Filing summary
Registrant and period: The supplied filing is j2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not a Ziff Davis, Inc. filing. Ziff Davis was a j2 Global subsidiary and its digital media business is included in the filing. The filing also provides unaudited fourth-quarter results.
Business context and reporting period
j2 Global operated two segments: Business Cloud Services, offering subscription and usage-based communications and other cloud services plus IP licensing, and Digital Media, earning primarily advertising and licensing revenue from web properties. The company emphasized acquisitions as a growth strategy; 2013 acquisitions included IGN Entertainment, NetShelter, MetroFax and others. The filing says its Digital Media properties generated 2.2 billion visits and 7.3 billion page views in 2013.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Revenue | $520.8 million | $371.4 million | Up 40%; acquisition activity was a major contributor. |
| Gross profit / margin | $433.9 million / 83% | $304.4 million / 82% | Gross margin improved approximately 1 percentage point. |
| Operating income / margin | $175.4 million / 34% | $162.2 million / 44% | Income rose 8%; margin declined as operating expenses grew faster than revenue. |
| Net income attributable to common shareholders | $107.5 million | $121.6 million | Down about 12%; diluted EPS was $2.28 versus $2.61. |
| Operating cash flow | $193.3 million | $169.9 million | Up about 14%. |
| Cash and investments | $345.9 million | $343.6 million | Includes $207.8 million cash and equivalents; $182.4 million was held abroad. |
| Working capital | $274.1 million | $298.6 million | Declined year over year. |
| Debt | $250 million principal; $245.7 million carrying value | $250 million principal | 8.0% senior unsecured notes due 2020; no revolving facility borrowings. |
Capital spending on property and equipment was $18.6 million. Investing cash outflow was $167.4 million, including $126.3 million of net acquisition spending. Financing cash outflow was $35.7 million, including $45.1 million of dividends paid. The company had $40 million available under its revolving credit facility, extended to November 2016, and said cash, short-term investments and operating cash flow should meet anticipated needs for at least 12 months.
Fourth quarter and segment performance
- Q4 2013: Revenue was $138.0 million, compared with $102.0 million in Q4 2012. Net income attributable to common shareholders was $20.8 million, versus $30.2 million; diluted EPS was $0.44 versus $0.65.
- Business Cloud Services: FY revenue was $390.1 million, up 7.9%; segment operating income was $198.9 million, up 6.2%, with a 51% segment operating margin. Paying telephone numbers rose to approximately 2.234 million from 2.094 million.
- Digital Media: FY segment revenue was $131.1 million and operating income was $6.7 million. The prior-year comparison is limited because the segment was established following the November 2012 Ziff Davis acquisition.
Material changes, outlook, risks and unusual items
- Sales and marketing expense increased 109% to $131.3 million, and general and administrative expense rose 67% to $101.7 million, largely reflecting acquired businesses and related costs. Amortization expense rose to $30.2 million from $16.0 million.
- Net income included a $14.4 million loss on extinguishment of debt and related interest expense arising from the December 31 reorganization of Ziff Davis and acquisition of minority interests. The filing attributes $12.9 million to other expense and $1.6 million to interest expense.
- Management expected Business Cloud Services revenue and profit to increase, excluding acquisitions, assuming a stable or improving economy. It expected Digital Media revenue and profit to increase as acquisitions were integrated and online advertising grew. Management also expected consolidated revenue and profit to increase, but forecast general pressure on operating margin as the lower-margin Digital Media segment grew faster; mobile and newer advertising formats were cited as additional margin pressures.
- Acquisitions completed in 2013 contributed $98.1 million of revenue; their net income contribution was not separately identifiable. Total consideration was $163.5 million, and purchase accounting remained provisional. LiveDrive was acquired in February 2014, after year-end.
- Income tax expense was $35.2 million and the effective tax rate was 24.7%, up from 21.5%. The company reported $43.9 million of liabilities for uncertain tax positions and multiple U.S. and foreign tax audits. It had no balance-sheet reserve for indirect taxes under audit, stating the potential liability was not probable and estimable.
- Patent, contract, antitrust and TCPA-related proceedings were pending. Management did not consider an adverse outcome probable or reasonably estimable and recorded no litigation loss contingency; it cautioned that an unfavorable resolution could materially affect a particular period.
- Key business risks include reliance on fax-related revenue and paid subscribers, dependence on advertising demand and third-party distribution and telecom providers, cyber/security and service-interruption exposure, regulatory and privacy changes, competition, acquisition integration, and debt covenants. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the entity and scope: this is j2 Global’s 2013 Form 10-K, with Ziff Davis reported as a subsidiary/segment.
- Review the drivers and sustainability of revenue growth, particularly acquisition contributions, subscriber retention and usage, and Digital Media advertising monetization.
- Assess the Q4 earnings decline and the $14.4 million Ziff Davis reorganization-related charge, including how much reflects a nonrecurring event.
- Review tax audit exposure, the $43.9 million uncertain-tax-position liability, and potential indirect-tax assessments for which no reserve was recorded.
- Evaluate acquisition integration and returns, Digital Media’s low reported segment operating income, debt service and covenant restrictions, and the location and potential repatriation cost of foreign cash.