j2 Global, Inc. (including Ziff Davis operations) — FY 2017 Form 10-K
Issuer and period: The supplied filing is j2 Global, Inc.’s annual report for the fiscal year ended December 31, 2017, not a standalone Ziff Davis, Inc. filing. Ziff Davis is part of the company’s Digital Media operations. Fourth-quarter figures are included below where available.
Business context
j2 Global operates two segments: Cloud Services, including fax, voice, backup, security, email marketing and IP licensing; and Digital Media, including technology, gaming, lifestyle and healthcare properties. Cloud Services is largely subscription-driven; Digital Media depends substantially on advertising and performance marketing. Acquisitions remain a key growth strategy.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,117.8 million | $874.3 million | +27.9% |
| Gross profit / margin | $945.5 million / 84.6% | $727.2 million / 83.2% | Margin +1.4 pts |
| Operating income / margin | $245.7 million / 22.0% | $242.6 million / 27.8% | Income +1.3%; margin down |
| Net income / diluted EPS | $139.4 million / $2.83 | $152.4 million / $3.13 | Net income -8.5%; EPS -9.6% |
| Cash from operations | $264.4 million | $282.4 million | -6.4% |
| Capital expenditures | $39.6 million | $24.7 million | Increased |
Segment mix: Cloud Services revenue was $579.0 million (+2.1%); operating income was $226.0 million (+7.2%), with a 39.0% segment operating margin. Digital Media revenue was $538.9 million (+75.3%), largely from acquisitions; operating income declined 5.2% to $48.1 million, and its segment margin fell to 8.9% from 16.5%. Digital Media generated 5.72 billion visits and 23.73 billion page views.
Fourth quarter: Revenue was $316.4 million versus $251.8 million in Q4 2016; net income was $49.9 million versus $43.2 million. The filing identifies $5.1 million of accelerated share-based compensation in Q4 related to the outgoing CEO’s resignation.
Liquidity and debt: Year-end cash and cash equivalents were $350.9 million, with $57.7 million in long-term investments; working capital was $355.3 million, versus negative $106.1 million a year earlier. Long-term debt carrying value was $1,001.9 million; principal totaled $1,052.5 million, comprising $650 million of 6.0% notes due 2025 and $402.5 million of 3.25% convertible notes due 2029. The company issued the 6.0% notes in 2017, redeemed $250 million of 8.0% notes for $265 million, and repaid its $225 million credit facility. Management said cash, short-term investments and operating cash flow should cover anticipated needs for at least 12 months.
Dividends paid were $73.5 million, or $1.52 per share, in 2017. The board approved a subsequent quarterly dividend of $0.405 per share. The share repurchase authorization was extended in February 2018.
Material changes and unusual items
- Revenue growth was acquisition-led, particularly in Digital Media. 2017 acquisitions cost approximately $203.9 million net of acquired cash and contributed $34.7 million of revenue after acquisition; their net income contribution was not separately identifiable.
- Sales and marketing expense rose 60% to $330.3 million, and general and administrative expense rose 35% to $323.5 million. Management attributed much of the increases to acquired businesses, advertising, personnel, amortization and depreciation.
- Net interest expense increased to $67.8 million from $41.4 million, reflecting the new debt, credit-facility borrowings, debt-extinguishment costs and lower interest income.
- Other income of $22.0 million included gains associated with business sales. The sale of Tea Leaves generated a $27.0 million gain; sales of Web24 and Cambridge generated a $1.6 million gain and a $0.9 million loss, respectively.
- The 2017 Tax Act produced a provisional net tax expense of $15.9 million: a $49.2 million transition-tax charge, partly offset by a $33.3 million deferred-tax benefit from the lower federal tax rate. Tax accounting remained incomplete and could be adjusted.
Outlook, risks and contingencies
Management expected Cloud Services revenue and profits to remain stable, excluding acquisitions, and expected Digital Media revenue and profits to improve as acquisitions were integrated and advertising continued shifting online. It also cautioned that consolidated operating margin would generally decline as lower-margin Digital Media becomes a larger share of revenue, with mobile advertising adding margin pressure. The filing provides no specific numerical earnings or revenue guidance.
Key risks include reliance on advertising budgets and traffic, competition from major digital platforms, mobile monetization and ad blocking, search-engine changes, the significant fax revenue contribution (about 29% of consolidated revenue), cybersecurity and privacy exposure, evolving regulation and indirect-tax assessments, acquisition integration, foreign exchange and debt obligations. EU GDPR was due to take effect in May 2018. The company reported $52.2 million of uncertain tax-position liabilities and ongoing income-tax audits. A New York sales-tax settlement was accrued at $2.80 million and paid at $2.77 million in February 2018. Management said the disclosed litigation was not expected to be materially adverse based on current knowledge; the appeal in a putative TCPA class action remained pending.
The company also committed to invest $200 million over several years in a fund managed by entities linked to its board chairman, subject to management fees and carried interest; a February 2018 capital call was approximately $12.2 million. The commitment had been approved by the Audit Committee.
Important facts for investors to verify
- Confirm the issuer and entity perimeter: this is j2 Global’s 10-K, with Ziff Davis operations included within Digital Media, not a Ziff Davis standalone filing.
- Assess how much reported growth reflects acquisitions versus organic performance, and whether Digital Media profitability improves as acquired properties are integrated.
- Review debt service, convertible-note terms and covenants alongside cash availability, including foreign-held cash and the planned fund commitment.
- Track final tax-reform accounting, tax audits and potential indirect-tax liabilities; several reported tax amounts were provisional or uncertain.
- Monitor advertising, mobile monetization, privacy/GDPR and cybersecurity developments, as well as the pending TCPA appeal and other legal matters.
The financial statements received an unqualified audit opinion. Management and the auditor also reported effective internal control over financial reporting; however, controls at all 2017 acquisitions, representing 9.9% of year-end assets and 3.1% of annual revenue, were not assessed.