j2 Global Communications (JCOM) Q4 2019 Earnings Call Transcript

j2 Global Communications (ZD -1.38%)
Q4 2019 Earnings Call
Feb 11, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to j2 Global's fourth quarter and 2019 year-end earnings call. I am Sherry, the operator who'll be assisting you today. [Operator instructions] On this call will be Vivek Shah, CEO of j2 Global, and Scott Turicchi, President of j2. I will turn the call over to Scott Turicchi, president and CFO of j2 Global.

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 2019. As the operator mentioned, I'm Scott Turicchi, president and CFO of j2 Global. And joining me today is our CEO, Vivek Shah.

We finished the year strong with a record fourth-quarter performance. Notably, we had record revenue, EBITDA and non-GAAP earnings, and it was our 24th consecutive year of revenue growth. We will use the presentation as a road map for today's call. A copy of this presentation is available at our website.

When you launch the webcast, there's 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 our press release, you may access it through our corporate website at j2global.com/press. In addition, you'll be able to access the webcast from this site. After we complete 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 us questions at any time 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 these risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we've included as part of the slide show for this webcast. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements. Now let me turn the call over to Vivek for his opening remarks.

Vivek Shah -- Chief Executive Officer

Thank you, Scott, and good morning, everyone. Let me start by saying how excited I am with our fantastic finish to 2019. With revenues up over 17% and adjusted EBITDA up over 14% in Q4, we just delivered our best quarter of the year, a year in which we exceeded our original guidance by a significant margin. We generated $1.37 billion of annual revenues in 2019, which surpassed the high end of our original guidance by over $40 million and represented year-over-year growth of almost 14%.

The stock also performed well in 2019, up nearly 37%. And in recent weeks, we have traded as high as $104. Earlier in 2019, we made the decision to suspend our dividend in order to redirect that capital to acquisitions and investment opportunities where we believe we can generate better returns for shareholders. We consummated four important transactions in 2019: iContact, IPVanish, Baby Center and Spiceworks, for a total of about $400 million.

All four of those acquisitions represent leading brands in their respective categories and strengthen our existing assets in those categories. We also raised about $550 million through our convertible note offering in November, giving us ample dry powder to continue to pursue acquisition opportunities. We also made some key additions to our executive team. Nate Simmons joined us in September to run our Cloud Services division.

He came to us from Symantec, where he served as SVP and COO of its $2.4 billion consumer division. Given our growing emphasis on security and privacy solutions, including Viper, IPVanish and SugarSync, his addition should only accelerate our growth on those areas. We also hired a new Global Head of Human Resources, Michelle Dvorkin, who previously held that role at the The Knot Worldwide; as well as our first Head of Corporate Communications, Rebecca Wright. Now let me provide some texture to our 2020 guidance.

We're guiding overall revenue growth of between 7% to 10%, which is consistent with how we initially guided revenue in 2019. As we've said in the past, we view the low to midpoint of our range as excluding any future acquisitions, while the higher end of the range contemplates acquisitions that would take place between now and the end of the year. While the M&A pipeline is robust and we spent over $400 million in calendar 2019, we have not closed on a material acquisition in the last four months. This, of course, is part of the normal ebb and flow of our acquisition program, and we're pleased with the potential of our current pipeline of deals.

At the segment level, we're looking at Digital Media to grow around 10% at the midpoint, with Cloud Services at around 5% at the midpoint. Within Digital Media, we see a handful of growth drivers: gaming, broadband, B2B, parenting and pregnancy and Everyday Health professional. In the case of gaming, we experienced solid organic growth from our two principal brands in 2019: IGN and Humble Bundle. We are ramping up our Humble publishing unit and expect to launch about 20 games in 2020.

We are quickly becoming one of the largest publishers of indie titles in the industry, with an expectation of about 40 games in our library by the end of 2020. Our subscription business, Humble Choice, rolled out a new and improved subscription value proposition by offering subscribers a greater selection of games each month, along with some new price tiers. At IGN, we had a strong 2019, growing organically 10%, and we're optimistic about 2020 with the new generation of consoles launching in Q4. We expect to experience a bit of a lull in ad spending in the intervening quarters as games marketers hoard their budgets for the next generation of their titles.

But once those are released, it generally unlocks a lot of marketing dollars. At broadband, revenue growth continues to be strong. We anticipate the business growing over 20% organically. Ookla continues to see its data subscription service, Speedtest Intelligence, experience high renewal rates and increased ARPA as we enhance the available data sets.

We've also beta launched Speedtest VPN in collaboration with our IPVanish team and are seeing promising early results. Our Ekahau business had a terrific first full year of ownership in 2019, and we believe will grow over 30% in 2020 with strong bookings over the past several months. Ekahau solutions are viewed as the leading tools for systems integrators as they develop and deploy WiFi networks for their commercial clients. In B2B and parenting and pregnancy, we will see the full-year benefit of owning Spiceworks and BabyCenter.

The integration of both of these brands is going well. We are realizing synergies, consolidating teams, applying new revenue models and expanding share of wallet from customers. Our Everyday Health professional business, which caters to physicians and providers, has a shot to have another strong year after growing over 15% in 2019. All three of our brands in this unit: MedPage, PRIME and Health eCareers are performing very well.

