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j2 Global Inc. (NASDAQ:JCOM)

Q1 2014 Earnings Conference Call

May 8, 2014 5:00 PM ET

Executives

Scott Turicchi - President

Kathy Griggs - CFO

Hemi Zucker - CEO

Analysts

Shyam Patil - Wedbush Securities

Daniel Ives - Friedman Billings Ramsey

James Breen - William Blair

Ryan McDonald - Northland Securities

Gregory Burns - Sidoti and Company

Operator

Good afternoon, ladies and gentlemen, and welcome to the j2 Global First Quarter Earnings Conference Call. It is my pleasure to introduce your host, Mr. Scott Turicchi, President of j2 Global.

Thank you, Mr. Turicchi. You may now begin.

Scott Turicchi

Thank you very much. Good afternoon, and welcome to the j2 Global’s investor conference call for the first fiscal quarter of 2014. As was just mentioned, I'm Scott Turicchi, the President of j2 Global, and I have with me today Hemi Zucker, our CEO; and Kathy Griggs, our CFO.

As you can see from the release, this has been a very strong quarter for both our cloud and Media businesses, as well as for the company as a whole, exceeding our expectations. We will be discussing in greater detail the Q1 results, provide you with an update on these two business segments, and also give you the details of our current dividend payment, which is raised to $0.27 per share. We will use the presentation for today's call. A copy of which is available at our web site. When you launch the web cast, there is a button on the viewer on the right hand side, which will allow you to expand the size of the slides. If you have not yet received a copy of the press release, you may access it through our corporate website at j2global.com/press. In addition, you can access the web cast also from the site.

After completing the presentation, we will conduct a Q&A session. At that time, the operator will instruct you regarding the procedures for asking a question. However, at any time, you may e-mail questions to us at investor@j2global.com.

Before we begin the prepared remarks, I will read the Safe Harbor language. As you know, this call and web cast will include forward-looking statements. Such statements involve risks and uncertainties that could 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, proxy statements and 8-K filings, as well as additional risk factors that have been included as part of the slide show for the web cast. We refer you to discussions in those documents regarding the Safe Harbor language, as well as the forward-looking statements.

And now I'll turn the presentation over to Kathy, to discuss the financial results.

Kathy Griggs

Thank you, Scott. Good afternoon ladies and gentlemen. Our revenues for the quarter were $134.1 million, an all time first quarter high and an increase of 18% versus a year ago quarter. Business Cloud Services revenues were $108.8 million, an increase of $10.1 million or 11% for just Q1 2013 and Digital Media revenues were $33.3 million, an increase of $10.5 million or 46% versus Q1 2013.

I am very pleased to say, that the results on both the cloud and the media business, each and together exceeded our internal budgeted targets for Q1. Consolidated EBITDA increased 19% to a Q1 record of $57.3 million, compared to $48.2 million in Q1 last year.

Please refer to slide 5 in our presentation for our Business Cloud Services segment financial results. For Q1 2014, that segment achieved the following results. Revenue growth versus Q1 2013 of 11.1%, from $90.7 million to $100.8 million. Non-GAAP gross margin of 81.3%; non-GAAP operating margin of 46.5%; non-GAAP operating income of $47.2 million; EBITDA margin of 48.1%, and EBITDA of $48.8 million. At the end of Q1 2014, our cloud segment is performing ahead of budget.

Our cancel rate was at 2.3% for Q1 2014, our best Q1 in the company's history. We added approximately 23,000 net paid DIDs this quarter, bringing our total at quarter end to a record 2.26 million DIDs. ARPU was $12.67 for DID this quarter, versus $12.75 last quarter. The decrease is primarily due to the growth in our larger corporate accounts and international users.

Moving to Digital Media segment on the same slide; the business achieved the following results. Revenue growth versus Q1 of 2013 at 46% or $22.9 million to $33.3 million. Non-GAAP gross margin of 88.4%; non-GAAP operating margin at 22.2%; and operating income of $7.4 million; EBITDA margin of 25.6% and EBITDA of $8.5 million. Again at the end of Q1 2014, our Media segment is also performing ahead of budget.

