j2 Global(US:ZD)2021-05-10 21:01PART I. FINANCIAL INFORMATION Presents J2 Global's unaudited condensed consolidated financial statements and detailed notes for the quarter ended March 31, 2021 Item 1. Financial Statements This section presents J2 Global's unaudited condensed consolidated financial statements for the quarter ended March 31, 2021, including balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, along with detailed notes explaining accounting policies, recent pronouncements, and specific financial line items Condensed Consolidated Balance Sheets This section provides a snapshot of J2 Global's financial position, detailing assets, liabilities, and stockholders' equity as of March 31, 2021, compared to December 31, 2020 Condensed Consolidated Balance Sheets (Unaudited, in thousands): | Metric | March 31, 2021 | December 31, 2020 | Change (vs. Dec 31, 2020) | | :--------------------------------- | :------------- | :---------------- | :------------------------ | | Cash and cash equivalents | $371,971 | $242,652 | +$129,319 | | Total current assets | $675,503 | $622,843 | +$52,660 | | Goodwill | $1,777,745 | $1,867,430 | -$89,685 | | Total assets | $3,703,657 | $3,665,331 | +$38,326 | | Total current liabilities | $867,534 | $882,557 | -$15,023 | | Total liabilities | $2,428,746 | $2,454,313 | -$25,567 | | Total stockholders' equity | $1,274,911 | $1,211,018 | +$63,893 | Condensed Consolidated Statements of Operations This section outlines J2 Global's financial performance, presenting revenues, gross profit, operating income, and net income for the three months ended March 31, 2021 and 2020 Condensed Consolidated Statements of Operations (Unaudited, in thousands except share and per share data): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Total revenues | $398,185 | $332,393 | +$65,792 (+19.8%) | | Gross profit | $340,363 | $273,262 | +$67,101 (+24.6%) | | Income from operations | $78,480 | $55,247 | +$23,233 (+42.0%) | | Net income (loss) | $77,922 | $(6,404) | +$84,326 | | Basic EPS | $1.75 | $(0.13) | +$1.88 | | Diluted EPS | $1.67 | $(0.13) | +$1.80 | Condensed Consolidated Statements of Comprehensive Income (Loss) This section details J2 Global's comprehensive income, including net income and other comprehensive income components like foreign currency translation adjustments for the three months ended March 31, 2021 and 2020 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited, in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Net income (loss) | $77,922 | $(6,404) | +$84,326 | | Foreign currency translation adjustment | $(8,424) | $(8,714) | +$290 | | Comprehensive income (loss) | $69,498 | $(14,410) | +$83,908 | Condensed Consolidated Statements of Cash Flows This section summarizes J2 Global's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2021 and 2020 Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Net cash provided by operating activities | $178,724 | $102,036 | +$76,688 | | Net cash used in investing activities | $(28,956) | $(69,062) | +$40,106 | | Net cash used in financing activities | $(20,139) | $(78,356) | +$58,217 | | Net change in cash and cash equivalents | $129,319 | $(49,061) | +$178,380 | | Cash and cash equivalents at end of period | $371,971 | $526,554 | -$154,583 | Condensed Consolidated Statements of Stockholders' Equity This section presents changes in J2 Global's stockholders' equity, including common stock, additional paid-in capital, retained earnings, and accumulated other comprehensive loss for the period ended March 31, 2021 Condensed Consolidated Statements of Stockholders' Equity (Unaudited, in thousands): | Metric | Balance, January 1, 2021 | Net Income | Repurchase and retirement of common stock | Balance, March 31, 2021 | | :--------------------------------- | :----------------------- | :--------- | :---------------------------------------- | :---------------------- | | Common stock (Amount) | $443 | — | — | $445 | | Additional paid-in capital | $456,274 | — | $(7,221) | $455,625 | | Retained earnings | $809,107 | $77,922 | $(4,958) | $882,071 | | Accumulated other comprehensive loss | $(54,806) | — | — | $(63,230) | | Total Stockholders' Equity | $1,211,018 | $77,922 | $(12,179) | $1,274,911 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations of J2 Global's accounting policies, recent pronouncements, and specific financial line items 1. Basis of Presentation This section describes J2 Global's business segments and highlights the significant management estimates involved in preparing the financial statements - J2 Global operates two main businesses: Digital Media (technology, shopping, gaming, healthcare content, tools, and services) and Cloud Services (cloud fax, cybersecurity, privacy, and marketing technology subscriptions)22 - The preparation of financial statements involves significant management estimates, including revenue recognition, valuation and impairment of investments, business combinations, long-lived asset impairment, contingent consideration, income taxes, and allowances for doubtful accounts26 2. Recent Accounting Pronouncements This section details the adoption of new accounting standards