Within Cloud Services, our growth should be driven primarily by our privacy and corporate fax businesses. We're thrilled to see our thesis on the growing importance of privacy to consumers and businesses proving out. IPVanish's customer base grew roughly 17% since we acquired the business in early 2019, and our team has embraced opportunities to bundle VPN with other j2 offerings. In the fourth quarter of 2019, we added SugarSync secure file storage to IPVanish subscriptions; rolled out VIPRE Ultimate Security for consumers, combining malware protection with the VIPRE-branded VPN; and launched the Ookla Speedtest VPN I previously mentioned.

We expect our privacy business to grow strong double digits in 2020 from a combination of organic growth plus an additional quarter of ownership. We also anticipate continued growth in corporate fax, which is a $130 million revenue business. As you know, we have increasingly focused our fax offerings on healthcare IT buyers who rely on our technology to securely transmit private patient information. To that end, in Q4, our eFax Corporate and Sfax services earned HITRUST certification, which, in essence, encompasses HIPAA and ISO information security standards and is a gold standard for compliance within the healthcare information industry.

We saw solid growth in corporate fax revenue and new bookings from small and medium-sized businesses in 2019. In Q4, over 60% of new bookings came from healthcare customers in our corporate fax business. Overall, we believe our corporate fax business will grow close to 10% in 2020. We're also expecting deceleration and a revenue decline within our backup business, which shrank over 8% in 2019.

We believe backup revenue will decline less than 4% in 2020 as we shift the business from an owned-IP model to a premium hosted service provider model, powered by our acquisition of OffSiteDataSync in 2019. This transformation should reduce our decline in 2020 and put us on track to grow revenues in 2021. One impact of this new model will be lower margins in this business unit but still category-leading for the backup market. On the EBITDA side, our guidance is between 5% to 8% growth, which is about 200 basis points less than our revenue growth.

200 basis points is about $10 million in incremental expenses. We have a few things occurring on the expense side: one, near-term margin pressure from the acquisition of Spiceworks and BabyCenter, which were both unprofitable at the time of acquisition; two, we are making organic investments in some of our businesses, notably, Humble Publishing; three, the business model shift at backup, which I just described; and four, continued investments in our financial and information security system as we look to grow into a $10 billion enterprise value company. You will see this mostly reflected in the growth in our corporate expenses. Before I turn the call back to Scott, I just want to inform everyone that we are hosting an analyst day, our first in company history, on March 4 at the NASDAQ in New York City.

It will be an opportunity for us to dive deeper into our portfolio and hear directly from members of our leadership team, who you don't usually hear from. Each of our three divisional presidents: Steve Horowitz, Nate Simmons and Dan Stone, will present; as well, our Head of Corporate Development, Sean Alford. I'm sure it will prove to be a worthwhile use of your time and give you a deeper understanding of the company and its businesses.

Scott Turicchi -- President and Chief Financial Officer

Thanks, Vivek. As I noted earlier, Q4 2019 set a variety of financial records, including revenue, adjusted EBITDA and non-GAAP earnings. These results were driven by several areas of strength in our portfolio of companies, notably, strength in our performance-based marketing, media subscriptions and growth in our VPN business. In addition, we continue to work through the integrations of both BabyCenter and Spiceworks, which contributed to our revenue in the fourth quarter and modestly to our EBITDA.

We ended the quarter with approximately $675 million of cash and investments after spending approximately $5 million in the quarter on our two small tuck-in acquisitions. In Q4, we also raised $550 million through the issuance of convertible securities priced at 1.75% interest and a conversion premium of 32.5%. Now let's review the summary quarterly financial results, which are outlined on Slide 4. For Q4 2019, j2 saw a 17.2% increase in revenues from Q4 2018 to $405.6 million.

As a reminder, the sequential increase in our revenues from the third to fourth fiscal quarter is due to the holiday seasonality for some of our Digital Media properties. These outperformed our expectations, particularly Ziff Media Group, IGN and Humble Bundle. Adjusted gross profit margin, which is a function of the relative mix of our 13 business units, remained healthy at 84.3% and improved 30 basis points from Q4 2018. We saw EBITDA grow by 14.3% to $176.3 million.

And finally, adjusted EPS grew 12.8% to $2.38 per share versus $2.11 per share for Q4 2018 despite interest being $3 million higher and non-GAAP depreciation being $2 million higher and a slight increase in our tax rate. Moving to Slide 5. For the full fiscal year, we saw a 13.6% growth in revenue from 2018 to $1.372 billion. And as Vivek mentioned earlier, this was a $40 million increase versus the original midpoint of our 2019 guidance.

Our EBITDA increased by 12.4% or $60.7 million to a record $550.2 million, and our adjusted EPS was $7.08 per share for the full year compared to $6.35 in 2018 for an 11.5% increase. Turning to Slide 6. You can see that due to about $25 million in timing differences, due to working capital in our Digital Media businesses similar to 2017, we had a 14.3% decrease in our Q4 free cash flow to $82.1 million. The collections in Q1 2020 will bias our quarterly free cash flow and our free cash flow conversion in Q1.

For the full fiscal year, we generated $350.4 million in free cash flow, modest increase from 2018 due to the reasons that impacted Q4 2019. For the full fiscal year, we experienced a free cash flow conversion of approximately 64% of our EBITDA. However, when adjusting for the timing of the $25 million of Digital Media working capital, we see a conversion rate in the high 60s, which is in line with the levels that we indicated throughout the year and that we expect. Now let's turn to our two businesses, Cloud and Digital Media, for Q4 as outlined on Slide 7.