As I have mentioned in the past, due to seasonality, Q1 Digital Media revenues generally represent app one-fifth of the annual total for this segment. Given the timing of the release of the games for the new gaming consoles, we achieved a bit stronger than seasonally expected first quarter for our IGN subsidiary and our Digital Media segment as a whole.

Please refer to slide 23 of the presentation for a recap of our Q1 2014 non-GAAP consolidated operating results, and to the supplemental schedules at the end of the presentation, for a reconciliation of all non-GAAP financial measures to the nearest GAAP equivalent.

On a consolidated basis, adjusted net income for the quarter was $36.4 million. Consolidated adjusted growth and operating margins were 83.1% and 40.5% respectively. For Q1 2014, we achieved adjusted diluted EPS of $0.76 a share compared to $0.67 in Q1 2013. A 13% increase, driven principally by strong performance in both of our segments.

For Q1 2014, amortization of intangibles on a pre-tax basis for the Cloud and Media segment, were $6.6 million and $3.8 million respectively. This represents 6.5% of revenues for the Business Cloud Services segment, and 11.4% of revenues for the Digital Media segment.

Consolidated free cash flow for the quarter was $38.4 million, representing 29% of revenue, despite decreasing our accounts payable by more than $16 million in the quarter, of which $7.3 million related to the payment of an accrued liability from one of our Digital Media acquisitions from Q1 of 2013. The seasonality of our Digital Media segment generated significant accrued expenses in Q4, that are paid in Q1 of the following year.

Our cash and investment balances were $315 million at March 31, 2014. During Q1, we deployed $52.4 million for acquisitions, and returned $22.4 million to our shareholders and bondholders in the form of interests and dividends. And today, we announced our 12th consecutive quarterly dividend and 11th consecutive dividend increase. Specifically, our Board of Directors have approved a dividend payout of $0.27 per share payable on June 3rd to shareholders of record as of May 19th.

Since starting our dividend program in 2011, we have increased our quarterly pay out by 35% on a cumulative basis. Inclusive of our June 3rd dividend, we have now returned $130 million to our shareholders or $2.78 per share through cash dividend payments.

Gains and losses from fluctuations in foreign currencies were not material to either our Q1 2014 or Q1 2013 results. Our estimated effect and adjusted effective tax rate for Q1 2014 was 27.1%. We anticipate our fiscal 2014 adjusted effective tax rate to remain between 27% and 29%.

In conclusion, let me remind you that the supplemental schedules at the end of the presentation will provide you with more specifics on our metrics as well as non-GAAP to GAAP reconciliation scheduled for all financial measures, including our remarks.

Now I will turn the call over to Hemi, who will provide you with an overview of our business units.

Hemi Zucker

Thank you, Kathy, and beautiful afternoon everybody. Let me start with our cloud business in slide 7. I will talk about the growth of our run rate versus the Qs of last year and the year before.

We just added few acquisitions in the month of April and May, and therefore we are thinking [ph] that the run rate is more flexible for the businesses.

Okay, let me start with the fax and voice, what we call our DID business. Fax and voice are both 4% up versus last year and continue to grow. The key growth areas for us are the U.S., Japan, U.K. corporate and also Australia. Our online business; the Backup business has grown 900% run rate versus the first quarter of 2013.

We drove a $50 million revenue run rate and I will discuss about this in our dedicated slide, slide number 9. We had both grown organically and through acquisition, and we are very happy, as I said last time, we had growth in the fast lane, and we actually passed $50 million.

Hosted Email grew 69% run rate versus last year quarter. Last year as you remember, we replaced our management and entered the U.K. market, in late 2013. We announced our market position with the last acquisition of iCritical. Our run rate there is $40 million versus $8 million last year, and we strongly believe that both Backup and FuseMail has large opportunity, growth opportunity ahead of us.

