j2 Global(ZD) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents J2 Global's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents J2 Global's unaudited condensed consolidated financial statements and related notes for Q2 2020 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position at June 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Assets | | | | Cash and cash equivalents | $616,820 | $575,615 | | Accounts receivable, net | $188,383 | $261,928 | | Total current assets | $853,145 | $886,890 | | Goodwill | $1,637,287 | $1,633,033 | | TOTAL ASSETS | $3,419,445 | $3,505,846 | | Liabilities & Equity | | | | Accounts payable and accrued expenses | $166,289 | $238,059 | | Current portion of long-term debt | $391,092 | $385,532 | | Total current liabilities | $772,181 | $833,104 | | Long-term debt | $1,071,364 | $1,062,929 | | TOTAL LIABILITIES | $2,156,277 | $2,194,654 | | TOTAL STOCKHOLDERS' EQUITY | $1,263,168 | $1,311,192 | - Total assets decreased from $3,505,846 thousand at December 31, 2019, to $3,419,445 thousand at June 30, 2020, a decrease of approximately 2.4%[10] - Total liabilities decreased from $2,194,654 thousand at December 31, 2019, to $2,156,277 thousand at June 30, 2020, a decrease of approximately 1.7%[10] - Total stockholders' equity decreased from $1,311,192 thousand at December 31, 2019, to $1,263,168 thousand at June 30, 2020, a decrease of approximately 3.7%[10] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income for the three and six months ended June 30, 2020 Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Total revenues | $330,984 | $322,432 | $663,377 | $622,325 | | Gross profit | $274,182 | $262,166 | $547,444 | $511,046 | | Income from operations | $73,040 | $56,614 | $128,287 | $107,476 | | Net income | $38,101 | $32,589 | $31,697 | $65,038 | | Basic EPS | $0.81 | $0.67 | $0.67 | $1.35 | | Diluted EPS | $0.80 | $0.66 | $0.65 | $1.32 | - Total revenues increased by 3% for the three months ended June 30, 2020, and by 7% for the six months ended June 30, 2020, compared to the prior year periods[13] - Net income increased by 16.9% for the three months ended June 30, 2020, but decreased by 51.2% for the six months ended June 30, 2020, compared to the prior year periods[13] - Diluted EPS increased by 21.2% for the three months ended June 30, 2020, but decreased by 51.5% for the six months ended June 30, 2020, compared to the prior year periods[13] Condensed Consolidated Statements of Comprehensive Income This section presents net income and other comprehensive income components for the three and six months ended June 30, 2020 Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net income | $38,101 | $32,589 | $31,697 | $65,038 | | Other comprehensive loss, net of tax | $(332) | $(1,179) | $(8,338) | $(128) | | Comprehensive income | $37,769 | $31,410 | $23,359 | $64,910 | - Comprehensive income increased by 20.2% for the three months ended June 30, 2020, but decreased by 64.0% for the six months ended June 30, 2020, compared to the prior year periods[14] - Other comprehensive loss, net of tax, significantly increased for the six months ended June 30, 2020, to $(8,338) thousand from $(128) thousand in the prior year, primarily due to foreign currency translation adjustments[14] Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $241,627 | $212,211 | | Net cash used in investing activities | $(96,868) | $(311,459) | | Net cash (used in) provided by financing activities | $(101,542) | $44,799 | | Net change in cash and cash equivalents | $41,205 | $(53,998) | | Cash and cash equivalents at end of period | $616,820 | $155,476 | - Net cash provided by operating activities increased by 13.9% to $241,627 thousand for the six months ended June 30, 2020, compared to $212,211 thousand in the prior year[17] - Net cash used in investing activities significantly decreased by 68.9% to $(96,868) thousand for the six months ended June 30, 2020, from $(311,459) thousand in the prior year, primarily due to fewer business acquisitions[17] - Net cash from financing activities shifted from a provision of $44,799 thousand in 2019 to a usage of $(101,542) thousand in 2020, mainly due to common stock repurchases and lower dividend payments[17] Condensed Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including common stock, retained earnings, and comprehensive loss Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $1,263,168 | $1,072,098 | | Common stock shares outstanding | 46,892,691 | 47,765,869 | | Retained earnings | $850,232 | $752,040 | | Accumulated other comprehensive loss | $(54,800) | $(46,107) | - Total stockholders' equity increased by $191,070 thousand from June 30, 2019, to June 30, 2020[18][19] - The number of common stock shares outstanding decreased from 47,765,869 at June 30, 2019, to 46,892,691 at June 30, 2020, reflecting share repurchases[18][19] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Basis of Presentation and Significant Accounting Policies This note outlines the basis for preparing interim financial statements, key accounting policies, and the impact of COVID-19 - J2 Global operates two main businesses: Cloud Services (fax, voice, backup, security, consumer privacy and