy space is just -- the demand just continues to grow.

I think as there is more consumer and business concern and attention around social media and government surveillance and other forms of privacy violations and breaches, I think we just have a natural demand occurring. And in fact, I would put the VPN assets into the category of assets within our portfolio that I would refer to as our high-growth assets. And so I put Ookla into that category, and I put humble bundle into that category, and I put Ekahau into that category, and I would put IPVanish into that category, which is exciting particularly for the cloud services side of the house to have something that has that kind of growth potential. It also is a highly fragmented market, the VPN market.

There are hundreds if not thousands of solutions. And so we think we have a strong one, we think have one that earned high-trust marks, which is absolutely vital and critical if you're providing a VPN service. So we see the opportunity, I think, to be opportunistic in this market. And then the last thing I would just say is that, while the Q2 cloud revenue growth 12%, 12.5% was very strong and driven in large part by the VPN assets, the rest of cloud did very well.

And voice and martech in particular had pretty strong year-over-year quarter. So it is certainly a driver of what we saw in Q2, but I don't want that to discount some of the strengths we're seeing in other parts of the cloud.

Scott Turicchi -- President

Yeah, and I would just add to that that we actually experienced in Q2 better performance in, what I'll call, the rest of the cloud business, exclusive of VPN than we did in Q1. You remember that was a little under 2% growth in Q1. And then the second piece to take into account, and it's something we're actually still working through is, we do have deferred revenue haircuts for any set of customers that we acquire in a subscription business. In the VPN space, it is more typical than it's all for other spaces to have more than month-to-month contracts, some even going out as long as three years.

So there's a larger base of deferred revenue than we would experience in other deals of similar size, but also a higher discount rate, since on the margin there aren't as many costs to attribute to servicing those customers. So we have a fairly big reduction in the book of revenue that we acquired this year and to a lesser extent next year through the deferred revenue haircut, which as I say, we're still working through, we've got an estimate for this quarter I think is very solid, but we work with third parties to actually nail that down and that would be finalized this coming -- well, the quarter we're in, Q3.

Will Power -- Robert W. Baird and Company -- Analyst

OK. All right. No, I appreciate that. OK.

I guess maybe just second question, just coming back, well, I guess to the other growth drivers on the digital media side, thinking of Ookla, humble bundle I think you -- Vivek referenced growing north of 30%. Anything in particular you'd call out there? Is it just the same trends moving forward? One of those assets performing better than the others or just continuing to see kind of full steam ahead on both fronts?

Vivek Shah -- Chief Executive Officer

Yeah. I think they're both executing according to plan. We feel very good about where they are. I might just point out, within the broadband assets, the Ekahau asset, which is still relatively new for us, is performing really well, lots of product enhancements, lots of pushes, looking at pricing models and ways in which we can generate more value from the customer base.

And so that's doing very well for us. And then the other thing is, I would just say, in the humble bundle business, there is three parts to the humble bundle business. You have the subscription business, which we've talked about and continues to be a nice business for us, the store business, which is more single unit sale transaction business, and then the publishing business. And the publishing business is one that we are leaning into where we work with indie developers to provide financing to publish their games, to market their games, put them in their normal distribution channel where PC games are sold, and we're making a very nice return on our investment just through those revenues and then have the ability to include those gains within our subscription service some months down the road, and that's also attractive because now we're including our own game versus licensing a third-party game.

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

Will Power -- Robert W. Baird and Company -- Analyst

Great. Yeah, thanks for the color.

Operator

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

Nick Jones -- Citi -- Analyst

Hi. Thanks for taking my questions. Just one on, I guess, kind of holes in your product portfolio. I think maybe the VPN acquisition helped patch up some of the web security.

Are there any other areas that are may be obvious for improvement or some holes in products? And then secondly, I am kind of bending this CAC to LTV equation. A lot of these pipelines for a potential acquisition generated from where you're generating most of the traffic via kind of targeted advertising. Or how should we think about how these types of acquisitions are targeted or sourced?

Vivek Shah -- Chief Executive Officer

Yeah. So just on the first question in terms of the product portfolio and components that are missing. I think in each of the market spaces we're in, we like the assets, it's fairly complete, but there are always opportunity for us to add components. And one thing I didn't answer on an earlier question but is related to this, we are having success in bundling now and that's been something that, historically, we haven't done as much on the cloud services side.