Moving to page number 8; when I will discuss about the globalization of our Cloud and Media business. Approximately 20% of our total revenue is international. In the Cloud, it is 25%. Our largest market now, outside the U.S. is the U.K. We achieved run rate, exceeding $60 million in the U.K. and we grew more than 3.5X versus last year quarter one. We employ more than 100 employees in the U.K., half of them are in London, and I am planning to spend more time this year than ever before in the U.K.

The services that we provide in the U.K. are our traditional Fax, Voice, Online Data, Hosted Email and Media. Another large market internationally for us is Australia-New Zealand, as we call it here, ANZ. The run rate there is $24 million. We grew 150% in the past two years. We have 45 employees on both the Media and the Cloud business in both Australia and New Zealand. The services we have been providing are fax, voice, online backup, media and we see a lot of opportunity in this part of the world.

Next stage is my dedicated stage for Online Backup. On the Online Backup, we operate two brands; one of them is KeepItSafe, dedicated for businesses-only. And the other one, which is LiveDrive, it individually [indiscernible] both, business users and private users. Our current annual revenue run rate is over $50 million. We are continuing this rapid growth.

2014 [indiscernible] was 480% versus Q1 of last year, and 160% versus Q4 of last year. Our recent Norwegian acquisition, extends our global presence to Norway and Sweden, and we are increasing our online backup business into nine countries, when people can back up their system locally. We believe that we are number one in five of the six countries, and the sixth country which is the U.K., while we are not sure if we are the largest, but definitely, we are a very significant player.

The markets that we are not the largest, are the U.S., Canada and Australia. We operate services, but we are not the largest, and we see huge opportunity and potential to grow in those markets.

Let me now talk a little bit about LiveDrive; we acquired during Q1. We fully integrated the company, except of the accounting system that we are going to integrate in Q2. Our conversion rate, our retention rate has improved dramatically since the acquisition. We are very pleased with this acquisition, and we see another additional upside opportunity in those market -- with LiveDrive, with more relationships, more products and better distribution opportunities.

Let me go to page 10; my favorite slide about our churn rate. Our churn rate in Q1 continued to improve. It is now down to 2.34. This is a churn rate, that is a bit higher than Q4, but always Q1 is higher, because many of our corporate accounts, the contracts renewal, the make [indiscernible], but they also cancel some, and this is what is reflected here.

Next, I will talk about our Digital Media, let's go to page 12; as you heard before from Kathy, our media business deals are doing well -- our Media business did very well and exceeded our expectation for the first quarter.

We are measuring both visits and page views in our web site. Our visits grew by 57% year-over-year to 594 million, and our page views grew even more, by 62%, and with 2 billion page views in the first quarter.

IGN launched new Android app in March, and even though it was launched in March, we already have 3.5 million downloads today, both Android and iOS. For the month of March, IGN apps represent 43% of the IGN mobile profit and is 17% of the total profit of IGN.

We have $1 million downloads of the IGN app dedicated to the Sony PlayStation, which is 14% of the PS -- for shipment. We know that people download over time, so 14% in this stage is number on in the category. We have five star ratings out of 9,300 users.

Next page, page 13; our PC Magazine web site is redesigned, to improve usability engagements in other traffic environment. AskMen have reached a record under our management of $162 million, it is the strongest magazine we acquired; and last but not least AskMen Germany has new launch of new products or new service in Germany for -- the first one for our international platform under the AskMen.

Let me pass it to Scott now.

Scott Turicchi

Okay. Thank you, Hemi. And very briefly before we turn it over to questions, just like to reaffirm the financial outlook for fiscal 2014 which can be found on slide 15. Remind you, that is for aggregate revenues of between $580 million and $600 million and adjusted non-GAAP EPS of between $3.23 and $3.47 per share.

And then as I mentioned at the beginning of the call, the Board approved a dividend payment for shareholders of record on May 19th, with an actual payment date on June 3rd. The rate is $0.27 per share, a $0.025 raise from a dividend paid a quarter ago. From a corporate standpoint, that will be app $12 million in cash, and as a dividend increase, its 12.5% from the dividend paid in the year ago period.