protection, email marketing, IP licensing) and Digital Media (technology, gaming, broadband, B2B, healthcare content, tools, and services)[22] - The COVID-19 pandemic began to have modest adverse impacts in Q2 2020, expected to continue into Q3 2020 and possibly longer, but no material decline in asset carrying value (except equity method investments) or contingent amounts as of June 30, 2020[27] - Significant accounting estimates include revenue recognition, valuation and impairment of investments, VIE consolidation, share-based compensation, business combination fair values, long-lived asset impairment, contingent consideration, income taxes, and doubtful accounts[28] Note 2. Recent Accounting Pronouncements This note discusses new accounting standards, including those simplifying income tax accounting and clarifying equity investments - The FASB issued ASU No. 2019-12 to simplify income tax accounting, effective for fiscal years beginning after December 15, 2020[57] - ASU No. 2020-01 clarifies interactions between accounting for equity securities, equity method investments, and derivatives, effective for fiscal years beginning after December 15, 2020[58] - ASU No. 2020-04 provides optional expedients for financial reporting affected by reference rate reform (e.g., LIBOR phase-out), effective from March 12, 2020, through December 31, 2022[59] Note 3. Revenues This note details revenue recognition policies and provides a breakdown of revenues by segment and source Revenue by Source (in thousands) | Revenue Source | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :----------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Digital Media | | | | | | Advertising | $120,919 | $109,961 | $236,184 | $215,561 | | Subscription | $41,720 | $40,976 | $87,148 | $81,354 | | Other | $1,348 | $2,422 | $3,346 | $4,127 | | Total Digital Media revenues | $163,987 | $153,359 | $326,678 | $301,042 | | Cloud Services | | | | | | Subscription | $167,040 | $168,909 | $336,788 | $320,698 | | Other | $18 | $223 | $54 | $679 | | Total Cloud Services revenues | $167,058 | $169,132 | $336,842 | $321,377 | | Total Revenues | $330,984 | $322,432 | $663,377 | $622,325 | - Digital Media advertising revenue increased by 10.0% for the three months and 9.6% for the six months ended June 30, 2020, year-over-year[70] - Cloud Services subscription revenue decreased by 1.1% for the three months but increased by 5.0% for the six months ended June 30, 2020, year-over-year[70] - The majority of revenue (over 98%) is recognized 'over time' for both periods, reflecting the subscription-based nature of many services[70] Note 4. Business Acquisitions This note describes the company's acquisitions in the first half of 2020 and their financial impact - J2 Global completed two acquisitions in the first six months of 2020: EDC Systems Inc. (SRFax) and an immaterial digital media business, with total consideration of $27.0 million[87][88] - These 2020 acquisitions contributed $2.9 million to the Company's revenues for the six months ended June 30, 2020[88] Assets and Liabilities Acquired (in thousands) | Assets and Liabilities Acquired (in thousands) | Valuation | | :----------------------------------- | :-------- | | Accounts receivable | $194 | | Property and equipment | $44 | | Trade names | $992 | | Customer relationships | $8,645 | | Goodwill | $16,466 | | Other intangibles | $1,261 | | Accounts payable and accrued expenses | $(94) | | Deferred revenue | $(519) | | Total | $26,989 | Note 5. Investments This note details the company's equity and debt investments, including impairment losses and fair value measurements - For equity securities without readily determinable fair value, the company recorded a $19.6 million impairment loss for the six months ended June 30, 2020, due to investee capital structure changes and market volatility[95] Equity Securities without Readily Determinable Fair Value (in thousands) | Equity Securities without Readily Determinable Fair Value (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------------------------- | :------------ | :---------------- | | Cost | $54,145 | $34,977 | | Impairment | $(23,769) | $(4,164) | | Adjustments | $(480) | $(3,678) | | Reported Amount | $29,896 | $27,135 | - The company recognized a $10.1 million investment loss (net of tax benefit) in its equity method investment in the OCV Fund for the six months ended June 30, 2020, primarily due to COVID-19 related impairments[108] Note 6. Assets Held For Sale This note describes the reclassification of certain Voice assets in Australia and New Zealand as held for sale - In Q2 2020, J2 Global committed to selling Voice assets in Australia and New Zealand, reclassifying $16.5 million net carrying value of assets and liabilities as held for sale[112] Assets Held for Sale (in thousands) | Assets Held for Sale (in thousands) | June 30, 2020 | | :---------------------------------- | :------------ | | Accounts receivable, net | $1,638 | | Property and equipment, net | $503 | | Customer relationships, net | $1,864 | | Goodwill | $13,595 | | Total assets held for sale | $19,040 | | Total liabilities held for sale | $2,544 | Note 7. Fair Value Measurements This note outlines the fair value hierarchy