j2 Global(ZD) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents J2 Global's unaudited condensed consolidated financial statements and management's analysis for Q3 2020 Item 1. Financial Statements This section presents J2 Global's unaudited condensed consolidated financial statements for Q3 2020, including balance sheets, income, cash flows, and detailed notes Condensed Consolidated Balance Sheets The balance sheet shows J2 Global's financial position as of September 30, 2020, with decreases in total assets, liabilities, and equity | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total Assets | $3,342,993 | $3,505,846 | | Total Liabilities | $2,166,656 | $2,194,654 | | Total Stockholders' Equity | $1,176,337 | $1,311,192 | | Cash and cash equivalents | $567,930 | $575,615 | | Accounts receivable, net | $192,800 | $261,928 | | Goodwill | $1,661,546 | $1,633,033 | Condensed Consolidated Statements of Operations Statements of operations detail J2 Global's performance for Q3 and nine months 2020, showing revenue growth and mixed net income trends | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Total revenues | $356,976 | $344,141 | 3.7% | $1,020,353 | $966,466 | 5.6% | | Gross profit | $301,154 | $282,425 | 6.6% | $848,598 | $793,471 | 7.0% | | Income from operations | $77,438 | $59,359 | 30.5% | $205,725 | $166,835 | 23.3% | | Net income | $60,883 | $30,745 | 98.0% | $92,580 | $95,783 | (3.3)% | | Basic EPS | $1.31 | $0.63 | 107.9% | $1.96 | $1.98 | (1.0)% | | Diluted EPS | $1.31 | $0.62 | 111.3% | $1.93 | $1.93 | 0.0% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income statements show increased Q3 net income but a nine-month decrease, impacted by foreign currency translation adjustments | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net income | $60,883 | $30,745 | 98.0% | $92,580 | $95,783 | (3.3)% | | Foreign currency translation adjustment | $(3,202) | $(8,166) | (60.8)% | $(12,085) | $(8,852) | 36.5% | | Other comprehensive loss, net of tax | $(3,194) | $(8,166) | (60.9)% | $(11,532) | $(8,294) | 39.0% | | Comprehensive income | $57,689 | $22,579 | 155.5% | $81,048 | $87,489 | (7.4)% | Condensed Consolidated Statements of Cash Flows Cash flow statements show increased operating cash, decreased investing cash, and higher financing cash outflow for nine months 2020 | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net cash provided by operating activities | $356,009 | $309,307 | 15.1% | | Net cash used in investing activities | $(107,286) | $(472,928) | (77.3)% | | Net cash (used in) provided by financing activities | $(256,854) | $46,852 | (648.1)% | | Net change in cash and cash equivalents | $(7,685) | $(117,289) | (93.4)% | | Cash and cash equivalents at end of period | $567,930 | $92,185 | 516.1% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from December 2019 to September 2020, mainly due to common stock repurchases | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total Stockholders' Equity | $1,176,337 | $1,311,192 | | Common stock, shares outstanding | 44,767,341 | 47,654,929 | | Repurchase and retirement of common stock (9 months ended Sep 30, 2020) | $(238,905) | N/A | | Net income (9 months ended Sep 30, 2020) | $92,580 | N/A | Notes to Condensed Consolidated Financial Statements Detailed notes explain accounting policies, revenue, acquisitions, investments, debt, leases, taxes, equity, and other financial disclosures 1. Basis of Presentation J2 Global, an internet services provider, presents unaudited financials for Cloud Services and Digital Media, with modest COVID-19 impacts - J2 Global operates two main businesses: Cloud Services (fax, voice, backup, security, consumer privacy and protection, email marketing) and Digital Media (technology, gaming, broadband, B2B, healthcare markets)[20][224] - The COVID-19 pandemic has had modest adverse impacts on the company's operations, with no material decline in asset carrying values (except for equity method investments) as of September 30, 2020, but future impacts are uncertain[25][27] 2. Recent Accounting Pronouncements J2 Global is evaluating new FASB ASUs, with ASU 2019-12 and 2020-01 expected to have no material impact - J2 Global expects to adopt ASU 2019-12 (Income Taxes) and ASU 2020-01 (Investments) on January 1, 2021, with no material impact on financial statements or disclosures[55][56] - The company is currently evaluating the effects of ASU 2020-04 (Reference Rate Reform) and ASU 2020-06 (Convertible Instruments) on its financial statements and disclosures[57][58] 3. Revenues Revenue from Digital Media and Cloud Services shows growth, with most revenue recognized 'over time' | Revenue Source | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :----------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Digital Media - Advertising | $135,219 | $123,463 | 9.5% | $371,403 | $339,024 | 9.5% | | Digital Media - Subscription | $49,386 | $47,048 | 5.0% | $136,534 | $128,402 | 6.3% | | Cloud Services - Subscription | $170,233 | $170,971 | (0.4)% | $507,021 | $491,669 | 3.1% | | Total Revenues | $356,976 | $344,141 | 3.7% | $1,020,353 | $966,466 | 5.6% | - The majority of the company's revenue (over 97% for both periods) is recognized "over time," reflecting the subscription and service-based nature of its offerings[68] 4. Business Acquisitions J2 Global completed several acquisitions in 2020, adding $5.9 million in revenue and recognizing $23.8 million in goodwill - J2 Global completed acquisitions including SRFax and other Digital Media/Martech businesses in the first nine months of 2020[85] | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | | :--------------------------------- | :--------------------------------------- | | Revenue contributed by 2020 acquisitions | $5,900 | | Total consideration for 2020 acquisitions | $39,100 | | Goodwill recognized from 2020 acquisitions | $23,817 | | Tax-deductible goodwill from 2020 acquisitions | $22,600 | 5. Investments Investments saw a $19.6 million impairment loss on equity securities and a $10.8 million loss in the OCV Fund for nine months 2020 | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Equity securities (reported amount) | $29,896 | $27,135 | | Impairment loss on equity securities (9 months ended Sep 30, 2020) | $19,600 | N/A | | Available-for-sale corporate debt securities (Fair Value) | $653 | $22,670 | | Equity method investment (carrying amount) | $66,026 | $50,274 | | Investment loss (gain) in OCV Fund (9 months ended Sep 30, 2020) | $10,800 | $(100) | - The $10.8 million investment loss in the OCV Fund for the nine months ended September 30, 2020, was primarily due to a $7.0 million impairment of two investments resulting from COVID-19[106] 6. Assets Held For Sale J2 Global sold non-core Voice assets in Australia and New Zealand in Q3 2020, realizing a $17.1 million gain - J2 Global sold non-core Voice assets in Australia and New Zealand on August 31, 2020[109] | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | | :----------------------- | :--------------------------------------- | | Gain on sale of businesses | $17,100 | 7. Fair Value Measurements Fair value measurements categorize assets and liabilities, with contingent consideration decreasing due to earn-out payments | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Total assets measured at fair value | $317,760 | $418,334 | | Total liabilities measured at fair value | $8,352 | $37,887 | | Contingent consideration liability (Level 3) | $8,352 | $37,887 | - The decrease in contingent consideration liability was due to $20.0 million paid for Humble Bundle earn-out targets and $8.3 million for other acquisition thresholds in the first nine months of 2020[118][119] 8. Goodwill and Intangible Assets Goodwill increased to $1.66 billion due to acquisitions, while intangible assets decreased with $115.6 million in amortization expense | Metric | Sep 30, 2020 (in thousands) | Jan 1, 2020 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Goodwill | $1,661,546 | $1,633,033 | | Goodwill acquired (9 months ended Sep 30, 2020) | $23,817 | N/A | | Purchase accounting adjustments (9 months ended Sep 30, 2020) | $7,591 | N/A | | Goodwill written off (9 months ended Sep 30, 2020) | $(4,751) | N/A | | Total intangible assets subject to amortization (Net) | $427,832 | $524,868 | | Amortization expense (9 months ended Sep 30, 2020) | $115,600 | N/A | - The company amortizes customer relationship assets in a pattern that recognizes a substantial majority of the expense in the first 4 to 5 years, despite a longer overall asset life[125] 9. Debt J2 Global's debt includes Senior and Convertible Notes, with the 6.0% Senior Notes being redeemed by new 4.625% Senior Notes | Debt Instrument | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | Fair Value Sep 30, 2020 (in thousands) | Fair Value Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | 6.0% Senior Notes | $650,000 | $650,000 | $676,200 | $689,800 | | 3.25% Convertible Notes | $402,414 | $402,500 | $461,000 | $583,600 | | 1.75% Convertible Notes | $550,000 | $550,000 | $490,200 | $559,600 | | Total long-term debt, less current portion | $1,075,071 | $1,062,929 | N/A | N/A | - On October 7, 2020, J2 Global issued $750 million of 4.625% Senior Notes due 2030 to redeem the outstanding 6.0% Senior Notes[130][217] - The 3.25% Convertible Notes are classified as current liabilities due to a holder repurchase option on June 15, 2021[137] 10. Leases J2 Global recorded $9.8 million in lease asset impairment due to a remote work shift, with total operating lease liabilities at $115.2 million - J2 