and the ongoing evaluation of their potential impact on J2 Global's financial statements - Adopted ASU 2019-12 (Income Taxes) and ASU 2020-01 (Equity Securities) in Q1 2021, with no material impact on financial statements or disclosures596064 - Currently evaluating the effect of ASU 2020-04 (Reference Rate Reform) and ASU 2020-06 (Convertible Instruments) on financial statements and disclosures6163 3. Revenues This section breaks down J2 Global's revenue streams by source, primarily Digital Media and Cloud Services, and explains revenue recognition policies - Digital Media revenues are primarily from advertising services, subscriptions (video games, health info), licensing assets, and software sales65676869 - Cloud Services revenues are mainly from monthly recurring subscription and usage-based fees for fax, voice, backup, security, CPP, and email marketing73 Revenues by Source (in thousands): | Revenue Source | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Digital Media - Advertising | $174,124 | $115,265 | +$58,859 (+51.1%) | | Digital Media - Subscription | $50,881 | $45,428 | +$5,453 (+12.0%) | | Total Digital Media revenues | $226,874 | $162,691 | +$64,183 (+39.5%) | | Cloud Services - Subscription | $171,337 | $169,748 | +$1,589 (+0.9%) | | Total Cloud Services revenues | $171,429 | $169,784 | +$1,645 (+1.0%) | | Total Revenues | $398,185 | $332,393 | +$65,792 (+19.8%) | - The majority of revenue ($392.2 million in Q1 2021) is recognized "over time," reflecting the subscription and service-based nature of the businesses75 4. Business Acquisitions This section outlines J2 Global's recent immaterial media acquisition and the finalization of purchase accounting for prior period acquisitions - Completed an immaterial media acquisition in Q1 2021 for $0.2 million cash, contributing an immaterial amount to revenues9091 - Finalized purchase accounting for prior period acquisitions in Digital Media and Cloud Services (Voice, Backup, Security, CPP), resulting in a net increase in goodwill of $2.5 million and $0.3 million, respectively, totaling $2.8 million9394 5. Investments This section provides a summary of J2 Global's investments, including equity securities and an equity method investment, detailing associated gains and losses Summary of Investments (in thousands): | Investment Type | March 31, 2021 | December 31, 2020 | Cumulative Impairment Losses (March 31, 2021) | | :--------------------------------- | :------------- | :---------------- | :-------------------------------------------- | | Equity securities (without readily determinable fair value) | $31,300 | $30,300 | $23,800 | | Corporate debt securities (available-for-sale) | $663 | $663 | — | | Equity method investment (OCV Fund) | $107,403 | $67,195 | — | - Recognized an investment gain of $(24.3) million (net of tax) from the OCV Fund in Q1 2021, compared to a loss of $4.3 million in Q1 2020, primarily due to gains on underlying investments110 - The company's maximum exposure to loss from the OCV Fund is limited to its proportional ownership and capital commitment112 6. Assets Held For Sale This section reports on the sale of certain Voice assets and the reclassification of the B2B Backup business as assets held for sale - Sold certain Voice assets in the United Kingdom for a $2.0 million gain in Q1 2021, recorded in gain on sale of businesses113 - Committed to selling the B2B Backup business, reclassifying $135.7 million in assets and $22.3 million in liabilities as held for sale as of March 31, 2021115 7. Fair Value Measurements This section details J2 Global's fair value measurements for financial instruments, including contingent consideration and debt, and their classification levels - Money market funds and long-term debt are classified as Level 1 fair value measurements, while certain debt securities are Level 2118119124 - Contingent consideration liabilities are classified as Level 3 due to reliance on unobservable inputs like volatility and market risks120 Fair Values of Financial Liabilities (in thousands): | Metric | March 31, 2021 | December 31, 2020 | Change (YoY) | | :--------------------------------- | :------------- | :---------------- | :----------- | | Fair Value of Contingent Consideration | $9,530 | $9,094 | +$436 | | Fair Value of Debt | $2,091,518 | $1,960,527 | +$130,991 | - The fair value of contingent consideration increased by $0.5 million during Q1 2021, reported in general and administrative expenses125 8. Goodwill and Intangible Assets This section presents changes in J2 Global's goodwill and intangible assets, including amortization expense and reclassifications Changes in Carrying Amounts of Goodwill (in thousands): | Metric | Balance as of January 1, 2021 | Goodwill written off related to sale | Goodwill reclassified to noncurrent assets held for sale | Purchase accounting adjustments | Foreign exchange translation | Balance as of March 31, 2021 | | :--------------------------------- | :---------------------------- | :--------------------------- | :------------------------------------------------------- | :------------------------------ | :--------------------------- | :--------------------------- | | Consolidated