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J2 Global Reports Third Quarter 2019 Results

Nachrichtenquelle: Business Wire (engl.)
31.10.2019, 21:30  |  2888   |   |   

J2 Global, Inc. (NASDAQ: JCOM) today reported financial results for the third quarter ended September 30, 2019.

“We’re pleased with the acceleration in our growth and our strong results across the board,” said Vivek Shah, CEO of J2 Global. “We’re also excited by our four acquisitions, including BabyCenter and Spiceworks, across four different business units in the quarter.”

THIRD QUARTER 2019 RESULTS

Q3 2019 quarterly revenues increased 17.6% to a third quarter record of $344.1 million compared to $292.7 million for Q3 2018.

Net cash provided by operating activities increased to $99.5 million compared to $87.8 million for Q3 2018. Q3 2019 free cash flow(1) increased 12.7% to $80.5 million compared to $71.5 million for Q3 2018 before the effects of payments associated with certain contingent consideration associated with our Media segment.

GAAP earnings per diluted share(3) increased 1.6% to $0.62 in Q3 2019 compared to $0.61 for Q3 2018.

Adjusted non-GAAP earnings per diluted share(3)(4) for the quarter increased 11.1% to a third quarter record of $1.70 compared to $1.53 for Q3 2018.

GAAP net income for Q3 2019 remained at $30.7 million as compared to Q3 2018.

Quarterly Adjusted EBITDA(5) increased 13.2% to $134.8 million compared to $119.1 million for Q3 2018.

J2 ended the quarter with approximately $191 million in cash and investments after deploying approximately $149 million during the quarter for acquisitions and approximately $16 million in respect of its share repurchase program.

Key financial results for Q3 2019 versus Q3 2018 are set forth in the following table (in millions, except per share amounts). Reconciliations of Adjusted non-GAAP earnings per diluted share, Adjusted EBITDA and free cash flow to their nearest comparable GAAP financial measures are attached to this Press Release.

 

Q3 2019

Q3 2018

% Change

Revenues

 

 

 

Cloud Services

$171.2 million

$150.1 million

14.0%

Digital Media

$173.0 million

$142.6 million

21.3%

Total Revenue: (1)

$344.1 million

$292.7 million

17.6%

Operating Income

$59.4 million

$57.1 million

4.0%

Net Cash Provided by Operating Activities

$99.5 million

$87.8 million

13.3%

Free Cash Flow (2)

$80.5 million

$71.5 million

12.7%

GAAP Earnings per Diluted Share (3)

$0.62

$0.61

1.6%

Adjusted Non-GAAP Earnings per Diluted Share (3) (4)

$1.70

$1.53

11.1%

GAAP Net Income

$30.7 million

$30.7 million

—%

Adjusted Non-GAAP Net Income

$82.8 million

$75.1 million

10.3%

Adjusted EBITDA (5)

$134.8 million

$119.1 million

13.2%

Adjusted EBITDA Margin (5)

39.2%

40.7%

(1.5)%

BUSINESS OUTLOOK

For fiscal 2019, the Company reaffirms its previously revised estimates that it will achieve revenues between $1.33 billion and $1.37 billion and Adjusted EBITDA between $540 million and $556 million. In addition, the Company is reaffirming its previously revised estimates that it will achieve Adjusted non-GAAP earnings per diluted share of between $6.95 and $7.15.

Adjusted non-GAAP earnings per diluted share for 2019 excludes share-based compensation of between $23 million and $27 million, amortization of acquired intangibles and the impact of any currently unanticipated items, in each case net of tax.

It is anticipated that the non-GAAP effective tax rate for 2019 (exclusive of the release of reserves for uncertain tax positions) will be between 20.5% and 22.5%.

The Company has not reconciled the Adjusted non-GAAP earnings per diluted share and tax rate guidance included in this release to the most directly comparable GAAP measure because this cannot be done without unreasonable effort due to the variability with respect to costs related to acquisitions and taxation, which are potential adjustments to future earnings. We expect the variability of these items to have a potentially unpredictable and significant impact on our future GAAP financial results.

Notes:

(1)

 

The revenues associated with each of the businesses may not foot precisely since each is presented independently.

(2)

 

Free cash flow is defined as net cash provided by operating activities, less purchases of property, plant and equipment. Free cash flow amounts are not meant as a substitute for GAAP, but are solely for informational purposes.