But now the ability to bundle our endpoint security, which is under the VIPRE Brand, our file sync and backup on the consumer side, which would be SugarSync, and IPVanish, and the ability to give you one price for all three services makes the -- make it a great value proposition and make it incredibly sticky. And in fact, we have moved the management of the SugarSync business from out -- from under the backup unit and put it actually into the VPN unit because it's very consumer driven, whereas the rest of the backup assets are more business customers and enterprise customers and so it's a different customer set. So we see opportunities in doing that. On the question relating to how do we leverage media audiences for subscriptions.

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

Nick Jones -- Citi -- Analyst

Got it. Thank you. And one quick follow-up. I guess we focus a lot on j2 Global acquiring, but how do we think about potential divestitures? Is there any kind of areas or any way you guys think about this?

Vivek Shah -- Chief Executive Officer

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

Scott Turicchi -- President

'17.

Vivek Shah -- Chief Executive Officer

2017 is we're certainly open to it, right? So it's a portfolio and our view isn't we're just -- we're only buyers, we're certainly willing to entertain offers that value these businesses in excess of what the market may be valuing and where we may not feel it's strategic or where we way may not feel we have future growth opportunities or where we may not feel we can execute the M&A program as well. So we're open to it. We get calls from time to time. So we're certainly -- and I do think that's a little bit of a shift.

I do think our openness and willingness to do it, but I don't -- right now I wouldn't say there's anything active, and then I wouldn't say there's anything meaningful going on.

Nick Jones -- Citi -- Analyst

All right. Thank you for taking my questions.

Vivek Shah -- Chief Executive Officer

Of course.

Operator

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

James Breen -- William Blair -- Analyst

Thanks for the question. Just following up on the VPN business. Obviously, the ARPU was lower and the churn is a little bit higher, but can you talk about some of the economics there? And also, it just gave you sort of a footprint in that space to do more M&A. Are there other companies out there where you can add customers to your current platform? Thanks.

Vivek Shah -- Chief Executive Officer

Yeah. I'll have Scott talk on just some of the metrics because they show up a little bit in our customer accounts and ARPA. But on the second piece, absolutely, and I do think that the VPN space is fragmented, has many subscale providers who are gonna find it difficult to compete with the likes of us. And they are fairly straightforward migrations from a technology and customer experience point of view.

And so we see pretty interesting opportunities from an M&A point of view. The other thing is, we also have a white-label version or portion of our VPN business where there are entities who may be interested in launching their own VPN for their own customer group, and we're able to provide that and power that and there we just get paid license fee or per-seat type fee from that provider. So we can come at the market that way, and that's a nice competitive advantage for us. But on the --

Scott Turicchi -- President

So on the metrics, most of the customer base that we acquired, and as you know, it occurs under four or five different brands, would be at the small end of the spectrum, meaning they're either individual users or SOHOs in a B2B case. And so they've got an ARPU and there is different programs, and as I mentioned to an earlier question, there are month-to-month subscribers, there are annuals, there is two-year, three-year subscribers. Based upon that mix, we're gonna get and ARPU on a net-net basis somewhere between $6 and $7 per month. So that's a lower ARPU than we've historically gotten in the rest of our cloud business, and it's why you see the $16 average ARPU in Q1 come down to $14 in Q2.

And so that will move around a little bit based upon as we move forward, the relative mix between that SOHO customer versus the B2B on the one and the different packages on the other.

James Breen -- William Blair -- Analyst

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

Scott Turicchi -- President

No, they're actually somewhat lower. They -- it's a strongly profitable business. And actually I would give, as Vivek mentioned earlier, a lot of credit to the incumbent historic cloud business because the margins actually went up in Q2 despite the fact there was some "drag" from the VPN business because that's a business that right now at its scale is more around 40% EBITDA margin.

James Breen -- William Blair -- Analyst

Great. Thank you.

Vivek Shah -- Chief Executive Officer

And look, the other thing I'm just gonna also point out is it's a growth business. And so we are gonna be aggressive in investing to generate future growth.