for financial assets and liabilities, including contingent consideration - The fair value of contingent consideration liabilities decreased from $37,887 thousand at December 31, 2019, to $8,122 thousand at June 30, 2020, primarily due to $34,611 thousand in payments[122] Fair Value Measurements (in thousands) | Fair Value Measurements (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------- | :------------ | :---------------- | | Assets | | | | Money market and other funds (Level 1) | $383,236 | $395,664 | | Corporate debt securities (Level 2) | $643 | $623 | | Corporate debt securities (Level 3) | — | $22,047 | | Total assets measured at fair value | $383,879 | $418,334 | | Liabilities | | | | Contingent consideration (Level 3) | $8,122 | $37,887 | | Total liabilities measured at fair value | $8,122 | $37,887 | - The fair value of the 6.0% Senior Notes was $661.4 million at June 30, 2020, and $689.8 million at December 31, 2019, classified as Level 2 inputs[117][138] Note 8. Goodwill and Intangible Assets This note details changes in goodwill and provides a breakdown of intangible assets subject to amortization Goodwill (in thousands) | Goodwill (in thousands) | January 1, 2020 | June 30, 2020 | | :---------------------- | :-------------- | :------------ | | Balance | $1,633,033 | $1,637,287 | | Acquired | — | $16,466 | | Reclassified to held for sale | — | $(13,595) | | Purchase accounting adjustments | — | $6,935 | | Foreign exchange translation | — | $(5,552) | Intangible Assets Subject to Amortization (in thousands) | Intangible Assets Subject to Amortization (in thousands) | Weighted Average Amortization Period | Historical Cost | Accumulated Amortization | Net (June 30, 2020) | | :--------------------------------------- | :----------------------------------- | :-------------- | :----------------------- | :------------------ | | Trade names | 10.0 years | $194,131 | $90,848 | $103,283 | | Customer relationships | 8.4 years | $634,319 | $425,977 | $208,342 | | Other purchased intangibles | 4.4 years | $377,698 | $232,151 | $145,547 | | Total | | $1,274,073 | $813,300 | $460,773 | - Amortization expense was $74.4 million for the six months ended June 30, 2020, down from $81.8 million in the prior year period[132] Note 9. Debt This note describes the company's debt structure, including Senior Notes, Convertible Notes, and the Credit Facility Debt Instrument (in thousands) | Debt Instrument | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------- | :----------------------------- | :------------------------------- | | 6.0% Senior Notes | $650,000 | $650,000 | | 3.25% Convertible Notes | $402,414 | $402,500 | | 1.75% Convertible Notes | $550,000 | $550,000 | | Total Notes | $1,602,414 | $1,602,500 | | Less: Unamortized discount | $(127,381) | $(139,981) | | Deferred issuance costs | $(12,577) | $(14,058) | | Total long-term debt | $1,462,456 | $1,448,461 | | Less: current portion | $(391,092) | $(385,532) | | Total long-term debt, less current portion | $1,071,364 | $1,062,929 | - The 3.25% Convertible Notes (principal amount $402.4 million) are classified as current liabilities due to a holder repurchase option on June 15, 2021[145][160] - The 1.75% Convertible Notes (principal amount $550.0 million) are classified as long-term debt, maturing November 1, 2026[150][151][160] - The company has a $100.0 million Credit Facility with no outstanding amounts as of June 30, 2020[177] Note 10. Leases This note details the company's operating lease obligations, costs, and related right-of-use assets Lease Metric (in thousands) | Lease Metric (in thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $9,114 | $16,218 | | Short-term lease cost | $648 | $1,093 | | Total lease cost | $9,762 | $17,311 | - Operating lease right-of-use assets totaled $110,302 thousand at June 30, 2020, down from $125,822 thousand at December 31, 2019[163] - The company recorded a $2.1 million impairment in Q2 2020 due to a sublease tenant defaulting as a result of COVID-19[166] - The weighted average remaining lease term for operating leases is 5.6 years, with a weighted average discount rate of 4.25% as of June 30, 2020[164] Note 11. Commitments and Contingencies This note addresses legal proceedings, credit facility compliance, and non-income related tax contingencies - J2 Global is involved in several legal proceedings, including a TCPA class action and a federal securities lawsuit, but management does not anticipate a material adverse effect on financial position[174] - The company has a $100.0 million Credit Facility with no outstanding amounts as of June 30, 2020, and is in compliance with its debt covenants[177][181] - A $21.2 million reserve has been established for non-income related tax matters, with potential for additional liabilities[183] Note 12. Income Taxes This note details the effective tax rates, uncertain tax positions, and ongoing income tax audits Income Tax Metrics | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $15,978 | $11,148 | $24,681 | $10,853 | | Effective tax rate | 26.7% | 28.1% | 37.1% | 15.0% | - The effective tax rate for the six months ended June 30, 2020, increased to 37.1% from 15.0% in the prior year, primarily due to a