Global recorded a $9.8 million non-cash impairment charge on operating lease right-of-use assets and a $3.6 million impairment charge for associated property and equipment in Q3 2020[154][155] - The impairment was due to a permanent shift to a "remote" or "partial remote" work model for a significant number of employees[154] | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Operating lease right-of-use assets | $97,439 | $125,822 | | Total operating lease liabilities | $115,236 | $130,997 | | Total lease cost (9 months ended Sep 30, 2020) | $34,463 | N/A | 11. Commitments and Contingencies J2 Global faces legal proceedings and has a $20.8 million tax reserve, with its Credit Agreement terminated post-quarter end - J2 Global is involved in several legal proceedings, including a TCPA class action and derivative claims, but management does not anticipate a material adverse effect[166][167][168][169] - The company has a $20.8 million reserve for non-income related tax matters, with potential for additional liabilities[174] - The $200.0 million Credit Facility was terminated on October 7, 2020, with no outstanding amounts as of September 30, 2020[171][172] 12. Income Taxes Effective tax rate increased to 32.2% for nine months 2020 due to valuation allowances and reduced foreign income benefits | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Income tax expense | $24,330 | $6,998 | 247.7% | $49,011 | $17,851 | 174.6% | | Effective tax rate | 28.3% | 17.0% | 11.3 pp | 32.2% | 15.7% | 16.5 pp | | Liabilities for uncertain income tax positions (Sep 30, 2020) | $60,200 | N/A | N/A | N/A | N/A | N/A | - The increased effective tax rate for the nine months ended September 30, 2020, was primarily due to a valuation allowance on deferred tax assets related to investment impairments and a decrease in the benefit of foreign income taxed at lower rates[175][261] 13. Stockholders' Equity J2 Global repurchased 1.14 million shares for $87.5 million (2012 Program) and 2 million shares for $141.8 million (2020 Program) - The 2012 Program, extended through February 2021, had 1,140,819 shares repurchased for $87.5 million in the first nine months of 2020, exhausting the program's capacity[183][184] - A new 2020 Program, approved on August 6, 2020, authorized the repurchase of up to 10 million shares through August 6, 2025, with 2,000,000 shares repurchased for $141.8 million by September 30, 2020[185][186] - The Board of Directors suspended dividend payments for the foreseeable future after the June 4, 2019 payment, citing significant investment opportunities[188][276] 14. Stock Options and Employee Stock Purchase Plan Share-based compensation for nine months 2020 totaled $18.6 million, including stock options, restricted stock, and ESPP expenses | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Stock option compensation expense | $700 | $700 | | Restricted stock/RSU compensation expense | $16,400 | $16,700 | | Employee Stock Purchase Plan compensation expense | $1,500 | $1,000 | | Total share-based compensation expense | $18,643 | $18,394 | - As of September 30, 2020, unrecognized compensation for stock options was $6.1 million (expected over 5.3 years), and for restricted stock/RSUs was $44.0 million (expected over 4.4 years)[195][200] 15. Earnings Per Share Basic EPS for Q3 2020 significantly increased to $1.31, while nine-month EPS remained stable at $1.96 (basic) and $1.93 (diluted) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Basic EPS | $1.31 | $0.63 | 107.9% | $1.96 | $1.98 | (1.0)% | | Diluted EPS | $1.31 | $0.62 | 111.3% | $1.93 | $1.93 | 0.0% | | Weighted-average outstanding shares (Basic) | 46,279,515 | 47,673,211 | (2.9)% | 46,914,750 | 47,654,327 | (1.5)% | 16. Segment Information J2 Global's Cloud Services and Digital Media segments show revenue growth, with Digital Media achieving significant operating income growth - J2 Global's operating segments are Fax and Martech; Voice, Backup, Security, and Consumer Privacy and Protection (CPP); and Digital Media[207] | Segment Revenue | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Cloud Services Total | $170,248 | $171,163 | (0.5)% | $507,090 | $492,540 | 3.0% | | Digital Media | $186,784 | $172,992 | 8.0% | $513,462 | $474,034 | 8.3% | | Total revenues | $356,976 | $344,141 | 3.7% | $1,020,353 | $966,466 | 5.6% | | Segment Operating Income | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Cloud Services Total | $65,757 | $60,945 | 7.9% | $183,470 | $181,826 | 0.9% | | Digital Media | $26,082 | $5,493 | 374.8% | $47,854 | $6,011 | 696.1% | | Total income from operations | $77,438 | $59,359 | 30.5% | $205,725 | $166,835 | 23.3% | 17. Accumulated Other Comprehensive Income Accumulated other comprehensive loss increased to $(57.99) million due to foreign currency translation