Daily Journal Corporation — Q2 FY2023 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2023; comparisons are to the periods ended March 31, 2022. The company operates a Traditional newspaper and public-notice business and Journal Technologies, a justice-system software business.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $16.2 million, up 48% | $28.5 million, up 25% |
| Operating income | $1.6 million, versus $0.4 million | $0.9 million, versus $0.4 million |
| Net income (loss) | $9.4 million ($6.85/share), versus a loss of $27.8 million | $27.3 million ($19.80/share), versus a loss of $20.9 million |
| Operating cash flow | Not presented for the quarter | $1.7 million, versus cash use of $13.1 million |
- For the six-month period, operating margin was approximately 3.2% (operating income divided by revenue). Results include substantial investment gains: $32.7 million of unrealized gains on marketable securities, compared with $44.4 million of unrealized losses in the prior-year period. Net income therefore reflects market-price changes, not just operating performance.
- Journal Technologies revenue rose 38% to $20.6 million for six months, led by consulting fees up $4.3 million as more projects reached client sign-off (“go-live”). It represented about 72% of company revenue. Its six-month operating loss narrowed to $0.7 million from $2.2 million; it reported $0.9 million of operating income in the second quarter.
- Traditional Business revenue increased 2% to $7.9 million for six months, while operating income fell to $1.6 million from $2.6 million. Management cited a smaller reduction in the supplemental compensation accrual compared with last year. Trustee-sale notices increased as foreclosure moratoriums were lifted.
- Cash, cash equivalents and restricted cash totaled $15.9 million at March 31. Six-month working capital was $318.2 million. Marketable securities were $318.8 million, with $153.4 million of pretax unrealized gains; most were concentrated in three U.S. financial institutions and one foreign manufacturer.
- Investment margin borrowings were $81.0 million, collateralized by marketable securities, at a variable 5.25% rate at March 31; the balance does not mature. The real-estate loan was approximately $1.35 million at a fixed 3.33%. Margin-loan interest expense increased materially year over year.
Changes, outlook and risks
- Revenue growth was chiefly in Journal Technologies: six-month consulting revenue increased 178%, and licensing and maintenance revenue increased 11%. Its expenses also rose 24%, reflecting higher personnel costs, hosting fees, software purchases and travel. Consolidated salaries and benefits increased 13%, which management attributed primarily to inflation-related compensation adjustments.
- Six-month operating cash flow improved from the prior-year period, but marketable-security purchases used $10.0 million and financing included $6.0 million of additional margin borrowing. The company received approximately $3.0 million in stock dividends.
- No quantified earnings or revenue guidance was provided. Management said it believes current working capital and operating cash flows can fund operations for the foreseeable future, but noted it may need to sell securities or borrow against them. A significant portfolio decline could trigger margin calls or reduce borrowing capacity.
- Management expects the newspaper industry’s decline and reduced office-based readership to continue. Journal Technologies faces government procurement delays and implementation or training delays; consulting revenue is generally recognized at project go-live, making timing significant. Software development and implementation, customer dependence on government agencies, public-notice law changes, cybersecurity, securities-price declines and rising costs are identified risks.
- Management said the company’s disclosure controls and procedures were not effective as of March 31, 2023 because of material weaknesses previously reported in its FY2022 10-K. No material changes to internal control over financial reporting were reported during the quarter.
- Ordinary-course contingencies, including litigation, were disclosed; management did not expect them to have a material adverse effect. The filing reported no subsequent events requiring recognition or disclosure.
Key investor verification points
- How much reported earnings and equity changes depend on unrealized portfolio gains, and how the concentrated securities portfolio performs.
- Whether Journal Technologies can sustain project go-lives, convert deferred consulting fees into revenue, and improve segment profitability as costs rise.
- The margin-loan collateral terms, potential margin-call exposure, and sensitivity of borrowing costs to interest rates and portfolio values.
- Progress remediating the disclosed material weaknesses and restoring effective disclosure controls.
- Whether newspaper and public-notice trends, government procurement timing, and implementation delays affect future revenue and cash generation.