Ziff Davis, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The filing was issued under Ziff Davis, Inc.; the company was formerly J2 Global, Inc. Results include the cloud fax business before its October 7, 2021 spin-off as Consensus Cloud Solutions.
Business context and reporting period
The company operated Digital Media and Cloud Services businesses. Digital Media earns revenue mainly from advertising, subscriptions and licensing; Cloud Services primarily earns recurring subscription and usage revenue. It sold certain UK Voice assets in February and its B2B Backup business in September 2021. On October 7, it completed the cloud fax spin-off, distributed 80.1% of Consensus to shareholders and retained 19.9%.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $444.3 million | $357.0 million | $1,271.5 million | $1,020.4 million |
| Gross profit | $380.0 million | $301.2 million | $1,086.0 million | $848.6 million |
| Income from operations | $96.1 million | $77.4 million | $236.3 million | $205.7 million |
| Net income | $42.6 million | $60.9 million | $136.2 million | $92.6 million |
| Diluted EPS | $0.88 | $1.31 | $2.86 | $1.93 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $430.3 million | $356.0 million |
Revenue grew 24% in Q3 and 25% for the nine-month period. Gross margin was approximately 85.5% in Q3 versus 84.4%, and 85.4% for nine months versus 83.2%. Operating margin was approximately 21.6% in Q3 versus 21.7%, and 18.6% for nine months versus 20.2%. Net margin was approximately 9.6% in Q3 versus 17.1%, and 10.7% for nine months versus 9.1%.
For the nine months, operating cash flow of $430.3 million less capital expenditures of $87.5 million implies approximately $342.8 million of cash flow after capital expenditures. Investing activities used $159.6 million; financing activities provided $39.8 million. Cash and cash equivalents were $546.5 million at September 30, up from $242.7 million at December 31, 2020. Cash, cash equivalents and investments totaled $657.2 million.
Debt had a $1.679 billion carrying value, including $568.1 million classified as current; principal included $1.3 billion of notes and a $485 million bridge loan. The company reported compliance with its debt covenants. Total liabilities were $2.461 billion and stockholders’ equity was $1.369 billion. Management said existing cash and expected operating cash flows should cover anticipated needs for at least 12 months.
Material changes versus prior comparable periods
- Digital Media revenue rose 40.5% in Q3 and 44.8% for nine months, primarily reflecting acquisitions. Digital Media operating income increased to $49.7 million for Q3 and $124.4 million for nine months.
- Cloud Services revenue rose 7.0% in Q3 and 4.3% for nine months, but operating income declined 6.0% and 15.1%, respectively, amid higher costs and the B2B Backup impairment.
- Q3 net income declined despite higher revenue and operating income, mainly reflecting a $24.6 million loss on sale of businesses and lower other income. Nine-month net income increased, with lower tax expense and a $16.6 million equity-method investment gain among the factors; results also included $32.6 million of goodwill impairment and $16.7 million of investment losses.
- Operating cash flow improved by $74.2 million year over year. Cash rose substantially, while debt carrying value increased, including the bridge loan used to fund redemption of the 3.25% convertible notes.
Outlook, management commentary and risks
Management expected fiscal 2021 revenue to exceed the prior year, excluding the fax spin-off impact, citing acquisitions and organic growth. It expected Digital Media revenue to be higher in the remainder of 2021, while noting COVID-19 uncertainty. Management anticipated lower future operating profit margins as Digital Media becomes a larger share of revenue and the higher-margin cloud fax business leaves the company. It also cited lower margins for newer mobile advertising formats and continuing acquisition-related uncertainty. No numeric earnings or revenue guidance was provided.
Consensus paid Ziff Davis approximately $269.6 million cash and issued $500 million of senior notes due 2028; Ziff Davis exchanged those notes with lenders to extinguish the $485 million bridge loan. After quarter-end, Ziff Davis accepted tenders for $83.3 million principal of its 4.625% Senior Notes for $90 million. The spin-off also involved leadership changes: the former President and CFO left to lead Consensus, and Ziff Davis appointed an interim principal financial officer while searching for a CFO.
Risks include the effects of the spin-off on revenue and margins, acquisition integration and valuation, advertising trends, customer retention and usage, cybersecurity and system disruptions, currency and interest-rate exposure, and debt-service capacity. The company disclosed ongoing income-tax audits and stated that any resulting change in uncertain tax positions could be material, although the amount could not be estimated. It had a $24.4 million reserve for indirect-tax matters and noted that additional liabilities were reasonably possible. Pending litigation included securities and derivative actions; management did not consider materially unfavorable outcomes probable, but acknowledged an adverse resolution could materially affect a particular period.
Investor verification priorities
- Review post-spin-off financial statements to assess the remaining business’s revenue mix, margins, cash flows and debt after removal of cloud fax.
- Reconcile the $500 million Consensus notes exchange, bridge-loan extinguishment, cash proceeds and subsequent $90 million senior-note tender in updated debt disclosures.
- Assess the sustainability and organic contribution of Digital Media growth, including acquisition effects and visit trends; Q3 visits declined to 2.047 billion from 2.197 billion.
- Track tax audits, the $24.4 million indirect-tax reserve and the potential range of additional exposure as more information becomes available.
- Evaluate the carrying values of investments and goodwill, including the B2B Backup disposal loss and the OCV Fund investment, whose results are reported on a one-quarter lag.