Business context and reporting period
Filing identity: The supplied filing is j2 Global, Inc.’s Form 10-Q for the quarter ended June 30, 2018, not a Ziff Davis filing. Verify the company and filing before relying on this summary.
j2 Global operates Cloud Services, including subscriptions and intellectual-property licensing, and Digital Media, including advertising, subscriptions and content. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise indicated.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $287.9 | $273.2 | $568.5 | $527.8 |
| Gross profit | $240.1 | $230.0 | $472.6 | $443.9 |
| Operating income | $54.4 | $58.6 | $100.5 | $106.5 |
| Net income | $28.5 | $31.4 | $47.3 | $57.2 |
| Diluted EPS | $0.57 | $0.63 | $0.95 | $1.16 |
| Operating cash flow | Not presented by quarter | $206.3 | $111.7 |
- Revenue increased 5% for Q2 and 8% for the first half. Management attributed growth primarily to acquisitions and organic growth in both segments.
- Q2 gross margin was approximately 83.4% versus 84.2%; operating margin was 18.9% versus 21.4%. For the first half, operating margin was 17.7% versus 20.2%.
- Q2 operating income fell about 7% and net income about 9%; first-half operating income fell about 6% and net income about 17%. Higher operating costs, interest expense and the equity-method investment loss weighed on earnings.
- First-half operating cash flow rose to $206.3 million, primarily reflecting lower accounts receivable and higher depreciation and amortization, partly offset by lower accounts payable and accrued expenses. Investing cash outflow was $154.1 million, including acquisitions and capital expenditures; financing cash outflow was $43.2 million, primarily dividends.
- At June 30, cash and cash equivalents were $357.4 million; cash, cash equivalents and investments were reported at $428.0 million. Current assets were $573.5 million and current liabilities $263.9 million. Long-term debt, net of discount and issuance costs, was $1,007.7 million; face principal was $1,052.5 million. The company reported compliance with debt covenants.
- Cash dividends paid were $0.415 per share in Q2. The Board subsequently approved a $0.425 quarterly dividend, subject to its terms.
Material changes versus the prior comparable period
- Cloud Services revenue increased 3.9% in Q2 and 4.7% for the first half; segment operating income was nearly flat, up 0.1% and 0.6%, respectively.
- Digital Media revenue grew 7.1% in Q2 and 11.2% for the first half, mainly from acquisitions. Segment operating income fell 68.3% in Q2 to $3.2 million; the segment recorded a $0.2 million operating loss for the first half versus $6.6 million income a year earlier. Higher acquisition-related costs, marketing, amortization and contingent consideration contributed.
- The company completed acquisitions including ThreatTrack Security, Line2 and Mosaik Solutions during the first half. They contributed $11.7 million of first-half revenue; acquired net income was not separately identifiable. Cash paid for acquisitions, net of cash received, was $103.2 million.
- Adoption of ASC 606 increased reported Q2 revenue and net income by $2.8 million and diluted EPS by $0.06; first-half revenue and net income increased by $4.8 million and diluted EPS by $0.10. Comparisons with periods before adoption are therefore not fully like-for-like.
- Share-based compensation increased to $7.1 million in Q2 from $5.6 million and to $13.5 million for the first half from $9.2 million.
Outlook, risks and unusual items
- Management expected Cloud Services revenue and profits to remain stable for the foreseeable future, excluding acquisitions, assuming a stable or improving economy. It expected Digital Media revenue and profits to improve over coming quarters as acquisitions are integrated. Overall, management anticipated improved consolidated revenue and profits excluding future acquisitions, but expected operating profit as a percentage of revenue to generally decline as lower-margin Digital Media becomes a larger share.
- No quantified earnings or revenue guidance was provided. Management said existing cash and operating cash generation should meet anticipated working-capital, capital expenditure, repurchase and dividend needs for at least 12 months.
- The company committed $200 million to OCV Fund I, a related-party investment managed by entities linked to Chairman Richard S. Ressler. First-half payments were $21.7 million; a further approximately $12.9 million capital call was paid in July. The company recorded a $3.0 million net-of-tax equity-method loss for the first half, primarily related to management fees. Verify the commitment, fees, carried interest and investment performance.
- Contingent consideration liabilities rose to $30.4 million, including a $9.9 million first-half fair-value increase recorded in general and administrative expense. Management estimates rely on significant unobservable inputs.
- Tax uncertainties include provisional accounting for the 2017 Tax Act, unresolved GILTI policy, $54.5 million of uncertain income-tax-position liabilities and ongoing tax audits. The filing cites the Wayfair ruling as a possible source of additional indirect-tax obligations; it reports a $4.6 million reserve for indirect-tax matters and says additional liabilities could materially affect results.
- Disclosed litigation includes a Massachusetts sales-tax dispute, an Ontario case and a putative TCPA class action. The Eighth Circuit vacated dismissal of the class action in July 2018 and remanded it for return to state court. Management did not consider the matters likely to have a material overall adverse effect based on current knowledge, but an unfavorable resolution could materially affect a particular period.
- Other risks include foreign-exchange movements, acquisition integration, advertising-margin pressure from mobile formats, cybersecurity and service disruptions, and evolving privacy requirements. GDPR was in effect and California’s CCPA had been enacted. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm that the intended issuer is j2 Global, Inc., not Ziff Davis, and that the filing period is Q2 2018.
- Reconcile reported results with the ASC 606 adoption adjustments when comparing growth and earnings to prior periods.
- Assess whether Digital Media’s revenue growth can translate into segment profitability, given the first-half operating loss and management’s margin outlook.
- Review acquisition integration, purchase accounting and contingent consideration assumptions, including the effect of subsequent acquisitions.
- Evaluate debt service and refinancing exposure against $1.05 billion of face debt, contractual interest payments and planned capital allocation.
- Review the related-party OCV commitment, future capital calls, fees and potential carry, along with tax audits, indirect-tax exposure and litigation developments.