Business context and reporting period
Registrant in the filing: j2 Global, Inc. The request identifies Ziff Davis, Inc., but the supplied Form 10-Q is for j2 Global and covers the quarter ended September 30, 2012. The interim financial statements are unaudited.
j2 Global provides cloud services for businesses, including online fax, virtual phone, hosted email, email marketing, backup and CRM. It reports one operating segment. The filing reports results for the three and nine months ended September 30, 2012, compared with the same periods in 2011.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $93.2m | $86.0m | $269.4m | $245.1m |
| Operating earnings | $42.3m | $36.4m | $119.9m | $97.5m |
| Net earnings | $31.7m | $25.5m | $91.4m | $84.9m |
| Diluted EPS | $0.69 | $0.54 | $1.96 | $1.81 |
Q3 revenue rose 8%, operating earnings 16%, and net earnings 24%. Gross margin was approximately 82.5% versus 82.6%; operating margin improved to approximately 45.4% from 42.4%. Nine-month revenue increased 10%, operating earnings 23%, and net earnings 8%; operating margin rose to approximately 44.5% from 39.8%. Nine-month net earnings growth was restrained by higher income tax expense.
Q3 subscriber revenue was $89.5m, up 4%; other revenue was $3.8m versus $0.4m, primarily reflecting increased patent and technology licensing revenue. For the nine months, subscriber revenue increased 8% to $262.4m and other revenue increased to $7.0m. Paying telephone numbers were 2.077m versus 1.994m. Fixed subscription fees represented 80.8% of Q3 subscriber revenue.
For the nine months, operating cash flow was $123.5m versus $109.2m. Investing cash outflow was $135.4m, including investment purchases and acquisitions; financing cash inflow was $159.4m, primarily from debt issuance, partly offset by repurchases and dividends. Cash and cash equivalents were $287.5m at September 30, 2012.
Cash, short- and long-term investments totaled $469.8m, including $34.9m of restricted short-term investments. Current assets were $470.8m and current liabilities $66.3m. Long-term debt was $245.1m carrying value ($250m principal); its estimated fair value was $273.0m. The company had no borrowings under its separate Union Bank credit agreement. Total stockholders’ equity was $568.3m.
Material changes versus the prior comparable period
- In July 2012, j2 Global issued $250m of 8.0% senior unsecured notes due 2020. Interest and other expense was $2.7m in both Q3 and the first nine months of 2012, compared with net income in the comparable 2011 periods, primarily due to interest on the new notes.
- Four 2012 acquisitions expanded backup, CRM and cloud voice offerings. The company reports $30.4m total consideration, net of cash acquired; acquisition accounting remained provisional. Management said the transactions’ financial impact was immaterial at the acquisition dates.
- The company repurchased 2.1m shares for $58.6m during the first nine months and paid $29.9m in dividends. Dividends were $0.22 per share in Q3 versus $0.20 a year earlier.
- Nine-month 2011 revenue included a one-time, non-cash $10.3m reduction from a change in the estimate of remaining service obligations to annual eFax subscribers. This also reduced 2011 net income by approximately $7.6m after tax. The reported 2012 year-over-year revenue comparison therefore benefits from a lower 2011 base.
- The effective tax rate was 19.9% in Q3 2012 versus 30.6% in Q3 2011, but 22.1% for the first nine months of 2012 versus 13.1% in 2011. The filing cites tax-rate changes and a prior-year reversal of uncertain tax positions.
Outlook, commentary, risks and unusual items
No specific earnings or revenue guidance is provided. Management expected existing cash, short-term investments and operating cash generation to meet anticipated working-capital, capital-expenditure, investment, repurchase and dividend needs for at least the next 12 months. Management also expected to continue evaluating acquisitions and said it expected additional acquisitions in 2012. Future dividends remain subject to board approval and debt-document restrictions.
Key risks identified include customer acquisition and retention, usage and payment declines, competition, acquisition integration, international expansion and foreign exchange, maintaining cash flow to service debt, tax uncertainties, cybersecurity or system failures, telecommunications regulation, and intellectual-property disputes. The company was party to multiple patent and other legal proceedings, including claims and counterclaims; management did not believe the matters were likely to materially harm consolidated results, but acknowledged an adverse resolution could materially affect a particular period. Certain losses were not accrued because they were not considered probable or reasonably estimable.
Other notable exposures include $36.6m of liabilities for uncertain tax positions and ongoing tax audits. Management stated that audit outcomes and any related changes in unrecognized tax benefits could not currently be estimated. The company also disclosed that a 100-basis-point decline in interest rates would reduce annual interest income on its cash and investment holdings to approximately zero, and it did not use interest-rate hedges.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for j2 Global, Inc., not Ziff Davis, Inc.
- Assess recurring subscriber growth separately from patent and technology licensing revenue, which can fluctuate with licensing and litigation outcomes.
- Evaluate nine-month revenue growth against the $10.3m one-time 2011 eFax estimate adjustment.
- Review the 8.0% notes’ interest burden, covenant restrictions, maturity and the company’s capacity to sustain dividends, repurchases and acquisitions.
- Track acquisition integration and final purchase-accounting adjustments; compare the disclosed $30.4m consideration with cash-flow acquisition outlays, reported at $25.1m net of cash acquired.
- Monitor patent litigation, tax audits and uncertain-tax-position liabilities, as well as restrictions on access to foreign-held cash and restricted investments.