Business context and reporting period
This is j2 Global, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The filing describes Cloud Services (fax, voice, backup, security, email marketing and IP licensing) and Digital Media (advertising, subscriptions and content). The request identifies Ziff Davis, Inc., but the filing itself names j2 Global, Inc.; investors should confirm the intended issuer.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $292.7 | $273.6 | $861.2 | $801.5 |
| Gross profit | $243.5 | $231.2 | $716.1 | $675.1 |
| Operating income | $57.1 | $63.0 | $157.6 | $169.5 |
| Net income | $30.7 | $32.4 | $78.1 | $89.6 |
| Diluted EPS | $0.61 | $0.66 | $1.57 | $1.81 |
- Revenue grew 7% in both comparison periods, primarily from acquisitions and organic growth. Gross margin was approximately 83.2% in Q3 versus 84.5% a year earlier; operating margin was approximately 19.5% versus 23.0%.
- Q3 operating income declined about 9% and net income about 5%. For the nine months, operating income declined about 7% and net income about 13%.
- Cloud Services revenue was $150.1 million in Q3, up 3%; segment operating income rose 1.7% to $57.1 million. Digital Media revenue was $142.7 million, up 11.6%, but segment operating income fell 43.2% to $7.0 million as acquisition-related and other operating costs increased.
- Q3 Cloud Services ARPU was $15.61 versus $15.26, while its cancel rate was 2.2% in both periods. Digital Media visits increased to 1.949 billion from 1.394 billion.
- Net interest expense fell to $15.2 million in Q3 from $25.3 million, mainly reflecting the prior-period debt extinguishment and increased interest income. General and administrative expense increased 23% to $93.8 million; it included higher amortization, acquisition costs and a $14.4 million year-to-date increase in contingent-consideration fair value.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $294.1 million, up from $179.0 million. Management attributed the increase primarily to lower accounts receivable and higher depreciation and amortization, partly offset by lower accounts payable and accrued expenses and lower income taxes payable.
- Investing cash outflow was $271.7 million, including $191.6 million for acquisitions, $44.9 million for capital expenditures and $34.6 million for the OCV equity-method investment. Financing cash outflow was $67.2 million, including $60.7 million of dividends.
- Cash and cash equivalents were $303.5 million, down from $350.9 million at year-end 2017. Cash and investments totaled $386.0 million, including $82.5 million of long-term investments. The company held $216.7 million domestically and $169.3 million in foreign jurisdictions.
- Long-term debt carrying value was $1.011 billion; principal outstanding was $1.053 billion, comprising $650 million of 6.0% senior notes due 2025 and $402.5 million of 3.25% convertible notes due 2029. The company reported covenant compliance. It expected cash and operating cash generation to cover anticipated needs for at least 12 months.
- Cash dividends paid were $1.245 per share in the first nine months. A $0.435 quarterly dividend was approved after quarter-end, subject to the stated record and payment dates and Board approval.
Changes, outlook, risks and unusual items
- During the first nine months, the company completed acquisitions including ThreatTrack Security, Line2, Mosaik Solutions, DW PRIME, The Communicator Corporation and smaller businesses. These acquisitions contributed $26.1 million in revenue; their net income contribution was not separately identifiable. A further acquisition, Ekahau, closed October 10, 2018.
- Management expected Cloud Services revenue and profit to remain stable, excluding acquisitions, and expected Digital Media revenue and profit to improve over coming quarters as acquisitions were integrated. It anticipated overall improvement excluding future acquisitions, but also expected consolidated operating margin to generally decline as Digital Media represents a larger revenue share. Management noted mobile advertising formats tend to carry lower margins. No specific numerical earnings or revenue guidance was provided.
- ASC 606 adoption increased reported Q3 revenue and net income by $2.9 million and nine-month revenue and net income by $7.7 million versus amounts without adoption. The company expected adoption of the lease standard on January 1, 2019 to materially affect the balance sheet and disclosures; it reported $78.1 million of aggregate lease obligations at September 30, 2018.
- Risks include acquisition integration and contingent payments, advertising-market and margin shifts, customer retention and payment declines, currency movements, debt and covenant capacity, cybersecurity and system failures, regulatory and privacy requirements, and tax exposures. Indirect-tax assessments were described as not material in aggregate, but a $4.6 million reserve was recorded and additional liabilities could materially affect results.
- Legal matters included a Canadian contract/negligence suit with a trial anticipated in January 2020, a Massachusetts sales-tax dispute, and a TCPA class action remanded toward state court after an appellate ruling. Management did not consider materially unfavorable outcomes probable, but noted an adverse resolution could materially affect a particular period. The company also disclosed multiple tax audits and $55.7 million of uncertain income tax positions.
- The $200 million OCV fund commitment is a related-party arrangement involving entities associated with the Board chairman; fees include a 2% annual management fee and potential 20% carried interest. The company had paid $34.8 million in capital calls through September 30.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for j2 Global, Inc., not Ziff Davis, Inc.
- Review the quality and sustainability of revenue growth, including acquisition contributions, and the substantial decline in Digital Media segment operating income.
- Assess cash conversion, planned acquisition spending, dividend commitments and the company’s ability to manage approximately $1.05 billion of debt principal.
- Track acquisition-related contingent consideration, provisional purchase accounting and the performance of the acquired businesses.
- Monitor tax audits, indirect-tax exposure, litigation developments, foreign-currency effects and the anticipated lease-standard balance-sheet impact.