Business context and reporting period
This filing is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014—not a standalone Ziff Davis filing. Ziff Davis, LLC and subsidiaries are included within j2 Global’s consolidated results and were designated unrestricted subsidiaries under the senior-notes indenture. j2 Global operates Business Cloud Services and Digital Media. On June 10, 2014, it completed a holding-company reorganization.
Financial results and liquidity
Amounts below are in millions except per-share data. Quarter comparisons are versus Q2 2013; six-month comparisons are versus the six months ended June 30, 2013.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $144.7 | $141.4 | $278.9 | $255.0 |
| Gross profit / margin | $119.2 / 82.3% | $118.7 / 83.9% | $229.9 / 82.4% | $212.1 / 83.2% |
| Operating income / margin | $44.8 / 31.0% | $52.6 / 37.2% | $86.4 / 31.0% | $85.6 / 33.6% |
| Net income attributable to j2 Global common shareholders | $35.0 | $36.0 | $63.8 | $59.0 |
| Diluted EPS | $0.73 | $0.77 | $1.33 | $1.26 |
- Q2 revenue rose 2%, while operating income fell 15% and diluted EPS declined. For the six months, revenue increased 9%, operating income was up about 1%, and diluted EPS increased.
- Q2 Business Cloud Services revenue fell 2.1% to $106.5 million; Digital Media revenue rose 16.8% to $38.3 million. Six-month segment revenue increased 3.9% and 28.7%, respectively. Digital Media returned to operating profitability: $5.6 million in Q2 and $10.2 million for the six months.
- Cash provided by operations was $91.8 million for the six months, down from $109.0 million. Investing activities used $66.1 million, including acquisitions; capital expenditures were $4.6 million.
- Cash and investments totaled $708.5 million at June 30 ($591.9 million cash and equivalents, $61.7 million short-term investments, and $54.9 million long-term investments), versus $345.9 million at year-end 2013. Management said available cash, short-term investments and operating cash flow should cover anticipated needs for at least 12 months.
- Long-term debt carrying value was $589.6 million, versus $245.7 million at year-end; principal outstanding was $652.5 million. The June issuance of $402.5 million of 3.25% convertible senior notes generated $391.4 million net proceeds. Existing senior notes carry an 8% coupon and mature in 2020; convertible notes mature in 2029, with specified holder repurchase dates in 2021 and 2024. j2 Cloud Services had not drawn on its revolving credit facility.
- Current assets were $761.5 million and current liabilities $130.2 million. The company paid $25.3 million in dividends during the first half; the board approved a subsequent quarterly dividend of $0.2775 per share.
Material changes, outlook and risks
- Growth included acquisitions and organic Digital Media expansion. Eight acquisitions were completed in the first half; they contributed $14.9 million of revenue, while their net income contribution was not separately identifiable. Purchase accounting remained provisional.
- Business Cloud Services’ Q2 operating income declined 23.1% to $46.4 million, reflecting lower IP licensing revenue and higher acquisition-related amortization, personnel costs, marketing, taxes and professional fees. The prior-year comparison included a $27 million patent license, of which about $12.6 million was attributed to past damages.
- Management expected relatively stable Business Cloud Services revenue, improving Digital Media revenue and profits as acquisitions are integrated, and overall improvement excluding future acquisitions and variable IP licensing. It anticipated consolidated operating margins could generally decline as lower-margin Digital Media grows faster and mobile and newer advertising formats pressure margins. No specific numerical earnings or revenue guidance was provided.
- Management identified acquisition integration, competition, customer retention and usage, international expansion and currency exposure, technology and security risks, IP litigation, and regulatory and tax uncertainty as key risks. It cautioned that results are not necessarily indicative of future periods.
- The company reported $42.7 million of uncertain income-tax-position liabilities and multiple ongoing tax audits. It had not accrued for the disclosed litigation or indirect-tax matters because losses were not considered probable or reasonably estimable; management said an unfavorable outcome could nevertheless materially affect a particular period. The Washington internet-tax moratorium was scheduled to expire in November 2014.
- The new convertible notes introduce potential cash settlement and repurchase obligations, dilution upon conversion, and possible working-capital effects if conversion conditions are triggered. The filing also notes that subsidiary restrictions and covenants may constrain cash distributions to the holding company. The company reported compliance with senior-note covenants and effective disclosure controls.
Important facts for investors to verify
- Confirm the filing entity: the provided 10-Q is for j2 Global, Inc.; assess Ziff Davis results within the consolidated and unrestricted-subsidiary disclosures rather than treating them as a separate registrant.
- Review the quality and sustainability of earnings growth, including acquisition contributions, the prior-period patent-license comparison, and Digital Media’s improving segment results.
- Track acquisition integration, provisional purchase accounting, amortization expense and cash deployed for acquisitions.
- Assess debt service and potential cash needs under the convertible-note conversion, repurchase and change-of-control provisions, along with subsidiary dividend restrictions.
- Monitor tax audits, indirect-tax exposure, patent and consumer litigation, and any changes to reserves or management’s assessments.