The Cloud business grew revenue approximately 14.3% to $169.3 million despite the seasonal weakness in Q4 due to fewer business days. The growth was driven primarily from the VPN business unit, which we acquired in April 2019. Excluding our VPN business, Cloud revenue still increased over last year's levels. Reported EBITDA increased 6.5% to $80.7 million with a margin of 47.7% after the allocation of certain corporate expenses.

The moderation of our EBITDA margin is due also in part to our VPN business, which is growing, having a lower than 50% EBITDA margin. Our Media business grew revenue 19.3% to $236.3 million and produced $98.2 million of EBITDA or 23.1% growth, once again, after certain corporate allocations. Turning to Slide 8. Let's quickly review the annual results by business.

The Cloud business finished the year at $662 million of revenues for a 10.7% increase over 2018, and it was the first double-digit year of revenue growth since 2016. Again, this increase was primarily but not solely driven by the unbudgeted benefit of owning the VPN business for three fiscal quarters. EBITDA was just in excess of $325 million after $9.7 million of corporate overhead allocations. Our Digital Media business showed a 16.6% increase in revenues to just over $710 million, and EBITDA grew to $235 million after allocating $10.6 million of corporate expenses.

When excluding BabyCenter and Spiceworks, our two most recent Digital Media acquisitions, we still had approximate revenue growth of 10%. Vivek provided some highlights of our 2020 guidance at the beginning of our call. On Slide 10, we have outlined some additional elements to help you understand our guidance range as well as the midpoint of our guidance. For our Cloud business, we expect revenue growth of approximately 5% at the midpoint from EBITDA margins, in line with 2019 before corporate allocations.

For our Digital Media business, we expect revenue growth in excess of 10% and an EBITDA margin before corporate allocations of approximately 34%. Also, for the purpose of modeling the quarters, remember that our Digital Media business experienced a 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 a significant fixed cost within our Digital Media business, so we experienced meaningfully higher margins in Q4 versus Q1.

By way of example, it is typical that our Q1 EBITDA margin for Digital Media will be in the mid-20s, and in Q4, in excess of 40%. I would note that we expect to experience higher non-GAAP depreciation by approximately $6 million this year due to the full-year expensing of acquisitions done in 2019 as well as incremental capex spent in 2019 that we will begin to depreciate. We believe that our interest expense net of interest income will be similar to 2019. Further, we believe that our tax rate will increase slightly from 2019 due to changes in our global tax structure and will be within the range of 21% to 23% this year, and EPS will be calculated on an imputed share count of 48.7 million shares.

Finally, on Slide 11, we outline our guidance for revenues, adjusted EBITDA and non-GAAP EPS. We expect our revenues this year to be between $1.465 billion and $1.505 billion, which translates into a 7% to 10% growth. EBITDA, we expect to be between $575 million and $595 million, with a growth between 5% and 8%. Finally, our non-GAAP EPS, we expect to be between $7.36 a share and $7.66 a share, which at the midpoint indicates an increase of about 6%.

Following our guidance slide are various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. I would now ask the operator to rejoin us to instruct you on how to queue for questions. Thanks. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Daniel Ives with Wedbush Securities. Please proceed.

Daniel Ives -- Wedbush Securities -- Analyst

Thanks. Obviously, a great year to you and the team. So when you think M&A, just obviously, with the convert and just given your position of strength, are you thinking about it like we're looking for larger deals, ones that may be rivals some of the biggest you've done? Or it's more in the number? Or are we going to do it across the group? Obviously, it depends on what's out there, but I just want to hear that.

Vivek Shah -- Chief Executive Officer

Right. Thanks, Dan. So I think it's across the board. I think all 13 of our business units are actively engaged in deals that would sit within those business units.

The three parent, the three divisions are also looking at deals: Ziff Davis, Everyday Health Group and Cloud Services; and then the parent is also looking at deals. So this is probably, I'd characterize as robust an M&A pipeline as I've seen in my time at the company. There's just a lot out there for us to assess and process. It has been four or five months since we've done something meaty, and so we anticipate that there will be some media opportunities for us in the not-too-distant future.

But we're also going to continue to do our tuck-ins and continue to do the smaller deals that are turnkey, that are your subscriber acquisition deals or traffic acquisition deals, which our platform can integrate pretty easily.

Daniel Ives -- Wedbush Securities -- Analyst

Got it. And maybe just to follow-up, like, on Digital Media, specifically, in terms of M&A pipeline, why do you think that is? I mean, obviously, well, it's your background for decades. But just why do you think, from an M&A perspective, it's as robust? I mean, what do you think, at least what you're hearing from some of the potential candidates?

Vivek Shah -- Chief Executive Officer

Yes, Dan, I think it has a lot to do with our business model and approach to monetization. So in areas where we see the opportunity to deploy affiliate commerce and performance marketing, lead gen-type revenues inside of a content business, that is one of our specialties. And so we'll find opportunities where they don't have the know-how, the technology or the team to unlock those, and we do. And so we're in a position to create value around the performance marketing business model.

In other instances, it's our ability to marry a consumer audience for content with a subscription service, which is what we've done, obviously, in the gaming space with IGN and Humble Bundle. And then finally, what we have proven with the Ookla business is our ability to monetize data and to create data analytics products that are meaningful. And so I think we are a far more versatile Digital Media company. We have the ability to operate in multiple spaces, technology space, the healthcare space, the gaming space and the shopping space.

