Filing Summary: j2 Global Communications, Inc. — Form 10-Q
Period: Quarter and nine months ended September 30, 2011. The supplied filing identifies the registrant as j2 Global Communications, Inc., not Ziff Davis, Inc.; confirm the filing is for the intended company.
Business context and reporting period
j2 Global provided cloud-based communications, messaging, and data-backup services, including online fax, virtual phone systems, hosted email, and online backup. It reported one operating segment. The interim financial statements are unaudited.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars. Third-quarter comparisons are against Q3 2010; nine-month comparisons are against the corresponding 2010 period.
| Metric | Q3 2011 | Nine months 2011 |
|---|---|---|
| Revenue | $86.0, up 37% | $245.1, up 33% |
| Gross profit / margin | $71.0 / 82.6% | $199.1 / 81.3% |
| Operating earnings / margin | $36.4 / 42.4% | $97.5 / 39.8% |
| Net earnings | $25.5, up 29% | $84.9, up 51% |
| Diluted earnings per share | $0.54 | $1.81 |
| Operating cash flow | Not stated for quarter | $109.2, versus $74.2 |
At September 30, cash and cash equivalents were $134.2 million, short-term investments $29.0 million, and long-term investments $30.6 million, totaling $193.8 million in cash and investments. Current assets were $200.2 million and current liabilities $53.5 million. Total liabilities were $104.5 million; the company reported no borrowings under its Union Bank credit agreement. Nine-month capital expenditures were $5.1 million, dividends paid were $9.5 million, and investing cash outflow was $49.0 million. Management said existing cash, short-term investments, and operating cash generation were expected to meet anticipated needs for at least 12 months.
Material changes versus prior comparable periods
- Subscriber revenue rose 38% in Q3 and 34% for the nine months. Paying telephone numbers increased to 1.994 million from 1.411 million; management attributed subscriber growth to acquisitions and organic customer additions.
- Other revenue declined 43% in Q3 and 41% year to date, primarily due to lower advertising and reduced patent-related revenue as certain licensed patents expired.
- Operating expenses increased, reflecting acquired businesses, marketing, personnel, bad debt, professional fees, and acquisition-related intangible amortization. Nine-month cost of revenue rose 46%, and its share of revenue increased from 17% to 19%.
- Nine-month net earnings benefited from a lower effective tax rate: 13.1% versus 29.2% in 2010. The filing cites releases of uncertain tax positions following statute expirations, foreign tax credits, research credits, and a greater share of income in lower-tax jurisdictions.
- Cash and investments rose from $87.0 million at December 31, 2010 to $193.8 million at September 30, 2011. The balance sheet reflects a July 2011 acquisition of Data Haven and certain Buzz Networks assets for $3.4 million net of cash acquired.
Outlook, commentary, risks, and unusual items
- Revenue estimate adjustment: In Q1, the company changed its estimate of remaining service obligations for annual eFax subscribers, recording a one-time, noncash $10.3 million increase in deferred revenue and equal reduction in revenue. The nine-month net-income reduction was approximately $7.6 million after tax, or $0.17 basic and $0.16 diluted EPS.
- Dividends: The company began quarterly dividends in 2011, paying $0.20 per share in September and declaring $0.205 per share for payment in November. Future dividends remain subject to board approval and credit-agreement restrictions; continuation is not assured.
- Acquisitions: An October 2011 purchase of C Infinity’s online-backup business was disclosed as a subsequent event; its financial impact was described as immaterial at acquisition.
- Litigation: The company disclosed multiple patent disputes and other claims, including infringement actions and counterclaims. Management did not believe the proceedings were likely to have a material adverse effect overall, but noted that an unfavorable resolution could materially affect a particular period. Certain matters were not accrued because losses were not considered probable or reasonably estimable.
- Tax and investment risks: The company had $28.2 million of uncertain tax-position liabilities and ongoing tax audits; potential changes could not be estimated. Some auction-rate securities were illiquid. Foreign-held cash and investments totaled $73.4 million, and repatriation could incur U.S. tax. Management also cited risks from competition, customer retention, international operations and currencies, system/security failures, regulation, acquisitions, and intellectual-property litigation.
Important facts for investors to verify
- Confirm the issuer mismatch: this filing is for j2 Global Communications, Inc., not Ziff Davis, Inc.
- Assess the $10.3 million eFax revenue adjustment and its effect on reported growth and earnings.
- Review the drivers and sustainability of revenue growth, particularly paying-number expansion, acquisitions, and international revenue.
- Evaluate the unusually low nine-month effective tax rate, uncertain tax positions, and pending tax audits.
- Review litigation developments, investment liquidity and credit exposure, and whether future dividends are sustainable and permitted.