Goodwill | $1,867,430 | $(1,339) | $(86,389) | $2,790 | $(4,747) | $1,777,745 | Intangible Assets Subject to Amortization (Net, in thousands): | Metric | March 31, 2021 | December 31, 2020 | | :--------------------------------- | :------------- | :---------------- | | Net Intangible Assets Subject to Amortization | $657,827 | $709,780 | - Amortization expense for intangible assets increased to $48.5 million in Q1 2021 from $38.8 million in Q1 2020129 9. Debt This section outlines J2 Global's various debt instruments, including senior notes and convertible notes, and their respective fair values and classifications Company's Debt (in thousands): | Debt Type | March 31, 2021 | December 31, 2020 | | :--------------------------------- | :------------- | :---------------- | | 4.625% Senior Notes | $750,000 | $750,000 | | 3.25% Convertible Notes | $402,413 | $402,414 | | 1.75% Convertible Notes | $550,000 | $550,000 | | Total debt (net of discount/costs) | $1,586,331 | $1,579,021 | - The 3.25% Convertible Notes were classified as current liabilities due to a holder repurchase option on June 15, 2021144 - The fair value of the 4.625% Senior Notes was approximately $760.3 million (March 31, 2021), 3.25% Convertible Notes was approximately $682.0 million, and 1.75% Convertible Notes was approximately $648.3 million136148159 10. Leases This section details J2 Global's lease expenses, right-of-use assets, and lease liabilities, along with weighted average lease terms and discount rates Components of Lease Expense (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total lease cost | $8,196 | $7,549 | Supplemental Balance Sheet Information Related to Leases (in thousands): | Metric | March 31, 2021 | December 31, 2020 | | :--------------------------------- | :------------- | :---------------- | | Total operating lease right-of-use assets | $100,492 | $105,845 | | Total operating lease liabilities | $126,009 | $131,388 | - The weighted average remaining lease term for operating leases is 5.0 years, with a weighted average discount rate of 3.94%165 11. Commitments and Contingencies This section addresses J2 Global's legal proceedings, potential loss contingencies, and reserves for non-income related tax assessments - The company is involved in several legal proceedings, including a TCPA class action lawsuit with a tentative settlement, and multiple derivative claims alleging breach of fiduciary duty and securities law violations170171172173174175 - Accrued approximately $4.5 million in connection with potential loss contingencies relating to certain legal proceedings177 - Has a $23.7 million reserve established for potential non-income related tax assessments in various states, municipalities, and foreign jurisdictions180 12. Income Taxes This section presents J2 Global's income tax expense and effective tax rate, explaining key drivers and liabilities for uncertain tax positions Income Tax Metrics (in thousands, except %): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Income tax expense | $5,725 | $8,703 | | Effective tax rate | 9.6% | 132.5% | - The decrease in effective tax rate was primarily due to a tax benefit recognized related to the release of a valuation allowance on deferred tax assets related to the impairment of certain investments and a reduction in foreign income subject to U.S. GILTI181265 - As of March 31, 2021, the company had $58.4 million in liabilities for uncertain income tax positions and is subject to ongoing audits by the U.S. IRS, California FTB, and New York State Department of Taxation and Finance182184185186 13. Stockholders' Equity This section details J2 Global's share repurchase activities and the suspension of dividend payments due to investment opportunities - Repurchased 108,287 shares from plan participants in Q1 2021 to satisfy tax withholding obligations193 - The 2012 stock repurchase program was completed as of December 31, 2020, with all available shares repurchased at an aggregate cost of $204.6 million190 - Under the 2020 program, 2,490,599 shares have been repurchased cumulatively at an aggregate cost of $177.8 million as of March 31, 2021, with no shares repurchased under this program in Q1 2021191 - The Board of Directors suspended dividend payments for the foreseeable future due to significant investment opportunities194 14. Stock Options and Employee Stock Purchase Plan This section outlines J2 Global's share-based compensation expenses for stock options, restricted stock, and the ESPP, along with unrecognized compensation Share-Based Compensation Expense (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Stock option compensation expense | $200 | $200 | | Restricted stock/units compensation expense | $5,300 | $5,600 | | ESPP compensation expense | $600 | $500 | | Total Share-Based Compensation | $6,113 | $6,313 | - As of March 31, 2021, unrecognized stock compensation for non-vested stock options was approximately $5.6 million (expected to be recognized over 4.8 years), and for restricted stock/units was approximately $48.0 million (expected over 3.9-4.7 years)199204 - No shares were purchased under the Employee Stock Purchase Plan in Q1 