So I think it's that combination of having a fairly broad portfolio but also very specific ways in which we can unlock value. And then I think the other thing I will say is that many of the digital media companies come out of either a venture-backed situation, a unicorn-type situation that where they were trying to be something that they really weren't going to become, and we're able to sort of rationalize it and add it to our portfolio and have it be a nice contributor within the mix.

Scott Turicchi -- President and Chief Financial Officer

Like the Spiceworks.

Vivek Shah -- Chief Executive Officer

Like the Spiceworks.

Scott Turicchi -- President and Chief Financial Officer

They are great insight. Thanks. 

Operator

Our next question is from Shyam Patil with Susquehanna Financial Group. Please proceed.

Shyam Patil -- Susquehanna Financial Group -- Analyst

Hey, guys. Good morning. Great quarter and year. I had a few questions.

Vivek, the past couple of years, it seems like every time you've entered the year, you had one or two kind of key things that you focused on. I know, initially, it was the GM structure and getting better at executing on M&A across the business. As you look at 2020, what are the one or two kind of big things or key things that you're focused on?

Vivek Shah -- Chief Executive Officer

Yes, I'll do it. I'll go by operating divisions. So on the Cloud Services side, I think we are knitting together between IPVanish and SugarSync and VIPRE and some of the other associated brands a really interesting security and privacy bundle that I think will be defining for how we approach 2020 and beyond. We'll inform our internal activities, our organic growth initiatives as well as our M&A.

So I think security and privacy, and by the way, I would throw the corporate fax business into that. We have $130 million business on the corporate fax side. That is all about the secure transmission of document. So whether we're protecting patient information, or we're protecting devices, or we're protecting privacy, this notion of protection, I think, is kind of a very important organizing principle for Nate Simmons and the Cloud Services team.

I think on the Ziff Davis side, it's the continued execution of performance marketing and the subscription generation, both in the data subscription business, the Speedtest Intelligence as well as the Humble Bundle business. The one thing I'll underscore, I mentioned it in the prepared remarks and I don't want it lost, is we are very bullish on the Humble Publishing business. This is where we are the publisher of games, and we have the ability to, I think, through the insight of what we see through our subscription service, identify winning games; the ability to market those games through our various channels, including the Humble Store; and then ultimately being able to include those games in our own subscription service, Humble Choice. There is a really interesting flywheel effect that goes into play, so we're excited about that.

And then, I think, on the healthcare side, the professional part of that business has done extremely well, and it had a very strong 2019. We're optimistic about 2020. This is our MedPage business, where we're providing news and information to physicians; our PRIME business, which is continuing medical education for physicians; and our Health eCareers business, which is a recruitment business for hospitals. We, like all of those businesses, they work well together.

And I've said this, I think, in the past, but when you look at the one million physicians in the United States, they are quite literally the most valuable media audience in the world, given that they are writing billions of dollars of prescriptions for pharmaceutical drugs every year, so a hard-to-reach and valuable audience. I'll also say that we are excited about the idea on our parenting and pregnancy side, with what to expect in BabyCenter. We own No. 1 and 2 in the space, and it's a great space to be in.

And so I think we're just beginning to scratch the surface of what that power is going to look like. So in each one, there are two to three organizing principles that are driving the various operating divisions.

Shyam Patil -- Susquehanna Financial Group -- Analyst

Great. Thanks. And just there's been a lot of talk in the industry about changes that Chrome is making. It seems like they're going to make some now and then in a couple of years.

iOS is constantly updating to limit tracking, user tracking and targeting. Just curious, I mean, as you look out in the near term and kind of intermediate term, do you see much impact from these on Digital Media? Or do you think it's mostly noise? Just what are your thoughts on those industry changes? Just your thoughts there.

Vivek Shah -- Chief Executive Officer

Yes, I know. I think it's a real subject. And I think that the business model that rely on data collection for ad targeting are going to be challenged. Now the good news is that it's not our business model.

Our business model is placing advertising and links and lead gen activity contextually. So I think if you are playing a contextual game, where you're producing in-market content to then put in-market advertising or, in-market marketing services, I think you're going to do well. So I think there is a shift to the contextual targeting versus behavioral and interest-based targeting. The second thing I will say, and I've said this in the past, and I think this is going to prove to be prescient because I think email matters.

And I think having registered users, which we have across all of our brands' large registered users, user databases where we have email address. email is, in many ways, identity. And it's the one piece of identity that generally never changes. Right? Your personal email address or addresses are the addresses that you've had probably for the last decade.

And so we are very focused on building our email databases. We have an entire part of our portfolio, our martech, that is dedicated to building email databases for its clients. So I think those that have sort of direct relationships with their audiences will also, I think, be advantaged in this view-strip, cookie-free, anti-tracking world. And I'll also say that it just is more attention to the need for privacy solutions like IPVanish.

Shyam Patil -- Susquehanna Financial Group -- Analyst

Great. And I have a couple of quick ones for Scott. Scott, for guidance, you guys mentioned at the high end, that there's some M&A assumed. Can you just talk about what level of M&A are you guys assuming? Is it kind of similar to what we saw in 2019? And then I know you guys don't guide quarterly but like any color on just how to think about aggregate revenue and EBITDA seasonality, just kind of 1Q and throughout the year?

Scott Turicchi -- President and Chief Financial Officer

Perfect. So I'll take your first question. And the first question on the guidance is one of sort of a philosophical element. So to be clear, at the midpoint of our guidance, that only contemplates the assets we own today.