Scott Turicchi -- President

Right. Its goal is not necessarily to drive it to drive 50% in the near term.

Vivek Shah -- Chief Executive Officer

Correct.

James Breen -- William Blair -- Analyst

OK. Thank you.

Operator

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

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

Hey, guys. Thanks for taking my questions. A couple ones here. I -- first, I wanted to dig into some of the VPN assets and maybe particularly IPVanish.

I think can you -- especially since we can see the impact on metrics from -- on the customer and on the ARPU side, just help us understand, directionally, is the VPN business, primarily actual SMB? Or is there a bigger consumer piece of that business? Because my understanding is that most of your current cloud business is SMB with relatively low consumer exposure, so just maybe a little bit of a different market focus.

Vivek Shah -- Chief Executive Officer

It is. It is absolutely much more of a consumer value proposition. Having said that, there are SMBs, and we are developing solutions for even larger companies. We've got a brand called Encrypt.me where companies can buy VPN for their teams and for their organizations, which they really ought to do because when you consider about how many endpoints in the world that are business endpoints, whether those would the laptops or phones that are connecting to in-flight WiFi, airport WiFi, hotel WiFi all of that's unsecured, coffee shops that's unsecured, it's a risk to the enterprise and those risks should be resolved.

So we see an opportunity. But with respect to the business as it is today, it is consumer. However, where I think we're leveraging our collective expertise is that about 60% of cloud services subscriptions are generated online. And so the discipline of online marketing, online customer acquisition, understanding sources of traffic, drivers of conversion, different testing of different funnel experiences, that's a common thing, whether it's eFax, whether it's IPVanish, whether it's Line 2.

Also our understanding of how to sell through on mobile devices and then through app stores is also sort of a common experience. So while a little bit of a different market for sure, I think a common set of marketing practices and dynamics.

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

OK. Got it. That's helpful. And I think just to understand, I mean, have -- do you have any other cloud businesses that you can -- in the past, you can bring some experiences from? Or is there something that you can bring from what you've done with the Ekahau and humble bundle, some best practice from that into kind of adapting your go-to-market and sales motion with the VPN assets?

Vivek Shah -- Chief Executive Officer

Well, listen, again, I think on the customer acquisition side, yes. I think that it is the same -- whether it's paid search or organic sorts, content recommendation engines, affiliates, I wouldn't make such a big nuance between the SMB buyer and the consumer buyer because they're buying online. So I think that's still just people who are buying online, and so there's a lot of collective experience. I also think from customer service side, we have fair amount of customer service infrastructure and knowledge across the company and they're sharing lots of best practices around customer service.

And then obviously, yes, on the media side, the humble bundle subscription business is entirely a consumer subscription business. And so I think they are learnings there that we can apply.

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

Got it. OK. Thanks. That's helpful.

And then speaking of the media subscription business. Looks like we've been working kind of in the mid- to high 20s range as a percent of the total media business. I know that's obviously been a focal point is growing that now. That was 13% a year and a half ago.

Looks like it's kind of been in the same range for a while now. Just help us understand, I mean is this kind of the steady state of where we should expect that? Or is there kind of other levers to seeing that kind of business as a percentage of total media business kind of continue to grow from here?

Vivek Shah -- Chief Executive Officer

Well, look, I mean, I think if the portfolio were to stay in unchanged, you would continue to see the subscription portion of it be larger and larger. Now I will also point out the nonsubscription pieces are growing nicely, and so you have got that in the proportional question. But I think as we acquire in media, to be very clear, we're interested in a full range of assets, including display-dependent assets that have performance marketing components to it. Also performance marketing-driven assets that we want to add to our performance marketing portfolio and subscription.

So it's a little hard to answer without being able to know over for the next 12, 24, 36 months, which of those assets and at -- and then what proportion they're going to be. So I don't want to leave the impression that the performance marketing and display pieces are pieces that we're not interested in of growing and acquiring into; we are, but subscriptions as well.

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

OK. Got it. That's helpful. Wanted to turn to OCV.

It looks like I think you had about $37 million in investments there in terms of actual capital called. Last year, about $10 million in Q1 and we'll see with the -- when the 10-Q comes out, how much, soon in Q2. But maybe just help us understand to the extent that you can share where are those investments going and maybe your sort of outlook on that?