And then as Kathy has mentioned, beginning on slide 17 and following are a variety of schedules dealing with the metrics for the individual pieces of the business, meaning the cloud versus the media as well as j2 consolidated and a number of reconciliation schedules that will give you the nearest GAAP alternative to the various non-GAAP presentation that has been put forth here.

And at this time, I would ask the operator to come back and to instruct you how to queue for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Shyam Patil with Wedbush Securities. Please proceed with your question.

Shyam Patil - Wedbush Securities

Hi guys. Good quarter. Couple of questions; first on the Digital Media business, at a high level can you talk about just the synergies and benefits you have been able to derive from the acquisitions, particularly the ones following [indiscernible], and your level of confidence of being able to -- to hit your 20% five year hurdle rate?

Scott Turicchi

Sure. Well I think the best way to look at that, from a financial standpoint, is if you look at the performance of the business top and bottom line, in Q1 of 2014 versus Q1 of 2013, and the core assets were basically in the businesses in both periods. Only IGN was missing, the month of January and 2013 and that's a relatively immaterial month, if you look at the 12 months as a whole.

So on a year-over-year basis, the revenues increased by $10.5 million, and I think the real thing to look through is the flow-through of that revenue to EBITDA in the Media segment, which was 50%. So when you look at that, and if you look at what we have been saying about -- ever since entering the media business, you recall there is a few key elements to it. Number one, was being able to get into the space and build it to some degree of scale, because with scale, comes improved margins. And this marginal flow-through analysis that you can see in the five quarters we have owned the business, is in fact producing. So I think that's one key element.

The other is, to stick to content providers or content that leads to decision making. So what we are doing in both, the tech and games in particular, is review oriented content that leads to a purchase decision. So as we have amalgamated the four businesses over the last 14-15 months, there has been a combination of cost synergies, but there has also been the ability to generate some revenue enhancement because of the nature of the games in the tech business, and the fact that these are all leading to purchase decisions.

So what we have been seeing internally for a while, and I think what you are starting to see now externally as we report, is that the thesis of getting into the space and deploying our capital and making our return, only goes up. Our degree of confidence only goes up, as we move forward. We saw this earlier on, but it wasn't so demonstrable for the marketplace, because as you know, for about six months last year, we had internal work to be done, particularly at IGN, to get the cost structure in the right place, and then to turn our attention, how to get greater productivity out of the traffic. I wouldn't say the latter is completely done, but certainly Q1 is very good emphasis that that is moving in the right direction.

Shyam Patil - Wedbush Securities

Great. And then maybe as a -- somewhat of a follow-up; there are a lot of questions just around the organic growth rate after the recent 10-K filing. Can you may be talk, just philosophically, kind of how you think about organic versus inorganic growth, and how you guys have been able to drive value or great value from inorganic -- from acquisitions essentially, over time?

Scott Turicchi

Well our whole thesis, is really about the return on invested capital. Whether that capital was invested in activity, that some people deem organic, or whether invest it in M&A activity, that's the key driver of how we think about our businesses, doesn't matter whether the intellectual property business, the cloud subscription business or the media business. So for those that have been around j2 some period of time, you will know that on the cloud side of the business, the way we have done that on an organic method, is to put certain limits in place on the sales and marketing. And to not, be 'as aggressive in our sales and marketing,' in terms of the percentage of its revenue that we spend to drive additional future growth, relative to many other cloud-based companies.

We are spending twice as much on a percentage basis of the revenues in sales and marketing. We spend between 16.5% and 18% depending on the quarter. Q1 is generally a little heavier, Q4 is generally the light. And then we look for opportunities to deploy, either borrow capital or internally generated funds, by buying books of business or by buying companies, and that is the whole philosophical model of j2.

