Business context and reporting period
Daily Journal Corporation’s unaudited Form 10-Q covers the quarter and nine months ended June 30, 2017, compared with the same periods in 2016; its fiscal year ends September 30. The company operates a Traditional Business publishing newspapers and related services, and Journal Technologies, which supplies case-management software and services to justice agencies. Journal Technologies accounted for 55% of quarterly revenue and 57% of nine-month revenue.
Financial performance and liquidity
| Metric | Three months ended June 30, 2017 | Nine months ended June 30, 2017 |
|---|---|---|
| Revenue | $10.201 million, down 1% year over year | $30.470 million, down 7% |
| Operating loss | $3.633 million; operating margin approximately -35.6% | $9.752 million; operating margin approximately -32.0% |
| Net income (loss) | ($1.351 million), or ($0.98) per share | $157,000, or $0.11 per share |
| Cash from operations | Not reported for the quarter | ($3.430 million), versus $45,000 provided in 2016 |
Nine-month net income followed a $6.015 million income-tax benefit, including a $743,000 reversal of interest and penalties and release of an approximately $2.655 million uncertain-tax-position liability after the IRS concluded its examination without changes. The company had a pretax loss of $5.858 million.
At June 30, cash was $2.635 million and marketable securities were $210.553 million, for combined cash and securities of $213.188 million. Working capital was $140.890 million. Marketable securities had $147.161 million of pretax unrealized gains, largely in shares of three U.S. financial institutions; the portfolio was concentrated in seven companies. Nine-month dividends and interest income were $3.491 million.
Debt included $29.493 million of investment-margin borrowings, secured by marketable securities, and approximately $2.099 million outstanding on the Logan, Utah real-estate loan. The margin borrowing rate was 1.75% at June 30 and the borrowings have no maturity. Cash declined $8.776 million in the nine months, principally reflecting operating and investing outflows and purchases of securities.
Material changes versus prior periods
- Nine-month revenue fell $2.125 million (7%); the main declines were public-notice-related revenue, Journal Technologies consulting fees, and online traffic-citation payment fees. Higher software licensing and maintenance fees partly offset the decreases.
- Nine-month operating expenses rose $4.307 million (12%) to $40.222 million, including a $3.327 million increase in salaries and benefits. Operating losses widened from $3.320 million to $9.752 million.
- Journal Technologies’ nine-month revenue fell 8% to $17.268 million, while operating expenses rose 17% to $26.927 million; its operating loss increased to $9.659 million from $4.236 million. Traditional Business shifted from $916,000 operating income to a $93,000 operating loss.
- Quarterly operating expenses increased 14% to $13.834 million, contributing to a wider quarterly net loss than in 2016.
- Shareholders’ equity rose to $149.415 million from $125.343 million at September 30, 2016, primarily reflecting increased accumulated other comprehensive income from unrealized investment gains.
Outlook, risks, and unusual items
Management said it expects to fund operations for the foreseeable future through operating cash flows and working capital; it gave no specific revenue or earnings guidance. It expects fewer foreclosure notices and declining public-notice advertising, with print-based earnings likely to decline significantly in fiscal 2017 because cost reductions may not offset lost revenue. The filing also notes that software development and product-upgrade costs are expensed as incurred and are expected to affect earnings for the foreseeable future.
Key risks include lower foreclosure notices, changes to legal public-notice requirements or loss of newspaper adjudication status; weaker subscriber and commercial advertising revenue; Journal Technologies’ software implementation and professional-services execution, including reliance on justice-agency engagements; security breaches; and declines in the concentrated investment portfolio. Management said ordinary-course contingencies, including litigation, were not expected to materially affect financial position, results, or cash flows. The company reported no material change in market-risk exposures and said disclosure controls were effective.
Important facts for investors to verify
- Whether Journal Technologies can convert installation and consulting work into completed, customer-accepted contracts and stabilize expenses.
- Trends in foreclosure notices, public-notice legal requirements, and traditional publishing revenue.
- The performance, concentration, and potential volatility of the marketable-securities portfolio, including related unrealized gains and deferred taxes.
- Whether operating cash flow improves and how management uses cash, securities, and margin borrowings.
- The sustainability of reported nine-month net income given the significant tax benefit and discrete uncertain-tax-position reversal.