Filing summary
Entity and period: The supplied filing identifies the registrant as j2 Global Communications, Inc. (NASDAQ: JCOM), not Ziff Davis, Inc. It is a Form 10-K for the fiscal year ended December 31, 2010; quarterly results include the fourth quarter. Financial amounts below are in U.S. dollars.
Business context and key metrics
j2 Global provided cloud-based communications, messaging and data-backup services, including online fax, virtual phone, hosted email, email marketing and online backup. It operated in one reportable segment. Its business remained heavily dependent on DID-based services, particularly fax: these generated $242.0 million, or about 95% of 2010 revenue. At year-end it reported 1.905 million paying DIDs and 13.099 million total active DIDs.
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $255.4 million | $245.6 million | +4.0% |
| Gross profit / margin | $211.3 million / 82.7% | $200.8 million / 81.8% | Margin +0.9 percentage points |
| Operating earnings / margin | $103.9 million / 40.7% | $104.5 million / 42.5% | Earnings −0.5% |
| Net earnings | $83.0 million | $66.8 million | +24.3% |
| Diluted EPS | $1.81 | $1.48 | +22.3% |
| Operating cash flow | $96.4 million | $101.8 million | −5.4% |
| Cash and cash equivalents | $64.8 million | $197.4 million | −67.2% |
| Cash and investments | $87.0 million | $243.7 million | −64.3% |
| Working capital | $57.6 million | $227.5 million | −74.7% |
Fixed subscriber revenue was $205.5 million, up from $197.9 million; variable subscriber revenue rose to $47.0 million from $44.0 million. Average monthly revenue per paying DID was reported as $12.44, versus $15.09 in 2009; management said the 2010 figure was distorted by the timing of the Protus acquisition and would be $14.43 using a monthly weighted-average calculation.
Material changes and unusual items
- j2 Global acquired eight businesses during 2010, including Canadian SaaS provider Protus IP Solutions, acquired in December. Protus contributed $6.2 million of reported 2010 revenue. The filing reports approximately $230.3 million for Protus, net of cash acquired and including assumed liabilities, and $274.6 million of total consideration for all 2010 acquisitions, net of cash acquired.
- Acquisition-related investing cash outflow was substantial: net cash used in investing activities was $231.1 million, primarily reflecting acquisitions and investment purchases. Goodwill increased to $281.8 million from $81.3 million, largely due to acquisitions.
- Sales and marketing expense rose to $46.3 million from $37.0 million, including higher worldwide marketing and acquired-business personnel costs. Advertising expense increased to $36.3 million from $28.3 million.
- Operating margin declined despite higher gross margin, as operating expenses rose. Net earnings benefited from $6.8 million of interest and other income, including about $4.4 million of gains on investment sales, and a lower effective tax rate (24.9%, versus 31.7%).
- Unlike 2009, when the company recorded $9.3 million of other-than-temporary investment impairment losses and a $2.4 million long-lived-asset disposal, neither item materially recurred in 2010.
Liquidity, debt and outlook
Operating cash flow remained strong at $96.4 million, but cash and investments fell mainly because of acquisition spending. The company said existing cash, cash equivalents, short-term investments and expected operating cash flows should cover anticipated working capital, capital expenditure and investment needs for at least 12 months. It had no outstanding borrowings under its $40 million revolving credit facility, which matures August 16, 2013; the facility carries financial and other covenants. No specific revenue or earnings guidance was provided.
The company paid no cash dividends. A board-authorized repurchase program allowed repurchases of up to 10 million shares through April 30, 2012; 6,300 shares were repurchased under the program during 2010. Management cited growth in paying DIDs and new services as objectives, but warned that DID-based revenue would remain dominant.
Risks, contingencies and controls
- Key business risks include reliance on fax and DID-based services, pressure on average revenue per subscriber, competition, customer acquisition and retention, dependence on third-party carriers and marketing channels, and service interruption, security and privacy risks.
- Regulatory and legal exposure includes telecommunications and indirect taxes, restrictions on unsolicited fax or email, and multiple patent disputes. Management said pending matters were not expected, after reserves, to materially affect consolidated results, but unfavorable outcomes could affect a particular period. Some litigation contingencies were not accrued because losses were not considered probable or reasonably estimable.
- Uncertain tax-position liabilities totaled $37.9 million at year-end. The company disclosed a California tax audit and other state tax audits. A subsequent event states that expiration of federal statutes of limitations in January 2011 was expected to produce approximately $12.4 million of tax benefits, including associated interest and penalties, in first-quarter 2011.
- The company retained substantial foreign earnings for reinvestment and said repatriation could incur U.S. tax at an approximate blended federal and state rate of 40%. It reported no foreign-exchange hedging.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; internal controls were reported effective at December 31, 2010.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for j2 Global Communications, Inc., not Ziff Davis, Inc.
- Assess the contribution and integration economics of 2010 acquisitions, especially Protus, whose earnings contribution was not separately identifiable in the filing.
- Reconcile paying-DID growth with the decline in reported average monthly revenue per paying DID, including the acquisition-timing adjustment.
- Evaluate whether operating cash generation can sustain acquisition activity and liquidity after the large 2010 cash outflow.
- Monitor the $37.9 million uncertain-tax-position liability, expected 2011 tax benefit, tax audits and potential repatriation costs.
- Track pending patent and other litigation, DID/carrier access, customer retention, and the company’s ongoing dependence on fax-related revenue.