2021207 15. Earnings Per Share This section provides J2 Global's basic and diluted earnings per share, including the weighted-average shares outstanding and dilutive effects Earnings Per Share (in thousands, except share and per share data): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) available to common shareholders | $77,834 | $(6,404) | | Basic EPS | $1.75 | $(0.13) | | Diluted EPS | $1.67 | $(0.13) | | Weighted-average outstanding shares (Basic) | 44,399,149 | 47,620,774 | | Weighted-average outstanding shares (Diluted) | 46,731,872 | 47,620,774 | - Dilutive effect for Q1 2021 included 2,224,020 shares from convertible debt and 108,703 shares from equity incentive plans211 16. Segment Information This section presents J2 Global's financial performance by reportable segment, Digital Media and Cloud Services, and by geographic region - The company's two main businesses are Digital Media and Cloud Services, which are aggregated into three reportable segments: Digital Media; Voice, Backup, Security, and Consumer Privacy and Protection; and Fax and Martech213 Revenue and Operating Income by Reportable Segment (in thousands): | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Revenue Change (YoY) | Operating Income Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------- | :---------------------------- | | Digital Media Revenue | $226,874 | $162,691 | +39.5% | +519.0% | | Cloud Services Revenue | $171,429 | $169,784 | +1.0% | +13.9% | | Digital Media Operating Income | $30,653 | $4,952 | | | | Cloud Services Operating Income | $63,464 | $55,734 | | | | Total Revenues | $398,185 | $332,393 | +19.8% | | | Total Income from Operations | $78,480 | $55,247 | | +42.0% | Revenues by Geographic Region (in thousands): | Geographic Revenue | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | United States | $322,968 | $270,309 | | Canada | $19,474 | $16,570 | | Ireland | $15,425 | $13,003 | | All other countries | $40,318 | $32,511 | | Total | $398,185 | $332,393 | 17. Accumulated Other Comprehensive Income This section details changes in J2 Global's accumulated other comprehensive income, primarily driven by foreign currency translation adjustments Changes in Accumulated Other Comprehensive Income (Loss) (in thousands): | Metric | Beginning Balance (Jan 1, 2021) | Other comprehensive loss | Ending Balance (Mar 31, 2021) | | :--------------------------------- | :---------------------- | :----------------------- | :---------------------------- | | Unrealized Gains (Losses) on Investments | $283 | — | $283 | | Foreign Currency Translation | $(55,089) | $(8,424) | $(63,513) | | Total Accumulated Other Comprehensive Loss | $(54,806) | $(8,424) | $(63,230) | 18. Subsequent Events This section reports on significant events occurring after the reporting period, including a new credit facility, a proposed spin-off, and an acquisition - On April 7, 2021, J2 Global entered into a $100 million revolving credit facility, with an option to increase commitments up to $350 million, maturing on April 7, 2026222 - On April 19, 2021, the company announced plans to separate into two independent publicly traded companies, J2 Global and Consensus (Cloud Fax business), through a spin-off, subject to board approval and tax rulings223 - On April 30, 2021, the company acquired certain assets of DailyOM, a California-based self-help e-learning platform225 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on J2 Global's financial condition and results of operations, highlighting key performance drivers, segment-specific results, liquidity, and capital resources Forward-Looking Information This section outlines the inherent risks and uncertainties associated with J2 Global's forward-looking statements, including those related to the proposed spin-off - Forward-looking statements are subject to risks including sustaining growth/profitability, maintaining customer base, generating cash flow, successful acquisitions, international expansion, tax liabilities, third-party vendor relationships, digital media content creation, managing business risks (fraud, system failure, legal), competition, adapting to technological changes, protecting intellectual property, retaining key personnel, and the proposed spin-off227228 - Specific risks include the scope and duration of the COVID-19 pandemic and its impact on customers and operations, as well as the form, terms, timing, and ability to complete the proposed spin-off transaction or the sale of the B2B Backup business229235 Overview This section provides a high-level summary of J2 Global's business model, segment characteristics, acquisition strategy, and the ongoing evaluation of the COVID-19 pandemic's impact - J2 Global's core businesses are Digital Media (advertising, subscriptions, performance marketing, licensing) and Cloud Services (customer subscription and usage fees)230231 - Digital Media is characterized by advertising revenues, higher sales and marketing expenses, and Q4 seasonal strength, while Cloud Services features higher-margin, stable subscription revenues with minor Q4 weakness232 - Acquisitions are a regular strategy to grow customer bases, diversify