Business context and reporting period
The filing is J2 Global, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2020. Although the request names Ziff Davis, the filing identifies the registrant as J2 Global, Inc.; verify that this is the intended filing. J2 Global operated Cloud Services and Digital Media businesses.
Financial highlights
Amounts below are in U.S. dollars; financial-statement figures are rounded to millions.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $332.4 million | $299.9 million; up 10.8% |
| Gross profit / margin | $273.3 million / 82.2% | $248.9 million / 83.0% |
| Operating income / margin | $55.2 million / 16.6% | $50.9 million / 17.0% |
| Net income (loss) | $(6.4) million; $(0.13) per diluted share | $32.4 million; $0.66 per diluted share |
| Operating cash flow | $102.0 million | $116.9 million |
| Cash and cash equivalents | $526.6 million | $575.6 million at Dec. 31, 2019 |
| Cash plus long-term investments | $624.6 million | $675.7 million at Dec. 31, 2019 |
| Long-term debt, net of discounts and issuance costs | $1,455.4 million | $1,448.5 million at Dec. 31, 2019 |
Cash and investments exceeded current liabilities of $368.7 million. No amounts were drawn on the $100 million credit facility. The filing reports total debt principal of approximately $1.602 billion. Net cash used in investing activities was $69.1 million and net cash used in financing activities was $78.4 million. Capital expenditures were $26.9 million.
Material changes versus the prior comparable period
- Revenue grew in both businesses: Cloud Services revenue increased 11.5% to $169.8 million; Digital Media revenue increased 10.2% to $162.7 million. Acquisitions contributed to growth.
- Cloud Services operating income declined 4.8% to $55.7 million, as higher operating expenses outpaced gross-profit growth. Digital Media operating income improved to $5.0 million from a $1.0 million loss.
- Net results turned to a loss, primarily alongside $20.8 million of net investment losses, higher interest expense ($21.0 million versus $16.0 million), increased foreign-currency losses, and an unusually high 132.5% effective tax rate.
- Operating cash flow declined by $14.8 million year over year. The company attributed the decline mainly to payment timing and increased prepaid and other current assets, partly offset by working-capital movements.
- The company repurchased 680,016 shares under its program for $55.6 million during the quarter; total financing cash used for repurchases was $63.0 million. It suspended dividends after its June 2019 payment. In April 2020, it repurchased an additional 319,984 shares for $23.6 million.
Outlook, risks and unusual items
- Management expected Q2 2020 revenue to be slightly lower than Q2 2019 on a consolidated basis and for each business; Digital Media revenue was also expected to decline from Q1. Management said it could not forecast the pandemic’s impact on future profits. No annual earnings guidance was provided in the filing.
- Management reported modest adverse COVID-19 effects beginning in Q2 and expected effects into Q3 or longer. It warned that prolonged disruption could materially affect results, financial position, liquidity, and asset values. No goodwill or long-lived-asset impairment was recorded in Q1, although $7.0 million of OCV investment impairments was reflected in the equity-method loss.
- Net investment losses included a $19.6 million impairment of equity securities and a $4.4 million loss on exchanging preferred securities, partly offset by a $3.2 million gain on a preferred-stock purchase.
- The company reported $1.455 billion of carrying-value debt and $301.1 million of scheduled future interest payments. It was in compliance with debt covenants; management did not anticipate COVID-19 affecting covenant compliance. The $402.5 million 3.25% convertible notes moved from current to long-term classification after they ceased to be convertible at holders’ option in Q1.
- Other exposures include a $21.2 million reserve for indirect taxes, $54.1 million of uncertain income-tax positions, and ongoing tax audits. Management said existing legal matters were not considered likely to have a material adverse effect, but unfavorable outcomes could materially affect a particular period.
- The company paid $22.8 million into OCV, an investment fund associated with the board chair, and disclosed approximately $105.3 million of remaining commitment; timing of future funding calls is uncertain.
Important facts for investors to verify
- Confirm the registrant and ticker: this filing is for J2 Global, Inc. (Nasdaq: JCOM), not a filing identified as Ziff Davis.
- Assess whether revenue growth and segment operating performance can withstand the anticipated COVID-19 pressure, particularly in Digital Media advertising.
- Review the nature, valuation, and potential further losses in the company’s equity investments and OCV commitment.
- Evaluate debt maturities, interest costs, convertible-note terms, covenant headroom, and available liquidity.
- Monitor tax audits, indirect-tax exposure, and the effect of the unusually high Q1 effective tax rate.
- Consider capital allocation, including substantial share repurchases, suspended dividends, acquisitions, and the April 2020 buyback.