Daily Journal Corporation — Q1 FY2015 Form 10-Q
Business context and reporting period. The quarter ended December 31, 2014. Daily Journal operates a Traditional Business (newspapers, publications and public-notice advertising) and Journal Technologies, which provides case-management software and related services to courts and other justice agencies. Journal Technologies combined Sustain, New Dawn and ISD under its name effective October 1, 2014. All comparisons below are with the three months ended December 31, 2013 unless otherwise noted.
Financial results and position
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Revenue | $11.323 million | $9.951 million |
| Operating income (loss) | $(0.361) million | $(1.269) million |
| Income (loss) before taxes | $0.408 million | $(0.650) million |
| Net income (loss) | $0.433 million; $0.31 per share | $(0.640) million; $(0.46) per share |
| Operating cash flow | $0.252 million | $(1.131) million |
- Revenue rose 14%; expenses increased 4%. The operating loss narrowed to 3.2% of revenue from 12.8% in the prior-year quarter. Net margin was 3.8%, versus a 6.4% loss margin.
- Journal Technologies revenue grew 31% to $6.410 million, about 57% of consolidated revenue, and its pretax loss narrowed to $0.657 million from $1.937 million. Traditional Business revenue fell 3% to $4.913 million; pretax income declined 17% to $1.065 million.
- Cash and cash equivalents were $8.660 million at December 31, down from $15.410 million at September 30, 2014. Marketable securities were $174.338 million, making cash plus securities $182.998 million. Working capital was $124.889 million.
- Investment margin borrowings were $29.493 million, unchanged from September 30. They are collateralized by marketable securities, bear a floating rate (0.75% at quarter-end), and have no stated maturity. Interest expense was $57,000.
- Available-for-sale investments had $119.421 million of pretax unrealized gains at quarter-end, mostly in common stocks of three U.S. financial institutions. The portfolio was concentrated in seven companies. A $3.642 million after-tax decline in unrealized appreciation drove comprehensive loss of $3.209 million, despite net income.
Material changes, outlook and risks
- Higher Journal Technologies licensing and maintenance revenue (+$749,000) and consulting revenue (+$775,000) were the principal revenue drivers. Consulting revenue is generally recognized upon customer acceptance; timing of installation-project acceptance can affect reported revenue.
- Management expects fewer foreclosure notices and declining public-notice advertising revenue to continue in FY2015, with a significant decline in print-based earnings; it does not expect commercial advertising to offset the decline. Foreclosure notices published fell 27% year over year.
- Management believes operating cash flows and working capital can fund operations for the foreseeable future. It may pursue acquisitions, reduce margin borrowings or make further investments; no quantified earnings or revenue guidance was provided.
- Risks include potential legal changes affecting required public notices, loss of a newspaper’s adjudicated status, declining foreclosure and commercial advertising, software development and implementation execution, and reliance on professional-services projects with justice agencies. Market-value declines in the concentrated securities portfolio could materially reduce equity and, in some circumstances, result in impairment losses.
- The company reported a $3.182 million liability for uncertain tax benefits relating to a fiscal 2013 acquisition and did not expect a significant change over the next 12 months. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows.
- Disclosure controls were not effective at December 31, 2014 because material weaknesses in internal control over financial reporting remained. Management reported no material changes to internal controls during the quarter. The filing also identifies prior late filings and a prior-quarter restatement as risk factors.
- No material change in market-risk exposures or risk factors from the FY2014 Form 10-K was reported. The quarter’s results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether Journal Technologies can sustain revenue growth and improve profitability, given its continuing operating loss and customer-acceptance-based project revenue.
- The pace and financial impact of declining foreclosure notices and other public-notice advertising, including any legal changes affecting publication requirements.
- Portfolio concentration, market values and the collateral implications of the $29.493 million margin borrowing.
- Progress remediating the material weaknesses in disclosure and financial-reporting controls, and the status of the uncertain tax-benefit liability.