Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The filing describes two segments: Business Cloud Services and Digital Media. Ziff Davis is referenced as part of the company’s Digital Media operations; the filing registrant is j2 Global, Inc.
Financial performance
Amounts are in U.S. dollars. Quarterly and six-month results are compared with the corresponding 2016 periods.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $273.2 million | $211.8 million | $527.8 million | $412.3 million |
| Gross profit | $230.0 million | $176.2 million | $443.9 million | $342.4 million |
| Income from operations | $58.6 million | $58.9 million | $106.5 million | $112.3 million |
| Net income | $31.4 million | $33.8 million | $57.2 million | $63.7 million |
| Diluted EPS | $0.63 | $0.69 | $1.16 | $1.30 |
- Revenue increased 29% in Q2 and 28% in the first half. Gross margin was approximately 84.2% in Q2, versus 83.2% a year earlier; operating margin declined to about 21.4% from 27.8%.
- For the first half, gross margin was about 84.1%, versus 83.1%; operating margin was about 20.2%, versus 27.2%. Higher sales and marketing and general and administrative costs, including acquisition-related costs and amortization, weighed on operating results.
- Business Cloud Services Q2 revenue rose 1.6% to $144.7 million and segment operating income increased 10.7% to $58.1 million. Digital Media revenue rose 85.2% to $128.5 million, primarily following the Everyday Health acquisition, while segment operating income fell 12.2% to $10.1 million.
- Six-month operating cash flow was $111.7 million, down from $132.1 million. Capital expenditures were $18.9 million, implying operating cash flow less capex of approximately $92.7 million. Investing activities used $56.1 million; financing activities provided $411.5 million, principally reflecting debt issuance and repayment activity.
- At June 30, cash and cash equivalents were $330.7 million, with a further $265.0 million classified as restricted cash for the planned note redemption. Current assets were $805.5 million and current liabilities $483.7 million; reported current assets include restricted cash and should not be read as entirely available liquidity.
- Debt carrying value totaled $1.243 billion, including $246.7 million of current maturities and $996.4 million of long-term debt. The company issued $650 million of 6.0% senior notes due 2025 and used proceeds to repay its $225 million credit facility and fund redemption of its 8.0% notes. The $250 million principal of 8.0% notes was redeemed on August 1, 2017 for $265 million including premium and accrued interest.
- The company paid dividends of $0.375 per share in Q2. The board subsequently approved a $0.385 per-share dividend, payable September 1, 2017, subject to the stated record date.
Material changes, outlook, and risks
- Management attributed revenue growth to acquisitions and organic growth. Everyday Health was the main driver of Digital Media growth; management said its lower margins were pressuring consolidated profitability and expected margins to trend toward historical levels as integration progresses and amortization is substantially realized.
- Management expected Business Cloud Services revenue and profit to remain stable, excluding acquisitions, assuming a stable or improving economy. It expected Digital Media revenue and profit to improve over coming quarters as acquisitions are integrated and online advertising expands, while noting mobile and newer ad formats may pressure margins. Overall, it anticipated improved consolidated revenue and profit excluding future acquisitions and variable IP-licensing revenue, but also expected operating profit as a percentage of revenue to generally decline as Digital Media becomes a larger share of the business.
- Management said existing cash, investments, operating cash flow, and debt resources should be sufficient for anticipated needs for at least the next 12 months. It also disclosed that substantial cash was held abroad and that repatriation could incur U.S. tax.
- Cambridge BioMarketing was classified as held for sale in Q2 and sold for cash on July 12. Management did not expect a material gain or loss; the financial impact was to be recorded in Q3.
- Unusual items included a $1.4 million Q2 share-based compensation charge related to accelerated vesting, and foreign-exchange losses of $4.2 million in Q2 versus $0.1 million a year earlier. First-half foreign-exchange losses were $4.6 million versus $0.9 million.
- Risks include substantial indebtedness and restrictive note covenants, the ability to generate cash for debt service and acquisitions, acquisition integration and margin execution, currency exposure, and regulatory or tax uncertainty. The filing reports ongoing tax audits and indirect-tax examinations; a Massachusetts tax assessment appeal was decided against an affiliate, and management said audit outcomes could cause material tax expense or benefit. Management did not consider the disclosed litigation likely to have a material adverse effect based on current knowledge, while noting an unfavorable outcome could affect a particular period.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Track whether Digital Media integration improves segment operating income and margins, and assess the contribution and costs of Everyday Health.
- Reconcile post-redemption debt, cash available for operations, interest expense, and compliance with the 6.0% notes’ covenants.
- Assess the quality and sustainability of operating cash flow, including working-capital movements and acquisition-related payments.
- Monitor Cambridge’s Q3 disposal accounting and any resulting gain or loss.
- Follow the outcomes of income- and indirect-tax audits, including the Massachusetts matter, and any changes to uncertain tax liabilities.
- Distinguish the filing’s legal registrant, j2 Global, from the Ziff Davis subsidiary/business referenced in the company structure.