valuation allowance on deferred tax assets related to investment impairments[184] - Liabilities for uncertain income tax positions were $57.6 million as of June 30, 2020, up from $52.5 million at December 31, 2019[185] - The company is currently undergoing income tax audits by the IRS (2012-2016), California FTB (2012-2013, 2015-2016), and New York State (2015-2017)[187][188][189] Note 13. Stockholders' Equity This note describes the common stock repurchase program and the suspension of dividend payments - During the six months ended June 30, 2020, J2 Global repurchased 1,000,000 shares of common stock for an aggregate cost of $79.1 million under its 2012 Program[192] - Cumulatively, 3.9 million shares have been repurchased under the 2012 Program at a cost of $196.2 million, with the program completed in July 2020[192][235] - The Board of Directors suspended dividend payments after June 4, 2019, to focus on investment opportunities[196][292] Note 14. Stock Options and Employee Stock Purchase Plan This note details share-based compensation plans, expenses, and unrecognized compensation costs Share-Based Compensation Expense (in thousands) | Share-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :---------------------------------------------- | :------------------------------- | :----------------------------- | | Cost of revenues | $143 | $277 | | Sales and marketing | $416 | $814 | | Research, development and engineering | $484 | $915 | | General and administrative | $5,487 | $10,837 | | Total | $6,530 | $12,843 | - Unrecognized stock compensation related to non-vested stock options was approximately $6.3 million as of June 30, 2020, expected to be recognized over 5.5 years[204] - Unrecognized share-based compensation cost for restricted stock and units was approximately $49.3 million as of June 30, 2020, expected to be recognized over 4.6 to 5.0 years[210] - 53,694 shares were purchased under the Employee Stock Purchase Plan for $3.3 million during the six months ended June 30, 2020[213] Note 15. Earnings Per Share This note provides the calculation of basic and diluted earnings per share for the reported periods EPS Metric | EPS Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $0.81 | $0.67 | $0.67 | $1.35 | | Diluted EPS | $0.80 | $0.66 | $0.65 | $1.32 | - Diluted EPS for the three months ended June 30, 2020, increased by 21.2% year-over-year, while for the six months, it decreased by 51.5%[217] - The dilutive effect of convertible debt was 586,611 shares for the three months and 1,023,521 shares for the six months ended June 30, 2020[217] Note 16. Segment Information This note presents financial information for the Cloud Services and Digital Media segments Segment Revenue (in thousands) | Segment Revenue (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fax and Martech | $93,976 | $95,567 | $188,643 | $188,850 | | Voice, Backup, Security, and CPP | $73,082 | $73,565 | $148,199 | $132,527 | | Cloud Services Total | $167,058 | $169,132 | $336,842 | $321,377 | | Digital Media | $163,987 | $153,359 | $326,678 | $301,042 | | Total revenues | $330,984 | $322,432 | $663,377 | $622,325 | Segment Operating Income (in thousands) | Segment Operating Income (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fax and Martech | $48,456 | $49,686 | $96,207 | $94,637 | | Voice, Backup, Security, and CPP | $13,523 | $12,661 | $21,506 | $26,244 | | Cloud Services Total | $61,979 | $62,347 | $117,713 | $120,881 | | Digital Media | $16,820 | $1,533 | $21,772 | $518 | | Total income from operations | $73,040 | $56,614 | $128,287 | $107,476 | - Digital Media operating income significantly increased by 997.2% for the three months and 4,103.1% for the six months ended June 30, 2020, year-over-year, primarily due to business acquisitions[289] Note 17. Accumulated Other Comprehensive Income This note summarizes changes in accumulated other comprehensive income, primarily due to foreign currency translation Accumulated Other Comprehensive Income (in thousands) | Accumulated Other Comprehensive Income (in thousands) | Beginning Balance (Jan 1, 2020) | Other Comprehensive Income (Loss) | Ending Balance (June 30, 2020) | | :---------------------------------------------------- | :------------------------------ | :-------------------------------- | :----------------------------- | | Unrealized Gains (Losses) on Investments | $(275) | $545 | $270 | | Foreign Currency Translation | $(46,187) | $(8,883) | $(55,070) | | Total | $(46,462) | $(8,338) | $(54,800) | - The accumulated other comprehensive loss increased by $8,338 thousand for the six months ended June 30, 2020, primarily driven by foreign currency translation adjustments[234] Note 18. Subsequent Events This note discloses events occurring after June 30, 2020, including the completion of a share repurchase program - In July 2020, J2 Global completed its 2012 share repurchase program by repurchasing 140,819 shares for $8.4 million[235] - On August 6, 2020, the Board approved a new share repurchase program for up to 10 million shares, valid through August 6, 2025[235] 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 operational results for Q2 2020 Forward-Looking Information This section highlights forward-looking