ZIFF DAVIS, INC. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. The company changed its name from J2 Global, Inc. to Ziff Davis, Inc. in October 2021. Following the October 7 spin-off of its cloud fax business, results for that business are presented as discontinued operations for all periods.
Business context
Ziff Davis operates two continuing segments: Digital Media, which earns revenue mainly from advertising, subscriptions, performance marketing and licensing; and Cybersecurity and Martech, which primarily earns recurring subscription and usage fees. Digital Media is seasonal, typically stronger in Q4, while Cybersecurity and Martech revenue is generally more subscription-based and predictable.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1.417 billion | $1.159 billion |
| Gross profit / margin | $1.229 billion / 86.7% | $980.4 million / 84.6% |
| Operating income / margin | $167.3 million / 11.8% | $138.3 million / 11.9% |
| Net income from continuing operations | $401.4 million | $28.7 million |
| Net income from discontinued operations | $95.3 million | $122.0 million |
| Total net income | $496.7 million | $150.7 million |
| Net cash from operating activities | $516.5 million | $480.1 million |
| Capital expenditures | $113.7 million | $92.6 million |
| Cash, cash equivalents and investments | $1.047 billion | $274.6 million |
| Debt carrying value | $1.091 billion | $1.579 billion |
FY2021 continuing-operations net income included a $298.5 million unrealized gain on Ziff Davis’s retained 19.9% Consensus stake. The company reported a $14.2 million income tax benefit for continuing operations, including tax effects associated with that gain. Thus, reported earnings growth was substantially affected by a non-cash, market-valued investment gain; it should not be read as equivalent to growth in recurring operating earnings.
Segments and changes versus FY2020
- Digital Media: Revenue rose 31.7% to $1.068 billion; operating income increased 56.4% to $217.5 million. Growth reflected acquisitions and organic growth. Digital Media visits fell to 8.548 billion from 9.091 billion, and page views declined to 29.592 billion from 30.546 billion.
- Cybersecurity and Martech: Revenue was nearly flat at $348.2 million, up 0.2%; operating income fell 44.6% to $29.3 million. The segment recorded a $32.6 million goodwill impairment tied to the B2B Backup sale, and operating expenses also increased. Fixed subscription revenue was $332.0 million, while variable usage revenue declined to $16.2 million from $23.3 million.
- Cost structure: Gross margin improved to 86.7% from 84.6%. Sales and marketing expense increased 35% to $493.0 million, and research, development and engineering expense rose 38% to $78.9 million. General and administrative expense increased 9% to $456.8 million, though it declined as a share of revenue.
- Cash flow: Operating cash flow increased to $516.5 million. Investing activities provided $59.1 million, versus $586.2 million used in FY2020, largely reflecting the $259.1 million cash distribution related to the Consensus separation and lower acquisition spending. Financing activities used $113.1 million.
Debt, liquidity and capital allocation
Year-end cash and cash equivalents were $694.8 million, with $229.2 million of short-term investments and $122.6 million of long-term investments. The short-term investment was the retained Consensus stake. Debt principal totaled $1.191 billion, principally $550 million of 1.75% convertible notes due 2026 and $641.3 million of 4.625% senior notes due 2030. The $100 million revolving credit facility had no amounts drawn at year-end. Management said cash and expected operating cash flow should cover anticipated needs for at least the following 12 months.
During 2021, the company repurchased 445,711 shares for $47.7 million under its share repurchase program. It paid no dividends in 2021 or 2020; the board had suspended dividends after the June 2019 payment. In January 2022, it repurchased a further $54.6 million principal amount of senior notes and 554,289 shares for $58.7 million.
Spin-off, unusual items and contingencies
- The company distributed 80.1% of Consensus to shareholders and retained 19.9%. Consensus paid Ziff Davis approximately $259.1 million in cash; the retained shares were remeasured at fair value, producing the $298.5 million unrealized gain. The company exchanged Consensus notes with lenders to extinguish the $485 million bridge loan used in connection with the separation.
- In 2021, Ziff Davis sold its B2B Backup business, recording a $32.6 million goodwill impairment and a $24.6 million loss on sale, and sold certain UK Voice assets for a $2.8 million gain. The cloud fax business contributed $95.3 million of discontinued-operations income, after tax, for the year, including activity through the separation date.
- The company maintains a $24.0 million reserve for indirect-tax audits and assessments; it says additional liabilities could be incurred. It reported $42.5 million of liabilities for uncertain tax positions and ongoing tax audits, including an IRS dispute concerning 2012–2014 deductions.
- A derivative lawsuit concerning the related-party OCV investment was settled with court approval in January 2022. Under the settlement, no further capital calls or management fees are due. The fund manager and general partner are entities associated with the company’s chairman.
- The company’s financial statements received an unqualified audit opinion, but management and the auditor concluded internal control over financial reporting was ineffective at year-end due to a material weakness in accounting controls for the Consensus spin-off. Management stated there was no material misstatement in the presented statements and targeted remediation by December 31, 2022.
Outlook and principal risks
Management expected FY2022 revenue to be higher than FY2021, supported by prior acquisitions and organic growth, and expected operating profit margin to be generally consistent with FY2021. It also said acquisitions would remain important, while noting that acquisition pace and mix could vary and affect margins. The filing does not provide specific numeric revenue or earnings guidance.
Risks highlighted include reliance on short-term Digital Media advertising agreements and search traffic; intense competition and changing technology; privacy, data-security and health-data regulation; cybersecurity and billing-system disruptions; acquisition integration and impairment risks; macroeconomic uncertainty, inflation and pandemic-related effects; foreign-currency exposure; and debt-service, refinancing and convertible-note risks. The tax-free treatment of the Consensus separation depends on specified requirements and representations continuing to hold. Management also disclosed litigation and indemnification exposures related to the separation.
Investor verification priorities
- Separate recurring operating performance from the $298.5 million unrealized Consensus gain and review the retained stake’s subsequent value and disposition.
- Reconcile debt principal, carrying value, maturities and post-year-end senior-note repurchases; assess the effects of convertible-note terms and dilution.
- Track remediation and independent testing of the material weakness in spin-off accounting controls.
- Monitor Digital Media traffic and advertising trends, and the drivers of Cybersecurity and Martech’s lower operating income.
- Assess exposure to the $24.0 million indirect-tax reserve, income-tax audits and the conditions supporting tax-free treatment of the Consensus separation.
- Review cash generation and acquisition spending against management’s FY2022 outlook and margin expectations.