adjustments | Metric | Sep 30, 2020 (in thousands) | Jan 1, 2020 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Ending balance of accumulated other comprehensive loss | $(57,994) | $(46,462) | | Foreign Currency Translation (9 months ended Sep 30, 2020) | $(12,085) | N/A | 18. Subsequent Events Post-quarter end, J2 Global issued $750 million in new Senior Notes, terminated its Credit Agreement, and completed two acquisitions - On October 7, 2020, J2 Global issued $750 million in 4.625% Senior Notes due 2030 to fund the redemption of its 6.0% Senior Notes, including a $29.2 million early redemption premium[217] - The company terminated its Credit Agreement on October 7, 2020[218] - J2 Global completed the acquisition of RetailMeNot for approximately $420 million on October 28, 2020, and Inspired eLearning on November 2, 2020[218][219] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion analyzes J2 Global's financial condition and results for Q3 and nine months 2020, including forward-looking statements and liquidity Forward-Looking Information Forward-looking statements are subject to risks including economic uncertainty, debt, acquisition integration, and the ongoing COVID-19 pandemic - Forward-looking statements are subject to risks including economic uncertainty, customer acquisition/retention, debt management, successful acquisition integration, international expansion challenges, and tax liabilities[221][222] - The COVID-19 pandemic is a significant factor that could materially impact financial results, with its full extent, duration, and overall impact currently unknown[223][230][231] Overview J2 Global's core businesses, Cloud Services and Digital Media, drive growth through organic efforts and acquisitions, with COVID-19 impacts monitored - J2 Global operates two core businesses: Cloud Services (subscription-based, high-margin, stable) and Digital Media (advertising-driven, seasonal strength in Q4)[224][228] - Acquisitions are a key growth strategy to expand customer bases, diversify offerings, enhance technology, and enter new markets[227] - The company is actively monitoring the global COVID-19 pandemic and its potential adverse effects on operations, financial position, and liquidity[229][230][231] Cloud Services Performance Metrics Cloud Services revenue slightly decreased in Q3 but increased for nine months 2020, with improved cancel rates | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Total subscriber revenues | $170,233 | $170,971 | (0.4)% | $507,021 | $491,669 | 3.1% | | Fixed subscriber revenues | $144,525 | $141,832 | 1.9% | $426,766 | $406,493 | 5.0% | | Variable subscriber revenues | $25,708 | $29,139 | (11.8)% | $80,255 | $85,176 | (5.8)% | | Average monthly revenue per Cloud Business Customer (ARPU) | $13.98 | $14.15 | (1.2)% | N/A | N/A | N/A | | Cancel Rate (3 months average) | 2.1% | 2.4% | (0.3 pp) | N/A | N/A | N/A | Digital Media Performance Metrics Digital Media engagement increased for both Q3 and nine months 2020, with visits growing by 18.3% and 26.8% respectively | Metric | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | Change (YoY) | | :--------------------------------- | :---------------------------------------- | :---------------------------------------- | :----------- | :---------------------------------------- | :---------------------------------------- | :----------- | | Visits | 2,197 | 1,857 | 18.3% | 6,701 | 5,282 | 26.8% | | Page views | 7,244 | 7,008 | 3.4% | 22,777 | 20,587 | 10.6% | Critical Accounting Policies and Estimates Critical accounting policies and estimates remained unchanged during the three months ended September 30, 2020 - No significant changes occurred in critical accounting policies and estimates during the three months ended September 30, 2020[238] Results of Operations Results of operations detail financial performance across segments, including revenues, costs, operating expenses, and taxes Cloud Services Segment Results Cloud Services net sales decreased in Q3 due to COVID-19 but increased for nine months 2020, with operating income growth - Cloud Services net sales decreased by 0.5% for the three months ended September 30, 2020, due to COVID-19, but increased by 3.0% for the nine-month period, primarily from acquisitions[266] - Operating income for Cloud Services increased by 7.9% for the three months and 0.9% for the nine months ended September 30, 2020, mainly due to lower amortization of intangible assets[268][269] - Revenue for the remainder of fiscal year 2020 is expected to be flat to modestly lower due to the macroeconomic environment and COVID-19[239] Digital Media Segment Results Digital Media net sales increased by 8.0% (Q3) and 8.3% (nine months) due to acquisitions, with substantial operating income growth - Digital Media net sales