statements and factors that could cause actual results to differ materially - The report contains forward-looking statements based on estimates and assumptions, subject to risks and uncertainties, and claims protection under the Private Securities Litigation Reform Act of 1995[237] - Factors that could cause actual results to differ include economic conditions, customer acquisition/retention, cash flow generation, acquisition integration, international expansion risks, tax liabilities, third-party vendor relationships, digital media content creation, business management risks, competition, regulatory changes, and the impact of the COVID-19 pandemic[238][239] Overview This section provides an overview of J2 Global's Cloud Services and Digital Media businesses and the impact of COVID-19 - J2 Global is a leading internet services provider with two businesses: Cloud Services (fax, voice, backup, security, CPP, email marketing, IP licensing) and Digital Media (technology, gaming, broadband, B2B, healthcare content)[240] - Cloud Services primarily generates subscription and usage fees, while Digital Media generates advertising, sponsorship, subscription, performance marketing, and licensing fees[242] - The COVID-19 pandemic is expected to negatively affect the global economy and J2 Global's operations, with management actively monitoring and adjusting operations[245][246] Cloud Services Performance Metrics This section presents key performance indicators for the Cloud Services segment, including subscriber revenues and ARPU Cloud Services Performance Metrics | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Total subscriber revenues | $167,040 | $168,909 | | Fixed subscriber revenues (% of total) | 84.3% | 83.1% | | Variable subscriber revenues (% of total) | 15.7% | 16.9% | | Average monthly revenue per Cloud Business Customer (ARPU) | $13.66 | $14.01 | | Cancel Rate | 2.2% | 2.5% | - Cloud Services total subscriber revenues decreased by 1.1% for the three months ended June 30, 2020, year-over-year[249] - Average monthly revenue per Cloud Business Customer (ARPU) decreased from $14.01 in Q2 2019 to $13.66 in Q2 2020[249] - The cancel rate for Cloud Services improved from 2.5% in Q2 2019 to 2.2% in Q2 2020[249] Digital Media Performance Metrics This section presents key performance indicators for the Digital Media segment, including website visits and page views Digital Media Performance Metrics (in millions) | Metric | Three Months Ended June 30, 2020 (in millions) | Three Months Ended June 30, 2019 (in millions) | Six Months Ended June 30, 2020 (in millions) | Six Months Ended June 30, 2019 (in millions) | | :------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Visits | 2,359 | 1,618 | 4,504 | 3,425 | | Page views | 7,786 | 6,492 | 15,533 | 13,579 | - Digital Media visits increased by 45.8% for the three months and 31.5% for the six months ended June 30, 2020, year-over-year[253] - Page views increased by 19.9% for the three months and 14.4% for the six months ended June 30, 2020, year-over-year[253] Critical Accounting Policies and Estimates This section confirms no significant changes in critical accounting policies and estimates during the quarter - There were no significant changes in critical accounting policies and estimates during the three months ended June 30, 2020[254] Results of Operations for the Three and Six Months Ended June 30, 2020 This section analyzes J2 Global's consolidated and segment-specific financial performance for the reported periods Consolidated Outlook This section provides J2 Global's anticipated consolidated revenue and operating profit trends for the remainder of fiscal year 2020 - Consolidated revenue for the remainder of fiscal year 2020 is anticipated to be modestly lower year-over-year[260] - Operating profit as a percentage of revenues is expected to decrease due to Digital Media's increasing revenue share and lower operating margins[261] Revenues Analysis This section analyzes the drivers of total revenue growth for the three and six months ended June 30, 2020 Revenues Analysis (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Percentage Change | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Percentage Change | | :------- | :-------------------------------------------- | :-------------------------------------------- | :---------------- | :------------------------------------------ | :------------------------------------------ | :---------------- | | Revenues | $330,984 | $322,432 | 3% | $663,377 | $622,325 | 7% | - Revenue growth in 2020 was primarily due to acquisitions and organic growth, partially offset by declines in specific areas of Digital Media and Cloud Services[263] Cost of Revenues Analysis This section analyzes changes in cost of revenues and their impact on gross profit for the reported periods Cost of Revenues Analysis (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Percentage Change | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Percentage Change | | :------------- | :-------------------------------------------- | :-------------------------------------------- | :---------------- | :------------------------------------------ | :------------------------------------------ | :---------------- | | Cost of revenue | $56,802 | $60,266 | (6)% | $115,933 | $111,279 | 4% | | As a percent of revenue | 17% | 19% | | 17% | 18% | | - The decrease in cost of revenues for the three months ended June 30, 2020, was primarily due to lower content fees, campaign fulfillment costs, and other editorial and production costs[264] - The increase in cost of revenues for the six months ended June 30, 2020, was mainly due to higher depreciation, database hosting, network operations, and online processing fees[264] Operating Expenses Analysis This section analyzes the trends and drivers of the company's various operating expenses Sales and Marketing This section analyzes the increase in sales and marketing expenses, primarily due to recent acquisitions Sales and Marketing (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Percentage Change | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Percentage Change | | :---------------- | :-------------------------------------------- | :-------------------------------------------- | :---------------- | :------------------------------------------ | :------------------------------------------ | :---------------- | | Sales and Marketing | $92,805 | $88,446 | 5% | $192,243 | $175,326 | 10% | | As a percent of revenue | 28% | 27% | | 29% | 28% | | - The increase in sales and marketing expenses was primarily due to increased personnel costs, partner revenue share, software licenses, and consulting fees from recent acquisitions[265] Research, Development and Engineering This section analyzes the increase in R&D and engineering costs, mainly from acquired businesses Research, Development and Engineering (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Percentage Change | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Percentage Change | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :---------------- | :------------------------------------------ | :------------------------------------------ | :---------------- | | Research, Development and Engineering | $13,606 | $11,938 | 14% | $29,012 | $24,922 | 16% | | As a percent of revenue | 4% | 4% | | 4% | 4% | | - The increase in R&D and engineering costs was primarily due to expenses associated with businesses acquired in and subsequent to Q2 2019[266] General and Administrative This section analyzes the decrease in G&A expenses, driven by lower amortization and contingent consideration changes General and Administrative (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Percentage Change | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Percentage Change | | :------------------------ | :-------------------------------------------- | :-------------------------------------------- | :---------------- | :------------------------------------------ | :------------------------------------------ | :---------------- | | General and Administrative | $94,731 | $105,168 | (10)% | $197,902 | $203,322 | (3)% | | As a percent of revenue | 29% | 33% | | 30% | 33% | | - The decrease in G&A for the three months was primarily due to decreased amortization of intangible assets[268] - The decrease in G&A for the six months was primarily due to changes in the fair value of contingent consideration and decreased amortization of intangible assets[268] Share-Based Compensation This section details the share-based compensation expense for the three and six months ended June 30, 2020 Share-Based Compensation Expense (in thousands) | Share-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenues | $143 | $131 | $277 | $263 | | Sales and marketing | $416 | $389 | $814 | $793 | | Research, development and engineering | $484 | $361 | $915 | $719 | | General and administrative | $5,487 | $5,981 | $10,837 | $10,173 | | Total | $6,530 | $6,862 | $12,843 | $11,948 | Non-Operating Income and Expenses Analysis This section analyzes the company's interest expense, investment losses, and other non-operating income/expenses Interest Expense, Net This section analyzes the increase in net interest expense, primarily due to new convertible senior notes Interest Expense, Net (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Interest expense, net | $22,196 | $17,335 | $43,167 | $33,354 | - The increase in net interest expense was primarily due to the issuance of the 1.75% Convertible Senior Notes in Q4 2019[270] Loss on Investments, Net This section analyzes the significant increase in net loss on investments due to market volatility and capital structure changes Loss on Investments, Net (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Loss on investments, net | $3 | $24 | $20,835 | $38 | - The significant increase in net loss on investments for the six months ended June 30, 2020, was due to net losses on certain investments from changes in investee capital structure and market volatility[271] Other (Income) Expense, Net This section analyzes the improvement in other (income) expense, net, driven by reduced currency exchange losses Other (Income) Expense, Net (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Other (income) expense, net | $(9,059) | $(401) | $(2,183) | $1,800 | - The increase in other (income) expense, net, for both periods was primarily due to