offerings, enhance technology, acquire personnel, and enter new markets231 - The full impact of the COVID-19 pandemic remains uncertain and is continuously evaluated234 Digital Media Performance Metrics This section presents key operating metrics for the Digital Media segment, highlighting consumer engagement indicators Digital Media Key Operating Metrics (in millions): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Visits | 2,291 | 2,145 | +146 (+6.8%) | | Page views | 7,530 | 7,167 | +363 (+5.1%) | - Visits and page views are key indicators of consumer engagement with mobile applications, websites, and other services, which drive advertising and other revenue streams236 Cloud Services Performance Metrics This section details key operating metrics for the Cloud Services segment, including subscriber revenues, ARPU, and cancel rates Cloud Services Key Operating Metrics (in thousands, except for percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Fixed subscriber revenues | $144,445 | $141,486 | +$2,959 (+2.1%) | | Variable subscriber revenues | $26,842 | $28,262 | -$1,420 (-5.0%) | | Total subscriber revenues | $171,287 | $169,748 | +$1,539 (+0.9%) | | Total revenues | $171,379 | $169,784 | +$1,595 (+0.9%) | | Average monthly revenue per Cloud Business Customer (ARPU) | $14.40 | $13.95 | +$0.45 (+3.2%) | | Cancel Rate | 2.2% | 2.3% | -0.1 ppt | - ARPU and cancel rate are used to evaluate trends in service types, levels, and usage, and to calculate the lifetime value of customers239241 Critical Accounting Policies and Estimates This section confirms that there were no significant changes to J2 Global's critical accounting policies and estimates during the first quarter of 2021 - No significant changes in critical accounting policies and estimates during Q1 2021242 Results of Operations for the Three Months Ended March 31, 2021 Analyzes J2 Global's consolidated and segment-specific financial performance for the three months ended March 31, 2021 Digital Media Discusses expected revenue growth and margin impacts for the Digital Media segment in fiscal year 2021 - Digital Media revenue is expected to be higher in FY2021 due to the RetailMeNot acquisition and organic growth, with a focus on improving ad relevance243 - Growth in advertising revenues from owned websites is expected to continue to exceed third-party websites, positively impacting operating margins, but the shift to mobile advertising may put pressure on margins244 - Acquisitions are an important component of the Digital Media strategy, but the pace and significance are unpredictable given macroeconomic conditions245 Cloud Services Focuses on anticipated revenue growth and strategic initiatives for the Cloud Services segment in fiscal year 2021 - Cloud Services revenue is expected to be higher in FY2021, with a strategic focus on enhancing existing offerings and developing new services to reduce costs, increase sales, and improve productivity for customers246 - Acquisitions are a key component of the Cloud Services growth strategy, with an unpredictable pace and significance247 J2 Global Consolidated Projects higher consolidated revenue for fiscal year 2021, with anticipated decreases in operating profit margins - Consolidated revenue for fiscal year 2021 is anticipated to be higher compared to the prior-year comparable period248 - Operating profit as a percentage of revenues is expected to generally decrease in the future primarily due to the increasing proportion of Digital Media business revenue, which has historically operated at a lower operating margin249 Revenues Details the drivers of J2 Global's 20% consolidated revenue growth for the three months ended March 31, 2021 Total Revenues (in thousands, except percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | | Revenues | $398,185 | $332,393 | 20% | - Revenue growth was primarily due to a combination of acquisitions and organic growth, partially offset by declines in certain areas of both the Digital Media and Cloud Services businesses251 Cost of Revenues Explains the 2% decrease in cost of revenues, primarily due to lower content and campaign fulfillment costs Cost of Revenues (in thousands, except percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | | Cost of revenue | $57,822 | $59,131 | (2)% | | As a percent of revenue | 15% | 18% | -3 ppt | - The decrease in cost of revenues was primarily due to lower content fees, campaign fulfillment costs, and other editorial and production costs, partially offset by an increase in depreciation and amortization252 Operating Expenses Analyzes changes in J2 Global's sales and marketing, research and development, and general and administrative expenses Sales and Marketing Attributes the 22% increase in sales and marketing expenses to higher creative services, sales, and advertising costs Sales and Marketing Expenses (in thousands, except percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | | Sales and Marketing | $121,186 | $99,438 | 22% | | As a percent of revenue | 30% | 30% | 0 ppt | - The increase was primarily due to increased creative services, sales, advertising operations, and advertising costs, partially offset