increased by 8.0% for the three months and 8.3% for the nine months ended September 30, 2020, primarily driven by business acquisitions[270] - Operating income for Digital Media surged by 374.8% for the three months and 696.1% for the nine months ended September 30, 2020, due to acquisitions and lower campaign fulfillment costs, despite lease asset impairments[271][272] - Revenue for the remainder of fiscal year 2020 is expected to be higher due to the RetailMeNot acquisition, though still subject to COVID-19 risks[241] J2 Global Consolidated Outlook J2 Global expects higher consolidated revenue for the remainder of 2020, but operating profit margin may decrease due to Digital Media growth - Consolidated revenue for the remainder of fiscal year 2020 is expected to be higher compared to the prior-year comparable period[244] - Operating profit as a percentage of revenues is expected to decrease due to the growing share of the Digital Media business, which has lower operating margins[245] Consolidated Revenues Consolidated revenues increased by 4% (Q3) and 6% (nine months) driven by acquisitions and organic growth | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Revenues | $356,976 | $344,141 | 4% | $1,020,353 | $966,466 | 6% | - Revenue growth was primarily due to acquisitions and organic growth, partially offset by declines in specific areas of both Digital Media and Cloud Services[247] Consolidated Cost of Revenues Cost of revenues decreased by 10% (Q3) and 1% (nine months), primarily due to lower content and fulfillment costs | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Cost of revenue | $55,822 | $61,716 | (10)% | $171,755 | $172,995 | (1)% | | As a percent of revenue | 16% | 18% | (2 pp) | 17% | 18% | (1 pp) | - The decrease in cost of revenues was primarily driven by lower content fees, campaign fulfillment costs, and other editorial/production costs, partially offset by increased depreciation and amortization[248] Consolidated Operating Expenses Consolidated operating expenses show mixed trends across sales and marketing, R&D, and general and administrative costs Sales and Marketing Sales and marketing expenses decreased by 3% (Q3) but increased by 5% (nine months) due to acquisitions and personnel costs | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Sales and Marketing | $95,074 | $98,486 | (3)% | $287,317 | $273,812 | 5% | | As a percent of revenue | 27% | 29% | (2 pp) | 28% | 28% | 0 pp | - The three-month decrease was due to lower advertising costs, while the nine-month increase was driven by higher personnel costs and partner revenue share from acquisitions[249] Research, Development and Engineering R&D expenses increased by 4% (Q3) and 12% (nine months), driven by costs from recent business acquisitions | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Research, Development and Engineering | $14,261 | $13,770 | 4% | $43,273 | $38,692 | 12% | | As a percent of revenue | 4% | 4% | 0 pp | 4% | 4% | 0 pp | - The increase in R&D costs was primarily due to expenses from businesses acquired in and subsequent to Q3 2019[251] General and Administrative G&A costs increased by 3% (Q3) due to impairments but decreased by 1% (nine months) from lower amortization | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | General and Administrative | $114,381 | $110,810 | 3% | $312,283 | $314,132 | (1)% | | As a percent of revenue | 32% | 32% | 0 pp | 31% | 33% | (2 pp) | - The three-month increase was due to lease asset impairments and additional depreciation, while the nine-month decrease was primarily due to lower amortization of intangible assets[252] Consolidated Share-Based Compensation Total share-based compensation was $5.8 million for Q3 and $18.6 million for the nine months ended September 30, 2020 | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Total share-based compensation | $5,800 | $6,446 | (10.1)% | $18,643 | $18,394 | 1.3% | Consolidated Non-Operating Income and Expenses Non-operating items show increased interest expense, a significant gain on business sales, and higher investment losses Interest expense, net Net interest expense increased by 31.2% (Q3) and 30.2% (nine months) due to 1.75% Convertible Senior Notes issuance | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Interest expense, net | $22,700 | $17,300 | 31.2% | $65,900 | $50,600 | 30.2% | - The increase in interest expense was primarily due to the issuance of 1.75% Convertible Senior Notes in Q4 2019[254] Gain on sale of businesses J2 Global recognized a $17.1 million gain from the sale of Voice assets in Australia and New Zealand in Q3 2020 | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Gain on sale of businesses | $17,122 | $0 | N/A | $17,122 | $0 | N/A | - The gain resulted from the sale of certain Voice assets in Australia