Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company operates Business Cloud Services, including subscriptions and intellectual-property licensing, and Digital Media, including advertising and lead generation. The request identifies Ziff Davis, Inc., but the filing is for j2 Global, Inc.; Ziff Davis is identified in the filing as a subsidiary/unrestricted subsidiary.
Financial performance and position
Unless otherwise noted, amounts are U.S. dollars. Quarter and nine-month comparisons are against the corresponding 2013 periods.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $153.0 million | $127.8 million | $431.9 million | $382.8 million |
| Gross profit | $125.0 million | $106.0 million | $354.9 million | $318.1 million |
| Operating income | $46.5 million | $39.3 million | $132.9 million | $124.9 million |
| Net income | $28.8 million | $27.6 million | $92.6 million | $86.4 million |
| Diluted EPS | $0.60 | $0.59 | $1.93 | $1.85 |
- Q3 revenue rose 20%; nine-month revenue rose 13%. Gross margin was approximately 81.7% in Q3 and 82.2% for nine months, versus 82.9% and 83.1%, respectively, in 2013. Operating margin was approximately 30.4% in Q3 and 30.8% for nine months, compared with 30.8% and 32.6%.
- Q3 operating income increased 18%, while nine-month operating income increased 6%. Higher amortization, acquisition-related costs, bad debt and professional fees contributed to expense growth. Interest expense rose to $10.1 million for Q3 and $20.8 million for nine months, chiefly following the convertible-note issuance.
- Operating cash flow was $132.1 million for the first nine months, compared with $134.9 million. Investing cash outflow was $168.2 million, including $118.2 million for acquisitions; financing cash inflow was $345.2 million, largely from debt issuance. Cash and cash equivalents ended at $515.0 million.
- Cash, short-term investments and long-term investments totaled $683.8 million at September 30, 2014, versus $345.9 million at year-end 2013. Long-term debt was $591.5 million, up from $245.7 million, including $402.5 million principal of 3.25% convertible notes issued in June and $250 million principal of 8% senior notes. The company reported no borrowings under its revolving credit agreement.
- Current assets were $729.7 million and current liabilities $130.5 million. The company said available cash, short-term investments and operating cash flow were expected to cover anticipated needs for at least 12 months. It paid $38.5 million in dividends during the nine-month period; the board approved a $0.285-per-share dividend payable in December, subject to stated conditions.
Material changes and management commentary
- Business Cloud Services revenue grew 16% in Q3 and 8% for nine months. Nine-month segment operating income declined 7% to $140.6 million, partly because the prior-year period included a patent-license payment; Q3 segment operating income rose 7% to $49.0 million.
- Digital Media revenue grew 29% in both Q3 and the first nine months. Segment operating income was $7.3 million in Q3 versus $0.9 million, and $17.6 million for nine months versus a $3.6 million loss, with acquisitions a primary growth driver.
- The company completed multiple acquisitions in the first nine months. They contributed $32 million of reported revenue; their net income was not separately identifiable. Purchase accounting remained provisional, including $79.6 million of acquired goodwill.
- Management expected stable Business Cloud Services revenue and improving Digital Media revenue and profits, assuming a stable or improving economy and excluding future acquisitions. It anticipated pressure on consolidated operating margins as lower-margin Digital Media grows faster and mobile advertising expands. The filing gives no specific numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- Risks include acquisition integration and execution, variability in IP licensing revenue, competition, customer retention and payment declines, technology and cybersecurity incidents, international currency and regulatory exposure, and the ability to service debt and maintain dividends.
- Management disclosed ongoing patent, tax, consumer and other litigation, including indirect-tax audits. It had not accrued losses for the cited legal proceedings because unfavorable outcomes were not considered probable; management said an adverse resolution could nevertheless materially affect a particular period. Tax audit outcomes could also change uncertain-tax-position liabilities, with amounts not presently estimable.
- The quarter included a $9.98 million other comprehensive loss, primarily from foreign-currency translation and unrealized investment losses; this reduced accumulated other comprehensive income to a $3.33 million loss. The company transferred $206.9 million of financial instruments from Level 1 to Level 2 fair-value classification.
- The June 2014 holding-company reorganization made j2 Global, Inc. the public holding company and renamed the predecessor operating entity j2 Cloud Services, Inc. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for j2 Global, Inc., not Ziff Davis, Inc.; determine whether this is the intended company and filing.
- Assess organic growth separately from acquisitions, and review the effects of acquisition integration, provisional purchase accounting and amortization on segment results.
- Review the convertible notes’ cash interest, noncash discount amortization, conversion and repurchase terms, and the resulting debt and dilution exposure.
- Monitor cash generation relative to dividends, acquisitions and contractual debt interest, as well as the location and availability of foreign-held cash.
- Track litigation, indirect-tax and income-tax audit developments, and the effect of mobile advertising and business mix on margins.