So we don't -- and that's why I tell people all the time. We don't [indiscernible] distinctions between organic growth or inorganic growth; the question for us is, how much of our capital can we put to work in a given period quarter or a year, what is the cost of our marginal capital to get access to more, if either we want to do it prospectively or in conjunction with a larger transaction. And then when we bring that asset into j2, which of the various models does it fit, [indiscernible] then extract value. There is the direct synergy model, where we bring a customer base in, and a lot of the costs that do not fall and therefore there tends to be very quick payback, because we put the customer base on to our platform, we use our employees and we get synergies out and we get very high EBITDA margins.

There is an alternative model though that we have used in going into a new segment like Ziff Davis, where the initial transaction is designed to get us into the space, within meaningful assets, where brands are appropriate and necessary with good brands, as well as key management, and then be able to leverage that with follow-on deals, to be able to make a good return on the aggregate amount of invested capital. And there are other derivatives that we use for international intellectual property, but there is four, five different core playbooks that we use, when we look at how we are going to be exporting our capital and spending it. But that's really the key for us. All about the return on the capital that we are intending to deploy.

Hemi Zucker

And while we are not talking about the mix of organic and acquisition, we do follow-up on it, and all our businesses are growing organically, either by just finding new customer and also by improving the assets that we acquire. So j2 continues to grow organically as well. Just as Scott said, there is of course capital deployed in organic, versus the acquisitions, and we are ready to do both, based on our metrics.

Shyam Patil - Wedbush Securities

Thank you. That was very helpful. And just one last one; free cash flow, I know you don't guide to this metric. But how are you guys thinking about this free cash flow for the year?

Scott Turicchi

Well, as Kathy mentioned, really the free cash flow which was $38 million, we look at it as $45 million in the quarter, because $7 million of it related to a deal over a year ago and the accounting of how that was paid for, it was paid in cash. But how that was paid for was not treated below the line from a free cash flow perspective; and as you can see from last year, the flow of the cash flows over the four quarters, it will be up relative to last quarter. I think even in light of the fact that Q2 was unusually strong, because of the settlement and the cash collection that we had, with respect to the intellectual property portfolio.

Shyam Patil - Wedbush Securities

Great, thank you.

Scott Turicchi

There was a $27 million of payment that flowed into free cash flow in Q2 of last year, and about $12.5 million of that related to prior years damages, which flowed through in terms of revenue and EBITDA.

Shyam Patil - Wedbush Securities

Okay, thank you. Congrats again.

Scott Turicchi

Thank you.

Operator

Our next question comes from Daniel Ives with FBR Capital Markets. Please proceed with your question.

Daniel Ives - Friedman Billings Ramsey

Yeah thanks. I feel like [indiscernible], but solid quarter yet again.

Scott Turicchi

Thanks.

Daniel Ives - Friedman Billings Ramsey

So let me ask you, in terms of acquisitions, obviously the Media acquisitions really strong to pan out. But in terms of cloud and maybe Hemi [indiscernible] Scott. In terms like, how are you -- are you starting to broaden out the thought process in terms of cloud acquisitions, just given where the platform is going, in terms of scale and scoop?

Hemi Zucker

Absolutely, I will [indiscernible] is also we have launched our mobile service, and we start selling these. We had several sales with one customer buying 2,000 units, and we are expanding into the cloud by this acquisition. We have a healthy pipeline. In our last quarter, I said $40 million, planning to reach $50 million. This quarter we actually passed $50 million, but conservatively, I'd say passed. And I believe that next quarter, I would be able to say -- project $60 million. So we are growing it in many ways, A, by acquisitions; and B, adding products; and C, by selling more services. The backup in the cloud sounds kind of simplistic, but there are many features there, that the more customers are getting used to it, they want to buy, what I would call the better insurers. And we have everything that they need to get into the product.

I am not sure Daniel, if I answered you, but do you want to follow-up with a more specific question?

Daniel Ives - Friedman Billings Ramsey

No, that's good. I mean, you are starting to see a different dialog in terms of targets. I mean, the usual guys that -- the hubris is there when they think they are going to take over the world, and then a year later, they are calling you guys?

