Ziff Davis, Inc. — Q2 2022 Form 10-Q
Business context and period. The unaudited report covers the quarter and six months ended June 30, 2022. Ziff Davis operates Digital Media and Cybersecurity and Martech businesses. Results exclude the cloud fax business, spun off as Consensus Cloud Solutions in October 2021, which is presented as discontinued operations in the 2021 comparisons. Unless noted otherwise, amounts are in millions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $337.4 | $341.3 | $652.4 | $653.0 |
| Gross profit | $291.4 | $292.5 | $560.3 | $560.3 |
| Operating income | $45.9 | $10.1 | $76.4 | $36.9 |
| Net income (loss) | $(46.4) | $15.7 | $(21.9) | $93.6 |
| Diluted earnings (loss) per share | $(0.99) | $0.35 | $(0.47) | $1.98 |
| Operating cash flow | — | $192.5 | $290.0 |
Q2 gross margin was approximately 86.4%; operating margin was approximately 13.6%, compared with 2.9% in Q2 2021. The prior-year operating result included a $32.6 million goodwill impairment. The six-month operating margins were approximately 11.7% and 5.7%, respectively. Prior-year net income also included $77.9 million of income from discontinued operations for the first half.
- Revenue mix: Q2 Digital Media revenue increased 1.9% to $258.7 million; advertising fell to $189.2 million from $198.4 million, while subscriptions rose to $58.9 million from $48.3 million. Cybersecurity and Martech revenue decreased 9.9% to $78.9 million. For the first half, Digital Media revenue rose 2.6% to $493.5 million and Cybersecurity and Martech revenue fell 7.6% to $159.4 million.
- Profitability: Q2 sales and marketing expense rose 3% and research, development and engineering rose 11%; general and administrative expense fell 9%. Digital Media operating income increased 1.2% to $44.6 million. Cybersecurity and Martech reported $12.6 million of operating income versus a $21.2 million loss, with the comparison affected by the prior-year goodwill impairment and the sale of B2B Backup.
- Cash and liquidity: At June 30, cash and cash equivalents were $648.3 million; short- and long-term investments totaled $201.0 million. Cash, cash equivalents and investments were $849.3 million, down from $1,046.6 million at year-end 2021. Current assets were $1,025.1 million and current liabilities $484.0 million.
- Cash flows: First-half operating cash flow was $192.5 million. Investing used $161.3 million, including $92.4 million for acquisitions and $53.9 million for capital expenditures. Financing used $61.7 million, including $76.3 million of share repurchases; reported cash declined $46.6 million.
- Debt: Debt carrying value was $1,102.2 million at quarter-end, including $565.2 million of 4.625% senior notes and $550.0 million principal of 1.75% convertible notes. The company repurchased $76.1 million principal of senior notes in the first half. In July and August, it repurchased a further $80.0 million principal for approximately $71.5 million. The company reported compliance with senior-note covenants and no amounts drawn under its revolving credit facility at June 30.
Changes, outlook and notable items
- Management expects 2022 consolidated revenue to be in line with 2021 and operating profit as a percentage of revenue to be generally consistent with 2021 margins. It expects Digital Media revenue to increase, supported by acquisitions and organic growth; Cybersecurity and Martech revenue to decline, primarily due to divestitures, partly offset by acquisitions and organic growth.
- Management cited lower advertising revenue and divested-business revenue as offsets to acquisition contributions. Q2 revenue included $26.2 million from businesses acquired in the preceding twelve months; 2021 comparison-period revenue included divested Voice and B2B Backup businesses.
- The company recorded a $48.2 million loss on disposing of 2.3 million Consensus shares in a debt-for-equity exchange and an $18.4 million first-half unrealized loss on retained Consensus shares. The retained 1.7 million shares were valued at $72.5 million at June 30; changes in Consensus’s share price may materially affect reported results.
- First-half effective tax rate was unusually high at 12,760.8%, principally because book losses on the Consensus investment generated no tax benefit. Management says the tax rate is disproportionately affected by these discrete items.
- Disclosure controls and procedures were deemed ineffective at quarter-end due to a material weakness in controls over accounting for significant unusual transactions, identified in the 2021 Form 10-K. Management was working on remediation and expected completion by December 31, 2022; remediation was not yet established as effective.
- Risks highlighted include macroeconomic and inflation effects on customer acquisition, retention and usage; advertising demand; acquisition integration; foreign exchange; cybersecurity and system disruptions; debt-service and covenant capacity; and tax exposures. The company reported a $24.3 million reserve for indirect-tax matters and $43.6 million of uncertain income-tax-position liabilities. It said existing cash and expected operating cash flow should meet anticipated needs for at least 12 months.
- Legal matters include ongoing derivative litigation and tax audits. The company said the legal proceedings were not expected, based on current knowledge, to materially affect its consolidated results, but an unfavorable outcome could be material in a particular period. A securities class-action amended complaint was dismissed without leave to amend on August 8, 2022, after quarter-end.
Most important facts for investors to verify
- Whether the expected revenue and operating-margin outlook is achievable, particularly given weaker advertising retention and the Cybersecurity and Martech revenue decline.
- How much reported profitability and earnings volatility reflects the Consensus share disposal and valuation changes, and how the remaining investment performs.
- Debt principal and repayment needs after the subsequent $80.0 million senior-note repurchase, alongside liquidity, buybacks and acquisition spending.
- Whether management remediates the material weakness on schedule and whether the controls operate effectively after testing.
- Potential outcomes and timing of indirect-tax exposures, income-tax audits and remaining litigation.