Scott Turicchi -- President

Yeah. So I think, you pulled the information from the Qs, so I think you're pretty close to the amount we have invested. You will see some additional investments that we made during Q2. What I would note is that now that the fund has been up and running for a while, they're starting to see some monetization events.

So in terms of their base of investments, they've got about eight of them, they range from life sciences to mobile payments, so it's really a broad array. One of the companies that they invested in went public about two, three months ago called Precision BioSciences. And you'll notice, both in our financials and you'll see it also when we file the Q at the end this week that there is a gain posted. In previous quarters you'll see that when we mark-to-market there is losses on the portfolio, primarily for the fees that we pay.

In this quarter, you're gonna see that's not only reversed out but there is a gain. Now that's not a realized gain because there is a lockup period, and we don't control the disposition of those shares, OCV does. But one company has already on public. I believe that there is at least one of the situation where there'll be a pending transaction that will also create a monetization event.

So right now as I say for where they're at in the life of the fund to have at least two of their situations already bearing fruit in terms of a return, even if not fully realized to us in cash, I think is positive. The other investments given the state that they're at are not quite right for either going public or a monetization event. But I think that from our standpoint, we're gonna start to see some return of capital from these investments. I still budget that we will expend about $50 million a year in terms of the investment into OCV to get to our full $200 million commitment.

We spent a little bit under that last year because they just didn't have the breath of deals in capital calls. We may, I think, be probably a little bit under that number again this year, but that'll be in part a function of what they have in their pipeline between now and year-end.

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

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

Scott Turicchi -- President

No. FX had very little impact in the quarter.

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

All right. That's great. Thanks. Thanks, Scott.

Thanks, Vivek.

Scott Turicchi -- President

Yup.

Vivek Shah -- Chief Executive Officer

Thank you.

Operator

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

Jon Tanwanteng -- CJS Securities -- Analyst

Hi, guys. Thank you for taking my questions. And again, congrats on a strong performance in the past 20 years and in the quarter. First of all, can you talk about how the fax business performed and maybe break out the enterprise or just made a -- excuse me, SMB performance and how you're efforts to penetrate healthcare and enterprise are progressing?

Vivek Shah -- Chief Executive Officer

Yes. So fax revenues were up a couple of million dollars sequentially, which was nice from Q1. The corporate business was up about 7% for the quarter and that's mostly in the healthcare space. And so things are going according to plan.

We're -- we have deployed and continuing to deploy salespeople in the field to have the discussions to convince healthcare clients to shift from their analog solutions to cloud. It takes a while. There is a fair amount of -- healthcare move slowly, but when it moves that it kind of moves in big ways. So we like the size of some of the opportunities that are in front of us, so it continues to be a pretty good growth business at about 7%.

And then on the web fax side, I would say that we haven't done a transaction --

Scott Turicchi -- President

25 months, I think.

Vivek Shah -- Chief Executive Officer

I think that's 25 months of --

Scott Turicchi -- President

How about now?

Vivek Shah -- Chief Executive Officer

So in two years, we haven't done one. And so that still holds together reasonably well without M&A. Historically, the web fax side has grown entirely through M&A, but we've been very focused on better customer acquisition, better customer retention. An interesting dynamic is, the actual search query volumes when you look at facts and facts-related terms is up.

So we're seeing that's a sort of proxy for interest in the solution and the service that we provide. So we're happy. And then margins continue to be very strong. John Nebergall, who runs that business for us, done a very nice job and they are investing.

So he is investing, yet finding ways to improve margins in other places.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. Thank you for that color. And I then just going back to the topic of margins in the VPN business. Where can those go as you bolt on assets? And what appears to be a target of this environment, are the same scaling opportunities and migration economics as in your traditional cloud businesses?

Vivek Shah -- Chief Executive Officer

Yeah, I would say --

Scott Turicchi -- President

Yeah. Vivek's right.

Vivek Shah -- Chief Executive Officer

Actually, they're very very similar to what we see -- we've seen in other cloud spaces. But again, I just think one of the things I want to continue to stress is, this is a business, we've talked about this, where we see tangible organic growth opportunities we are gonna invest. And so we're not looking at a magic margin percentage, we're really looking to feed our growth engines, and we view this as an engine.

