Filing identity and reporting period
The supplied filing is j2 Global Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011—not a Ziff Davis filing as stated in the request metadata. The company provides cloud-based communications, messaging and data-backup services. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $85.7m | $61.3m | $159.1m | $121.6m |
| Gross profit | $70.5m | $50.9m | $128.1m | $100.9m |
| Operating earnings | $37.9m | $25.9m | $61.0m | $50.4m |
| Net earnings | $28.5m | $18.7m | $59.4m | $36.3m |
| Diluted EPS | $0.61 | $0.41 | $1.27 | $0.80 |
| Operating cash flow | Not separately reported | Not separately reported | $80.6m | $47.0m |
- Q2 revenue rose about 40%, operating earnings 47%, and net earnings 52% year over year. Q2 gross margin was about 82.3% versus 83.1%; operating margin was about 44.3% versus 42.2%.
- For the first half, revenue grew about 31% and operating earnings about 21%. Gross margin was about 80.5% versus 83.0%, and operating margin about 38.4% versus 41.4%. Net earnings rose about 64%, substantially affected by the unusually low tax provision.
- At June 30, cash and cash equivalents were $129.7m, short-term investments $21.2m and long-term investments $20.7m, for total cash and investments of $171.6m. Total assets were $607.5m and total liabilities $103.3m. The filing reports no borrowings under its credit agreement; it does not show funded debt on the balance sheet.
- Six-month investing cash outflow was $23.0m and financing cash inflow was $6.6m. Cash increased $65.0m in the first half. Management said cash, short-term investments and expected operating cash flows should meet anticipated needs for at least 12 months.
Material changes versus comparable periods
- Subscriber revenue increased to $85.3m in Q2 from $60.6m; other revenue declined to $0.4m from $0.8m. Management attributed subscriber growth to a larger subscriber base, including acquired customers, direct and enterprise sales, website acquisitions and free-to-paid upgrades.
- Paying telephone numbers increased to 1.961m from 1.335m year over year. The company reported 13.253m total active telephone numbers.
- Cost of revenue rose faster than revenue in the first half, partly because acquired businesses were not yet fully integrated. Sales and marketing, research and development, and general and administrative costs also increased, with acquisitions, marketing, personnel, bad debts and acquired-intangible amortization among the cited drivers.
- First-half operating cash flow increased to $80.6m from $47.0m. Deferred revenue rose to $27.7m from $16.9m at year-end, including the effect of the eFax estimate change described below.
Outlook, unusual items, and risks
- Estimate change: In Q1, updated information about remaining service obligations to annual eFax subscribers led to a one-time, non-cash $10.3m increase in deferred revenue and corresponding reduction in first-half revenue. The company said the change reduced six-month net income by about $7.6m after tax and basic/diluted EPS by $0.17/$0.16.
- Taxes: The six-month effective tax rate was 2.5% versus 29.6% in 2010; Q2’s rate was 25.4%. The first-half tax expense included a roughly $14.1m reversal of uncertain tax positions following statute-of-limitations expirations, along with effects from foreign tax credits, the R&D credit and a greater share of income in lower-tax jurisdictions. Tax audits are ongoing; the company said any potential change in recorded benefits could not currently be estimated.
- Acquisitions and capital allocation: July 2011 acquisitions added online backup and virtual PBX businesses; their financial impact was described as immaterial at acquisition. On August 1, the board approved quarterly cash dividends, with an initial $0.20 per share payable September 19, 2011; future dividends remain subject to board approval.
- Litigation: The company faces multiple patent disputes, including claims brought against it and claims it brought to enforce its patents, as well as other litigation. Management did not believe the matters, after existing reserves, were likely to materially affect consolidated results overall, but acknowledged an unfavorable outcome could materially affect a particular period. Some matters were not accrued because losses were not considered probable or reasonably estimable.
- Other risks: The filing highlights customer acquisition and retention, competition, integration of acquisitions, telecommunications regulation, system failure or security breach, patent disputes, taxes, foreign currency and interest-rate exposure. A portion of auction-rate securities remained illiquid; $0.538m was classified as Level 3 fair value. The company reported no material changes to its previously disclosed risk factors.
- No specific revenue or earnings guidance is provided. Management’s stated outlook is that liquidity is adequate for anticipated needs over at least the next 12 months.
Important facts for investors to verify
- Confirm the issuer: the source is j2 Global Communications, Inc., notwithstanding the Ziff Davis metadata.
- Assess the recurring earnings impact of the $10.3m eFax revenue deferral and the unusually low first-half tax expense, including the $14.1m tax-position reversal.
- Track organic subscriber and paying-number growth separately from acquisition-driven growth, and monitor whether acquired operations are integrated without further margin pressure.
- Review the status and possible financial exposure of the patent and other litigation, and the outcomes of the disclosed tax audits.
- Confirm subsequent dividend declarations and cash needs, including contractual commitments of $34.1m and the limited liquidity of auction-rate securities.