Filing summary
Issuer identification: The supplied filing is J2 Global, Inc.’s Form 10-Q for the quarter ended June 30, 2020 (filed August 10, 2020; ticker JCOM), not a filing identified as Ziff Davis, Inc. Verify the issuer before relying on this summary.
Business context and reporting period
J2 Global provides internet services through Cloud Services—including fax, voice, backup, security, privacy and email marketing—and Digital Media, which includes advertising, subscriptions and content. The filing reports Q2 and the six months ended June 30, 2020, compared with the same 2019 periods. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $331.0 | $322.4 | $663.4 | $622.3 |
| Gross profit / margin | $274.2 / 82.8% | $262.2 / 81.3% | $547.4 / 82.5% | $511.0 / 82.1% |
| Operating income / margin | $73.0 / 22.1% | $56.6 / 17.6% | $128.3 / 19.3% | $107.5 / 17.3% |
| Net income | $38.1 | $32.6 | $31.7 | $65.0 |
| Diluted EPS | $0.80 | $0.66 | $0.65 | $1.32 |
| Operating cash flow | Not separately stated | Not separately stated | $241.6 | $212.2 |
Q2 revenue rose 3%; six-month revenue rose 7%. Digital Media revenue grew 7% in Q2 and 9% for the first half, primarily reflecting acquisitions. Cloud Services revenue declined 1% in Q2 but increased 5% for the first half. Q2 net income increased 17%; first-half net income fell 51%, reflecting investment losses, higher interest expense and a higher effective tax rate.
At June 30, cash and cash equivalents were $616.8, long-term investments were $94.0, and total cash and investments were $710.9. Current assets were $853.1 versus current liabilities of $772.2 (about 1.10 current ratio). Total debt carrying value was $1,462.5, including $391.1 classified as current; the notes’ aggregate principal was $1,602.4. The company had no borrowings under its $100 million credit facility. Operating cash flow was $241.6 for the first half; investing cash outflow was $96.9 and financing cash outflow was $101.5. Capital expenditures were $50.5.
Material changes versus comparable periods
- Q2 operating income increased 29%, helped by Digital Media operating income of $16.8 versus $1.5 a year earlier. Cloud Services operating income was nearly flat at $62.0.
- First-half operating income increased 19%, but net income declined to $31.7 from $65.0. The period included $20.8 of net investment losses and $10.1 of losses in the equity-method investment, versus small investment gains in the prior-year period. First-half interest expense rose to $43.2 from $33.4.
- First-half share repurchases totaled $88.5, buying back 1.0 million shares. The board approved a new authorization for up to 10 million shares on August 6, 2020; the prior program was completed in July.
Outlook, risks and unusual items
- Management expected the remainder of 2020 revenue to be modestly lower year over year overall. It expected Cloud Services revenue to be modestly lower and Digital Media revenue flat to slightly lower, citing COVID-19 uncertainty.
- Management cautioned that operating margin as a percentage of revenue may generally decline as Digital Media represents a larger share of revenue and mobile and newer advertising formats carry lower margins. It expected acquisitions to remain part of its strategy but said the pace and effects were uncertain.
- The company reported modest adverse COVID-19 impacts in Q2, with possible continued effects in Q3 and beyond. It cited uncertainty around customer demand, advertising, collections, investments and potential future impairment. It recorded a $2.1 sublease impairment related to a tenant default and investment impairments, including $19.6 on certain equity securities during the first half.
- In Q2, the company designated certain non-core Australian and New Zealand Voice assets for sale; net carrying value was $16.5. It also completed acquisitions for $27.0 of consideration, which contributed $2.9 of first-half revenue.
- Debt and liquidity considerations include the $402.4 carrying amount of 3.25% convertible notes classified as current due to holders’ June 2021 repurchase option, and $1.2 billion of note principal due thereafter, principally in 2025, 2026 and 2029. The company said it was in compliance with debt covenants and expected cash and operating cash flows to meet anticipated needs for at least 12 months.
- Contingencies include a $21.2 reserve for indirect tax matters, $57.6 of uncertain income tax positions, ongoing tax audits, and litigation including a putative securities class action filed in July 2020. Management said it had not accrued material loss contingencies for the disclosed legal proceedings because materially unfavorable outcomes were not considered probable.
Important facts for investors to verify
- Confirm the filing issuer: the document names J2 Global, Inc., whereas the request names Ziff Davis, Inc.
- Assess the drivers and repeatability of Q2 earnings improvement, particularly Digital Media performance and the first-half investment and tax charges.
- Review COVID-19 sensitivity, the planned asset sale, investment valuations and the risk of future impairment.
- Check convertible-note repurchase and maturity terms, covenant requirements, and the company’s liquidity relative to debt and planned repurchases.
- Monitor the indirect-tax reserve, uncertain tax positions, audits and litigation developments.