Scott Turicchi

Yeah, it might take a little longer than a year. But yes, that's true. Also there is a lot in the psychology behind what's going on in the market itself. So quite frankly, the volatility that we are seeing in the stock market right now and the way certain firms have been treated on the downside is a good thing.

Whenever it is growth, and the Dow is hitting, and the S&P and the NASDAQ are either at or near all time high. That comment you just made, was that the company is probably traded or whether they are not yet publicly traded, but hoping to go public. While I feel they could cancel or [indiscernible]. All those dynamics, for the way our model works, will put a lot more pressure to do medium to larger size transactions. And that's why you recall, over the last eight or nine months, beginning in the middle of last year, we talked about a lot of our attention, M&A wise, became focused outside of the United States, and its not a coincidence that we are doing deals now in Norway, the U.K., Australia, that's by design; because what we have found is that things were just too expensive domestically in the United States, and we could not justify it. We couldn't justify where either things were trading, or where people thought they should be trading, if they were not public. So we go to other parts of the world. Obviously the volatility has been in the very recent past, so I think it’s a little bit too early to extrapolate and say, three or four weeks of volatility means that the pipeline in the United States will come gushing in. But this kind of tone from an M&A standpoint for us, is a very bullish sign.

Hemi Zucker

And Daniel, if you take the top brand names in storage, in syncing, like Dropbox and the least -- there are four, five other there. Some of them are already coming to us. Not everybody is running up to the top, and we are shifting gears, finalizing and refining the business when it makes money, and waiting for the right opportunities. Meanwhile, we are growing and our mobile product is the leader. From beta, we moved to sell thousands of them in the last week.

Daniel Ives - Friedman Billings Ramsey

It’s a good place to be. Thanks guys and congrats.

Scott Turicchi

Thank you.

Operator

Our next question comes from James Breen with William Blair. Please proceed with your question.

James Breen - William Blair

Thanks. Just a couple of questions. On the page views side, it seems like you're seeing robust growth there. I am wondering if you think this is sustainable, and then just provide any upside to advertising rates that you charge from page views? And then just secondly, can you give us an idea of what organic growth was around the cloud segment? Thanks.

Hemi Zucker

Yeah, so regarding the page views. The page views are not born of [indiscernible]. Some of them, we are selling directly our inventory. Sometimes, we sell other inventory, and in the last quarter, we sold more of our inventory, that usually they mix it. So the page view -- the current page view, net contribution to the bottom line improved. And what was the other question, the organic on the cloud? I just mentioned organic growth on the backup. We have seen also organic growth on our -- everywhere. All our products are growing organically, so there is no one that I can specify out. Needless to say, that fax is more mature, the voice is more mature, bigger base, percentage is lower. And for [indiscernible] we are seeing very good numbers; very good numbers on our FuseMail and amazing numbers on our backup.

Scott Turicchi

I think orders of magnitude is about half and half.

James Breen - William Blair

Okay. And then how about the Media side, what does it look like in terms of organic growth, the Media?

Scott Turicchi

Its higher.

Hemi Zucker

Higher, and as we say --

Scott Turicchi

Its double digit. It’s a solid double digit.

Hemi Zucker

Kathy just mentioned, we have done our -- we do budget and then we do need an upgrade of our outlook. And then we watch every quarter. Our Q1 was significantly higher than it was with our outlook, but j2 as you know, we don't update the year-end number, unless its --

Scott Turicchi

Clearly north.

Hemi Zucker

But we are very comfortable and very confident, where we will end up the year. Q1 was a very positive surprise for us.

James Breen - William Blair

Great. Thank you.

Hemi Zucker

You're welcome.

Operator

(Operator Instructions). Our next question comes from Ryan McDonald with Northland Securities. Please proceed with your question.

Ryan McDonald - Northland Securities

Hi everybody, great quarter. Thanks for taking my questions. In the digital media segment, obviously, you are sort of expecting Q1 to be stronger. I mean does that -- based on the strong quarter you have had, how does that affect what your thoughts are for the remainder of the year? I mean, do you think this is something that continues into to the second and third quarter, in terms of being better than expected? I mean, is this a full year where gaming or IGN will benefit from these new gaming consoles coming out and everything around that?