So it contemplates no M&A in 2020. So what we're saying is to be at the higher end of the range, assuming all other organic and operational activities are as planned, that will be driven by M&A. Now as you can tell, to go from the midpoint to the high end of the range is not that many dollars in revenue or EBITDA. It's only $10 million in EBITDA to go from $585 million to $595 million.

so we don't need the volume of M&A that we did in 2019 to drive that delta. And as you know, last year, that volume of M&A not only caused us to go above the high end of the range but actually to reset our guidance to yet higher levels. So two different elements are going on. It's not as though there's a secondary budget with a certain amount of M&A baked in that says, "Oh, here's $10 million of EBITDA." It's more of the philosophical bands with the still intention, based on what Vivek said earlier, that we will expand all or substantially all of our free cash flow generation this year in M&A or at least in capital allocation activities, probably heavily weighted to M&A but there could be stock buybacks as well.

In terms of your second question, you're correct, we don't guide quarterly. But as to your point, we have the slide in the deck about, particularly in Digital Media, the seasonality. So we come off of a very good quarter in Q4. Generally, it represents 30-plus percent of the Digital Media's annual revenue, exclusive of any M&A.

And as a result, you see some dramatic shift in the profit margins on an EBITDA basis between Q4 and Q1. So last quarter, Q4, we'll do in excess of 40%. I think it was 43% EBITDA margins for Digital Media. That will reverse down to somewhere between the call it around mid-20s.

So 24%, 25% for Q1. And the reason for that is that there is a seasonal bias, and there's a heavy fixed cost nature. In addition, you may recall that in 2019, we had some shifting of expenses in our Humble Bundle business out of Q1 into Q2, which made Q1 look better by about $3.5 million. So I would expect, for Q1 of this year, there to be a modest uptick in EBITDA versus Q1 of last year because of some of those cost elements.

In addition, as you'll notice in the slide, and as Vivek talked about in his prepared remarks, we continue to make investments, both in our, as we evolve some of our systems within j2 on the finance side and in the infosec area. And some of those costs will flow through corporate throughout the year, but some of them will be in Q1 of '20 versus Q1 of '19. So I would expect the more muted growth in EBITDA and net earnings in Q1 year over year for those reasons.

Shyam Patil -- Susquehanna Financial Group -- Analyst

Got it. Thanks, guys.

Operator

Our next question is from James Fish with Piper Sandler. Please proceed.

James Fish -- Piper Sandler -- Analyst

Hey, guys. Congrats on the year and nice Q4 and also nice to be back on the j2 story here again. You guys are talking more about a bundle approach on the BCS side than you guys have historically before. I understand the product side of it all.

But what, from a go-to-market perspective, are you encouraging for the bundling to occur, given these units operate in silos historically?

Vivek Shah -- Chief Executive Officer

Yes. So, hey, Jim, it's a great question. So let's just start with the direct business, which is the online channel as the source of acquisition, and we're testing a variety of things. In some instances, it's one price, and you get a suite of services.

In other instances, it is an upsell that come you purchase the product and then we're offering you another product at a discount or in some kind of trial period. And what we're looking for is where can we drive unit revenue and where can we drive retention. And so we're testing various ways within the online channel. And the online channel is a very, very large channel.

It is the main channel for SugarSync, for IPVanish and the VIPRE consumer business. As we move more upmarket, and we start to leverage our inside sales, which is more of the SMB market, we're starting to move into actually some different solution sets. So a lot of what, sort of your typical endpoint, VPN has privacy and file storage but then we're also moving into remote access VPN, sort of the traditional sense of VPN. When often people think about VPN-ing into their corporate network, we have a brand called Encrypt.Me that does precisely that and is far more cost-effective and easier to deploy than sort of the legacy on-premises VPN solution.

So that's where we start to bring in Encrypt.me into the proposition. And again, it's the same thing. If it's inside sales, it could be a bundle, it could be a cross-sell, it could be an upsell. And I think the reason, if you take a step back as to why you're hearing us talking about bundling on the cloud side, where we have not historically talked about that, is I don't think we ever had like assets.

I don't think we had bundable assets. I think the cloud fax customer was frankly quite different than the martech customer or the need or the use case was different. And so bringing those together seem like an artificial way to bundle, where these security and privacy really are all protection. They are all protection services, and they fit well side-by-side and together.

James Fish -- Piper Sandler -- Analyst

Got it. That makes a lot of sense. And then just two quick ones for me. How do we think about the impact of the backup transition on gross margins? You guys alluded to it on the script.

And then can we get the difference in the display advertising versus subscription revenue within the Digital Media business for this quarter?

Vivek Shah -- Chief Executive Officer

Yes. So let me talk a little bit about the strategy at backup and then maybe Scott can answer some of the questions on margins. But generally speaking, as you know, backup has been a space in which we were challenged to find compelling M&A valuations that made sense for us. We operated at a very high margin.

And what we have come to the conclusion is that we are, instead of leveraging our own IP and selling our own IP into clients, we're essentially going to be a value-added hosted reseller of various solutions, whether it's VIM, OSA or CCRA. And so by transitioning that way, we find that we don't necessarily need to invest the R&D to have the winning technology, which is very hard to do, but we can leverage our infrastructure in being able to sell-through third party technology. Doing that introduces a new cost, which is the cost of that third party technology, which, in a typical backup business, would have offset against our R&D. We weren't investing in R&D in our own IP.

And so that does introduce a new cost base, but it puts us in a position where we believe, and I mentioned in my prepared remarks, that the backup business will get to stability and growth within the next 12 to 24 months, albeit at a different margin. So I'll pause and just...

