Filing summary
Important entity discrepancy: The supplied filing is a Form 10-Q for j2 Global Communications, Inc., not Ziff Davis, Inc. It covers the quarter ended June 30, 2010 and was signed August 5, 2010. The summary below reflects the filing text; verify the issuer before relying on it.
Business context and reporting period
j2 Global provides internet-based fax, voicemail, email and call-handling services, principally through subscription and usage fees. It reports one operating segment. Results are for Q2 and the six months ended June 30, 2010, compared with the corresponding 2009 periods. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $61.3 | $62.5 | $121.6 | $122.9 |
| Gross profit | $50.9 | $50.9 | $100.9 | $99.9 |
| Operating earnings | $25.9 | $27.6 | $50.4 | $54.0 |
| Net earnings | $18.7 | $11.1 | $36.3 | $29.8 |
| Diluted EPS | $0.41 | $0.25 | $0.80 | $0.66 |
| Operating cash flow | Not separately stated | Not separately stated | $47.0 | $51.5 |
- Q2 revenue declined about 1.8%; six-month revenue declined about 1.0%. Q2 and six-month net earnings increased about 68% and 22%, respectively. Comparisons benefited from a $9.2 million investment impairment recorded in 2009, not repeated in 2010.
- Gross margin was approximately 83.1% in Q2 2010 versus 81.4% in Q2 2009; operating margin was approximately 42.2% versus 44.1%. For the six-month periods, gross margin was approximately 83.0% versus 81.3%, and operating margin approximately 41.4% versus 44.0%.
- At June 30, cash and cash equivalents were $212.0 million; short- and long-term investments were $52.9 million, for total cash and investments of $264.9 million. Current assets were $242.9 million and current liabilities $31.3 million. The balance sheet reported no borrowings; the company had an undrawn $25 million revolving credit facility.
- Operating cash flow was $47.0 million for the first half, down from $51.5 million. Investing activities used $28.6 million and financing activities used $2.1 million. Cash and cash equivalents increased $14.6 million during the period.
- Total liabilities were $68.8 million, including a $34.0 million liability for uncertain tax positions. Stockholders’ equity was $374.4 million. The filing does not provide a separate conventional debt balance beyond noting that the credit line had never been drawn.
Material changes versus prior comparable periods
- Subscriber revenue decreased modestly, while the number of paying telephone numbers rose to 1.335 million from 1.274 million year over year. Average monthly revenue per paying telephone number fell to $14.37 from $14.96 in Q2.
- Management attributed subscriber-revenue softness to a product mix shift away from premium products, partly offset by subscriber-base growth. Other revenue fell to $0.8 million from $1.4 million in Q2, mainly due to lower patent-related and advertising revenue.
- Cost of revenue declined to 17% of revenue from 19%, which management attributed primarily to network efficiencies and lower depreciation. Sales and marketing expense increased, reflecting higher worldwide marketing activity; general and administrative expense also rose, including acquisition-related amortization and compensation costs.
- First-half investment in acquisitions and intangible assets increased: acquisitions used $16.6 million of cash and intangible-asset purchases used $5.3 million. Four businesses or asset portfolios were acquired during the first half for total consideration of $18.7 million, including assumed liabilities.
- Uncertain-tax-position liabilities declined from $46.8 million at year-end 2009 to $34.0 million, following effective settlement of the transfer-pricing portion of an IRS audit covering 2004–2008.
Outlook, risks, contingencies and unusual items
- Management expected existing cash, cash equivalents, short-term investments and operating cash generation to meet anticipated working-capital, capital-expenditure and investment needs for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- Management said the company did not expect illiquid auction-rate securities to impair normal operations given its other liquidity sources. Auction-rate securities were valued using Level 3 methods; their $2.3 million fair value was less than 1% of total assets.
- A 100-basis-point immediate interest-rate decline was estimated to reduce annual interest income by approximately $2.6 million. The company also cited foreign-exchange, customer retention and acquisition, competition, technology, regulation, cybersecurity, telecommunications-provider and intellectual-property risks. It reported no currency hedging instruments.
- The company disclosed numerous patent disputes and other litigation, including counterclaims seeking damages and injunctive relief, plus consumer class-action allegations relating to fees after free trials. Management did not consider the disclosed proceedings likely to have a material adverse effect based on its current knowledge, but said an unfavorable resolution could materially affect a particular period. No loss contingency was accrued because outcomes were not considered probable or reasonably estimable.
- Contractual obligations totaled $31.2 million, mainly operating leases and telecom/co-location commitments. The $34.0 million uncertain-tax-position liability was excluded from that table because payment amounts and timing were uncertain.
- In July 2010, after quarter-end, j2 Global acquired substantially all assets of a U.K. voice-services business; the filing described the financial impact as immaterial at acquisition.
Most important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is for j2 Global Communications, Inc., not Ziff Davis, Inc.
- Assess the durability of subscriber growth against falling revenue per paying telephone number and lower total subscriber revenue.
- Separate underlying earnings trends from the prior-year $9.2 million impairment comparison and review the effect of rising marketing and acquisition-related costs.
- Review investment liquidity and valuation, especially auction-rate securities, and the company’s substantial cash held in foreign jurisdictions; repatriation could incur U.S. tax.
- Monitor tax audits and the uncertain-tax-position balance, material litigation and counterclaims, acquisition integration, and the terms and compliance requirements of the undrawn credit facility.