SEC Filing Summary
Important identity note: The request identifies Ziff Davis, Inc., but the supplied Form 10-Q is for j2 Global Communications, Inc. for the quarter ended March 31, 2011. Confirm the filing and issuer before relying on this summary.
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. The unaudited report covers the three months ended March 31, 2011, with comparisons to the same 2010 quarter. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $73.4 million, up 21.8% from $60.3 million. Subscriber revenue was $72.9 million; other revenue was $0.5 million.
- Profitability: Gross profit was $57.6 million versus $50.0 million; gross margin was approximately 78.5%, compared with 83.0%. Operating earnings were $23.1 million versus $24.5 million; operating margin was approximately 31.4%, compared with 40.6%.
- Net earnings and EPS: Net earnings were $30.9 million versus $17.6 million. Basic and diluted EPS were $0.69 and $0.66, respectively, versus $0.40 and $0.39.
- Cash flow: Operating cash flow was $38.2 million, compared with $34.7 million. Investing activities provided $0.9 million versus using $46.9 million; financing activities provided $2.2 million versus using $0.6 million.
- Liquidity: Cash and cash equivalents were $106.9 million, and short- and long-term investments totaled $19.8 million, for cash and investments of $126.7 million. Current assets were $158.4 million and current liabilities $55.6 million.
- Debt and obligations: The filing reports no borrowings under its credit agreement. Contractual obligations totaled $38.4 million. It also reported $26.0 million of liabilities for uncertain tax positions.
- Operating metrics: Paying DIDs rose to 1.930 million from 1.315 million; total active DIDs increased to 13.175 million from 11.598 million.
Material changes and unusual items
- A change in estimate for remaining service obligations to annual eFax subscribers led to a one-time, non-cash $10.3 million increase in deferred revenue and an equal reduction in revenue. Management said this reduced net income by approximately $7.6 million after tax and EPS by $0.17 basic and $0.16 diluted.
- The reported $8.2 million income tax benefit, versus a $7.0 million tax provision a year earlier, included reversal of approximately $14.1 million of uncertain tax positions following expiration of statutes of limitations. The reported increase in net earnings therefore reflects a significant tax-related benefit.
- Cost of revenue rose to $15.8 million from $10.3 million, which management attributed primarily to acquired businesses not yet fully integrated. Sales and marketing, research and development, and general and administrative expenses also increased, with acquired-business costs and other stated factors contributing.
- Revenue by customer location shifted: U.S. revenue was $44.4 million versus $51.2 million, while revenue from all other countries rose to $29.0 million from $9.1 million. The filing says the eFax estimate change reduced subscriber revenue predominantly in the United States.
Outlook, risks and contingencies
- Management expected existing cash, cash equivalents, short-term investments and operating cash flow to meet anticipated working-capital, capital-expenditure and investment needs for at least the next 12 months. The filing gives no specific revenue or earnings guidance.
- Risks identified include customer acquisition and retention, competition, international expansion and foreign exchange, telecommunications and privacy regulation, technology and security failures, integration of acquisitions, and intellectual-property disputes.
- The company disclosed multiple patent and other lawsuits, including claims involving Open Text, EasyLink, AGV and Xpedite. Management did not believe the matters were likely, based on current knowledge, to materially harm consolidated results overall, but said an unfavorable resolution could materially affect a particular period. Wordcheck was settled on May 4, 2011 and was in the process of dismissal.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2010 Form 10-K.
Key facts for investors to verify
- Confirm issuer identity: the supplied filing is for j2 Global Communications, Inc., not Ziff Davis, Inc.
- Assess the $10.3 million revenue deferral and its effect on comparisons, recurring revenue trends and future recognition.
- Separate operating performance from the $14.1 million uncertain-tax-position reversal when evaluating earnings and EPS.
- Review acquisition integration costs, changes in margins, and the substantial shift in reported international revenue.
- Monitor tax audits and uncertain tax liabilities, litigation developments, and the liquidity and valuation risks in investments, including auction-rate securities.