Scott Turicchi -- President and Chief Financial Officer

Yes, I would say that the transition we're going through right now from a margin perspective is really one of scale. So as we add these additional costs and evolve the business, there'll be a combination in the gross profit and in the opex. I think, combined, we're talking about, call it 10 percentage points lower as we move through this transition. And then we expect, as we scale that margin then to lift back up, not necessarily to the 50% or 50-plus percent that, that business unit operated at historically, but probably somewhere in the high 30s to maybe 40%.

And I'm talking on an EBITDA margin basis. In terms of your second question, the advertising for Q4 for the Digital Media business, which is a combination of display and performance, was about 75% of the revenue and 24% were subscriptions and there's 1% that's other. And for the full fiscal year, which I think is a little better way to look at it because of the seasonal bias in Q4, which does bring us additional display advertising, it was about 40% display, 33% performance marketing, so 73% advertising, 26% subscriptions and one percentage point of other.

James Fish -- Piper Sandler -- Analyst

Thank you. 

Operator

Next question is from James Breen with William Blair & Company. Please proceed.

James Breen -- William Blair & Company -- Analyst

Thanks for taking the question. Just a couple, I guess, for Vivek. Can you just talk about, you made mention growth in the corporate fax business, and what's driving that now? And how you've seen that improve and where you think it is going? And then for Scott, on the cash flow side, you talked about some of the working capital push that's happening from fourth quarter into first quarter. I think you said around, Digital Media around $25 million.

So just sort of looking at it on an annualized basis, with free cash flow being closer to $375 million for '19, and does this imply that you'll see sort of a an outsized free cash flow number in the first quarter that would normalize back down to the second quarter of '20?

Scott Turicchi -- President and Chief Financial Officer

I'll take that. I'll let Vivek chime in. The answer to your question is yes, yes and yes. Now you may remember that a similar situation occurred in Q4 of 2017 and for the full fiscal -year '17 relative to 2018.

And you'll see in the slide deck, where we outlined the free cash flow and we've got the history, which is on Slide 6. You'll see that '16 to '17 was very muted. And then '17 to '18, there was a pop. So I would expect we'll see something similar in 2020.

I can tell you we've had good cash collections in the first 40 days of the year. So it's just a timing issue. We are not totally able to influence the rate at which these advertisers pay. So it's a function of when the actual revenue occurs, how late in the quarter.

And then, as you know, it's not uncommon that those collections occur over the next 100 days. So timing is always going to be, I think, a little bit tricky in predicting the net cash from operations between Q4 and Q1, particularly when you've got a robust growing sequential quarter-to-quarter growth in Digital Media.

James Breen -- William Blair & Company -- Analyst

And just I was just going to say, as a follow-up to that. So if you sort of think about free cash flow from '19 to '20, assuming sort of '19 was around that $375 million level with the adjustment. Given the commentary on '20 about where revenue growth would be, along with some additional expense, tax is up a little bit, do you see free cash flow growing modestly sort of mid-single digits from '19 to '20?

Scott Turicchi -- President and Chief Financial Officer

Well, I think it depends how you deal with the $25 million. If you're going to put it back into '19, then, yes, you'd have a lower rate of growth from '19 to '20. If you take that $25 million and put it in '20, obviously, it's going to be a bigger growth. So I think this year, even with some of the additional expenses operationally in capex, with that $25 million, we should be somewhat north of $400 million of free cash flow.

James Breen -- William Blair & Company -- Analyst

OK. Great. And then, Vivek, just on the strategy side around the eFax?

Vivek Shah -- Chief Executive Officer

Yes. Look, so I would tell you that we have $130 million healthcare IT business that's growing double digits and has great potential. As you know, as I've talked about in the past, the healthcare industry sends something like nine billion faxes a year. That is growing at a reasonably high clip.

Yet only less than 4% of those are faxes that we're involved with, either on the send or receive side. So we actually have a real view into market share. And so we've got $130 million business. That's not all healthcare.

It's dominated by healthcare in a market where we're still small. And the incumbent really is the machine. And I think what we're now seeing through our work, which is it's a sales and marketing process, is really convincing healthcare organizations to eliminate on-site fax hardware, servers and machines and replace them with cloud-based solutions, which yet, we have the market-leading solution. So I think execution against that, I think it takes a while.

They want to see these machines hit end of life. But we're long-term bullish on the opportunity. We're going to be at the HIMSS Conference in March. We're going to unveil some new features and solutions that go beyond fax, that really get into more workflow in the healthcare space, that is going to be very exciting and help accelerate growth in that business.

James Breen -- William Blair & Company -- Analyst

Great. Thank you.

Operator

Our next question is by Nick Jones with Citigroup. Please proceed.

Nick Jones -- Citi -- Analyst

Thanks for taking the question. I guess I want to piggyback off that last comment about some workflow processes for healthcare. Is there a robust pipeline of potential acquisitions for kind of health tech? I think a big driver for a lot of medical professionals is the amount of administrative work. Any color there would be helpful.

Vivek Shah -- Chief Executive Officer

Nick, it's a great question. Again, if I can attach the healthcare IT multiple to our $130 million business, that would be fantastic, because it really is hard for us to acquire in HCIT. That would be a space that would be difficult for us to buy in, and so we're building in that space. And we're making investments, capital investments, in developing really on our own.

There's a partnership that we haven't announced that we are that is part of this.