Hemi Zucker

Ryan, I think you said, as we expect it to be stronger -- we expected it actually to be lower, it just surprised us; because the way our media is, you know, not all the quarters are equal. Like the fourth quarter, we needed a significant [ph] stronger seasonality. So the seasonality that we originally planned for Q1 was lower and it came up stronger. We knew that the games will be launched in Q1, but still it surpassed our expectations. So there was big demand, and we were able to sell our own inventory, which basically gives us higher margins.

Scott Turicchi

I'd like -- two things. So yes, I think in terms of IGN benefiting from the console and the game phenomenon, that is probably a full year -- will have a full year impact, although it will probably wane. The farther you go out, from where we sit in real time. And the other comment I want to make is that Q4 will still be the most important of the four fiscal quarters for Media this year. So even though, relative to what we said a quarter ago, it might be at the midpoint or even a little bit higher than the midpoint of the band that we gave. Q4 is still going to be a very material quarter, and still drive a lot of the total EBITDA for the year.

Hemi Zucker

And you know, I mean, we had a --

Scott Turicchi

All I'd say, I think its important for particularly the analyst and anybody who is building the model to remember that, because last year, there was some confusion as to how the spread, the revenues, and the EBITDA over the fourth quarter. Just remember last year, half the EBITDA for the whole business and media occurred in Q4. There is that much leverage in what are primarily -- the cost part is primarily the people in the business. So when you get past with the revenue from Q3 to Q4, you get even better marginal flow through to EBITDA that we just experienced from Q1 of 2013 to Q1 of 2014, which was 50%.

Hemi Zucker

And Ryan, you know the driver on IGN is first the new consoles, but then the money, not from the consoles but the new games. And many of the popular games are just working with the new version. So once the new version, all the games will come, we expect even more growth in the IGN part of the business. So we are very optimistic about it.

Ryan McDonald - Northland Securities

Okay. Thanks for the clarification there. Then you talked about in your prepared remarks about the backup business and how there is huge opportunities for growth, I believe in the U.S., Canada and Australia. I mean, is that something that you feel that you already have, the infrastructure in place and that will be just done with the -- existing brands that you already have, or is this something that you are looking for additional M&A in those specific regions?

Hemi Zucker

Our M&As are not geared towards systems-software know-how. They are mostly -- so we have systems that we are very pleased with. We have a system that is for the LiveDrive, which by the way some of LiveDrive customers are U.S. customers, and we have the platform that we have -- KeepItSafe, which actually [indiscernible] is due to several platforms, but they are all from a customer standpoint, they are merged into one. So we have the platforms, but we are trying most of the time we are buying our businesses, that they are using similar platforms, but didn't come to the growth and their ability and they are saving behind their ability to provide all the area of services. So we buy what they have, and we add it to our business.

So basically, we are less looking for technology and we are more looking for customer base. And again, when we buy the customer base, most of them don't have all the features. We say hey customer, we can pay to you whatever you have already this and that feature, mobile feature and as I said, we just saw last week, one customer took 2,000 tablets and smartphones, and edit it [ph]. They were a customer before. Nobody could offer them the service, and you know, this [indiscernible], we offer those at $10 each. So it’s a lot of money. $10 per unit.

Ryan McDonald - Northland Securities

And then just finally, my last question. I don't want to start to sound like a broken record, but I think you touched on it a little bit before. What I mean, is there any update in your thoughts of the position that you are holding with Carbonite and just that area of the business?

Scott Turicchi

I mean that's an investment we hold. We have held it for 18 months, so we have a 13B on file that the language hasn't changed. So it says that we are interested in acquiring the company at a price of $10.50 a share. They are trading slightly below that right now, so not much of a premium in terms of our stated purchase price of interest, while -- the way they are trading. And our view like we said, or has been [indiscernible] on some of the other conversations, really to be very patient. What we may do with the physician in the future, will obviously in part be a function of their performance, their stock price, and we will let you know when we make those decisions.

