Daily Journal Corporation — Form 10-Q summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022; comparison is the three months ended December 31, 2021. Amounts are in U.S. dollars. Daily Journal operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and services, primarily to justice agencies.
Financial performance and liquidity
- Revenue: $12.301 million, up 5% from $11.736 million. Journal Technologies contributed $8.514 million, up 7%; Traditional Business contributed $3.787 million, approximately flat.
- Operating results: Expenses rose 11% to $13.017 million, and the operating result shifted to a $716,000 loss from $56,000 of operating income. The operating margin was approximately negative 5.8%, versus positive 0.5%.
- Segment results: Traditional Business operating income was $935,000, compared with $506,000. Journal Technologies’ operating loss widened to $1.651 million from $450,000, as its 7% revenue growth was outweighed by a 21% increase in operating expenses.
- Net income: $17.827 million, or $12.95 per share, compared with $6.878 million, or $4.98 per share. The increase primarily reflects the swing to $24.025 million of unrealized investment gains from $36.088 million of unrealized losses in the prior-year quarter. This is not equivalent to improved operating profitability.
- Cash flow: Operating cash flow was $2.398 million, versus $325,000. Investing activities used $7.211 million, including $10.001 million of marketable-security purchases; financing activities provided $5.988 million, mainly from additional margin borrowing of $6.011 million. Cash and restricted cash totaled $16.643 million at quarter-end.
- Investments: Marketable securities had a fair value of $307.151 million, adjusted cost basis of $162.434 million, and pretax unrealized gains of $144.717 million. Most accumulated gains were in shares of three U.S. financial institutions and one foreign manufacturer. Securities are classified as current assets and are available for sale.
- Liquidity and debt: Working capital was $305.380 million. Margin-account borrowings were $81.011 million, at a 5% variable rate at quarter-end, secured by marketable securities and without stated maturities. The real-estate loan balance was approximately $1.4 million. Management believes current working capital and operating cash flows can fund foreseeable operations.
- Margins and taxes: Gross margin is not separately reported. The effective tax rate was 25.49%, compared with 39.87%; the quarter’s tax provision included tax on unrealized investment gains.
Material changes and management commentary
- Revenue increased by $565,000, mainly from Journal Technologies consulting fees and public-service fees. Traditional Business revenue was nearly unchanged.
- Employee-benefit expense rose $1.154 million, which management attributed primarily to larger salary adjustments amid inflation in the compensation market. Other expense increases included hosting, software, maintenance, newsprint, and travel.
- Journal Technologies consulting revenue increased with more project go-lives, but management said project implementation and training can be delayed, and consulting fees are generally recognized upon go-live. Software development and upgrade costs are expensed as incurred.
- Traditional Business public-notice revenue remains sensitive to legal requirements and foreclosure activity. Published trustee-sale notices increased 44% year over year; management noted the effect of lifted COVID-related foreclosure moratoriums.
- The filing provides no specific quantitative earnings or revenue guidance. Management says it hopes to build a significant software company while continuing the Traditional Business.
Risks, contingencies, and unusual items
- Management stated disclosure controls and procedures were not effective as of December 31, 2022, in light of material weaknesses in internal control over financial reporting previously discussed in the fiscal 2022 Form 10-K. No material control changes were reported during the quarter.
- Borrowing capacity against the securities portfolio fluctuates with market value; a significant decline could result in margin calls. The portfolio’s value and reported earnings are exposed to market movements, and investment gains are concentrated in a small number of issuers.
- Other disclosed risks include software development and implementation execution, government procurement delays, cybersecurity breaches, newspaper-industry and subscriber declines, changes to public-notice laws or newspaper adjudicated status, and continuing effects of COVID-19.
- Management did not expect ordinary-course contingencies, including litigation, to have a material adverse effect. No subsequent event requiring recognition or disclosure was identified, other than new employee retirement and deferred-compensation plans effective January 1, 2023.
Important facts for investors to verify
- Review the securities portfolio’s issuer concentration, fair values, tax exposure, and sensitivity to market declines.
- Assess the $81.0 million margin borrowing, variable interest cost, collateral terms, and potential margin-call exposure.
- Track Journal Technologies’ project go-lives, consulting revenue conversion, expense growth, and path toward segment profitability.
- Review the material weaknesses and subsequent remediation disclosures in the fiscal 2022 Form 10-K and future filings.
- Monitor Traditional Business public-notice and circulation trends, including the durability of foreclosure-related advertising.