Filing summary
Issuer and period: The supplied filing is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012. This does not match the request metadata naming Ziff Davis, Inc.; verify the intended company and filing before relying on this summary.
Business context and reporting period
j2 Global provides cloud services for businesses, including online fax, virtual phone, hosted email, backup, and customer relationship management. It reports one business segment. Results below compare Q2 and the first half of 2012 with the same periods in 2011; amounts are in millions of dollars unless stated otherwise.
Financial and operating metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $89.5 | $85.7 | $176.1 | $159.1 |
| Gross profit | $73.3 | $70.5 | $144.1 | $128.1 |
| Operating earnings | $40.0 | $37.9 | $77.6 | $61.0 |
| Net earnings | $31.2 | $28.5 | $59.7 | $59.4 |
| Diluted EPS | $0.67 | $0.61 | $1.27 | $1.27 |
| Operating cash flow | Not separately reported | Not separately reported | $85.3 | $80.6 |
Q2 revenue increased 4.4%, operating earnings 5.5%, and net earnings 9.4%. Derived Q2 gross, operating, and net margins were approximately 81.9%, 44.7%, and 34.9%, respectively, versus 82.3%, 44.3%, and 33.3% a year earlier. First-half revenue rose 10.7% and operating earnings 27.2%; net earnings were nearly flat. First-half subscriber revenue was $172.9 million, comprising $142.4 million fixed and $30.5 million variable revenue. Paying telephone numbers increased to 2.058 million from 1.961 million.
At June 30, cash and cash equivalents were $142.9 million, short-term investments $41.7 million, and long-term investments $22.2 million: total cash and investments of $206.8 million, down from $220.9 million at year-end 2011. Some $17.0 million of short-term investments was restricted until maturity. Total assets were $649.3 million and total liabilities $105.8 million. The company had not drawn on its Union Bank credit facility at quarter-end. It subsequently issued $250 million of 8.0% senior unsecured notes due 2020 on July 26, 2012, with expected net proceeds of $243 million.
Cash from operations was $85.3 million; investing activities used $6.7 million and financing activities used $76.0 million during the first half. Financing outflows included $60.2 million of stock and restricted-stock repurchases and $19.9 million of dividends. The company repurchased 2.1 million shares for $58.6 million under its repurchase program.
Material changes versus the prior comparable period
- First-half 2012 subscriber revenue benefited from comparison with a $10.3 million one-time, non-cash revenue reduction recorded in first-quarter 2011 after a change in the estimate of remaining service obligations to annual eFax subscribers. The 2011 adjustment reduced net income by approximately $7.6 million and EPS by $0.17 basic and $0.16 diluted.
- Other revenue increased to $3.2 million in the first half from $0.9 million, primarily due to higher patent and technology licensing revenue.
- First-half 2012 income tax expense was $18.0 million versus $1.5 million in 2011. The prior-year comparison included a $14.1 million reversal of uncertain tax positions; the reported effective tax rates were 23.2% and 2.5%, respectively.
- First-half investing included $18.8 million of cash outflow for acquisitions, net of cash received. Four acquisitions closed in Q1—online backup, CRM, and cloud voice businesses—with total consideration of $22.4 million net of cash acquired; purchase accounting remained provisional.
- Goodwill increased to $289.3 million from $279.0 million at year-end. One tradename was reclassified from indefinite-lived status and will be amortized over its estimated remaining 1.5-year life.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, cash equivalents, short-term investments, and operating cash generation should be sufficient for anticipated needs for at least the next 12 months. It expected additional immaterial acquisitions in 2012 and said it may pursue material acquisitions in the near term. No earnings or revenue guidance was provided.
- Management identified customer growth and retention, usage and payment declines, competition, integration of acquisitions, international expansion and currency movements, cybersecurity and system reliability, regulation, intellectual property, and tax uncertainty among key risks.
- The new notes raise indebtedness to approximately $250 million after issuance and carry an 8.0% coupon. The filing describes restrictive debt covenants, including limits on additional debt, dividends, repurchases, investments, and asset sales, as well as risks to financial flexibility and debt service. Future dividends remain subject to Board approval and applicable restrictions.
- Uncertain tax-position liabilities totaled $33.7 million at June 30. Federal, state, and Canadian tax audits were ongoing; the company said the timing and amount of any changes could not currently be estimated.
- The company was involved in multiple patent and other legal disputes, including cases involving Open Text/EasyLink, RingCentral, EC Data, IGC, and Xpedite. Management did not consider the disclosed matters likely to materially affect consolidated results based on current knowledge, but noted an adverse resolution could materially affect a particular period; certain losses were not accrued because they were not considered probable or estimable.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm that j2 Global, Inc.—not Ziff Davis, Inc.—is the intended issuer and that the June 30, 2012 reporting period is correct.
- Review the $250 million notes’ terms, covenant limits, use of proceeds, and their effect on interest expense, dividends, repurchases, and acquisition capacity.
- Assess the sustainability of operating cash flow and revenue growth, including the impact of acquired businesses and the nonrecurring 2011 eFax revenue adjustment.
- Track resolution of tax audits and the $33.7 million uncertain-tax-position liability, as well as material litigation developments and any resulting accruals.
- Check the final purchase accounting and subsequent performance of the four acquisitions, and the status of restricted investments and foreign-held cash.