J2 Global, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing’s registrant is J2 Global, Inc.; it describes Digital Media and Cloud Services businesses. (The request metadata identifies Ziff Davis.) Dollar amounts below are in millions unless noted.
Business context and financial results
J2 Global provides digital media content, advertising and subscription services, and cloud-based subscription products including fax, cybersecurity, privacy and marketing technology. Growth during the period reflected acquisitions and organic growth, partly offset by declines in some business areas.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $429.0 | $331.0 | $827.2 | $663.4 |
| Gross profit | $365.7 | $274.2 | $706.1 | $547.4 |
| Operating income | $94.3 | $73.0 | $172.8 | $128.3 |
| Net income | $15.7 | $38.1 | $93.6 | $31.7 |
| Diluted EPS | $0.33 | $0.80 | $1.98 | $0.65 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $290.0 | $241.6 |
Revenue rose 30% in Q2 and 25% for the first half. Gross margin was approximately 85.3% in Q2 versus 82.8%; operating margin was approximately 22.0% versus 22.1%. Net income fell in Q2 despite higher revenue and operating income, reflecting investment losses, a $32.6 million goodwill impairment and other non-operating items. First-half earnings also included an $18.5 million equity-method investment gain, versus a $10.1 million loss in the prior-year period.
Segments and material changes
- Digital Media: Q2 revenue was $254.0 million, up 54.9%, primarily from acquisitions; operating income was $44.1 million versus $16.8 million. First-half revenue increased 47.2% to $480.9 million.
- Cloud Services: Q2 revenue was $175.4 million, up 5.0%; operating income was $63.0 million, up 1.7%. First-half revenue increased 3.0% to $346.8 million.
- Acquisitions completed in the first half, including DailyOM and SEOmoz, contributed $5.8 million in revenue. Consideration totaled $91.8 million, net of cash acquired and assumed liabilities.
- Cloud Services ARPU was $14.89 in Q2 versus $13.66; the reported customer cancel rate was 1.9% versus 2.2%. Digital Media visits declined to 2.116 billion from 2.359 billion, while page views were 7.276 billion versus 7.553 billion.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $347.9 million and investments were $117.4 million, for cash and investments of $465.3 million. Operating cash flow for the first half was $290.0 million; investing cash outflow was $152.6 million and financing cash outflow was $31.6 million.
- Debt carrying value was $1.592 billion, including $402.1 million classified current and $1.190 billion long-term. The company reported compliance with debt covenants. A new $100 million revolving facility was established, expandable subject to conditions to $350 million.
- A $405 million Bridge Loan Facility was arranged in connection with the proposed separation and redemption of the 3.25% convertible notes. On August 2, 2021, after quarter-end, the company redeemed the remaining notes, paying $399.6 million principal in cash and issuing 3,031,817 shares.
- Management said existing cash and cash generated from operations were expected to cover working capital, capital expenditures and any stock repurchases for at least the next 12 months.
Outlook, risks and unusual items
- Management expected 2021 consolidated revenue to exceed the prior year. It expected Digital Media revenue to be higher for the remainder of 2021, citing RetailMeNot, organic growth and acquisition integration, subject to COVID-19 risk. Cloud Services revenue was also expected to be higher, assuming a stable or improving economy.
- Management expected operating profit as a percentage of revenue to generally decrease, in part because Digital Media was becoming a larger share of revenue and historically had lower operating margins. It also cited margin pressure from advertising shifting to mobile and newer formats.
- The proposed spin-off of part of Cloud Services into Consensus Cloud Solutions was subject to approvals, tax-related conditions and an effective Form 10 registration statement. The filing does not provide a completed-transaction outcome for the period.
- The company classified B2B Backup assets as held for sale and recorded a $32.6 million goodwill impairment after receiving a purchase offer. It also recorded a $16.7 million investment impairment related to a pending sale transaction involving an investee. A sale of UK Voice assets generated a $2.8 million first-half gain.
- Risks include acquisition integration and execution, COVID-19 and macroeconomic effects, advertising and customer trends, competition, cybersecurity and service disruption, foreign exchange and interest-rate exposure, debt service, and tax and regulatory obligations. The company reported $25.4 million reserved for indirect-tax matters and $4.5 million accrued for certain legal contingencies; it warned additional indirect-tax liabilities could materially affect results. Income-tax audits and uncertain tax positions could also produce material changes.
- No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Verify the reported Q2 and first-half growth against acquisition contributions, organic trends and segment-level results, especially the decline in Digital Media visits.
- Assess earnings quality and recurring profitability apart from the goodwill impairment, investment losses, equity-method gains or losses, and tax benefits.
- Review post-quarter debt changes: the Bridge Loan funding, the August redemption’s cash and share components, and resulting interest costs, maturity profile and dilution.
- Track the B2B Backup sale process, final sale proceeds and any further impairment or disposal effects; confirm the proposed spin-off’s terms, timing and tax treatment.
- Monitor liquidity uses and commitments, including acquisitions, capital spending, the remaining OCV investment commitment of approximately $82.9 million, and potential legal, indirect-tax and income-tax exposures.