by lower editorial costs associated with acquired businesses254 Research, Development and Engineering Explains the 39% increase in research, development, and engineering expenses due to acquired businesses Research, Development and Engineering Expenses (in thousands, except percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | | Research, Development and Engineering | $21,351 | $15,406 | 39% | | As a percent of revenue | 5% | 5% | 0 ppt | - The increase was primarily due to an increase in costs associated with businesses acquired in and subsequent to the first quarter 2020255 General and Administrative Details the 16% increase in general and administrative expenses, driven by amortization, salaries, and professional fees General and Administrative Expenses (in thousands, except percentages): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | | General and Administrative | $119,346 | $103,171 | 16% | | As a percent of revenue | 30% | 31% | -1 ppt | - The increase was primarily due to increased amortization of intangible assets, salary and related costs, and professional fees256 Share-Based Compensation Presents J2 Global's share-based compensation expenses categorized by functional area for the quarter Share-Based Compensation Expense by Category (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenues | $132 | $134 | | Sales and marketing | $362 | $398 | | Research, development and engineering | $520 | $431 | | General and administrative | $5,099 | $5,350 | | Total | $6,113 | $6,313 | Non-Operating Income and Expenses Reviews J2 Global's non-operating financial items, including interest expense, gains on business sales, and investment losses Interest expense, net Explains the increase in net interest expense, primarily due to lower interest income earned Interest Expense, Net (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Interest expense, net | $21,704 | $20,971 | - The increase was primarily due to lower interest income earned between the comparable periods258 Gain on sale of businesses Reports a $2.0 million gain from the sale of certain Voice assets in Q1 2021 Gain on Sale of Businesses (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Gain on sale of businesses | $1,979 | $0 | Loss on investments, net Highlights the absence of net investment losses in Q1 2021 compared to the prior year Loss on Investments, Net (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Loss on investments, net | $0 | $20,832 | - The decrease was due to the absence of net losses realized on certain investments as the result of changes in the investee's capital structure and overall market volatility recognized in the prior comparable period260 Other (income) expense, net Attributes the shift to other income to decreased losses on currency exchange Other (Income) Expense, Net (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Other (income) expense, net | $(622) | $6,876 | - The shift to income was primarily due to decreased losses on currency exchange261 Income Taxes Details J2 Global's income tax provision and effective tax rate, explaining the drivers of the decrease Income Tax Provision and Effective Rate (in thousands, except %): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Provision for income taxes | $5,725 | $8,703 | | Effective tax rate | 9.6% | 132.5% | - The decrease in the effective income tax rate was primarily attributable to a decrease in tax expense due to the release of a valuation allowance on deferred tax assets related to the impairment of certain investments and a reduction in foreign income subject to U.S. GILTI263265 Equity Method Investment Explains the gain from equity method investment in Q1 2021, contrasting it with the prior year's loss (Income) Loss from Equity Method Investment, Net (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | (Income) loss from equity method investment, net | $(24,270) | $4,269 | - The first quarter 2021 gain was primarily a result of a gain on the underlying investments265 - The first quarter 2020 loss was primarily a result of the impairment of two of its investments as a result of COVID-19 in the amount of $7.0 million, net of tax benefit265 Digital Media and Cloud Services Results Presents the detailed financial performance of J2 Global's Digital Media and Cloud Services segments Digital Media Details the significant increases in net sales, gross profit, and operating income for the Digital Media segment Digital Media Segment Results (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Net sales | $226,874 | $162,691 | +$64,183 (+39.5%) | | Gross profit | $206,081 | $141,920 | +$64,161 (+45.2%) | | Operating expenses | $175,428 | $136,968 | +$38,460 (+28.1%) | | Operating income | $30,653 | $4,952 | +$25,701 (+519.0%) | - The increase in net sales, gross profit, and operating income was primarily due to business acquisitions268269 Cloud Services Outlines the modest increases in net sales and operating income for the Cloud Services segment Cloud Services Segment Results (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Net sales | $171,429 | $169,784 | +$1,645 (+1.0%) | | Cost of revenues | $36,964 | $38,360 | -$1,396 (-3.6%) | | Gross profit | $134,465 | $131,424 | +$3,041 (+2.3%) | | Operating expenses | $71,001 | $75,690 | -$4,689 (-6.2%) | | Operating income | $63,464 | $55,734 | +$7,730 (+13.9%) | - Net sales increase primarily due to business acquisitions, partially offset by businesses sold272 - Operating expenses decreased due to lower depreciation and amortization costs, partially offset by increased marketing and advertising274 Liquidity and Capital Resources Discusses J2 Global's cash position, investments, cash flows, stock repurchase programs, and contractual obligations Cash and Cash Equivalents and Investments Summarizes J2 Global's cash, cash equivalents, and investment balances, including a new revolving credit facility Cash, Cash Equivalents and Investments (in thousands): | Metric | March 31, 2021 | December 31, 2020 | Change | | :--------------------------------- | :------------- | :---------------- | :------- | | Cash, cash equivalents and investments | $511,300 | $340,800 | +$170,500 | | Cash and cash equivalents | $372,000 | $242,700 | +$129,300 | | Short-term investments | $700 | $700 | $0 | | Long-term investments | $138,700 | $97,500 | +$41,200 | - Entered into a $100 million revolving credit facility in April 2021, with potential to increase to $350 million, for working capital, acquisitions, and capital expenditures278 - Has a $200 million commitment to the OCV Fund, with $8.1 million paid in Q1 2021279280 - Anticipates existing cash and operating cash flows will be sufficient to meet anticipated needs for working capital, capital expenditures, and stock repurchases for at least the next 12 months281 Cash Flows Details J2 Global's cash flows from operating, investing, and financing activities for the three months ended March 31, 2021 Cash Flow Summary (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------ | | Net cash provided by operating activities | $178,724 | $102,036 | +$76,688 | | Net cash used in investing activities | $(28,956) | $(69,062) | +$40,106 | | Net cash used in financing activities | $(20,139) | $(78,356) | +$58,217 | - Operating cash flow increase attributed to lower decrease in accounts payable and accrued expenses, a decrease in accounts receivables, an increase in deferred revenue, and lower increase in prepaid expenses and other current assets282 - Decrease in investing cash used primarily due to fewer business acquisitions283 - Decrease in financing cash used primarily due to lower repurchases of common stock and business acquisitions284 Stock Repurchase Program Provides an update on J2 Global's stock repurchase programs, including shares repurchased and remaining authorization - The 2012 stock repurchase program was completed as of December 31, 2020, with all available shares repurchased at an aggregate cost of $204.6 million285 - Under the 2020 program (authorized for up to 10 million shares through August 2025), 2,490,599 shares have been repurchased cumulatively for $177.8 million as of March 31, 2021, with no shares repurchased under this program in Q1 2021286 Stock Repurchases During Q1 2021: | Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program | | :--------------------------------- | :----------------------------------- | :--------------------------- | :-------------------------------------------------------------------------- | | January 1, 2021 - January 31, 2021 | 10,779 | $97.69 | 7,509,401 | | February 1, 2021 - February 28, 2021 | 11,571 | $108.89 | 7,509,401 | | March 1, 2021 - March 31, 2021 | 85,937 | $114.99 | 7,509,401 | | Total (Q1 2021) | 108,287 | | 7,509,401 | Contractual Obligations and Commitments Lists J2 Global's contractual obligations and commitments as of March 31, 2021, excluding uncertain tax positions Contractual Obligations and Commitments as of March 31, 2021 (in thousands): | Contractual Obligation | Total | | :--------------------------------- | :---------- | | Long-term debt - principal | $1,703,323 | | Long-term debt - interest | $412,031 | | Operating leases | $141,309 | | Telecom services and co-location facilities | $3,885 | | Holdback payments | $6,031 | | Contingent consideration payments | $5,468 | | Transition tax | $11,675 | | Self-Insurance | $21,857 | | Other | $1,736 | | Total | $2,308,098 | - Excluded from the table are $58.4 million in uncertain tax positions and an approximately $87.2 million commitment to OCV Management, LLC, due to the uncertainty of the amounts and timing of cash settlement291292 Off-Balance Sheet Arrangements States that J2 Global is not party to any material off-balance sheet arrangements - J2 Global is not party to any material off-balance sheet arrangements293 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses J2 Global's exposure to market risks, primarily related to interest rate fluctuations on its investment portfolio and variable-rate debt, and foreign currency exchange rate changes from international operations Interest Rate Risk Discusses J2 Global's exposure to interest rate fluctuations on its investment portfolio and variable-rate debt - Exposure to market risk for changes in interest rates relates primarily to the investment portfolio (cash equivalents