Filing summary: J2 Global, Inc. (Q3 2020)
Entity note: The request identifies Ziff Davis, Inc., but the supplied Form 10-Q is for J2 Global, Inc. (Nasdaq: JCOM). Confirm the intended filing before relying on this summary.
Business context and reporting period
The unaudited report covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. J2 Global operates Cloud Services, including fax, voice, backup, security, privacy and email marketing, and Digital Media, including advertising, subscriptions and content services.
Financial performance and liquidity
- Q3 revenue: $357.0 million, up 4% year over year. Digital Media revenue rose 8% to $186.8 million; Cloud Services revenue declined 0.5% to $170.2 million.
- Q3 earnings: Gross profit was $301.2 million, a gross margin of about 84.4% (versus 82.1%). Operating income was $77.4 million, a 21.7% margin (versus 17.2%). Net income was $60.9 million, or $1.31 per diluted share, compared with $30.7 million, or $0.62.
- Nine-month results: Revenue was $1.020 billion, up 6%; operating income was $205.7 million, up 23%. Net income was $92.6 million, down 3% from $95.8 million; diluted EPS was $1.93, unchanged year over year.
- Cash flow: Operating cash flow for nine months was $356.0 million, versus $309.3 million. Investing used $107.3 million, compared with $472.9 million; financing used $256.9 million, versus $46.9 million provided in 2019. Capital expenditures were $71.3 million.
- Cash and liquidity: Cash and cash equivalents were $567.9 million at September 30, down from $575.6 million at year-end 2019. Cash, cash equivalents and investments totaled $664.5 million. Current assets were $807.3 million and current liabilities $768.9 million.
- Debt: Debt carrying value was $1.469 billion, including $394.0 million classified as current; the company had no borrowings under its credit facility. Management said existing cash and operating cash flow should meet anticipated needs for at least 12 months.
- Balance sheet: Total assets were $3.343 billion and total liabilities $2.167 billion. Stockholders’ equity was $1.176 billion.
Material changes and unusual items
- Q3 results included a $17.1 million gain on the sale of certain Australia and New Zealand Voice assets, completed August 31.
- Nine-month investment losses were $21.0 million, including impairment and exchange-related losses; the equity-method investment also recorded $10.8 million of net losses.
- Q3 included $13.4 million of non-cash lease and related property impairment charges after the company decided to exit or sublease facilities in connection with a permanent or partial remote-work model.
- Other income included foreign currency gains; reported other income was $14.2 million in Q3. Interest expense rose to $22.7 million in Q3 and $65.9 million for nine months, partly due to the 1.75% convertible notes issued in late 2019.
- The company repurchased $238.9 million of shares in the first nine months, reducing shares outstanding. It paid no dividends; the board had suspended dividends after June 2019.
- On October 7, after quarter-end, the company issued $750 million of 4.625% senior notes due 2030 to fund redemption of its $650 million 6.0% notes, scheduled for December 7. The stated redemption payment was $694.6 million, including premium and accrued interest. It also gave notice to terminate its credit agreement.
- After quarter-end, J2 Global announced a roughly $420 million RetailMeNot acquisition and acquired Inspired eLearning on November 2; these transactions are not reflected in September 30 balances.
Outlook, commentary and risks
Management expected Cloud Services revenue for the rest of 2020 to be flat to modestly lower year over year, citing macroeconomic uncertainty and COVID-19. It expected Digital Media revenue to be higher, partly due to RetailMeNot, while acknowledging near-term pandemic risk. Consolidated revenue was expected to be higher for the remainder of 2020 than in the comparable 2019 period. Management expected operating profit as a percentage of revenue to generally decline over time as Digital Media becomes a larger share of revenue and has historically lower margins.
Management said COVID-19 had caused modest adverse impacts beginning in Q2 and expected impacts to continue into Q4 and possibly longer. The full duration and consequences remained uncertain, with potential future effects on results, liquidity and asset values. Other material watch items include indirect-tax exposure (a $20.8 million reserve, with possible additional liabilities), uncertain income-tax positions ($60.2 million) and ongoing audits; litigation, including putative class and derivative actions; acquisition integration and execution; foreign currency movements; and substantial debt and contractual commitments. The company reported compliance with debt covenants and effective disclosure controls.
Most important facts for investors to verify
- That the intended issuer is J2 Global, not Ziff Davis, and that JCOM is the correct filing and ticker.
- How much Q3 operating improvement reflects recurring performance versus the asset-sale gain, currency gains, impairments and acquisition-related effects.
- The impact of COVID-19 on Cloud Services demand, Digital Media advertising and future impairment risk.
- The completed refinancing terms, redemption costs, resulting debt profile and status of the proposed replacement credit facility.
- Funding needs and expected returns for acquisitions, including RetailMeNot, and the remaining approximately $102 million OCV investment commitment.
- Potential outcomes of indirect-tax matters, income-tax audits and litigation, which could produce additional expense or cash obligations.