Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a filing under the name Ziff Davis, Inc. The filing describes Ziff Davis, LLC as an unrestricted subsidiary within j2 Global’s consolidated reporting. j2 Global operates Business Cloud Services, including fax, voice, cloud services and IP licensing, and Digital Media.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $211.8 million | $176.0 million | $412.3 million | $337.3 million |
| Gross profit / margin | $176.2 million / 83.2% | $146.5 million / 83.2% | $342.4 million / 83.0% | $279.6 million / 82.9% |
| Operating income / margin | $58.9 million / 27.8% | $50.1 million / 28.4% | $112.3 million / 27.2% | $90.6 million / 26.9% |
| Net income | $33.8 million | $38.9 million | $63.7 million | $60.8 million |
| Diluted EPS | $0.69 | $0.80 | $1.30 | $1.25 |
- Q2 revenue grew 20%; first-half revenue grew 22%. Management attributed growth to acquisitions and organic expansion in both segments.
- Q2 net income fell 13% year over year despite higher revenue and operating income, principally alongside a sharp increase in income tax expense. First-half net income rose 5%.
- Q2 income tax expense was $15.1 million versus $0.2 million; effective tax rates were 30.9% and 0.5%, respectively. The filing attributes the higher 2016 rate to uncertain-tax-position changes and accruals and lower foreign tax credits.
- First-half operating cash flow was $132.1 million, versus $97.6 million. Investing used $22.3 million and financing used $49.2 million. Cash and cash equivalents increased to $313.8 million from $255.5 million at year-end.
- At June 30, cash and investments totaled $407.2 million. Reported long-term debt was $596.8 million; contractual debt principal was $652.5 million. Current assets were $493.5 million and current liabilities $185.2 million.
Material changes and segment trends
- Business Cloud Services revenue increased 14% in Q2 and 15% in the first half, to $142.5 million and $280.6 million. Segment operating income was nearly flat in Q2 at $52.5 million, and up 3% in the first half to $102.8 million. Acquired-business costs, amortization, taxes and bad debt weighed on profit growth.
- Digital Media revenue increased 36% in Q2 and 40% in the first half, to $69.4 million and $131.7 million. Segment operating income rose 16% in Q2 to $11.6 million and 37% in the first half to $19.3 million.
- Business Cloud Services average monthly revenue per customer rose to $15.26 from $14.15, while its Q2 cancel rate increased to 2.2% from 1.9%.
- Q2 sales and marketing expense rose 20% and general and administrative expense rose 26%; management cited acquisition-related costs, advertising and personnel, higher amortization, contingent consideration and bad debt.
Outlook, risks and unusual items
- Management expected Business Cloud Services revenue and profits to continue in a stable or improving economic environment, excluding acquisitions. It expected Digital Media revenue and profits to improve over coming quarters as acquisitions are integrated and online advertising expands; mobile and newer ad formats may pressure margins. Consolidated improvement expectations excluded future acquisitions and volatile IP-licensing revenue. No numerical earnings or revenue guidance was provided.
- Management said cash, cash equivalents, short-term investments and operating cash generation should meet anticipated working-capital, capital-expenditure, repurchase and dividend needs for at least 12 months. Future dividends remain subject to Board approval.
- Five 2016 acquisitions, including VaultLogix, CallStream, Publicaster and SMTP, had total consideration of $78.7 million and contributed $10.3 million of first-half revenue; acquired net income was not separately identifiable. Acquisition accounting remained provisional for some deals. Additional acquisitions in July occurred after quarter-end.
- Acquisition-related contingent consideration had a $15.4 million fair value at quarter-end. The company recorded a $2.8 million first-half increase in its value in general and administrative expense.
- Risks include acquisition integration and returns, customer retention and payment declines, competition, advertising mix and margins, IP-licensing variability, foreign exchange, debt covenants, cybersecurity and system reliability, and tax and regulatory uncertainty. The filing notes ongoing litigation and indirect-tax audits; management did not consider losses on the described legal matters probable, but adverse outcomes or tax liabilities could materially affect a particular period. Uncertain income tax positions totaled $40.4 million, and audit outcomes could change the recorded liability.
- Foreign-currency translation reduced other comprehensive income by $12.7 million in Q2. The company reported no material off-balance-sheet arrangements and stated that it was in compliance with Senior Notes covenants.
Key facts for investors to verify
- Confirm the issuer and reporting entity: the supplied filing is for j2 Global, Inc., although the request names Ziff Davis, Inc.
- Assess whether acquisition-driven revenue growth translates into durable organic growth and improving segment operating income, particularly in Business Cloud Services.
- Reconcile the Q2 tax-rate jump and track uncertain tax positions, tax audits and potential indirect-tax exposure.
- Review debt maturities, cash and investments, covenant headroom, and the sustainability of dividends and planned acquisition spending.
- Monitor customer cancel rates, advertising economics and mobile-format margin pressure, as well as acquisition integration and contingent consideration.