Filing Summary
Issuer identification: The supplied filing is for J2 Global, Inc. (NASDAQ: JCOM), not Ziff Davis, Inc. It is a Form 10-Q for the quarter ended September 30, 2019, filed November 8, 2019. Investors should verify that this is the intended filing.
Business context and reporting period
J2 Global provides cloud services—including fax, voice, backup, security, privacy and email marketing—and digital media services, including advertising, subscriptions and content. Results below compare the three and nine months ended September 30, 2019 with the comparable 2018 periods. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $344.1M | $292.7M | $966.5M | $861.2M |
| Gross profit / margin | $282.4M / 82.1% | $243.5M / 83.2% | $793.5M / 82.1% | $716.1M / 83.2% |
| Operating income / margin | $59.4M / 17.2% | $57.1M / 19.5% | $166.8M / 17.3% | $157.6M / 18.3% |
| Net income | $30.7M | $30.7M | $95.8M | $78.1M |
| Diluted EPS | $0.62 | $0.61 | $1.93 | $1.57 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $309.3M | $294.1M |
For the first nine months, investing activities used $472.9M, primarily for acquisitions; capital expenditures were $49.5M. Financing activities provided $46.9M, including net credit-facility proceeds. Cash and cash equivalents were $92.2M at September 30, 2019, down from $209.5M at year-end 2018. Cash plus long-term investments totaled $189.0M, versus $293.3M at year-end.
Long-term debt was $1.151B, including $128.0M drawn on the credit facility; it was $1.013B at December 31, 2018. The credit facility had $200M available in total and matures in 2024. Current assets were $344.9M and current liabilities $410.1M. The company reported compliance with debt covenants. No material off-balance-sheet arrangements were reported.
Material changes versus prior comparable periods
- Q3 revenue increased 18%; nine-month revenue increased 12%. Management attributed growth primarily to acquisitions and organic growth.
- Digital Media revenue rose 21% in Q3 and 15% for nine months, largely from acquisitions. Its operating income declined 22% in Q3 and 12% for nine months, reflecting higher acquired-business costs, amortization, depreciation and allocated corporate expenses.
- Cloud Services revenue rose 14% in Q3 and 9.5% for nine months, primarily from acquisitions; operating income rose 6.8% and 5.6%, respectively.
- Margins declined: consolidated gross margin was about 82.1% versus 83.2% in both comparison periods; operating margin also fell. Net income was nearly flat in Q3 but increased 23% for the nine-month period.
- Seven acquisitions and other smaller transactions were completed in the first nine months. Total consideration was $425.8M, net of cash acquired and assumed liabilities; acquired businesses contributed $68.3M of reported revenue. Acquired-business net income was not separately identifiable.
Outlook, commentary, risks and unusual items
- Management expects Cloud Services revenue and profits to remain stable, excluding acquisitions, and expects Digital Media revenue and profits to improve over the next several quarters as acquisitions are integrated. It anticipates overall improvement excluding future acquisitions, but provided no quantified guidance.
- Management expects operating profit as a percentage of revenue to generally decline, citing Digital Media’s growing share of consolidated revenue and its historically lower operating margins. It also cited lower margins for newer mobile advertising formats.
- The company said cash, cash equivalents and operating cash generation should cover anticipated needs for working capital, capital expenditures and stock repurchases for at least 12 months. Acquisitions remain a significant capital-allocation priority.
- The board suspended dividends after the June 4, 2019 payment for the foreseeable future, citing investment opportunities. The company repurchased 197,870 shares for $16.0M during the first nine months.
- Risks include acquisition integration and returns, competition, customer retention and payment declines, debt service and covenant limits, foreign exchange, cybersecurity and system disruptions, regulation, and income and indirect taxes. A 100-basis-point increase in variable rates would increase annual interest expense by an estimated $1.3M.
- The company held a $21.6M reserve for indirect-tax matters; additional liabilities were reasonably possible and could materially affect results. Income-tax audits were ongoing, and management said changes to uncertain tax positions could be material, though the amount could not be estimated.
- Disclosed litigation included a putative TCPA class action with class certification contested and a separate Ontario case with a trial anticipated in February 2021. No material loss contingency was accrued; management did not consider materially unfavorable outcomes probable, while acknowledging an adverse outcome could affect a particular period.
- The company’s OCV Fund investment involves a related party: the fund manager and general partner are entities linked to the board chairman. J2 committed $200M and reported a $43.4M carrying value; it paid $22.3M in capital calls and received a $10.3M distribution in the first nine months.
Important facts for investors to verify
- Confirm issuer identity: this filing is J2 Global, Inc. (JCOM), not Ziff Davis, Inc.
- Assess how much reported growth and future performance depend on acquisitions, integration and provisional purchase-accounting estimates.
- Review the decline in operating margins and Digital Media operating income, alongside acquisition-related amortization and other costs.
- Evaluate liquidity after substantial acquisition spending, increased debt, and the suspension of dividends; review credit-facility covenants and variable-rate exposure.
- Track the $21.6M indirect-tax reserve, uncertain income-tax positions and the status of disclosed litigation.
- Review the related-party OCV commitment, fund performance, fees and remaining capital obligations.