(3)

 

The estimated GAAP effective tax rates were approximately 17.0% for Q3 2019 and 22.9% for Q3 2018. The estimated Adjusted non-GAAP effective tax rates were approximately 21.7% for Q3 2019 and 20.8% for Q3 2018.

(4)

 

Adjusted non-GAAP earnings per diluted share excludes certain non-GAAP items, as defined in the Reconciliation of GAAP to Adjusted non-GAAP Financial Measures, for the three months ended September 30, 2019 and 2018 totaled $1.08 and $0.91 per diluted share, respectively.

(5)

 

Adjusted EBITDA is defined as earnings before interest and other expense, net; income tax expense; depreciation and amortization; and the items used to reconcile EPS to Adjusted non-GAAP EPS, as defined in the Reconciliation of GAAP to Adjusted non-GAAP Financial Measures. Adjusted EBITDA amounts are not meant as a substitute for GAAP, but are solely for informational purposes.

About J2 Global

J2 Global, Inc. (NASDAQ: JCOM) is a leading internet information and services company consisting of a portfolio of brands including IGN, Mashable, Humble Bundle, Speedtest, PCMag, Offers.com, Spiceworks, Everyday Health, BabyCenter and What To Expect in its Digital Media business and eFax, eVoice, iContact, Campaigner, Vipre, IPVanish and KeepItSafe in its Cloud Services business. J2 reaches over 180 million people per month across its brands. As of December 31, 2018, J2 had achieved 23 consecutive fiscal years of revenue growth. For more information about J2, please visit www.J2global.com.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain statements in this Press Release are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995, including those contained in Vivek Shah’s quote and the “Business Outlook” portion regarding the Company’s expected fiscal 2019 financial performance. These forward-looking statements are based on management’s current expectations or beliefs and are subject to numerous assumptions, risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors and uncertainties include, among other items: the Company’s ability to grow non-fax revenues, profitability and cash flows; the Company’s ability to identify, close and successfully transition acquisitions; subscriber growth and retention; variability of the Company’s revenue based on changing conditions in particular industries and the economy generally; protection of the Company’s proprietary technology or infringement by the Company of intellectual property of others; the risk of adverse changes in the U.S. or international regulatory environments, including but not limited to the imposition or increase of taxes or regulatory-related fees; and the numerous other factors set forth in J2 Global’s filings with the Securities and Exchange Commission (“SEC”). For a more detailed description of the risk factors and uncertainties affecting J2 Global, refer to the 2018 Annual Report on Form 10-K filed by J2 Global on March 1, 2019, and the other reports filed by J2 Global from time-to-time with the SEC, each of which is available at www.sec.gov. The forward-looking statements provided in this press release, including those contained in Vivek Shah’s quote and in the “Business Outlook” portion regarding the Company’s expected fiscal 2019 financial performance are based on limited information available to the Company at this time, which is subject to change. Although management’s expectations may change after the date of this press release, the Company undertakes no obligation to revise or update these statements.

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following Adjusted non-GAAP financial measures: Adjusted non-GAAP net income, Adjusted non-GAAP earnings per diluted share, Adjusted EBITDA and free cash flow. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these Adjusted non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our management believes that these Adjusted non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures that may not be indicative of our recurring core business operating results. We believe that both management and investors benefit from referring to these Adjusted non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These Adjusted non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance and liquidity. We believe these Adjusted non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

For more information on these Adjusted non-GAAP financial measures, please see the appropriate GAAP to Adjusted non-GAAP reconciliation tables included within the attached Exhibit to this release.

J2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)

 

September 30, 2019

 

December 31, 2018

ASSETS

 

 

 

Cash and cash equivalents

$

94,570

 

 

$

209,474

 

Accounts receivable, net of allowances of $12,335 and $10,422, respectively

203,869

 

 

221,615

 

Prepaid expenses and other current assets

48,857

 

 

29,242

 

Total current assets

347,296

 

 

460,331

 

Long-term investments

96,788

 

 

83,828

 

Property and equipment, net

117,496

 

 

98,813

 

Operating lease right-of-use assets

90,134

 

 

 

Goodwill

1,626,266

 

 

1,380,376

 

Other purchased intangibles, net

604,906

 

 

526,468

 

Other assets

12,799

 

 

11,014

 

TOTAL ASSETS

$

2,895,685

 

 

$

2,560,830

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Accounts payable and accrued expenses

$

228,751

 

 

$

166,521

 

Income taxes payable, current

2,144

 

 

12,915

 

Deferred revenue, current

155,162

 

 

127,568

 

