Business context and reporting period
This is j2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. The request metadata names Ziff Davis, Inc., but the filing’s registrant is j2 Global, Inc. Ziff Davis is associated with the company’s Digital Media business.
j2 Global operates Cloud Services, including fax, voice, backup, security, email marketing and IP licensing, and Digital Media, which earns revenue from advertising, subscriptions, performance marketing and licensing. The filing notes seasonal weakness in Cloud Services in the fourth quarter and seasonal strength in Digital Media.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1,207.3 million | $1,117.8 million | Up 8.0% |
| Gross profit / margin | $1,006.2 million / 83.3% | $945.5 million / 84.6% | Margin down about 1.3 percentage points |
| Operating income / margin | $244.3 million / 20.2% | $245.7 million / 22.0% | Operating income down 0.6% |
| Net income | $128.7 million | $139.4 million | Down 7.7% |
| Diluted EPS | $2.59 | $2.83 | Down 8.5% |
| Operating cash flow | $401.3 million | $264.4 million | Up $136.9 million |
Fourth-quarter 2018 revenue was $346.1 million, up 9.4% from $316.4 million in Q4 2017. Q4 net income was $50.6 million versus $49.9 million; diluted EPS was $1.03 versus $1.02.
Cloud Services revenue rose 3.3% to $598.0 million, and operating income rose 1.8% to $230.1 million. Digital Media revenue rose 13.1% to $609.4 million, while operating income fell 13.8% to $41.4 million. Digital Media visits increased to 7.7 billion from 5.7 billion, and page views to 31.7 billion from 23.7 billion.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $209.5 million; cash and investments totaled $293.3 million, down from $408.7 million a year earlier.
- Working capital was $153.0 million, versus $355.3 million in 2017. Current assets were $460.3 million and current liabilities $307.3 million.
- Long-term debt was $1.013 billion net on the balance sheet; stated principal was $1.0525 billion: $650 million of 6.0% Senior Notes due 2025 and $402.5 million of 3.25% Convertible Notes due 2029. Net interest expense was $62.0 million.
- Cash used in investing activities was $406.6 million, including $312.4 million for acquisitions and $56.4 million for capital expenditures. Financing activities used $131.4 million, including $81.7 million of dividends and $47.1 million of share repurchases. Operating cash flow less capital expenditures was approximately $345 million.
- Management said existing cash and operating cash flow should meet anticipated needs for at least the next 12 months. A new $100 million credit facility, expandable to $150 million, was entered into in January 2019 and had not been drawn as of March 1, 2019.
Material changes, outlook and notable items
- Acquisitions remained a key growth driver. The company completed several 2018 acquisitions for total consideration of $324.7 million; those acquisitions contributed $56.2 million of 2018 revenue. Goodwill increased to $1.38 billion. Purchase accounting for some acquisitions remained provisional.
- Management expected Cloud Services revenue and profits to be stable, excluding acquisitions, and Digital Media revenue and profits to improve over the next several quarters as acquisitions were integrated. It anticipated consolidated revenue and profit improvement, excluding future acquisitions, while warning that operating margin would generally decline as Digital Media grows as a share of revenue and mobile advertising pressures margins. No specific numerical earnings or revenue guidance was provided.
- Digital Media growth did not translate into higher segment operating income: content fees and acquisition-related costs contributed to lower margins and operating income. Consolidated general and administrative expense increased 16%, partly due to acquisition-related amortization, depreciation and personnel costs.
- Adoption of ASC 606 increased 2018 reported revenue and net income by $7.1 million compared with amounts that would have been reported without adoption; 2017 figures were not restated. The company recorded a $1.6 million cumulative adjustment to opening retained earnings.
- Unusual or potentially volatile items included an $18.9 million increase in the fair value of acquisition-related contingent consideration, recorded in general and administrative expense, and a $4.1 million equity-method investment loss. The company committed $200 million over several years to a fund managed by an entity related to its chairman; $36.8 million was funded in 2018.
- Key risks include dependence on advertising and search/social platforms, competition, mobile-ad monetization, cybersecurity and privacy regulation, reliance on fax revenue (about 27% of consolidated revenue), acquisition integration, patent litigation, foreign exchange and debt restrictions. The company reported $59.6 million of liabilities for uncertain tax positions and a $4.6 million reserve for indirect-tax audits. IRS and other tax audits were ongoing.
- The filing describes pending litigation, including a TCPA putative class action remanded to Arkansas state court in January 2019. Management did not consider materially unfavorable outcomes probable and had not accrued material loss contingencies for the described cases; an adverse resolution could nevertheless affect a particular period.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded certain 2018 acquisitions from the internal-control assessment because of their timing; together those acquisitions represented 13.2% of assets and 4.7% of revenue.
Most important facts for investors to verify
- Confirm the entity and period: the supplied filing is j2 Global’s FY 2018 10-K, not a filing under the registrant name Ziff Davis, Inc.
- Assess whether Digital Media can convert substantial audience and revenue growth into operating-income growth, and track acquisition-related costs and margin trends.
- Review acquisition returns, provisional purchase accounting, goodwill and the contingent-consideration liability, particularly the Humble Bundle earn-out.
- Evaluate liquidity against debt service, dividends, repurchases, acquisition spending and the remaining OCV fund commitment; note the convertible-note repurchase dates and conversion terms.
- Monitor tax audits and indirect-tax exposure, pending litigation, privacy and cybersecurity compliance, and the impact of ASC 606 and the 2019 lease-accounting adoption.