j2 Global, Inc. — Q1 2017 Form 10-Q
Filing identity: The supplied filing is for j2 Global, Inc. (now associated with the Ziff Davis name in the request metadata), not a registrant named Ziff Davis, Inc. It covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Amounts below are in U.S. dollars.
Business context and reporting period
j2 Global operates Business Cloud Services, including fax, voice, cloud products and intellectual-property licensing, and Digital Media, which includes advertising, lead generation and content licensing. The company reported unaudited interim results. Q1 2017 includes the December 2016 acquisition of Everyday Health; its inclusion materially affects year-over-year comparisons, especially in Digital Media.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $254.7 million | $200.5 million; up 27% |
| Gross profit / margin | $213.9 million / 84.0% | $166.2 million / 82.9% |
| Operating income / margin | $48.0 million / 18.8% | $53.3 million / 26.6% |
| Net income | $25.8 million | $29.9 million |
| Diluted EPS | $0.52 | $0.61 |
| Operating cash flow | $51.2 million | $64.5 million |
| Cash and cash equivalents | $187.4 million at March 31 | $124.0 million at December 31, 2016 |
| Long-term debt, carrying value | $604.3 million | $601.7 million at December 31, 2016 |
| Line of credit outstanding | $224.1 million | $178.8 million at December 31, 2016 |
| Stockholders’ equity | $930.4 million | $914.5 million at December 31, 2016 |
Net cash used in investing activities was $13.4 million, including $9.7 million of capital expenditures and $3.6 million for acquisitions, net of cash received. Financing activities provided $25.5 million, primarily from line-of-credit borrowings, partly offset by $17.6 million of dividends. The quarterly dividend paid was $0.365 per share; the board subsequently approved $0.375 per share for payment in June 2017.
Reported debt comprises $247.5 million of 8% Senior Notes and $364.1 million of 3.25% Convertible Notes, net of issuance costs. Combined with the line of credit, reported borrowings were approximately $828.4 million at quarter-end. The company also disclosed $47.2 million of uncertain tax-position liabilities.
Material changes versus the prior comparable period
- Revenue grew 27%, primarily due to acquisitions and organic growth. Digital Media revenue rose 81% to $113.1 million, principally from Everyday Health; Business Cloud Services revenue increased 2.5% to $141.5 million.
- Digital Media reported a $3.5 million segment operating loss, versus $7.7 million of income in Q1 2016. Higher acquired-business marketing, personnel and amortization costs contributed to the decline.
- Business Cloud Services segment operating income rose 12% to $56.3 million. Cloud Connect (fax/voice) revenue was $93.6 million; overall segment revenue growth was modest.
- Consolidated operating income fell 10% and net income fell 14%, despite higher revenue. Sales and marketing expense rose 61%, general and administrative expense 37%, and depreciation and amortization increased to $39.3 million from $27.2 million.
- Operating cash flow declined by $13.3 million. Management attributed this mainly to lower accounts payable and accrued expenses, including Everyday Health-related payments; the cash-flow statement reports a $53.2 million decrease in accounts payable and accrued expenses.
- Cash increased partly because the company drew a further $45 million on its credit facility. It also paid $17.6 million in dividends.
Outlook, risks and unusual items
- Management expects Business Cloud Services revenue and profits to be stable for the foreseeable future, excluding acquisitions. It expects Digital Media revenue and profits to improve over the next several quarters as acquisitions are integrated, while cautioning that Everyday Health currently has lower margins.
- Management anticipates consolidated revenue and profit improvement, excluding future acquisitions and variable IP-licensing revenue, but expects operating margins generally to decline as Digital Media becomes a larger revenue share and as lower-margin Everyday Health results are integrated. It expects margins to move back toward historical levels after integration and amortization are substantially realized.
- Management said existing cash, operating cash flow and additional debt facilities should meet anticipated needs for at least 12 months. The $225 million credit facility matures December 4, 2017; the agreement provides for a $75 million repayment six months after closing and requires reduction to $150 million if outstanding borrowings exceed that amount at that date. The contractual-obligations table lists the full $225 million principal as due in 2017.
- The company borrowed $126.8 million from non-U.S. subsidiaries to help fund the Everyday Health acquisition and was seeking domestic financing, with no assurance it would be secured. Failure to generate adequate domestic liquidity or refinance could affect repayment and potentially increase future taxes. A substantial portion of cash was held abroad; repatriation could incur U.S. tax.
- Risks include acquisition integration and performance, advertising-market and mobile-format margin pressure, customer retention and payment declines, competition, cybersecurity and system disruption, foreign exchange, debt service and covenants, and changing tax or regulatory obligations. Management reported compliance with credit-agreement and Senior Notes covenants. No material changes to the prior annual report’s risk factors were reported.
- Legal matters include tax assessments and audits, patent litigation, and other claims. Management did not consider materially unfavorable outcomes probable and had not accrued material loss contingencies; it cautioned that an adverse resolution could materially affect a particular period. The company is also under indirect-tax audits in several jurisdictions and said a material liability is reasonably possible, though not considered probable and estimable.
- Q1 acquisitions included sFax and smaller email-related businesses; consideration was $26.5 million, subject to post-closing adjustments. Their revenue contribution was immaterial in the quarter. Acquisition accounting remained provisional for some transactions.
- Disclosure controls were concluded effective, and the company reported no material change in internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Confirm the registrant and security being analyzed: this filing is for j2 Global, Inc., notwithstanding the Ziff Davis company label in the request.
- Track Digital Media profitability and whether Everyday Health integration delivers the improvement and margin recovery management anticipates.
- Review the December 2017 credit-facility maturity, required repayment provisions, refinancing progress and liquidity available in the United States.
- Assess the sustainability of operating cash flow, the impact of acquisition-related payments, and the capacity to fund dividends and debt service.
- Monitor uncertain tax positions, indirect-tax audits and other litigation for changes in probability, estimated exposure or cash timing.
- Evaluate acquisition spending, provisional purchase accounting, amortization and goodwill/intangible-asset assumptions, alongside the variability of IP-licensing revenue.