j2 Global, Inc. (NASDAQ:JCOM) Q2 2019 Earnings Conference Call - Final Transcript
Aug 07, 2019 • 08:30 am ET
[Operator Instructions] Our first question is from Shyam Patil with Susquehanna. Please go ahead.
Hey, guys. Good morning. Congrats on a great quarter. I had a few questions. I had a few questions. First, I guess for you, Vivek. When you look at the M&A incentives for the GMs, do you see any kind of weighting first half or second half in terms of M&A transactions in a year? And then a follow-up to that is, when you look at the M&A pipeline, particularly for Digital Media subscription deals, can you just talk about kind of how that looks midsized deals versus large deals?
Sure. So on the first part of your question in terms of the incentive structure for the general managers, there is 2 components. So in terms of their annual incentive, their bonus compensation, it is entirely EBITDA-based. It is a function of the EBITDA goals we set for the business unit at the beginning of the year. When M&A occurs that is incremental to what's in that goal and that target, that EBITDA contribution will count less a capital charge for the asset. And so we look for things that can be immediately accretive vis-a-vis that capital charge. And so it really isn't a timing benefit.
It isn't per se, you should do it earlier, you should do it late. It really comes down to, can you move your scale? And then the second piece of their compensation is they're all shareholders. And so not unlike my own equity package, it is a mixture of time-based restricted shares as well as performance-based shares. And so they're incentivized to enhance the enterprise value and the per share price of the company.
On the second question around media and media subscription businesses, we really are looking for businesses where we can leverage our media audiences to drive customer acquisition and really sort of bend the CAC to LTV equation, right? As you know, in all subscription businesses, that's the equation. And so if we can reduce the amount of third-party marketing spend that we have, then that becomes very interesting and we've seen that, obviously, in the gaming space. And I wouldn't confine it just to media subscriptions. We're also looking for cloud subscription services that can benefit from having media and -- media audiences that are relevant. And in some ways, you can argue that's what VPN is.
Great. Second question, interest rates are coming down. Just wondering does that impact kind of how you guys think about leverage and valuations?
So, I think there is two separate elements to that. As it relates to valuations, we have, as you know, fairly strict parameters that we adhere to irrespective of the market environment, whether it's driven by interest rates or other valuations. So, that remains unchanged in terms of what we're looking for in terms of rates of return.
The second -- or the first part of your question in terms of the lower interest rates may give