and New Zealand in Q3 2020[255] Loss on investments, net Net loss on investments significantly increased to $21.0 million for nine months 2020 due to investee capital structure changes | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Loss on investments, net | $156 | $7 | 2128.6% | $20,991 | $45 | 46546.7% | - The substantial increase in loss on investments for the nine-month period was due to net losses from changes in investee capital structure and market volatility[257] Other (income) expense, net Other (income) expense, net, shifted to significant income due to increased gains on currency exchange | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Other (income) expense, net | $(14,230) | $857 | (1759.9)% | $(16,413) | $2,657 | (718.9)% | - The shift to income was primarily driven by increased gains on currency exchange[258] Consolidated Income Taxes Income tax provision significantly increased, with the effective tax rate rising to 32.2% for nine months 2020 | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Provision for income taxes | $24,300 | $7,000 | 247.1% | $49,000 | $17,900 | 173.7% | | Effective tax rate | 28.3% | 17.0% | 11.3 pp | 32.2% | 15.7% | 16.5 pp | - The increase in the effective tax rate was primarily due to a valuation allowance on deferred tax assets related to investment impairments and a decrease in the benefit of foreign income taxed at lower rates[261] Consolidated Equity Method Investment Net loss from equity method investment was $10.8 million for nine months 2020, primarily due to COVID-19 related impairments | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net loss (income) in earnings of equity method investment | $700 | $3,500 | (80.0)% | $10,800 | $(100) | 10900.0% | - The significant loss for the nine-month period was primarily due to a $7.0 million impairment of two investments resulting from COVID-19[263] Liquidity and Capital Resources Liquidity decreased due to stock repurchases and acquisitions, despite increased operating cash flow, with new senior notes issued Cash and Cash Equivalents and Investments Cash, cash equivalents, and investments decreased to $664.5 million due to repurchases and acquisitions, offset by operating cash flow | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Cash, cash equivalents and investments | $664,500 | $675,700 | | Cash and cash equivalents | $567,900 | $575,600 | | Long-term investments | $96,600 | N/A | - The decrease was primarily due to cash used for common stock repurchases, property and equipment purchases, investments, and business acquisitions, partially offset by operating cash flow[273] - Post-quarter end, the company terminated its Credit Agreement and issued $750 million in new 4.625% Senior Notes due 2030[274][275] Cash Flows Operating cash flow increased by 15.1%, investing cash flow decreased by 77.3%, and financing cash flow became a net outflow | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net cash provided by operating activities | $356,000 | $309,300 | 15.1% | | Net cash used in investing activities | $(107,300) | $(472,900) | (77.3)% | | Net cash (used in) provided by financing activities | $(256,900) | $46,900 | (648.1)% | - The increase in operating cash flow was due to decreased accounts receivable, prepaid expenses, and higher uncertain tax positions, partially offset by reduced accounts payable and deferred revenue[280] - The shift in financing cash flow was primarily due to common stock repurchases and the absence of net borrowings under the line of credit seen in 2019[282] Stock Repurchase Program J2 Global repurchased 1.14 million shares for $87.5 million (2012 Program) and 2 million shares for $141.8 million (2020 Program) - Under the 2012 Program, 1,140,819 shares were repurchased for $87.5 million in the first nine months of 2020, exhausting the program's capacity[283] - The new 2020 Program, approved in August 2020, authorized up to 10 million shares, with 2,000,000 shares repurchased for $141.8 million by September 30, 2020[284] Contractual Obligations and Commitments Total contractual obligations were $2.05 billion, primarily long-term debt and operating leases, excluding uncertain tax positions | Contractual Obligation | Total (in thousands) | | :--------------------------------- | :------------------- | | Long-term debt - principal | $1,602,414 | | Long-term debt - interest | $270,641 | | Operating leases | $135,179 | | Finance leases | $1,418 | | Telecom services and co-location facilities | $4,368 | | Holdback payments | $7,630 | | Transition Tax | $11,675 | | Self-Insurance | $11,980 | | Other | $1,600 | | Total | $2,046,905 | - The table excludes $60.2 million in uncertain tax positions, contingent acquisition consideration, and a $102.0 million commitment to OCV Management, LLC due to