Filing summary
Entity note: The supplied filing is j2 Global, Inc.’s Form 10-K, not a filing under the name Ziff Davis, Inc. j2 Global reported fiscal 2016, the year ended December 31, 2016; quarterly figures are also provided for Q4.
Business context and reporting period
j2 Global operated two segments: Business Cloud Services, including fax, voice, backup, email and IP licensing; and Digital Media, covering technology, gaming, lifestyle and healthcare properties. The company acquired Everyday Health on December 5, 2016, expanding its digital-health business. The audited financial statements received an unqualified opinion. Management and the auditor reported effective internal controls, but the assessment excluded 2016 acquisitions because of their late-year timing.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $874.3 million | $720.8 million |
| Gross profit / gross margin | $727.2 million / 83% | $597.9 million / 83% |
| Operating income / operating margin | $242.6 million / 28% | $199.4 million / 28% |
| Net income | $152.4 million | $133.6 million |
| Diluted EPS | $3.13 | $2.73 |
| Cash from operations | $282.4 million | $229.1 million |
| Cash and cash equivalents | $124.0 million | $255.5 million |
| Working capital | $(106.1) million | $286.2 million |
- Revenue rose 21%; net income rose 14% and diluted EPS rose 15%. Net margin declined to about 17% from 19%, principally reflecting higher taxes and acquisition-related costs.
- Business Cloud Services revenue was $566.9 million, up 12%; segment operating income was $210.9 million, nearly flat, and its operating margin declined to 37.2% from 41.7%. Digital Media revenue grew 42% to $307.5 million and segment operating income increased 67% to $50.7 million.
- Fixed subscription revenue was 83.3% of Business Cloud Services subscriber revenue. Average monthly revenue per Cloud Business Customer was $15.21 versus $14.79; the reported cancel rate was 2.1% in both 2016 and 2015.
- Capital expenditures were $24.7 million; operating cash flow less capital expenditures was approximately $257.6 million. Investing activities used $448.9 million, primarily for acquisitions.
- Income tax expense increased to $59.0 million from $23.3 million; the effective tax rate rose to 27.9% from 14.8%. The filing attributes the increase mainly to prior-year tax-position releases and higher deemed foreign income, partly offset by a lower valuation allowance.
Material changes, debt and liquidity
- Everyday Health purchase consideration was approximately $493.7 million, net of cash acquired and assumed liabilities. All 2016 acquisitions together contributed $52.9 million of revenue during the periods owned; acquired-company net income was not separately identifiable. Acquisition spending drove goodwill to $1.12 billion from $807.7 million.
- At year-end, long-term debt had a carrying value of $601.7 million and the credit-line balance was $178.8 million. The credit facility was $225 million, with $45 million still available at year-end; the company drew the remaining amount on February 27, 2017, bringing borrowings to $225 million. The facility matures December 4, 2017, and requires a $30 million repayment six months after closing.
- Debt includes $250 million principal of 8.0% Senior Notes due 2020 and $402.5 million principal of 3.25% Convertible Notes due 2029. The convertible notes carry repurchase dates in 2021 and 2024 and potential cash-settlement obligations on conversion.
- Cash and investments fell from $413.7 million to $124.0 million, primarily because of acquisitions, dividends and share repurchases. Management said cash, short-term investments and operating cash flow were expected to cover anticipated needs for at least 12 months. A substantial portion of cash was held abroad and repatriation could trigger tax costs.
- Dividends paid were $1.36 per share for 2016; the board declared $0.365 per share for payment in March 2017. Future dividends remain subject to board approval.
Outlook, risks and unusual items
- Management expected Business Cloud Services revenue and profits to remain stable, excluding acquisitions. It expected Digital Media revenue and profits to improve over the next several quarters as acquisitions were integrated, while warning that Everyday Health initially lowered margins. Management anticipated margins could move back toward historical levels after integration and amortization, but also expected consolidated operating margins to face pressure as Digital Media grew and mobile advertising carried lower margins.
- Consolidated revenue growth was partly acquisition-driven. The company reported 4,992 million Digital Media visits and 18,063 million page views in 2016, versus 4,001 million and 10,276 million, respectively, in 2015.
- Key risks include dependence on fax-to-email, which represented 35% of consolidated revenue; short-term and uncertain digital advertising demand; competition and ad blocking; mobile monetization; privacy, cybersecurity and health-data regulation; acquisition integration; tax audits and indirect-tax disputes; and patent litigation.
- Management reported no material accrued loss contingencies for the listed legal matters because unfavorable outcomes were not considered probable. It cautioned that an adverse outcome could materially affect a particular period. Income tax audits included IRS examinations for 2012–2014; the filing said potential reserve changes could not then be estimated.
- Other notable items: the company recorded a $7.6 million gain on sale of its Carbonite investment and a $2.5 million Gawker-related breakup fee. It reported no goodwill or long-lived asset impairment in 2016.
Important facts for investors to verify
- Confirm the filing’s registrant identity: the source document names j2 Global, Inc., despite the request metadata naming Ziff Davis, Inc.
- Track post-acquisition Everyday Health revenue, profitability, integration progress and margin recovery against management’s expectations.
- Review liquidity after the February 2017 full draw on the credit facility, including the December 2017 maturity, required repayments, refinancing plans and covenant compliance.
- Assess the sustainability and composition of cash flow and revenue growth, including acquisition contributions, organic growth, fax dependence and Digital Media advertising trends.
- Monitor tax-audit outcomes, potential indirect-tax exposure, foreign-cash repatriation costs, litigation developments and the effect of convertible-note terms on future cash needs and dilution.