Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2018—not a filing under the name Ziff Davis, Inc. j2 Global operated Cloud Services (including fax, voice, backup, security, email marketing and IP licensing) and Digital Media businesses.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $280.6 million | $254.7 million; up 10.2% |
| Gross profit / margin | $232.5 million / 82.8% | $213.9 million / 84.0% |
| Operating income / margin | $46.2 million / 16.4% | $48.0 million / 18.8% |
| Net income | $18.9 million | $25.8 million; down 26.9% |
| Diluted EPS | $0.38 | $0.52 |
| Operating cash flow | $103.9 million | $51.2 million |
| Capital expenditures | $13.2 million | $9.7 million |
Revenue growth reflected acquisitions and organic growth in both segments. Cloud Services revenue increased 5.6% to $149.5 million; segment operating income rose 1.0% to $56.9 million. Digital Media revenue increased 15.9% to $131.2 million, while its operating loss narrowed slightly to $3.4 million. Cloud Services ARPU increased to $15.65 from $15.03 and its cancel rate improved to 2.2% from 2.3%.
Cash and cash equivalents were $331.4 million and investments were $64.9 million at quarter-end. Total cash and investments were $396.3 million, compared with $408.7 million at December 31, 2017. Current assets were $537.8 million and current liabilities $241.9 million. Long-term debt, net of discount and issuance costs, was $1.005 billion; the notes’ stated principal totals $1.053 billion. The company reported compliance with debt covenants. Operating cash flow benefited mainly from lower accounts receivable; investing cash outflow was $107.0 million, principally for acquisitions, investments and capital expenditures. Cash dividends paid were $19.9 million.
Material changes and unusual items
- General and administrative expense rose 15% to $87.8 million, including higher amortization, acquisition-related costs, share-based compensation and a $4.1 million increase in contingent-consideration fair value.
- Interest expense, net increased to $15.8 million from $12.4 million, primarily reflecting the 6.0% senior notes. Other expense increased to $4.5 million, including a $3.7 million loss on equity securities and higher foreign-exchange losses.
- j2 Global adopted ASC 606 on January 1, 2018 using the modified retrospective method. The filing states that adoption increased Q1 revenue by $2.0 million and net income by $2.0 million versus the amounts that would have been reported without adoption; prior-year results were not recast.
- Acquisitions included cybersecurity provider ThreatTrack and a digital health business. Q1 acquisitions contributed $4.4 million in revenue; their net income contribution was not separately identifiable. Acquisition consideration was reported as $77.0 million net of cash acquired and assumed liabilities; purchase accounting remains provisional.
- The company recorded a $2.5 million unrealized loss on available-for-sale debt securities in other comprehensive income. It also committed $200 million to an investment fund associated with the Board chair; $13.4 million had been called by quarter-end.
Outlook, risks and contingencies
Management expected Cloud Services revenue and profits to remain stable, excluding acquisitions, assuming a stable or improving economy. It expected Digital Media revenue and profits to improve over the next several quarters as acquisitions are integrated and, longer term, as advertising shifts online. Management anticipated overall improvement excluding future acquisitions, but also expected consolidated operating margin to generally decline as Digital Media grows as a share of revenue and mobile and newer advertising formats pressure margins. No specific numerical earnings or revenue guidance was provided.
Management said existing cash and expected operating cash flow should meet anticipated working-capital, capital-expenditure, repurchase and dividend needs for at least 12 months. Future dividends remain subject to Board approval. Risks include acquisition integration and returns, advertising trends and margins, debt service and covenants, currency movements, cybersecurity and system disruptions, competition, and changing indirect-tax requirements. The company disclosed a $2.0 million reserve for indirect-tax matters and $53.3 million of liabilities for uncertain tax positions; additional tax expense could be material. Several income-tax audits and legal proceedings were pending; management did not consider materially unfavorable legal outcomes probable, but noted an adverse resolution could affect a particular period.
Key investor verification points
- Confirm the filing entity: the supplied 10-Q is for j2 Global, Inc., although the request identifies Ziff Davis, Inc.
- Assess underlying performance and comparability after separating acquisition effects from organic growth and considering the ASC 606 adoption impact.
- Review the cash-flow improvement’s dependence on working-capital movements, alongside acquisition spending, dividends and debt obligations.
- Examine acquisition purchase-accounting estimates, contingent consideration, and the economics, fees and related-party governance of the investment-fund commitment.
- Track tax audits, uncertain tax positions, indirect-tax exposure, advertising-margin pressures and any changes to the stated outlook or dividend policy.