Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019—not a filing identified as Ziff Davis, Inc. j2 Global operates Cloud Services and Digital Media businesses. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $299.9 | $280.6; up 7% |
| Gross profit / margin | $248.9 / 83.0% | $232.5 / 82.8% |
| Operating income / margin | $50.9 / 17.0% | $46.2 / 16.4% |
| Net income | $32.4; diluted EPS $0.66 | $18.9; diluted EPS $0.38 |
| Operating cash flow | $116.9 | $103.9 |
| Cash and cash equivalents | $226.6 at March 31 | $209.5 at December 31, 2018 |
| Long-term debt, carrying value | $1,016.0 | $1,013.1 at December 31, 2018 |
Net cash used in investing was $81.7 million, including $59.3 million for acquisitions and $12.5 million of capital expenditures. Net cash used in financing was $19.3 million, including $21.5 million of dividends paid. Cash plus long-term investments totaled $320.3 million. Current assets were $435.6 million and current liabilities $348.5 million.
Material changes versus the prior comparable period
- Digital Media revenue increased 12.6% to $147.7 million, primarily from acquisitions; Cloud Services revenue rose 1.8% to $152.2 million. Q1 acquisitions contributed $4.7 million of revenue.
- Digital Media operating loss narrowed to $1.0 million from $3.4 million, while Cloud Services operating income increased to $58.5 million from $56.9 million.
- General and administrative expense rose 12% to $98.2 million, principally reflecting acquired-intangible amortization, depreciation and personnel costs. Q1 amortization expense was $37.3 million.
- The effective tax rate was negative 0.9%, versus 27.1%, with management attributing the decrease primarily to reductions in uncertain-tax-position reserves and expenses disallowed under the 2017 Tax Act. This contributed to higher net income.
- Digital Media visits declined to 1.807 billion from 1.958 billion and page views to 7.087 billion from 8.159 billion. Cloud Services ARPU increased to $16.03 from $15.65; cancel rate was unchanged at 2.2%.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects Cloud Services revenue and profits to be stable, excluding acquisitions, and expects Digital Media revenue and profits to improve over the next several quarters as acquisitions are integrated. Management anticipates consolidated revenue and profit improvement, excluding future acquisitions, but expects operating margin to generally decline as Digital Media becomes a larger share of revenue and mobile advertising pressures margins.
- The board approved a $0.455-per-share dividend payable June 4, 2019, then decided to suspend dividends for the foreseeable future. The board cited investment opportunities and returns from prior investments.
- After quarter-end, the company acquired VPN provider Highwinds in a cash transaction and drew $100 million under its credit facility. The $100 million facility was undrawn at March 31; it includes an option to request a further $50 million.
- Q1 acquisitions included iContact, Safe Send and smaller online-backup businesses, for total consideration of $60.6 million net of cash acquired and assumed liabilities. Purchase accounting remained provisional. The filing reports $55.3 million of contingent consideration liabilities, including $40 million payable for Humble Bundle, and a $5.0 million quarterly fair-value expense.
- Debt consists principally of $650 million of 6.0% senior notes due 2025 and $402.5 million of 3.25% convertible notes due 2029. The company reported compliance with debt covenants. A $200 million commitment to the OCV investment fund is a related-party investment; $9.8 million was paid in Q1, including fees.
- Management says existing cash and operating cash generation should meet anticipated needs for at least 12 months. Key risks include acquisition integration and performance, debt service and covenants, foreign currency, indirect taxes, legal matters, customer retention, cybersecurity and regulatory changes. A $4.6 million reserve covers indirect-tax matters; management says additional liabilities are reasonably possible. Several income-tax audits are ongoing, and the amount of any potential change is not currently estimable.
- Management says the disclosed legal matters are not likely, based on current knowledge and existing accruals, to materially affect the company overall; an unfavorable outcome could nevertheless materially affect a particular period. No material loss contingency was accrued for those proceedings.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for j2 Global, Inc., despite the request metadata naming Ziff Davis, Inc.
- Assess how much of revenue growth and the Digital Media improvement reflects acquisitions versus organic performance, especially given declining visits and page views.
- Review the post-quarter Highwinds acquisition, $100 million facility draw, remaining acquisition funding needs and the decision to suspend dividends after June 4.
- Monitor debt maturities, covenant headroom, contingent consideration and the provisional purchase accounting for recent acquisitions.
- Track tax audits and indirect-tax exposure, including whether reserves prove sufficient, and evaluate the related-party OCV commitment and fees.