Scott Turicchi -- President and Chief Financial Officer

Facilitating some of those.

Vivek Shah -- Chief Executive Officer

Yes. For the most part, it's not going to be a buy, it's going to be a build and rent within healthcare. The valuations are just too high.

Nick Jones -- Citi -- Analyst

That makes sense. And then one follow-up on kind of the changes in Google. I guess, I understand how it can impact targeting, but does it have a potential to impact your ability to assign attribution to some of your cost per action or performance marketing? And then, I guess, could you remind us what kind of the ratio is between display and performance?

Vivek Shah -- Chief Executive Officer

Yes. So just to answer that question, on a full-year basis, display was about 40% of the Digital Media revenues, performance marketing was about 33%. So they're almost equalizing in terms of scale. Now, look, attribution is an interesting thing.

In a lot of the, if it's CPC, that doesn't get affected. If it's cost per click, it doesn't get affected. If it's cost per lead, it doesn't get affected. If it's cost per acquisition or a percentage of the part, all of the affiliate networks that sit between publishers and merchants have the ability to map to URL.

So you don't need cookies even there to get attribution. So in our three primary performance marketing: PC, CPC, CPL, CPA, the cookie-less future doesn't interfere with attribution.

Nick Jones -- Citi -- Analyst

Great. Thanks for taking my questions.

Operator

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

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

All right, guys. Thanks for taking questions. Firstly, I wanted to maybe touch on the cloud EBITDA margin side. It sounds like you're guiding to margins being relatively flat.

I understand the VPN business is a little bit of a drag on it, sometimes an actual growth business. Maybe help us understand how should we be thinking about VPN margin maybe going beyond next year. Is there something structurally about the VPN business that's going to make us a lower-margin business? Or is there a path to get that to become a 50% EBITDA margin business? And what would be those drivers?

Scott Turicchi -- President and Chief Financial Officer

No. So two things. One, and we didn't highlight this, but in the fourth fiscal quarter, the Cloud business, but really, most of it was the VPN business with a little bit from iContact. There were, as we sort of get through the year of these acquisitions, and in some cases, third parties, meaning the sellers were involved in providing us financial information, there were certain true-ups of about $1.5 million negative to the top and bottom line, most of that in the VPN business.

So that had about a one point margin impact in Q4. Those are nonrecurring, but then, nevertheless, they hit the quarter. So that's one thing to keep in mind. I think in terms of your longer-term question, if we look at the VPN business, it is a growth business.

I think Vivek mentioned in his prepared remarks, it's a double-digit grower. We intend to continue to feed that business and that growth and build that customer base. So the goal is not to take that business unit and force it to get to 50% EBITDA margins or something in excess of that with no growth. We're going to feed it.

We're going to continue to market it. So I think that an appropriate margin level for the VPN business is probably somewhere between the high 30s to low 40s. We could use 40 as kind of an average margin. And of course, we'll make decisions over time based upon the M&A that we do in that space, some of the cross-selling activity that Vivek mentioned, and that we're working and experimenting on to see how much either we should moderate some of that feeding or increase that feeding in terms of both personnel and sales and marketing dollars.

But you should not expect that, you should not plan for it to be a 50% EBITDA margin business. We look at, I'd say, the portfolio in cloud, and given the relative percentage of its contribution today, to still on, before corporate allocations, to be right around 50%, probably a little bit under this year but right around or hovering near 50%.

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

Got it. And in the release, you talked a little bit about the international reorg not to get too ahead of the Analyst Day next month. But maybe if you could tell us a little bit about what's going on, on the international side that you've had this reorg going on? And how that flows through to the different business units?

Scott Turicchi -- President and Chief Financial Officer

Yes. So first of all, the reorg has nothing to do with the operations of j2. It's all a tax matter. So you may recall some number of years ago, the European Union put pressure on Ireland to increase its tax rate.

So we have operated for 15, 16 years under what's known as a double Dutch, Irish structure. So we have a fair amount of IP that is outside the United States. There would be two elements to this structure: Ireland itself, where we have substantial presence; and an anti called nonresident Ireland, which, for us, happens to be the Isle of Jersey. The Isle of Jersey, as we enter 2020, is starting to build in more presence rules, meaning they want more personnel and staff literally on the island.

And the value of that piece diminishes as the Irish tax in Ireland moves up and evolves. So we transferred the IP within the jtwo system such that it created this gain. You may have noticed that our GAAP tax rate looks very odd this quarter, it's a negative or a benefit. So we have recognized, from a GAAP accounting standpoint, a $53 million gain, hence the negative tax rate.

We've eliminated that from our non GAAP presentation, hence, the more normalized tax rate of 21.3%. From a cash perspective, we will realize that $53 million roughly over the next 15 years. And then we do see, because of the evolution of the structure and where we're earning our money in 2020, about a 70 basis point increase in our tax rate on a non-GAAP basis from 21.3% to 22%. But the day-to-day operations of our international businesses, most of which are on the cloud side, remain unaffected.

The people are in London, the people are in Ireland, throughout Europe, all of that stays in place.

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

Got it. That's helpful. And then turning to the gaming side of the equation, two questions there. First, as you talked about coming out with 20 games publishing this year, which should be, at the most, taking about double the size of the existing portfolio, effectively double the size of your portfolio of indie games publishing.