Jon Tanwanteng -- CJS Securities -- Analyst

OK. Fair enough. And then, finally, can you just give us a little more color on the scope and quality of M&A opportunities for second half and into 2020? I know you've done about $270 million of deals this year. What looks like the close by year-end? And kind of what does the mix look like in the pipeline? Is it more cloud and VPN? Or is there a bigger balance toward media?

Scott Turicchi -- President

No. It's a mix. Look, I think we've got close to half of the business units participating in perspective M&A right now. So we've obviously had a run in the first half of the year that's been dominated by the cloud.

Although, there was a small media deal done in Q2 that goes into Ziff media group. We have a balance on both sides. I think it's very hard to predict what the total outcome will be. But as I said in the last earnings call, I feel very confident that we will spend clearly more than the free cash flow we will generate this year, which, as I said earlier, is about $375 million to $380 million.

Whether that comes in a series of smaller deals spread across five or six BUs or is more concentrated to the function really of which deals get to the finish line and at what point in the year. But I think you're gonna see a mix of deals between now and year-end.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. Thank you. Congrats again.

Operator

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

Pat Walravens -- JMP Securities -- Analyst

Oh, great. Thank you very much. And thank you for the 20-year perspective. None of the companies I covered back then are still in business.

So that's one indication.

Scott Turicchi -- President

It's the best line.

Pat Walravens -- JMP Securities -- Analyst

So I have big two big-picture questions. The first is just, when you look at the M&A pipeline, do you feel like sellers' expectations are at an unreasonable point these days?

Vivek Shah -- Chief Executive Officer

Yeah. And look, I think it depends. Right, you've got the range and so the great thing about us is, we'll look at all situations and we keep an open mind and we look for a path to value creation. And I think some buyers may not have that.

We have the ability to take a growth asset, leverage both our balance sheet and the assets within the company to accelerate that. And so we'll look at those assets, but we'll also look at assets where there's a profitable core and we need to shrink the asset to get to that profitable core and then look to grow it from there. And I don't know if all buyers could do both of those things, for instance. And so we've got versatility as a buyer.

I think we also have a very solid reputation for moving decisively and quickly. So the degree to which speed and certainty is valued by seller then we're the buyer. Where it comes to someone is looking for the greater fool, that's -- those aren't processes we're ever gonna win, and those will always exist. I've been in markets up, I've been in markets down and you'll always find assets like that.

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

Pat Walravens -- JMP Securities -- Analyst

All right. Great. Then my second question is, are you guys seeing any changes in sort of the macroeconomic environment either on the media or the cloud services side?

Vivek Shah -- Chief Executive Officer

No. I mean just -- I feel like the macro things that happened often have nothing to do with our business, but we get swept into it. We're not -- we don't have much of a business in China. It's de minimis for us, but that wouldn't -- that doesn't stop us from getting pulled in to that tide.

So I think the larger things, often if one took a closer look at what we do and where we make our money and how we make our money, don't apply to us, but it has an impact, obviously, on the company's stock price, right? But beyond that, I actually think the areas that we display having had challenges in the past, we feel good three consecutive quarters of display growth, which we feel good about. So no, I don't see things specific to our businesses and our industries and our markets that worry me, we just worry about the larger market, which we can't control.

Pat Walravens -- JMP Securities -- Analyst

Right. Right. Great. Thank you.

Operator

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

Scott Turicchi -- President

Thank you, Claudia. We think everyone for participating today in our Q2 earnings call. As usual, look for a press release soon about upcoming conferences, some beginning as early as next week, then obviously there is a hiatus in the latter part of August and then there is a series of conferences beginning or after Labor Day in September. And we look forward to communicating again to our Q3 results sometime in early November.

Vivek Shah -- Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Scott Turicchi -- President

Vivek Shah -- Chief Executive Officer

Shyam Patil -- Susquehanna International Group -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

Will Power -- Robert W. Baird and Company -- Analyst

Nick Jones -- Citi -- Analyst

James Breen -- William Blair -- Analyst

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

Jon Tanwanteng -- CJS Securities -- Analyst

Pat Walravens -- JMP Securities -- Analyst

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