Filing summary
Issuer and period: The supplied filing is j2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, not a filing by Ziff Davis, Inc. j2 Global acquired Ziff Davis on November 9, 2012; Ziff Davis became its Digital Media segment. The filing also reports unaudited fourth-quarter results.
Business context and reporting period
j2 Global generated revenue primarily from subscriptions and usage fees for business cloud services, alongside advertising, lead-generation and licensing revenue from digital media and intellectual property. Its Business Cloud Services segment included online fax, voice, email, backup and CRM products. The Ziff Davis acquisition added technology-focused media properties; j2 Global subsequently acquired IGN Entertainment on February 1, 2013.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $371.4 million | $330.2 million | 12.5% |
| Gross profit / margin | $304.4 million / 82.0% | $269.5 million / 81.6% | Gross profit +12.9% |
| Operating income / margin | $162.2 million / 43.7% | $136.0 million / 41.2% | +19.3% |
| Net income attributable to common shareholders | $121.6 million | $114.8 million | +5.9% |
| Diluted EPS | $2.61 | $2.43 | +7.4% |
| Cash from operating activities | $169.9 million | $150.7 million | +12.7% |
Revenue growth reflected subscriber-base gains, acquisitions and higher patent and technology licensing revenue. Business Cloud Services revenue rose 9.5% to $361.7 million; Digital Media contributed $9.7 million after its acquisition. Digital Media generated $2.9 million of segment operating income during the reported period. Fourth-quarter revenue was $102.0 million and common-shareholder net income was $30.2 million.
Operating cash flow exceeded reported capital expenditures of $5.1 million; this simple difference is approximately $164.9 million and does not account for acquisitions or other investing needs. Investing activities used $249.5 million, primarily for acquisitions and investments. Financing activities provided $158.4 million, including debt proceeds, partly offset by repurchases and dividends.
At year-end, cash and cash equivalents were $218.7 million, short-term investments $105.1 million and long-term investments $19.8 million. Working capital was $298.6 million. The company reported $250 million principal amount of 8.0% senior notes due 2020, carried at $245.2 million after discount, and an unused $40 million revolving facility. Cash and investments exceeded the notes’ principal by about $93.6 million, before considering restrictions, obligations or the location of funds. Short-term investments included $34.9 million of restricted balances; $160.5 million of cash and investments were held abroad.
Dividends declared totaled $0.87 per share in 2012; a $0.2325 quarterly dividend was approved in February 2013. j2 Global repurchased 2.1 million shares for $58.6 million under its 2012 program. Total assets were $995.2 million and stockholders’ equity $594.6 million at year-end.
Material changes versus prior period
- Revenue increased 12.5%, while operating margin improved to 43.7% from 41.2%; net margin declined to 32.8% from 34.8%.
- Interest expense rose to $9.0 million from $0.1 million, principally due to the July 2012 notes issuance. The effective tax rate increased to 21.5% from 16.3%, contributing to slower net-income growth than operating-income growth.
- The November Ziff Davis acquisition added a Digital Media segment, $9.7 million of 2012 revenue, and $112.9 million of goodwill. The acquisition accounting remained provisional. Five other 2012 acquisitions contributed $16.9 million of revenue.
- Cash and investments rose from $220.9 million to $343.6 million, mainly due to debt issuance and operating cash generation, partly offset by acquisitions, repurchases and dividends.
- The 2011 comparison includes a $10.3 million non-cash revenue reduction from a change in estimate for remaining service obligations to annual eFax subscribers. This reduced 2011 net income by about $7.6 million after tax.
Outlook, risks and unusual items
Management gave no specific revenue or earnings guidance. It stated that existing cash, cash equivalents, short-term investments and operating cash generation were expected to cover anticipated working capital, capital expenditures, investment needs, repurchases and dividends for at least the next 12 months. Future dividends remain subject to board approval and debt-agreement restrictions.
- Key business risks include dependence on fax-related revenue, subscriber retention and usage, competition, advertising-market volatility, reliance on credit-card billing and third-party telecommunications providers, and cybersecurity or service disruptions.
- Debt covenants restrict certain borrowing, acquisitions, asset sales, dividends and repurchases; the company reported covenant compliance at year-end. Debt service and refinancing capacity depend partly on future cash generation.
- Tax audits and uncertain tax positions create potential variability: the reported liability for uncertain income tax positions was $37.7 million, and management said the timing and amount of possible settlements were uncertain. Repatriating foreign funds could trigger additional U.S. tax.
- Numerous patent and other legal proceedings were pending. Management did not consider an adverse outcome likely to materially affect consolidated results overall, but said an unfavorable resolution could materially affect a particular period; certain losses were not accrued because they were not considered probable or estimable.
- The Ziff Davis Series A preferred instrument is mandatorily redeemable in 2017 and carries a 15% cumulative dividend. Its reported carrying amount was $8.7 million; the contractual obligations table lists $8.6 million for redemption and $6.6 million for dividends. Investors should review the terms and presentation in the notes.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2012.
Most important facts to verify
- Confirm issuer identity: this is j2 Global’s 10-K, with Ziff Davis as an acquired subsidiary—not a standalone Ziff Davis 10-K.
- Review the final purchase accounting for Ziff Davis and the subsequent IGN acquisition, including goodwill, financing and expected contribution.
- Assess the sustainability of cloud subscriber growth, churn, usage and average revenue per subscriber, alongside Digital Media advertising performance.
- Check debt covenant headroom, 8.0% note servicing, revolving-facility renewal and restrictions on dividends and repurchases.
- Track tax-audit outcomes, foreign cash repatriation exposure, and material developments in patent litigation and the Series A redemption obligation.