Business context and reporting period
This is J2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2020, including unaudited quarterly results. The request metadata names Ziff Davis, Inc., but the filing identifies the registrant as J2 Global, Inc. (ticker JCOM); confirm the intended issuer before relying on this summary.
J2 Global operated Digital Media properties and services (including technology, shopping, gaming, and healthcare) and Cloud Services (including cloud fax, cybersecurity, privacy, and marketing technology). The company reported 9.1 billion Digital Media visits during 2020 and completed multiple acquisitions, including RetailMeNot.
Financial results and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $1,489.6 million | $1,372.1 million | +8.6% |
| Gross profit / margin | $1,257.8 million / 84% | $1,134.7 million / 83% | Margin increased |
| Operating income / margin | $334.6 million / 22% | $277.1 million / 20% | +20.8% |
| Net income | $150.7 million | $218.8 million | -31.1% |
| Diluted EPS | $3.18 | $4.39 | Down |
| Cash from operations | $480.1 million | $412.5 million | +16.4% |
Revenue growth and operating income improvement were partly acquisition-driven. Net income fell despite higher operating income, reflecting substantially higher interest expense ($132.0 million versus $69.5 million), a higher tax provision ($68.4 million versus a $19.4 million tax benefit in 2019), investment losses, and an equity-method investment loss. The 2019 tax benefit included a $53.7 million benefit from an intra-entity asset transfer.
Digital Media revenue increased 14.2% to $811.4 million; Cloud Services revenue increased 2.5% to $678.5 million. Digital Media advertising revenue was $616.2 million, up from $515.7 million. Cloud fixed subscription revenue rose, while variable subscriber revenue declined; reported Cloud customer ARPU decreased to $13.93 from $14.54 and cancel rate improved to 2.3% from 2.4%.
Operating cash flow was $480.1 million; capital expenditures were $92.6 million, implying operating cash flow less capital expenditures of approximately $387.5 million. Investing cash outflow was $586.2 million and financing cash outflow was $234.6 million. Cash and cash equivalents ended the year at $242.7 million; cash, cash equivalents, and investments totaled $340.8 million.
Reported debt principal was approximately $1.703 billion, with $1.579 billion net carrying value. The company issued $750 million of 4.625% senior notes due 2030 and redeemed $650 million of 6.0% notes, recording a $38.0 million debt-extinguishment loss. Working capital was negative $259.7 million, partly because $396.8 million net carrying value of 3.25% convertible notes was classified as current. Holders could require repurchase on June 15, 2021; management considered exercise remote because the notes traded well above par. Management stated cash and operating cash generation should cover anticipated needs for at least 12 months.
Material changes and unusual items
- 2020 acquisitions had total consideration of $497.8 million, net of cash acquired and assumed liabilities; RetailMeNot accounted for $414.4 million. Acquisitions contributed $61.9 million of 2020 revenue after their respective closing dates; acquired-company net income was not separately identifiable.
- Share repurchases totaled $275.7 million in 2020, and 3.63 million shares were repurchased across the two programs. The company authorized a new program for up to 10 million shares; 7.51 million remained available at year-end.
- The board suspended quarterly dividends after the June 2019 payment. No dividends were paid in 2020.
- A sale of Voice assets in Australia and New Zealand generated a $17.1 million gain. The company also recorded $21.0 million of net investment losses and $31.6 million of other income, primarily foreign-exchange gains.
- COVID-19-related changes to the office footprint led to $12.1 million of lease asset impairments and $3.6 million of related property and equipment impairments; a further $2.1 million impairment related to a sublease tenant in default.
- Fourth-quarter 2020 revenue was $469.2 million versus $405.6 million in fourth-quarter 2019; net income was $58.1 million versus $123.0 million. The prior-year quarter included the one-time tax benefit noted above. First-quarter 2020 included a net loss of $6.4 million.
Outlook, risks, and contingencies
Management expected 2021 consolidated revenue to be higher than 2020, citing RetailMeNot and other acquisitions and anticipated growth in both businesses, while cautioning that COVID-19 remained a risk. Management expected operating profit as a percentage of revenue to generally decline as lower-margin Digital Media became a larger share of revenue. It also cited lower margins on mobile and newer advertising formats. These statements are forward-looking, not quantified guidance.
- Key risks include advertising-market volatility and short-term advertiser contracts; competition and dependence on search and mobile traffic; cybersecurity, privacy, and data-protection obligations; reliance on cloud fax, which represented about 22% of consolidated revenue; acquisition integration and goodwill/intangible valuation; and COVID-19 effects.
- The company carried a $22.5 million reserve for indirect-tax matters and $57.1 million of liabilities for uncertain tax positions. It had accrued approximately $4.5 million for specified legal proceedings. Management did not believe the identified legal matters were likely to materially affect consolidated results overall, but acknowledged an unfavorable outcome could materially affect a particular period.
- The $3.25% convertible notes’ conversion feature was triggered for the first quarter of 2021; conversion or repurchase could create cash needs and/or dilution. Contractual obligations included $2.327 billion in scheduled debt principal and interest, leases, and other commitments, excluding uncertain tax positions, contingent consideration, and the remaining approximately $94.5 million OCV investment commitment.
- The OCV investment is a related-party arrangement: the fund manager and general partner are entities associated with the board chair. The filing reports a $200 million commitment, annual management fees, and potential carried interest.
- After year-end, the company sold certain U.K. Voice assets and approved exploration of strategic alternatives for its B2B Backup business.
The auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded 2020 acquisitions from their internal-control assessments because of acquisition timing; those acquisitions represented 17.7% of year-end assets and 4.2% of 2020 revenue.
Important facts for investors to verify
- Confirm whether the intended filing is J2 Global’s 2020 10-K or a filing for Ziff Davis, Inc.; the registrant name in the supplied text is J2 Global.
- Assess the 2021 cash, refinancing, conversion, and holder-put implications of the $402.4 million principal amount of 3.25% convertible notes, including settlement choices and potential dilution.
- Separate acquisition-driven growth from organic performance, and review RetailMeNot integration, purchase accounting, and the remaining provisional acquisition valuations.
- Evaluate the sustainability of operating cash flow and liquidity against acquisition spending, repurchases, debt service, and the negative working-capital position.
- Track indirect-tax and income-tax audits, legal proceedings, privacy and cybersecurity exposure, and the OCV related-party commitment.
- Check subsequent filings for quantified guidance, strategic alternatives for B2B Backup, and any changes to the dividend or share-repurchase programs.