Hemi Zucker

And as I said last time, we are not sitting and waiting. We grew in one quarter like $250 million [ph] of revenue. We are growing faster than they do in absolute dollar size, and in presence for sure, because we have a smaller base; and we are focused on business. So we are not waiting. We are growing our own business independent with that.

Ryan McDonald - Northland Securities

All right, great. Thank you very much.

Operator

Our next question comes from Greg Burns with Sidoti and Company. Please proceed with your question.

Gregory Burns - Sidoti and Company

Good afternoon. Let's stick to reporting. Cloud business customers and the average revenue for those customers, now I think that's something new. What are the puts and takes of the average revenue per cloud customer and how that evolves going forward, given the different, I guess, growing components of the business? Should we expect any material changes in that metric?

Scott Turicchi

Let me address that. On slide 21, which is what you're referring to. And you have heard us talk about, for some period of time, that the historic metrics which are on page 19 for the Cloud and our DID base, in our judgment have been sufficient to describe the overall cloud business; but, we also stated that there probably would come a time, when those metrics would not be sufficient to describe the total business, because the non-DID based services. So the email businesses, email marketing and core hosted email as well as the online backup, were totally excluded from the metrics.

So what slide 21 is doing, is introducing with a non-DID base business, the addition of those accounts, the customer in those accounts for the non-DID base business, and adding them to the DID base metrics that you see on slide 19, to create the cloud customer base metrics. We actually believe these are the right metrics on a going forward basis, to look at the business, because it will encompass the cloud business as a whole, and the way that these metrics are constructed, it not only can accommodate all of the cloud services we offer today, but other cloud services that we may have prospectively in the future, either that we acquire or that we internally develop.

Now to draw your attention, that if you look on slide 21 towards the bottom, the ARPU has been actually relatively stable over these 13 quarters presented. $13.75, sometimes $14. You will see movement in that ARPU, based upon the same things that drives the movement in the DID based ARPU, which is larger customers depending upon how they buy. They get discounts made by us, went down a little bit. The smaller customers tend to buy us at up. The mix of the small relative to large, will be influential to the average ARPU. You will also note, the cancel rate tracks very closely as well to the DID base metrics; because remember, the DID base business is still 80% some of the total cloud business.

So I think -- in units. I think the near term, we would expect continued growth, albeit maybe a little bit more lumpy than just truing the DID business in terms of total customers; because in the online backup, they can come in big chunks, and so that can cause some spikes in that numbers from quarter-to-quarter. LiveDrive certainly influenced that in Q1 of 2014; but I think the other dynamics in terms of the ARPU, it’s the relative mix of what has been going on, and we have obviously had a dramatic increase in the online backup component, it has been the most important growth component in the non-DID base piece of the business, for the period these metrics are presented. But you will notice the ARPU has been stable.

So if you go back to Q1 of 2011, basically online backup was non-existent, didn't exist.

Hemi Zucker

And on the online backup, we can't actually -- accounts versus units. Even though in many times, we do know the units, it is very complex because it can be one employee that has three, and one employee that has none. And we have the one customer that has almost 1 million units, and we count them as one. So its kind of tricky. So we decided there to go and count accounts versus units, because the units and the backup are usually just by how much data they have, and not so much, but how many units. So you know one server [ph] can be bigger than the rest of the company. If you understand what I am saying.

Gregory Burns - Sidoti and Company

Okay. Great, thank you.

Hemi Zucker

You're welcome.

Operator

There are no further questions in queue at this time. I would like to turn the floor back to management for closing comments.

Scott Turicchi

Okay. Thank you very much. We appreciate your attention today to listen to the results for the Q1 fiscal 2014, and we will remind you that over the next several weeks, we will be on the road, participating in various conferences around the country, as well as involved in non-deal road show activity to answer for the questions. If you do have other questions, please feel free to either email or call, and then we would look to have our next scheduled earnings some time in early August. Thank you.

Hemi Zucker

Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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