Business context and reporting period
This filing is j2 Global, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2012; the request metadata names Ziff Davis, Inc., which does not match the registrant in the filing. j2 Global provides cloud-based business services, including online fax, virtual phone, hosted email, backup, and CRM services.
Financial performance and position
- Revenue was $86.7 million, up 18% from $73.4 million. Subscriber revenue was $84.8 million, up 16%; other revenue was $1.8 million, primarily from increased patent and technology licensing.
- Gross profit was $70.8 million, with an 81.7% gross margin versus 78.5% a year earlier. Operating earnings rose to $37.6 million from $23.1 million; operating margin increased to 43.4% from 31.4%.
- Net earnings were $28.5 million, down from $30.9 million; diluted EPS was $0.60 versus $0.66. The effective tax rate was 22.6%, compared with a tax benefit and negative 36.0% rate in the prior-year quarter.
- Operating cash flow was $38.9 million, compared with $38.2 million. Investing activities provided $2.9 million, while financing activities used $47.3 million, mainly for share repurchases and dividends. Cash and cash equivalents ended at $135.7 million.
- Cash and investments totaled $193.3 million, down from $220.9 million at December 31, 2011. Total assets were $637.9 million and total liabilities $97.7 million. The company reported no borrowings under its Union Bank credit agreement.
- Quarter-end stockholders’ equity was $540.2 million. The company repurchased 1.3 million shares for $38.9 million and paid a $0.21-per-share dividend.
Material changes and unusual items
- Reported first-quarter 2011 revenue included a one-time, noncash $10.3 million reduction from a revised estimate of remaining service obligations for annual eFax subscribers. The filing says this reduced 2011 net income by about $7.6 million after tax. Excluding that revenue adjustment, comparable revenue growth was approximately 3.5%.
- The prior-year quarter also included reversal of approximately $14.1 million of uncertain tax positions, contributing to its tax benefit. The different tax outcomes materially affect year-over-year net earnings comparisons.
- j2 Global acquired Offsite Backup Solutions, Landslide Technologies, Zimo Communications, and Zintel’s Australian business. Total consideration was $22.4 million, net of cash acquired; acquisition accounting remained provisional. Cash-flow statements report $18.8 million for acquisitions, net of cash received.
- Paying telephone numbers increased to 2.025 million from 1.930 million. Fixed subscriber revenue rose to $70.2 million from $57.5 million, while variable subscriber revenue fell to $14.6 million from $15.4 million.
Outlook, risks, and contingencies
- Management expected existing cash, short-term investments, and operating cash generation to cover anticipated working capital, capital spending, investments, repurchases, and dividends for at least 12 months. The company also expected additional immaterial acquisitions in 2012 and said it might pursue material acquisitions; no quantitative earnings or revenue guidance was provided.
- Future dividends are subject to board approval and credit-agreement restrictions. Management approved a subsequent $0.215-per-share quarterly dividend in May 2012.
- Key stated risks include customer acquisition and retention, competition, international expansion and foreign exchange, technology and cybersecurity incidents, regulatory requirements, integration of acquisitions, intellectual-property disputes, and tax uncertainty. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
- Patent and other litigation was ongoing, including cases involving Open Text/EasyLink, RingCentral, Xpedite, and Klausner. Management did not consider the proceedings likely to have a material adverse effect overall, but warned an unfavorable resolution could materially affect a particular period. Certain matters were not accrued because a loss was not considered probable or reasonably estimable.
- Uncertain tax-position liabilities were $31.6 million, and tax audits were ongoing. The company also disclosed investment credit risk and sensitivity to interest rates and foreign currency movements.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for j2 Global, Inc., not Ziff Davis, Inc.
- Assess year-over-year comparability after accounting for the $10.3 million 2011 revenue estimate adjustment and the prior-year tax benefit.
- Review acquired-business performance and final purchase-price allocation, which was provisional; reconcile the $22.4 million stated consideration with acquisition cash flow of $18.8 million net of cash received.
- Monitor cash and investment levels alongside substantial repurchases and dividends, and confirm future distributions remain within board and credit-agreement constraints.
- Track litigation outcomes, tax audits and uncertain tax positions, and acquisition integration.