reduced losses on currency exchange[272] Income Taxes Analysis This section analyzes the effective tax rates and the impact of valuation allowances on deferred tax assets Income Taxes Analysis | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Provision for income taxes | $16.0 million | $11.1 million | $24.7 million | $10.9 million | | Effective tax rate | 26.7% | 28.1% | 37.1% | 15.0% | - The six-month effective tax rate increased significantly due to establishing a valuation allowance on deferred tax assets related to investment impairments and the absence of prior year's discrete tax benefits[277] Equity Method Investment Analysis This section analyzes the net loss from equity method investments, including COVID-19 related impairments Equity Method Investment Analysis (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net loss (income) in earnings of equity method investment | $5,821 | $(4,081) | $10,090 | $(3,607) | - The fiscal 2020 loss was primarily a result of a $7.0 million impairment of two investments due to COVID-19 and an additional $3.1 million investment loss[279] Cloud Services Segment Results This section analyzes the net sales and operating income performance of the Cloud Services segment Cloud Services Segment Results (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net sales | $167,058 | $169,132 | $336,842 | $321,377 | | Gross profit | $127,631 | $132,534 | $259,055 | $252,296 | | Operating expenses | $65,652 | $70,187 | $141,342 | $131,415 | | Operating income | $61,979 | $62,347 | $117,713 | $120,881 | - Cloud Services net sales decreased by 1.2% for the three months ended June 30, 2020, due to the COVID-19 pandemic, but increased by 4.8% for the six months due to business acquisitions[282] - Operating income for Cloud Services decreased by 0.6% for the three months and 2.6% for the six months ended June 30, 2020[285] Digital Media Segment Results This section analyzes the net sales and operating income performance of the Digital Media segment Digital Media Segment Results (in thousands) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net sales | $163,987 | $153,359 | $326,678 | $301,042 | | Gross profit | $146,649 | $129,691 | $288,569 | $258,844 | | Operating expenses | $129,829 | $128,158 | $266,797 | $258,326 | | Operating income (loss) | $16,820 | $1,533 | $21,772 | $518 | - Digital Media net sales increased by 6.9% for the three months and 8.5% for the six months ended June 30, 2020, primarily due to business acquisitions[286] - Digital Media operating income increased significantly by 997.2% for the three months and 4,103.1% for the six months ended June 30, 2020, year-over-year[289] Liquidity and Capital Resources This section discusses J2 Global's cash position, capital resources, and cash flow activities - Cash and investments increased to $710.9 million at June 30, 2020, from $675.7 million at December 31, 2019, primarily from cash provided by operations[290] - Net cash provided by operating activities increased by 13.9% to $241.6 million for the six months ended June 30, 2020[295] - Net cash used in investing activities decreased significantly to $96.9 million for the six months ended June 30, 2020, from $311.5 million in the prior year, mainly due to fewer business acquisitions[296] - Net cash from financing activities shifted from a $44.8 million provision in 2019 to a $101.5 million usage in 2020, driven by common stock repurchases and lower dividend payments[297][298] Cash and Cash Equivalents and Investments This section details the company's cash and investment balances and their expected sufficiency for future needs - Cash and investments increased to $710.9 million at June 30, 2020, from $675.7 million at December 31, 2019[290] - The Credit Facility's borrowing capacity was reduced to $100.0 million, with no outstanding amounts as of June 30, 2020[291] - Dividends were suspended after June 4, 2019, to prioritize investment opportunities[292] Cash Flows Analysis This section analyzes cash flows from operating, investing, and financing activities for the six months ended June 30, 2020 Cash Flow Activity (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $241,627 | $212,211 | | Net cash used in investing activities | $(96,868) | $(311,459) | | Net cash (used in) provided by financing activities | $(101,542) | $44,799 | - Operating cash flow increased due to a decrease in accounts receivables, higher uncertain tax positions, and income taxes payable, partially offset by a decrease in accounts payable and accrued expenses[295] - The decrease in investing cash flow was primarily due to fewer business acquisitions[296] Stock Repurchase Program This section details the company's common stock repurchase activities, including the completion of one program and approval of a new one - 1,000,000 shares were repurchased for $79.1 million under the 2012 Program during the six months ended June 30, 2020[299] - The 2012 Program was completed in July 2020 with the repurchase of 140,819 shares for $8.4 million[299] - A new program for up to 10 million shares was approved on August 6, 2020, valid through August 6, 2025[300] Contractual Obligations and Commitments This section outlines J2 Global's total contractual