Daily Journal Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparisons are to the three months ended December 31, 2016 unless otherwise noted. Daily Journal operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and related services, primarily to government justice agencies.
Financial performance and position
- Revenue: $10.252 million, up $262,000 (2.6%). Journal Technologies revenue rose 10% to $6.171 million and represented about 60% of consolidated revenue. Traditional Business revenue declined to $4.081 million from $4.397 million.
- Operating results: Operating loss was $3.445 million versus $2.853 million; operating margin was approximately negative 33.6% versus negative 28.6%. Pretax loss was $2.111 million versus $1.781 million.
- Net income and tax: Net income was $14.739 million ($10.67 per share), compared with a $1.471 million loss ($1.07 per share). The result included a $16.850 million income-tax benefit, principally reflecting the Tax Act’s revaluation of deferred tax balances; it does not indicate a comparable improvement in operating performance.
- Cash flow: Operating cash flow was negative $814,000, improved from negative $1.311 million. Investing cash flow was negative $34,000 and financing cash flow negative $28,000. Cash fell $876,000 to $2.508 million.
- Liquidity and investments: Working capital was $230.284 million. Cash plus marketable securities totaled $247.442 million at December 31. Marketable securities had fair value of $244.934 million, including $181.540 million of pretax unrealized gains.
- Debt: Investment-margin borrowings were $29.493 million, secured by marketable securities and bearing a 2% rate at quarter-end; they do not mature. The real-estate loan was about $2.043 million, with a fixed 4.66% rate and payments through 2030.
- Comprehensive income: $26.857 million, including $12.118 million of after-tax unrealized appreciation in marketable securities.
Changes, outlook and risks
- Journal Technologies revenue growth was led by licensing and maintenance fees (+$384,000) and consulting fees (+$147,000), but its operating loss widened to $3.212 million from $2.850 million as operating expenses rose 11%, mainly due to personnel and computer-service costs. Traditional Business operating results also weakened, with a $233,000 operating loss versus near breakeven.
- Traditional advertising and circulation revenue declined. Foreclosure notices published fell 15% year over year. Management expects fewer foreclosure and other public-notice advertisements and declining related revenue in fiscal 2018; it expects print-based earnings to decline significantly because expense reductions may not offset all revenue losses. No quantified company-wide earnings or revenue guidance is provided.
- The Tax Act reduced the federal corporate rate to 21% effective January 1, 2018. The reported quarter’s tax benefit includes an approximately $16 million discrete deferred-tax benefit; approximately $20 million of deferred-tax revaluation related to items previously recorded in accumulated other comprehensive income.
- The investment portfolio was concentrated in seven companies, with most unrealized gains in three U.S. financial institutions and one foreign manufacturer. A significant decline in holdings could reduce equity and potentially trigger impairment losses. Management said it believes resources are sufficient to fund operations for the foreseeable future.
- Other stated risks include changes to legal public-notice requirements or newspaper adjudication status, declines in subscriptions and commercial advertising, software development and implementation challenges, cybersecurity incidents, and dependence on government-agency engagements. Management reported no goodwill impairment indicator. It said adoption of ASC 606 had no significant financial impact and remediated the previously identified revenue-recognition material weakness; certain IT-control improvements were also made. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of future net income reflects ongoing operations versus the one-time deferred-tax revaluation benefit.
- Whether Journal Technologies can grow revenue while controlling costs and narrowing its operating losses.
- The pace of public-notice revenue declines and the effect of legal or adjudication changes on the Traditional Business.
- The concentration, fair value, and sensitivity of the securities portfolio, including margin borrowing collateral and exposure to market declines.
- Progress and sustained effectiveness of internal-control remediation, and execution, cybersecurity, and collection risks in software contracts with government customers.