ZIFF DAVIS, INC. quarterly report, Q1 FY2014

Business context and reporting period

This is j2 Global, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014, compared with the first quarter of 2013. The request identifies Ziff Davis, Inc.; the filing registrant is j2 Global, Inc. Ziff Davis, LLC and subsidiaries are included in j2 Global’s consolidated results as its Digital Media segment and are designated an unrestricted subsidiary under the notes indenture.

j2 Global operates Business Cloud Services, including subscriptions and intellectual-property licensing, and Digital Media, including advertising and lead generation.

Financial results and liquidity

Revenue grew 18%; net income rose about 26%. Operating cash flow declined about 7%, mainly due to lower accounts payable and accrued expenses, partly offset by higher depreciation and amortization and lower receivables. Operating cash flow less capital expenditures was approximately $34.4 million, versus $38.1 million.

At March 31, cash and cash equivalents were $208.1 million, short-term investments $71.3 million, and long-term investments $35.7 million, totaling $315.1 million. Cash and investments were down from $345.9 million at year-end, primarily reflecting acquisitions, dividends and stock-related payments. Long-term debt had a carrying value of $245.8 million, representing 8% senior unsecured notes with $250 million principal due in 2020. The revolving credit facility was undrawn; the company reported compliance with debt covenants. The company said available liquidity and operating cash flow should cover anticipated needs for at least 12 months.

Material changes and segment performance

• Business Cloud Services: Revenue increased 11% to $100.8 million, primarily on subscriber-base growth. Segment operating income was $45.2 million, up 1%. Paying telephone numbers rose to 2.257 million from 2.155 million; ARPU was $12.67 versus $12.98 and cancel rate was 2.3% versus 2.4%.
• Digital Media: Revenue increased 46% to $33.4 million, largely reflecting acquisitions. Segment operating income improved to $4.7 million from a $4.0 million loss. Visits rose to 594 million from 377 million; page views to 2.021 billion from 1.249 billion.
• Six acquisitions, including Livedrive, contributed $4.5 million of Q1 revenue; their net income contribution was not separately identifiable due to integration. Total consideration was $70.6 million, including $18.9 million of assumed liabilities. Acquisition accounting remained provisional. Goodwill increased to $483.3 million.
• Amortization expense increased to approximately $10.0 million from $6.8 million, contributing to higher general and administrative expense.

Outlook, risks and unusual items

Management provided no quantified earnings or revenue guidance. Subject to a stable or improving economic environment and the stated risks, it expected Business Cloud Services revenue and profits to continue, and Digital Media revenue and profits to improve over the next several quarters as acquisitions are integrated. It anticipated overall improvement excluding future acquisitions and variable IP licensing revenue, but expected operating profit as a percentage of revenue generally to decline as lower-margin Digital Media grows faster and mobile and newer advertising formats pressure margins. Acquisition pace and IP licensing results may vary materially.

The effective tax rate was 22.2%, up from 19.5%, primarily due to state taxes and Subpart F income, partly offset by tax-credit valuation allowance and uncertain-tax-position changes. Uncertain tax-position liabilities totaled $44.2 million; audits could result in material tax expense or benefit, but the amount of any change was not estimable. The filing also describes patent, consumer, tax and other litigation; management did not accrue losses because unfavorable outcomes were not considered probable or reasonably estimable, while noting an adverse resolution could affect a particular period materially.

Other investor-relevant items: the board declared a subsequent quarterly dividend of $0.27 per share, payable June 3, 2014. The company acquired a Nordic online-backup provider on May 2, 2014. Cash and investments included $158.5 million held in foreign jurisdictions; repatriation could incur U.S. tax. Management cited acquisition integration, competition, cybersecurity and system reliability, international and currency exposure, advertising margin pressure, IP disputes, and tax liabilities among key risks. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

• Confirm the issuer identity: this filing is for j2 Global, Inc., not a standalone Ziff Davis, Inc. filing; review the Digital Media/Ziff Davis results and unrestricted-subsidiary disclosures.
• Assess the durability and organic component of growth, particularly acquisition-driven Digital Media revenue and the extent to which its operating improvement is sustainable.
• Track acquisition integration, provisional purchase accounting, goodwill and amortization, and the cash required for continued acquisitions.
• Review operating cash conversion, the causes of the year-over-year cash-flow decline, and liquidity after dividends, acquisitions and debt service.
• Monitor tax audits and the $44.2 million uncertain-tax-position liability, as well as litigation developments and potential outcomes not accrued.
• Check future margin trends, mobile-advertising mix, variable IP licensing results, and board decisions on future dividends.