Business context and reporting period
This is j2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 2, 2015. Although the request identifies Ziff Davis, Inc., the registrant named in the filing is j2 Global, Inc.; Ziff Davis is part of its Digital Media business. j2 Global operates two segments: Business Cloud Services, including subscriptions, usage fees and IP licensing, and Digital Media, including advertising, performance marketing and licensing.
Results reflect extensive acquisition activity. The company completed multiple acquisitions in 2014, which contributed $51.9 million of reported revenue after their respective acquisition dates. Digital Media properties recorded 2.6 billion visits and 8.0 billion page views during 2014.
Financial performance and position
Amounts below are in millions of dollars except per-share data and where otherwise noted.
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $599.0 | $520.8 | +15% |
| Gross profit / margin | $493.0 / 82% | $433.9 / 83% | Margin down about 1 point |
| Operating income / margin | $186.2 / 31% | $175.4 / 34% | +6%; margin down about 3 points |
| Net income | $125.3 | $107.5 | +17% |
| Net income attributable to common shareholders | $124.3 | $107.5 | +16% |
| Diluted EPS | $2.58 | $2.28 | +13% |
| Cash from operating activities | $177.2 | $193.3 | Down $16.1 |
Net interest expense increased to $31.2 million from $21.3 million, principally following the June 2014 convertible-note issuance. The 2013 period included $11.5 million of other expense, largely from a $12.9 million debt-extinguishment expense related to the Ziff Davis reorganization; 2014 other income was $0.2 million.
- Business Cloud Services: Revenue was $431.5 million, up 10.6%. Segment operating income fell 4.6% to $189.9 million, and operating margin declined to 44% from 51%. Growth in subscriptions and non-DID services was partly offset by lower IP licensing revenue, acquisition-related costs and lower initial profitability of acquired businesses. Fixed subscriber revenue was $348.3 million; variable revenue was $76.4 million. Reported monthly ARPU was $14.23 versus $13.85, while cancel rate was 2.1% in both years.
- Digital Media: Revenue was $167.8 million, up 28.0%; segment operating income rose to $30.5 million from $6.7 million. The filing attributes growth mainly to acquisitions, with integration and scale also contributing to improved profitability.
- Liquidity: Cash and cash equivalents were $433.7 million; short- and long-term investments were $96.2 million and $60.5 million. Total cash and investments were $590.4 million, versus $345.9 million at year-end 2013. Working capital was $486.8 million, compared with $274.1 million.
- Debt: Carrying value of long-term debt was $593.4 million, versus $245.7 million in 2013. This included $250 million principal of 8.0% Senior Notes due 2020 and $402.5 million principal of 3.25% Convertible Notes due 2029. The filing reports total debt principal of $652.5 million; no principal payments were scheduled before 2020. The Senior Notes indenture includes restrictive covenants; the company reported compliance at year-end.
Fourth-quarter results
For the three months ended December 31, 2014, revenue was $167.1 million versus $138.0 million in Q4 2013, gross profit was $138.1 million versus $115.9 million, and net income was $32.8 million versus $20.8 million. Diluted EPS was $0.66 versus $0.44. The filing notes that Digital Media is seasonally stronger in Q4, while Business Cloud Services typically has seasonal weakness.
Material changes, outlook and risks
- Acquisition spending was substantial: 2014 business acquisitions used $245.3 million of net cash, and reported consideration for 2014 acquisitions was $300.2 million, subject to adjustments. Goodwill increased to $635.7 million from $457.4 million. No goodwill or intangible-asset impairment was recorded.
- Management expects Business Cloud Services revenue and profits to remain generally stable, excluding acquisitions, and expects Digital Media revenue and profits to increase as acquisitions are integrated and online advertising grows. Management anticipated overall revenue and profits to increase, excluding acquisitions and volatile IP licensing. It also expected mobile and newer ad formats to pressure Digital Media margins. These are qualitative expectations, not quantified guidance.
- Management said existing cash, short-term investments and operating cash generation should cover anticipated working capital, capital expenditures, investments, repurchases and dividends for at least 12 months. The company paid $1.10 per share in 2014 dividends and approved a $0.2925 quarterly dividend in February 2015, subject to future Board approval.
- Cash from operations declined, which management primarily attributed to higher Digital Media billings and that segment’s longer collection cycle. Investing cash outflow was $275.5 million, primarily reflecting acquisitions and investment purchases; financing cash inflow was $327.5 million, largely due to the convertible-note issuance.
- Key stated risks include dependence on fax services and paid-subscriber retention, advertising-market volatility, intense competition, integration and execution risks from acquisitions, cybersecurity and service interruptions, regulatory and privacy changes, foreign exchange exposure, and patent disputes. The company reported a $37.6 million liability for uncertain tax positions and ongoing income-tax audits. It had no reserve for indirect-tax matters, which management said were not then probable and estimable, but a future liability could materially affect results.
- Numerous patent, tax, TCPA and customer-fee matters remained pending. Management did not consider an unfavorable outcome probable and recorded no litigation loss accrual; it cautioned that resolution could materially affect a particular period. The 2014 Carbonite tender offer, announced in December at $15 per share, was effectively rescinded on March 2, 2015, and the company entered a confidentiality agreement with Carbonite.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting, and management and the auditor concluded internal controls were effective as of year-end.
Important facts for investors to verify
- Confirm the entity and period: this filing is for j2 Global, Inc. for FY 2014, not a standalone Ziff Davis, Inc. 10-K.
- Assess whether acquisition-driven growth and Digital Media operating-income improvement are sustainable, and track integration costs, goodwill and future acquisition cash needs.
- Review the decline in Business Cloud Services operating margin and the role of IP licensing volatility, subscriber retention, ARPU and usage trends.
- Reconcile debt principal, carrying value, interest costs and maturity/repurchase terms against available liquidity, including the convertible notes’ potential cash settlement and dilution.
- Monitor operating cash flow, Digital Media collections, indirect-tax exposure, tax audits and the outcome of material litigation.
- Check subsequent filings for developments on the Carbonite offer, dividends, acquisitions and management’s outlook.