Business context and reporting period
This is j2 Global, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed February 29, 2016. The request identifies Ziff Davis, Inc., but the registrant is j2 Global; Ziff Davis is part of its Digital Media business. j2 Global operates Business Cloud Services, including fax, voice, backup, email and IP licensing, and Digital Media, including technology and gaming websites, advertising and performance marketing.
Financial performance and liquidity
Unless noted otherwise, amounts are in U.S. dollars. Annual results compare fiscal 2015 with fiscal 2014; fourth-quarter results compare Q4 2015 with Q4 2014.
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $720.8 million | $599.0 million | +20% |
| Gross profit / margin | $597.9 million / 82.9% | $493.0 million / 82.3% | Margin +0.6 percentage points |
| Operating income / margin | $199.4 million / 27.7% | $186.2 million / 31.1% | Income +7%; margin -3.4 points |
| Net income | $133.6 million | $125.3 million | +7% |
| Diluted EPS | $2.73 | $2.58 | +6% |
| Operating cash flow | $229.1 million | $177.2 million | +29% |
For Q4 2015, revenue was $204.8 million versus $167.1 million (+23%); gross profit was $170.2 million versus $138.1 million; net income was $35.5 million versus $32.8 million; and diluted EPS was $0.72 versus $0.66.
- Segments: Business Cloud Services revenue was $504.6 million (+17%), with operating income of $210.2 million (+11%) and a 41.7% segment operating margin, down from 44.0%. Digital Media revenue was $216.4 million (+29%), while operating income was essentially flat at $30.4 million; its segment margin fell to 14.1% from 18.2%.
- Revenue mix: Business Cloud Services generated 70% of revenue and Digital Media 30%. Fax and voice represented 49.1% of consolidated revenue, down from 58.3% in 2014. Fixed subscription revenue grew to $414.9 million from $348.3 million; non-number-based cloud revenue grew to $152.0 million from $83.7 million.
- Costs and margins: General and administrative expense rose 53% to $205.1 million, including higher amortization, acquisition-related costs, contingent consideration and bad debt expense. A $16.2 million increase in the fair value of acquisition earn-outs was recorded in this expense category. Interest expense, net increased to $42.5 million from $31.2 million, primarily following the 2014 convertible-note issuance.
- Cash and liquidity: Year-end cash and cash equivalents were $255.5 million, down from $433.7 million. Cash plus short- and long-term investments totaled $413.7 million, versus $590.4 million. Working capital was $286.2 million, versus $486.8 million; current assets were $482.8 million and current liabilities $196.7 million.
- Debt: Long-term debt carrying value was $601.2 million; principal outstanding was $652.5 million, comprising $250 million of 8% Senior Notes due 2020 and $402.5 million of 3.25% Convertible Notes due 2029. The notes have covenants and specified repurchase or conversion provisions. Cash interest paid in 2015 was $33.1 million.
- Capital allocation: The company paid $58.8 million in dividends in 2015 and declared a subsequent quarterly dividend of $0.325 per share. The board extended its authorization to repurchase up to five million shares through February 20, 2017; cumulative program repurchases were 2.1 million shares at a cost of $58.6 million through year-end 2015.
Material changes, outlook and risks
- Revenue growth reflected organic growth and acquisitions. j2 Global completed multiple 2015 acquisitions for total consideration of approximately $314.0 million, including SugarSync, Salesify, LiveVault and Offers.com. These acquisitions contributed $52.4 million of reported 2015 revenue; acquired earnings were not separately identifiable. Goodwill rose to $807.7 million from $635.7 million.
- Net cash used in investing activities increased to $335.7 million, largely reflecting $302.8 million of net cash paid for acquisitions. Financing activities used $67.4 million, primarily for dividends, acquisition deferrals and share repurchases.
- Management expected Business Cloud Services revenue and profit to be stable for the foreseeable future, excluding acquisitions. It expected Digital Media revenue and profits to improve over the next several quarters as acquisitions were integrated and online advertising expanded, but noted that mobile and newer ad formats generally have lower margins. Overall, management anticipated improved consolidated revenue and profits, excluding future acquisitions and variable IP-licensing revenue, and expected operating margin to generally stabilize. These are expectations, not numerical guidance.
- Management stated that cash, short-term investments and operating cash generation should cover anticipated needs for working capital, capital expenditures, investments, repurchases and dividends for at least 12 months. A substantial amount of cash and investments was held abroad; repatriation could incur U.S. tax.
- Key risks include reliance on fax-related revenue (disclosed as 42% of consolidated revenue), competition and advertising volatility, mobile monetization and ad blocking, acquisition integration and earn-out exposure, cybersecurity and service interruptions, privacy and regulatory changes, foreign exchange, and debt service and covenant constraints.
- Potentially material contingencies include income-tax audits and indirect-tax disputes. The company reported $35.9 million of liabilities for uncertain tax positions and no reserve for certain indirect-tax matters it considered not probable and estimable. Several lawsuits remained pending, including a patent appeal, a TCPA-related case and a tentative late-fee class settlement subject to court approval; management did not consider material litigation losses probable. The filing notes that adverse outcomes could nevertheless materially affect a particular period.
- The 2015 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. Management and the auditor excluded the 2015 acquisitions from their internal-control assessments because of acquisition timing; those businesses represented approximately 17% of year-end assets and 7% of annual revenue.
Important facts for investors to verify
- Confirm the entity and scope: the filer is j2 Global, Inc.; Ziff Davis is a component of its Digital Media business, not the registrant named in the request.
- Assess the sources and durability of growth, distinguishing organic performance from acquisition contributions and reviewing the integration and returns on the substantial acquisition spending.
- Track margin pressure: consolidated operating margin declined despite revenue growth, and Digital Media operating income was flat while revenue increased.
- Review debt terms, cash interest burden, conversion and repurchase triggers, covenants, and the location and accessibility of cash and investments.
- Monitor tax and legal exposures, including the $35.9 million uncertain-tax-position liability, unreserved indirect-tax matters and pending litigation.
- Evaluate dividend and repurchase sustainability against cash flows, acquisition plans and debt obligations; future dividends remain subject to board approval.