obligations, including debt, leases, and other commitments Contractual Obligations (in thousands) | Contractual Obligations (in thousands) | Total | | :------------------------------------- | :-------- | | Long-term debt - principal | $1,602,414 | | Long-term debt - interest | $290,141 | | Operating leases | $139,313 | | Finance leases | $1,820 | | Telecom services and co-location facilities | $5,119 | | Short-term note payable | $400 | | Holdback payments | $7,554 | | Contingent consideration | $2,092 | | Transition Tax | $11,675 | | Self-Insurance | $16,679 | | Other | $1,923 | | Total | $2,079,130 | - The liability for uncertain tax positions was $57.6 million as of June 30, 2020, not included in the table due to timing uncertainty[304] - A remaining commitment of approximately $101.4 million to OCV Management, LLC, is also not presented due to uncertainty of funding request timing[305] Off-Balance Sheet Arrangements This section confirms that J2 Global has no material off-balance sheet arrangements - The company has no material off-balance sheet arrangements[306] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses J2 Global's exposure to interest rate risk and foreign currency risk from its operations and investments - J2 Global's primary market risks are interest rate risk (investments, Credit Facility) and foreign currency risk (international operations)[308][314] - As of June 30, 2020, there were no amounts outstanding under the Credit Facility, mitigating immediate interest rate risk from variable borrowings[310][312] - Foreign exchange (gains) losses for the six months ended June 30, 2020, were $1.1 million, with cumulative translation adjustments of $(8.9) million[318][319] - The company does not currently use derivative financial instruments for hedging purposes[320] Interest Rate Risk This section details the company's exposure to interest rate fluctuations on its investments and credit facility - The company's investment portfolio and Credit Facility are exposed to interest rate fluctuations[308] - As of June 30, 2020, cash and cash equivalents were $616.8 million, primarily in money market funds with maturities of 90 days or less[309] - No amounts were outstanding under the Credit Facility as of June 30, 2020, meaning a 100 basis point increase in LIBOR-based rates would not increase annual interest expense from this facility[310][312] Foreign Currency Risk This section discusses the foreign currency risk arising from international operations and related exchange gains/losses - J2 Global conducts business in foreign markets (Canada, Australia, EU) and is exposed to foreign currency risk from investments and inter-company debt in non-U.S. Dollar functional currencies[314] - Foreign exchange (gains) losses for the three months ended June 30, 2020, were $(8.8) million, and for the six months, $1.1 million[318] - Cumulative translation adjustments, net of tax, included in other comprehensive income were $(8.9) million for the six months ended June 30, 2020[319] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and the absence of material internal control changes - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020[322] - No material changes in internal control over financial reporting occurred during the second quarter ended June 30, 2020[323] PART II. OTHER INFORMATION This part provides additional information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 11 for details on legal proceedings and management's assessment of their impact - Information on legal proceedings is detailed in Note 11 – Commitments and Contingencies[324] - Management does not believe current legal proceedings are likely to have a material adverse effect on the company's financial position, results of operations, or cash flows[174] Item 1A. Risk Factors This section directs readers to previously disclosed risk factors and confirms no material changes - Readers should review risk factors from previous filings (10-K for 2019, 10-Q for Q1 2020) and other SEC documents[325] - There have been no material changes from the previously disclosed risk factors[325] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered equity sales and details common stock repurchase activities - No unregistered sales of equity securities occurred[326] - Cumulatively, 3.9 million shares were repurchased under the 2012 Program for $196.2 million by June 30, 2020[327] - The 2012 Program was completed in July 2020, and a new program for up to 10 million shares was approved on August 6, 2020[327][330] Item 3. Defaults Upon Senior Securities This section confirms that there were no defaults upon senior securities - There were no defaults upon senior securities[333] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[334] Item 5. Other Information This section indicates that there is no other information to report - No other information to report[335] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL financial information - Exhibits include organizational documents, a waiver form, and certifications from the Principal Executive Officer and Principal Financial Officer[336][343] - Financial information for the quarter ended June 30, 2020, is provided in XBRL format[336][343]