Business context and reporting period
Filing identity: The supplied filing is j2 Global, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2015, filed August 10, 2015. This does not match the request metadata naming Ziff Davis, Inc.; Ziff Davis, LLC is identified in the filing as an unrestricted subsidiary of j2 Global. Verify the issuer before relying on this summary.
j2 Global operated Business Cloud Services, including subscription, usage-based and intellectual-property licensing services, and Digital Media, including advertising and lead generation. Comparisons below are with the corresponding 2014 period unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $176.0 million | $144.7 million | $337.3 million | $278.9 million |
| Gross profit | $146.5 million | $119.2 million | $279.6 million | $229.9 million |
| Income from operations | $50.1 million | $44.8 million | $90.6 million | $86.4 million |
| Net income | $38.9 million | $35.0 million | $60.8 million | $63.8 million |
| Diluted EPS | $0.80 | $0.73 | $1.25 | $1.33 |
| Operating cash flow | Not separately stated | Not separately stated | $97.6 million | $91.8 million |
Q2 revenue rose 22%; six-month revenue rose 21%. Gross margin was approximately 83.2% in Q2 versus 82.3% and 82.9% for the first half versus 82.4%. Operating margin was approximately 28.4% in Q2 versus 31.0%, and 26.8% for the first half versus 31.0%. The filing attributes the margin pressure primarily to higher general and administrative costs, including acquired-intangible amortization and acquisition-related costs.
- Segments: Q2 Business Cloud Services revenue was $125.2 million, up 17.5%, with operating income of $52.3 million, up 12.9%. Digital Media revenue was $50.9 million, up 33.0%, with operating income of $9.9 million, versus $5.6 million. Management attributed growth to acquisitions and, for Digital Media, organic growth.
- Cash and liquidity: At June 30, cash and cash equivalents were $415.9 million; short- and long-term investments totaled $151.4 million; combined cash and investments were $567.3 million, down from $590.4 million at year-end 2014. Six-month operating cash flow was $97.6 million; investing cash use was $83.5 million and financing cash use was $29.7 million.
- Debt: Carrying value of long-term debt was $597.2 million, comprising $246.5 million of 8.0% Senior Notes due 2020 and $350.7 million carrying value on $402.5 million principal of 3.25% Convertible Notes due 2029. The company reported compliance with Senior Notes covenants. Debt fair value was approximately $734.9 million.
- Other: Total assets were $1.727 billion and stockholders’ equity $849.2 million. Dividends paid were $28.6 million in the first half; the board later approved a $0.3075-per-share dividend payable September 1, 2015. The effective tax rate was 0.5% in Q2 and 13.3% for the first half, benefiting from an IRS settlement and reversal of uncertain tax positions.
Material changes versus the prior period
- Revenue growth was broad-based: Business Cloud Services benefited mainly from acquisitions, while Digital Media growth reflected organic expansion and acquisitions. Business Cloud Services’ fixed subscription revenue increased; non-DID-based revenue also rose materially.
- Operating expenses increased faster than revenue: Q2 general and administrative expense rose 50% to $47.1 million; first-half expense rose 55% to $93.6 million. Amortization expense increased to $17.6 million for Q2 and $34.6 million for the first half.
- Interest expense rose to $10.9 million in Q2 and $21.2 million for the first half, primarily reflecting the Convertible Notes issued in June 2014. Net income and EPS declined for the first half despite revenue and operating-income growth.
- Acquisitions completed in the first half included Firstway, Nuvotera, EmailDirect, SugarSync and smaller online backup businesses. They contributed $11.3 million of first-half revenue; their net income was not separately identifiable. Consideration was $74.9 million, net of cash acquired and assumed liabilities. Purchase accounting remained provisional.
Outlook, risks and contingencies
- Management expected Business Cloud Services revenue and profits to continue, excluding acquisitions, assuming a stable or improving economy; it cautioned that IP-licensing results can vary substantially by period. Management anticipated Digital Media improvement over coming quarters as acquisitions are integrated and online advertising grows, while noting lower margins in mobile and newer ad formats. Consolidated improvement was expected excluding future acquisitions and volatile IP-licensing revenue. No numerical earnings or revenue guidance was provided.
- Management said existing cash, short-term investments and operating cash flow should cover anticipated working capital, capital expenditures, repurchases and dividends for at least the next 12 months. A substantial portion of foreign cash was intended for reinvestment abroad; repatriation could incur U.S. tax.
- Risks include acquisition integration and purchase-accounting changes, advertising-market and mobile-margin pressures, customer churn and payment declines, debt service and restrictive covenants, foreign exchange and interest-rate exposure, cybersecurity or system failures, and changing telecommunications, privacy and indirect-tax regulation.
- Legal matters included state and local indirect-tax disputes and audits, patent litigation and purported class actions concerning fax transmissions and customer late fees. Management did not consider the listed proceedings probable to cause a material adverse effect overall, but acknowledged that an unfavorable outcome could materially affect a particular period. The company had no reserves for certain indirect-tax matters it deemed not probable and estimable; additional expense remained reasonably possible.
- Uncertain income-tax-position liabilities were $25.1 million. The IRS settled its 2009–2010 examination in April 2015, reducing uncertain-tax liabilities by $9.3 million; other tax audits remained open. The company also carried $13.0 million of contingent consideration tied to Ookla earn-out thresholds.
Important facts for investors to verify
- Confirm the issuer and filing match the intended Ziff Davis, Inc. coverage; the filing itself is for j2 Global, Inc.
- Review acquisition contribution, integration costs, provisional purchase accounting and the sustainability of organic growth in both segments.
- Assess whether elevated amortization, general and administrative expense, interest expense and lower first-half EPS constrain future earnings and margins.
- Evaluate debt repayment and conversion terms, covenant headroom, and the difference between debt carrying value and disclosed fair value.
- Track tax and indirect-tax audits, litigation developments, foreign-cash repatriation exposure, and the company’s capacity to maintain dividends while funding acquisitions.