timing uncertainties[290][291] Off-Balance Sheet Arrangements J2 Global has no material off-balance sheet arrangements - J2 Global has no material off-balance sheet arrangements[292] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details J2 Global's market risk exposure, focusing on interest rate fluctuations and foreign currency risk Interest Rate Risk Interest rate risk stems from investments and variable-rate borrowings, with no impact from LIBOR changes due to no Credit Facility outstanding - J2 Global's interest rate risk is primarily related to its investment portfolio and variable-rate borrowings[294] | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--------------------------------- | :-------------------------- | :-------------------------- | | Debt securities (maturities > 1 year) | $700 | N/A | | Cash and cash equivalent investments (maturities <= 90 days) | $567,900 | $575,600 | - As of September 30, 2020, there were no outstanding amounts under the Credit Facility, meaning a 100 basis point increase in LIBOR would not impact annual interest expense from this facility[296][298] Foreign Currency Risk Foreign currency risk from international operations led to significant foreign exchange gains due to lower inter-company balances - J2 Global's principal foreign currency risk exposure relates to investments and inter-company debt in foreign subsidiaries operating in currencies like AUD, CAD, EUR, HKD, JPY, NZD, NOK, and GBP[300] | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | Change (YoY) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Foreign exchange (gains) losses | $(13,900) | $1,000 | (1490.0)% | $(15,000) | $2,800 | (635.7)% | - The decrease in foreign exchange losses (i.e., increase in gains) was attributed to lower inter-company balances in foreign subsidiaries and exchange rate fluctuations[304] Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during Q3 2020 Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2020[308] Changes in Internal Controls No material changes in internal control over financial reporting occurred during the third quarter ended September 30, 2020 - No material changes in internal control over financial reporting occurred during the third quarter ended September 30, 2020[309] PART II. OTHER INFORMATION This section provides other information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings Legal proceedings, detailed in Note 11, are not expected to have a material adverse effect on the company - Information on legal proceedings is detailed in Note 11, where the company does not believe current claims will have a material adverse effect[310][169] Item 1A. Risk Factors Risk factors refer to prior filings, with no material changes reported from previously disclosed risks - Readers are directed to previously filed 10-K and 10-Q reports for detailed risk factors[311] - No material changes to the previously disclosed risk factors have occurred[311] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported, with details on common stock repurchase programs Unregistered Sales of Equity Securities No unregistered sales of equity securities were reported during the period - There were no unregistered sales of equity securities[312] Issuer Purchases of Equity Securities J2 Global repurchased 2.15 million shares for $69.80 average price in Q3 2020, with 8 million shares remaining in the 2020 Program | Metric | 3 Months Ended Sep 30, 2020 | | :--------------------------------- | :-------------------------- | | Total shares purchased | 2,145,243 | | Average price paid per share | $69.80 | | Shares purchased under publicly announced plans | 2,140,819 | | Maximum shares yet to be purchased under 2020 Program | 8,000,000 | - The 2012 Program is fully utilized, and 8 million shares remain available for repurchase under the 2020 Program[315][316][317] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported by J2 Global - There were no defaults upon senior securities[318] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to J2 Global - Mine Safety Disclosures are not applicable to the company[319] Item 5. Other Information No other information was reported under this item - No other information was reported under this item[320] Item 6. Exhibits Exhibits include corporate governance documents, certifications, and XBRL financial information filed with the Form 10-Q - Exhibits include corporate governance documents, Sarbanes-Oxley certifications (Rule 13a-14(a) and Section 1350), and XBRL formatted financial information[321][329] Signature The report was signed by the CEO, President and CFO, and Chief Accounting Officer on November 9, 2020 - The report was signed by the Chief Executive Officer, President and Chief Financial Officer, and Chief Accounting Officer on November 9, 2020[327]