Maybe you could help us understand the economics on that and what sort of contribution you expect from that? And then second, I mean, given the strength in your gaming business, both from the Humble Bundle side as well as on IGN, what are opportunities for M&A in gaming looking like? Are there opportunities to grow more properties and expand the footprint on the advertising side? Or are there other ways to lever the publishing side of the business? Just wanted to know how you think about M&A on the gaming side?

Vivek Shah -- Chief Executive Officer

Yes, sure. So the way the publishing business works is essentially you have a universe of indie developers who are seeking essentially two things. They're seeking financing, and they're seeking marketing in choosing a publisher to go with to publish their game. And so what we typically do is we'll write a check.

In exchange for that check, we will get a percentage of revenue generated by that game in all channels in which it is sold and distributed as well as, depending on the deal, have various other rights but always including the ability to include it into our subscription service at no incremental charge to us, where we're typically paying for nonowned games a fee for including those games inside of our monthly service. And so the economics are, what is the return on the investment we make against those games. And in all cases, we are looking for positive ROI on the sales of that game in its normal channels. We then have the incremental revenue that comes from sales of that game through our own channel, through the Humble store, and then ultimately the benefit of having that game inside of Humble Choice, our subscription product, at no cost.

But those two other things are pure gravy. The first thing has to be true, which is we invested X in the game, and we're going to see more than X in our returns related to the normal sales of that game. Now with respect to your question on M&A, I think we would be open to gaming information news that is advertising-based, like IGN is today. We like that space.

We want to continue to be in that vertical and into that space. I think any sort of technology within the gaming space that may enhance our subscription value proposition, we're always thinking about things that make a Humble Choice membership even more valuable. So we're looking at various things that would do that. There would be the possibility of buying a library, buying another publisher's library of games, if it made sense for us, and we saw long-term value in that library and able to leverage that library within our services.

So really, all of the above.

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

That's helpful. All right. Thank you, guys.

Operator

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

Jon Tanwanteng -- CJS Securities -- Analyst

Guys, thank you for taking my questions. Nice quarter. Just a little bit more on the Humble business. What kind of dollar investment will that be needing in 2019 as you grow these indie games, which I understand are much smaller? And where does that investment go in terms of magnitude or percentage of revenue, as you go to 40, 80 games in the library and then even beyond that?

Vivek Shah -- Chief Executive Officer

Yes. So look, I think it is in the single-digit millions incremental expense in 2020 versus 2019. So it is not a significant drag on the overall at the j2 level, but it does explain, I mentioned in the prepared remarks, some of the difference in our EBITDA versus revenue growth rate. But it's not larger than that.

Now if we see opportunities to put more capital to work, we will. But we're really limited in our infrastructure on how many games can we actually bring to market based on the team, based on our scheduling. So that really is more of a limit than anything else.

Jon Tanwanteng -- CJS Securities -- Analyst

OK. Great. And then more broadly on the $10 million in additional, either expense or margin drag on a year-over-year basis, could you help us understand the scheduling of that? Is that weighted more toward the first half or if there's any of the lumpiness as it gets to the end of the year, just like how you had to push some spending out to, I'd say, the last year?

Scott Turicchi -- President and Chief Financial Officer

Yes, I would say there's probably a little, well, there's different elements in that $10 million. So the drag from the acquisitions of BabyCenter and Spiceworks would be more front-end loaded because, as we said last year when we acquired them, that's a process over a 12-month period of improvement. I think in terms of the things like the Humble Bundle publishing and the infosec or the systems element, which occur in corporate, those will probably be more ratable over the four quarters. So I think you have different things.

You have different pacings based upon which of those four items we're talking about. But I would say that in the aggregate, there'll be a little bit more on the front-end loading side if you take that $10 million in its totality.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. OK. And then last one. You mentioned the corporate fax growth rate, your expectations for this year, about 10% growth.

Remind us what the split is again between corporate and noncorporate. And what your expectations are for growth on the other side, if it's flat or is growing, or if you're still seeing secular declines there?

Vivek Shah -- Chief Executive Officer

Yes. So about 40% of the overall cloud fax business is in the corporate space. I'd say the other 60% is flat to declining. Historically, it's been maintained at flat through M&A on the web fax side.

We haven't had a web fax transaction in...

Scott Turicchi -- President and Chief Financial Officer

Two-plus years.

Vivek Shah -- Chief Executive Officer

In two-plus years. So I think I view that as kind of a modest, a very modest decline to flat depending on a couple of factors. But we don't view that, we view it as stable, not growth. If we can find M&A in the space, great.

But our focus is really on growing the corporate business.

Jon Tanwanteng -- CJS Securities -- Analyst

Got it. And just to tack on one more. Do you see opportunities in corporate, or excuse me, in fact, for M&A at this point? And also on the backup side, where you're changing strategy, is M&A still in the cards for that?

Vivek Shah -- Chief Executive Officer

Yes. Look, I mean there are deals to be done in both spaces. And again, because we have the broad portfolio, we never feel like we need to do a deal in any one particular space. We've had a lot of inbound but not at prices that we're willing to transact that.

So we'll wait it out.

Jon Tanwanteng -- CJS Securities -- Analyst

Great. Thank you so much.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Scott Turicchi -- President and Chief Financial Officer

Vivek Shah -- Chief Executive Officer

Daniel Ives -- Wedbush Securities -- Analyst

Shyam Patil -- Susquehanna Financial Group -- Analyst

James Fish -- Piper Sandler -- Analyst

James Breen -- William Blair & Company -- Analyst

Nick Jones -- Citi -- Analyst

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

Jon Tanwanteng -- CJS Securities -- Analyst

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