j2 Global, Inc. — Q3 2015 Form 10-Q Summary
Entity note: The supplied filing is for j2 Global, Inc., not Ziff Davis, Inc. It identifies Ziff Davis, LLC and subsidiaries as an unrestricted subsidiary of j2 Global. The filing covers the quarter and nine months ended September 30, 2015; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
j2 Global operates Business Cloud Services, including cloud communications, fax and voice services and intellectual-property licensing, and Digital Media, focused on technology and gaming audiences. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $178.7 million | $153.0 million | $516.0 million | $431.9 million |
| Gross profit | $148.0 million | $125.0 million | $427.6 million | $354.9 million |
| Operating income | $55.7 million | $46.5 million | $146.3 million | $132.9 million |
| Net income | $37.4 million | $28.8 million | $98.2 million | $92.6 million |
| Diluted EPS | $0.77 | $0.60 | $2.02 | $1.93 |
- Q3 revenue rose 17% and net income rose 30% year over year; nine-month revenue rose 19% and net income rose 6%.
- Calculated gross margin was approximately 82.8% in Q3 2015 versus 81.7% in Q3 2014; operating margin was 31.2% versus 30.4%. Nine-month gross margin was 82.9% versus 82.2%, while operating margin declined to 28.4% from 30.8%.
- By segment, Q3 Business Cloud Services revenue was $126.4 million and operating income $56.8 million; Digital Media revenue was $52.3 million and operating income $7.3 million. Digital Media operating income was essentially flat year over year despite revenue growth.
- Operating cash flow for the nine months was $148.6 million, compared with $132.1 million in 2014. Investing activities used $263.3 million, mainly for acquisitions; financing activities used $43.0 million, including $43.5 million of dividends paid. Capital expenditures were $11.9 million.
- Cash and cash equivalents were $272.4 million at September 30, down from $433.7 million at year-end 2014. Cash plus short- and long-term investments totaled $410.7 million, versus $590.4 million. Current assets were $499.7 million and current liabilities $165.4 million.
- Long-term debt carrying value was $599.2 million, with no current portion; principal obligations were $652.5 million. The debt comprised 8.0% senior notes due 2020 and 3.25% convertible notes due 2029. The company reported compliance with senior-note covenants.
- Total assets were $1.765 billion and stockholders’ equity was $872.0 million. Goodwill was $772.9 million. The nine-month effective tax rate was 14.3%, down from 17.6%.
Material changes versus the prior comparable period
- Growth reflected acquisitions and organic expansion in both segments. Eight acquisitions were completed in the first nine months, for total consideration of $265.6 million net of cash acquired and assumed liabilities; they contributed $20.1 million of revenue, while their net income contribution was not separately identifiable.
- Digital Media revenue grew 21% in Q3 and 28% for the nine months, while Business Cloud Services revenue grew 15% and 17%, respectively. Business Cloud Services growth was attributed primarily to acquisitions; Digital Media growth reflected organic growth and acquisitions.
- General and administrative expense rose 34% in Q3 and 47% for the nine months, mainly from acquired-intangible amortization, acquisition-related personnel costs, taxes and bad-debt expense. Nine-month interest expense increased to $31.5 million from $20.8 million, primarily following the 2014 convertible-note issuance.
- Acquisitions drove substantial investment cash outflows and increased goodwill and intangible assets. The company recorded $50.5 million of intangible-asset amortization for the first nine months, versus $32.2 million in 2014.
Outlook, risks, contingencies and unusual items
- Management provided no numerical earnings or revenue guidance. It expects Business Cloud Services revenue and profit to continue, excluding acquisitions, subject to economic and other risks; it expects Digital Media revenue and profit to improve over coming quarters as acquisitions are integrated. Management anticipates overall improvement excluding future acquisitions and volatile IP-licensing revenue.
- Management expects existing cash, short-term investments and operating cash generation to cover anticipated working capital, capital expenditure, repurchases and dividends for at least 12 months. It noted foreign-held cash may incur U.S. tax if repatriated and is generally intended for reinvestment abroad.
- Management highlighted risks involving acquisition integration and returns, customer retention and usage, advertising trends and lower-margin mobile formats, IP-licensing variability and litigation, competition, foreign exchange, cybersecurity and service reliability, regulation, and tax exposures.
- Several legal and indirect-tax matters remain pending or under review. Management did not accrue losses for the described legal proceedings because unfavorable outcomes were not considered probable, but said an adverse resolution could materially affect a particular period. Indirect-tax audits and assessments could also result in additional expense.
- IRS settlements closed the 2009–2011 federal income-tax examinations and reduced uncertain tax liabilities; other tax audits remain ongoing or were expected to begin. Uncertain-tax-position liabilities were $27.6 million at quarter-end, and management said audit outcomes could materially change tax expense.
- Acquisition accounting remained provisional for some 2015 purchases. Contingent consideration was recorded for Ookla and Salesify, with maximum potential payments of $40 million and $17 million, respectively; amounts and timing depend on future performance.
- Quarterly dividends paid rose from $0.2775 per share in Q3 2014 to $0.3075 in Q3 2015. After quarter-end, the board declared a $0.3150 dividend payable December 3, 2015, subject to the stated record date.
Important facts for investors to verify
- Confirm the intended issuer: this filing is j2 Global’s 10-Q, despite the request metadata naming Ziff Davis, Inc.
- Assess how much reported growth and margin change came from acquisitions versus organic performance, especially in Digital Media and Business Cloud Services.
- Review the sharp increase in G&A expense, acquired-intangible amortization, and remaining provisional purchase accounting and contingent consideration.
- Evaluate liquidity after acquisition spending, dividends and debt obligations, including the distinction between debt carrying value and contractual principal.
- Track tax audits, indirect-tax assessments and litigation outcomes, which could affect future cash flows or periodic results.
- Consider whether the expected Digital Media improvement can offset mobile-advertising margin pressure and whether the dividend remains sustainable.