with short maturities) and variable-rate borrowings under the new $100 million Credit Facility296298 - The company has not entered into interest rate hedging transactions to control or minimize certain of these risks300 Foreign Currency Risk Details J2 Global's primary exposure to foreign currency risk from international operations and inter-company debt - Principal exposure to foreign currency risk relates to investment and inter-company debt in foreign subsidiaries that transact business in functional currencies other than the U.S. Dollar, primarily the Australian Dollar, the Canadian Dollar, the Euro, the Hong Kong Dollar, the Japanese Yen, the New Zealand Dollar, the Norwegian Kroner and the British Pound Sterling301 Foreign Exchange Losses (in thousands): | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Foreign exchange losses | $500 | $7,800 | - The company has not historically hedged translation risks because cash flows from international operations were generally reinvested locally, but may do so in the future304306 Item 4. Controls and Procedures J2 Global's management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of March 31, 2021 - Disclosure controls and procedures were effective as of March 31, 2021308 - No material changes in internal control over financial reporting occurred during the first quarter ended March 31, 2021309 PART II. OTHER INFORMATION Presents additional disclosures including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 11 – Commitments and Contingencies in Part I for detailed information regarding J2 Global's involvement in various legal proceedings - Refer to Note 11 – Commitments and Contingencies of the Notes to Financial Statements (Part I, Item 1) for information regarding certain legal proceedings in which the company is involved310 Item 1A. Risk Factors This section updates the risk factors from the 2020 Annual Report on Form 10-K, with new material risks primarily related to the proposed spin-off of the Cloud Fax business - New material risks relate to the proposed spin-off of the Cloud Fax business, including potential delays, increased operating expenses, management distraction, and difficulties retaining key customers or employees312314 - If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, J2 Global, Consensus, and J2 Global stockholders could be subject to significant tax liabilities316317 - The proposed spin-off may result in disruptions to, and negatively impact relationships with, customers and other business partners315 - As independent publicly-traded companies, Consensus and the remaining businesses of J2 Global will be smaller, less diversified, and may be more vulnerable to changing market conditions313 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds J2 Global reported no unregistered sales of equity securities. The company completed its 2012 stock repurchase program by December 31, 2020. Under the 2020 program, 2.49 million shares have been repurchased cumulatively for $177.8 million as of March 31, 2021, with 108,287 shares purchased in Q1 2021 primarily for tax withholding obligations - No unregistered sales of equity securities occurred during the period320 - The 2012 stock repurchase program was completed as of December 31, 2020, with all available shares repurchased at an aggregate cost of $204.6 million323 - Under the 2020 program (authorizing up to 10 million shares through August 6, 2025), 2,490,599 shares were repurchased cumulatively at an aggregate cost of $177.8 million as of March 31, 2021324 Issuer Purchases of Equity Securities (Q1 2021): | Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program | | :--------------------------------- | :----------------------------------- | :--------------------------- | :-------------------------------------------------------------------------- | | January 1, 2021 - January 31, 2021 | 10,779 | $97.69 | 7,509,401 | | February 1, 2021 - February 28, 2021 | 11,571 | $108.89 | 7,509,401 | | March 1, 2021 - March 31, 2021 | 85,937 | $114.99 | 7,509,401 | | Total (Q1 2021) | 108,287 | | 7,509,401 | Item 3. Defaults Upon Senior Securities J2 Global reported no defaults upon senior securities during the period - There were no defaults upon senior securities326 Item 4. Mine Safety Disclosures This item is not applicable to J2 Global - Not Applicable327 Item 5. Other Information J2 Global reported no other information for this period - No other information to report328 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, stock plan agreements, various certifications, and XBRL financial data - Exhibits include Amended and Restated Certificate of Incorporation, By-Laws, Form of Restricted Stock Unit Agreement, Form of Performance Stock Unit Agreement, Rule 13a-14(a) and Section 1350 certifications, and XBRL financial data329336 SIGNATURE The report is officially signed by J2 Global, Inc.'s Chief Executive Officer, Principal Financial Officer, and Chief Accounting Officer on May 10, 2021 - The report was signed by Vivek Shah (Chief Executive Officer), R. Scott Turicchi (President and Chief Financial Officer), and Steve P. Dunn (Chief Accounting Officer) on May 10, 2021334