Business context and reporting period
Filing identity: The supplied filing is j2 Global, Inc.’s Form 10-K, not a Ziff Davis, Inc. filing. It covers the fiscal year ended December 31, 2011; quarterly figures below are unaudited.
j2 Global provides cloud services for businesses, including online fax, virtual phone, hosted email, email marketing, backup and CRM. It reported one operating segment and approximately 2.0 million paying subscribers at year-end. DID-based services generated most revenue; the company identified paying telephone numbers as a key operating metric.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $330.2 million | $255.4 million |
| Gross profit / margin | $269.5 million / 81.6% | $211.3 million / 82.7% |
| Operating earnings / margin | $136.0 million / 41.2% | $103.9 million / 40.7% |
| Net earnings / diluted EPS | $114.8 million / $2.43 | $83.0 million / $1.81 |
| Cash from operations | $150.7 million | $96.4 million |
| Cash and investments | $220.9 million | $87.0 million |
| Working capital | $155.1 million | $57.6 million |
Revenue increased 29% and net earnings 38% year over year. Subscriber revenue rose 30% to $328.0 million, while other revenue fell 24% to $2.2 million. Fixed subscription revenue was 81.3% of subscriber revenue. Gross margin declined about 1.1 percentage points, while operating margin improved about 0.5 points.
Fourth-quarter revenue was $85.1 million and net earnings were $29.8 million, compared with $71.0 million and $26.9 million, respectively, in fourth-quarter 2010. Full-year investing cash outflow was $76.2 million, mainly for investments; financing cash flow was $0.3 million, including $19.2 million of dividends paid.
Year-end cash and cash equivalents were $139.4 million, with short- and long-term investments of $38.5 million and $43.1 million. Total liabilities were $96.8 million. The company had no borrowings under its $40 million revolving credit facility, which matures in 2013. It held $91.8 million of cash and investments overseas and said repatriation could incur tax.
Material changes versus the prior comparable period
- Paying telephone numbers increased to 2.003 million from 1.905 million. DID-based revenue reached $307.1 million, up from $242.0 million.
- 2011 subscriber revenue includes a one-time, non-cash $10.3 million reduction from a revised estimate of remaining service obligations for annual eFax subscribers; the filing says this reduced net income by approximately $7.6 million and diluted EPS by $0.16.
- Operating cash flow increased to $150.7 million from $96.4 million. Cash and investments rose to $220.9 million, from $87.0 million.
- Income tax expense fell to $22.4 million from $27.6 million; the effective tax rate declined to 16.3% from 24.9%, including releases of uncertain tax positions and a greater share of earnings in lower-tax foreign jurisdictions.
- Cost of revenue rose 37%, and sales and marketing rose 27%, reflecting acquired businesses, higher network/customer-service costs and increased marketing. Other revenue decreased, principally due to reduced advertising to free customers.
Outlook, commentary, risks and unusual items
Management expected existing cash, short-term investments and operating cash flows to cover working capital, capital expenditures and investment needs for at least 12 months. The filing provides no numerical revenue or earnings guidance. Management noted the business traditionally sees lower-than-average usage and sign-ups in the fourth quarter.
The company initiated quarterly dividends in 2011; it paid $0.20 and $0.205 per share during the year and announced a $0.21 dividend for March 2012. Future dividends require board approval and are subject to credit-agreement restrictions. A new authorization for repurchases of up to five million shares through February 2013 was adopted in February 2012.
Notable risks include dependence on fax and DID-based services, subscriber retention and acquisition economics, intense competition, credit-card declines and fraud, cybersecurity or service interruptions, telecommunications carrier availability and pricing, changing regulation and privacy laws, foreign currency and tax exposure, and acquisition integration. Patent litigation is active on both sides; management said outcomes were not expected to materially affect consolidated results overall, but adverse resolution could affect an individual period. The company had $30.1 million of uncertain tax-position liabilities and ongoing federal, state and Canadian tax examinations.
Three acquisitions closed in 2012 after year-end; their reported financial impact was described as immaterial as of each acquisition date. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for j2 Global, Inc., despite the request metadata naming Ziff Davis, Inc.
- Review the $10.3 million eFax revenue estimate adjustment and its effect on reported growth and earnings.
- Track paying DIDs, subscriber retention, usage, revenue per subscriber and the mix of DID-based revenue.
- Assess cash availability and potential tax costs on overseas funds, along with the $30.1 million uncertain-tax-position liability and audit developments.
- Monitor patent litigation, acquisition integration, and the credit agreement’s restrictions on dividends and repurchases.