Filing summary
Issuer identity: The supplied filing is j2 Global Communications, Inc.’s Form 10-Q, not a Ziff Davis, Inc. filing. It covers the quarter and nine months ended September 30, 2010; financial figures below are in millions of dollars unless stated otherwise.
Business context and reporting period
j2 Global provides outsourced Internet-based fax, voice, email and call-handling services, principally through eFax, eFax Corporate, Onebox, eVoice and Electric Mail. It reported one operating segment. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $62.8 | $61.8 | $184.4 | $184.7 |
| Gross profit | $52.0 | $50.5 | $153.0 | $150.4 |
| Operating earnings | $27.2 | $26.7 | $77.6 | $80.7 |
| Net earnings | $19.8 | $19.3 | $56.2 | $49.1 |
| Diluted EPS | $0.43 | $0.43 | $1.23 | $1.09 |
| Gross margin | 82.9% | 81.8% | 83.0% | 81.5% |
| Operating margin | 43.4% | 43.1% | 42.1% | 43.7% |
- Revenue drivers: Q3 subscriber revenue rose 1.7%; nine-month subscriber revenue was nearly unchanged. Paying telephone numbers increased to 1.411 million from 1.274 million year over year, while average monthly revenue per paying number declined to $14.21 from $15.03 in Q3.
- Cash flow: Nine-month operating cash flow was $74.2, down from $78.0. Investing cash use was $57.0, including acquisitions and purchases of investments; financing cash use was $1.6. Cash and cash equivalents increased to $212.7 from $197.4 at year-end 2009.
- Liquidity and debt: Cash and investments totaled $272.3 at September 30, 2010, versus $243.7 at December 31, 2009. The company reported no borrowings under its amended $40.0 revolving credit facility, available through August 16, 2013. The filing says existing cash, short-term investments and operating cash generation should cover anticipated needs for at least 12 months.
- Balance sheet: Total liabilities were $73.3 and stockholders’ equity was $400.7. The filing reports $36.1 of liabilities for uncertain tax positions. There was no reported funded debt balance.
Changes versus prior comparable periods
- Q3 revenue and net earnings increased modestly year over year; nine-month revenue edged down 0.2%, while net earnings rose 14.4%.
- Nine-month operating earnings declined 3.8%, in part as sales and marketing spending rose to $32.3 from $27.4. Management said marketing investment increased to support customer acquisition; lower cost of revenue, attributed to network efficiencies and reduced depreciation, supported gross margin.
- Q3 sales and marketing expense increased to $10.9 from $9.3. Nine-month general and administrative expense increased to $34.3 from $33.6.
- The 2009 nine-month comparison included a $9.2 other-than-temporary investment impairment; no such impairment was recorded in 2010. This was a material factor in the year-over-year net earnings comparison.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management described liquidity as sufficient for at least the next 12 months.
- Six businesses were acquired during the first nine months for aggregate consideration of $39.8 million, net of cash acquired and including assumed liabilities. They contributed $4.8 million of revenue for the nine months; earnings contributions were not separately identifiable. Goodwill increased to $113.1 from $81.3.
- Purchase accounting for Venali remained provisional, particularly regarding acquired tax net operating losses and customer-relationship valuation; final amounts could differ materially from current estimates.
- In October 2010, j2 Global acquired Irish online-backup provider keepITsafe for cash; the reported financial impact at acquisition was immaterial.
- Key risks include customer acquisition and retention, declining average revenue per paying number, competition, international expansion and currency exposure, technology and network reliability, regulation, acquisition integration, intellectual-property disputes, and tax estimates. Management noted that an unfavorable legal resolution could materially affect a particular period, although it had not accrued for the disclosed litigation because losses were not considered probable or reasonably estimable.
- The company held illiquid auction-rate securities valued at $2.7 million using Level 3 inputs. It stated that this illiquidity was not expected to affect normal operations. A 100-basis-point interest-rate decline was estimated to reduce annual interest income by approximately $2.7 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during Q3.
Important facts for investors to verify
- Confirm issuer identity: the filing is for j2 Global Communications, Inc., despite the request metadata naming Ziff Davis, Inc.
- Track paying telephone-number growth against the decline in average monthly revenue per paying number and the effect on subscriber revenue.
- Review acquisition integration, Venali purchase-accounting adjustments, and subsequent acquisition spending.
- Assess the $36.1 million uncertain-tax-position liability, ongoing tax audits and potential cash settlement timing.
- Monitor patent and other litigation outcomes, investment liquidity and valuation, and compliance with the credit facility’s covenants.