j2 Global, Inc. — Q3 2013 Form 10-Q
Issuer identification: The supplied filing is for j2 Global, Inc., not Ziff Davis, Inc. Ziff Davis is discussed as a j2 Global subsidiary and operating business. Reporting period ended September 30, 2013; amounts below are in U.S. dollars.
Business context and reporting period
j2 Global operated Business Cloud Services, including subscription, usage and intellectual-property licensing, and Digital Media, including online content and advertising. Digital Media was added following the 2012 Ziff Davis acquisition and expanded through acquisitions during 2013. Interim statements are unaudited; nine-month comparisons are for the periods ended September 30, 2013 and 2012.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $127.8 million | $93.2 million | $382.8 million | $269.4 million |
| Operating income | $39.3 million | $42.3 million | $124.9 million | $119.9 million |
| Net income | $27.6 million | $31.7 million | $86.4 million | $91.4 million |
| Diluted EPS | $0.59 | $0.69 | $1.85 | $1.96 |
| Operating cash flow | — | — | $134.9 million | $123.5 million |
- Revenue rose 37% in Q3 and 42% for the nine-month period. Gross profit was $106.0 million in Q3 and $318.1 million year to date. Gross margin was approximately 82.9% in Q3, versus 82.5% a year earlier.
- Despite higher revenue, Q3 operating income fell about 7% and net income fell about 13%. Sales and marketing rose 129% in Q3, and general and administrative expense rose 75%; management attributed much of the increase to acquired businesses, related personnel and severance, advertising, and acquired-intangible amortization.
- Business Cloud Services Q3 revenue was $94.4 million, up 1.2%, while segment operating income declined 6.1% to $45.9 million. Digital Media generated $33.5 million of Q3 revenue and $0.9 million of segment operating income; its nine-month segment operating loss was $3.6 million. There is no comparable prior-year Digital Media segment period presented.
- Business Cloud Services paying telephone numbers were 2.218 million versus 2.077 million. Q3 ARPU was $12.87 versus $13.27; the cancel rate was 2.3% in both periods.
- Cash and cash equivalents were $199.2 million at September 30, down from $218.7 million at year-end. Cash plus short- and long-term investments totaled $374.1 million, including $8.2 million of restricted short-term investments. Current assets were $397.0 million and current liabilities $116.5 million.
- Nine-month investing cash outflow was $132.0 million, including $81.6 million of acquisitions, net of cash acquired; financing cash outflow was $21.2 million, including $33.3 million of dividends. Cash and cash equivalents decreased $19.5 million during the period.
- Long-term debt carrying value was $245.5 million, representing $250 million principal of 8.0% senior unsecured notes due 2020. The company reported covenant compliance and no borrowings under its revolving credit agreement.
Material changes and unusual items
- 2013 acquisitions included IGN, MetroFax, Backup Connect, NetShelter, Email Protection Agency and other smaller businesses. Acquisitions contributed $50.3 million of nine-month revenue; acquired net income was not separately identifiable. Total consideration was $114.0 million, including assumed liabilities, and purchase accounting remained provisional.
- A $27 million OpenText patent-license agreement contributed approximately $12.6 million of revenue related to past damages in Q2 2013, supporting year-to-date Business Cloud Services growth. Patent licensing revenue can vary substantially by period.
- Q3 net income attributable to j2 Global common shareholders was $27.8 million; consolidated net income was $27.6 million because of the allocation of a noncontrolling-interest loss.
- Available-for-sale investments included $38.1 million of equity securities. Unrealized investment gains contributed to other comprehensive income; these gains are not operating earnings.
Outlook, risks and contingencies
- Management expected Business Cloud Services revenue trends to remain generally stable and Digital Media revenue to improve over coming quarters as acquisitions were integrated. It anticipated consolidated revenue trends improving, excluding future acquisitions and volatile IP licensing revenue.
- Management expected operating profit as a percentage of revenue to generally decline as lower-margin Digital Media grows faster than Business Cloud Services. It also warned that advertising shifts to mobile and newer formats may pressure margins, partly offset by scale benefits.
- Management noted that Business Cloud Services typically has lower usage and sign-ups in Q4, while Digital Media is seasonally more active during the Q4 holiday period. No numeric earnings or revenue guidance was provided.
- Management believed cash, short-term investments and operating cash flow would cover anticipated needs for at least 12 months. Foreign-held cash and investments totaled $162.5 million; repatriation could trigger U.S. tax.
- Risk factors include acquisition integration and purchase-accounting uncertainty, competition, customer retention and payment declines, cybersecurity and system disruptions, regulation, foreign exchange, investment and interest-rate exposure, debt obligations, and dependence on intellectual property and advertising performance.
- The company disclosed multiple patent, contract and other lawsuits. Management did not believe the matters, after existing reserves, were likely to materially affect consolidated results overall, but said an unfavorable resolution could materially affect a particular period. Some matters were not accrued because losses were not considered probable or reasonably estimable.
- Uncertain tax-position liabilities were $41.5 million. U.S., California and Canadian tax audits were ongoing; the company could not estimate the amount or timing of any potential changes. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and scope: this filing is j2 Global’s consolidated 10-Q, with Ziff Davis included as a subsidiary, not a standalone Ziff Davis filing.
- Assess whether acquisition-driven revenue growth can translate into sustained Digital Media profitability and whether elevated sales, marketing and administrative costs persist.
- Separate recurring subscriber growth from the timing-sensitive OpenText patent-license revenue and other IP licensing transactions.
- Review final acquisition purchase accounting, integration progress, goodwill and intangible balances, and the effects of acquired businesses on cash flows.
- Monitor $250 million of 8% notes, dividend commitments, covenant restrictions, tax audits and uncertain tax liabilities, as well as developments in disclosed litigation.