Operating lease liabilities, current

24,078

 

 

 

Other current liabilities

2,303

 

 

318

 

Total current liabilities

412,438

 

 

307,322

 

Long-term debt

1,150,515

 

 

1,013,129

 

Deferred revenue, noncurrent

11,807

 

 

13,200

 

Operating lease liabilities, noncurrent

70,927

 

 

 

Income taxes payable, noncurrent

11,675

 

 

11,675

 

Liability for uncertain tax positions

50,758

 

 

59,644

 

Deferred income taxes, noncurrent

83,496

 

 

69,048

 

Other long-term liabilities

19,701

 

 

51,068

 

TOTAL LIABILITIES

1,811,317

 

 

1,525,086

 

Commitments and contingencies

 

 

 

Preferred stock

 

 

 

Common stock

476

 

 

481

 

Additional paid-in capital

369,973

 

 

354,210

 

Treasury stock

 

 

(42,543

)

Retained earnings

768,192

 

 

769,575

 

Accumulated other comprehensive loss

(54,273

)

 

(45,979

)

TOTAL STOCKHOLDERS’ EQUITY

1,084,368

 

 

1,035,744

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

2,895,685

 

 

$

2,560,830

 

 

J2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2019

 

2018

 

2019

 

2018

Total revenues

$

344,141

 

 

$

292,724

 

 

$

966,466

 

 

$

861,236

 

 

 

 

 

 

 

 

 

Cost of revenues (1)

61,716

 

 

49,217

 

 

172,995

 

 

145,112

 

Gross profit

282,425

 

 

243,507

 

 

793,471

 

 

716,124

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing (1)

98,486

 

 

80,708

 

 

273,812

 

 

250,190

 

Research, development and engineering (1)

13,770

 

 

11,950

 

 

38,692

 

 

35,412

 

General and administrative (1)

110,810

 

 

93,792

 

 

314,132

 

 

272,926

 

Total operating expenses

223,066

 

 

186,450

 

 

626,636

 

 

558,528

 

Income from operations

59,359

 

 

57,057

 

 

166,835

 

 

157,596

 

Interest expense, net

17,271

 

 

15,175

 

 

50,625

 

 

46,428

 

Other expense, net

864

 

 

1,239

 

 

2,702

 

 

6,150

 

Income before income taxes and net loss (income) in earnings of equity method investment

41,224

 

 

40,643

 

 

113,508

 

 

105,018

 

Income tax expense

6,998

 

 

9,310

 

 

17,851

 

 

23,365

 

Net loss (income) in earnings of equity method investment

3,481

 

 

610

 

 

(126

)

 

3,581

 

Net income

$

30,745

 

 

$

30,723

 

 

$

95,783

 

 

$

78,072

 

 

 

 

 

 

 

 

 

Basic net income per common share:

 

 

 

 

 

 

 

Net income attributable to J2 Global, Inc. common shareholders

$

0.63

 

 

$

0.63

 

 

$

1.98

 

 

$

1.61

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

Net income attributable to J2 Global, Inc. common shareholders

$

0.62

 

 

$

0.61

 

 

$

1.93

 

 

$

1.57

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

47,673,211

 

 

48,009,953

 

 

47,654,327

 

 

47,945,264

 

Diluted weighted average shares outstanding

49,064,272

 

 

49,279,217

 

 

48,892,523

 

 

49,068,653

 

 

 

 

 

 

 

 

 

(1) Includes share-based compensation expense as follows:

 

 

 

 

 

 

 

Cost of revenues

$

127

 

 

$

128

 

 

$

390

 

 

$

378

 

Sales and marketing

419

 

 

548

 

 

1,212

 

 

1,380

 

Research, development and engineering

373

 

 

399

 

 

1,092

 

 

1,187

 

General and administrative

5,527

 

 

6,831

 

 

15,700

 

 

18,448

 

Total

$

6,446

 

 

$

7,906

 

 

$

18,394

 

 

$

21,393

 

J2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

 

Nine Months Ended
September 30,

Cash flows from operating activities:

2019

 

2018

Net income

$

95,783

 

 

$

78,072

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

Depreciation and amortization

170,409

 

 

132,850

 

Amortization of financing costs and discounts

9,072

 

 

8,692

 

Amortization of operating lease assets

14,474

 

 

 

Share-based compensation

18,394

 

 

21,393

 

Provision for doubtful accounts

9,217

 

 

13,992

 

Deferred income taxes, net

2,850

 

 

559

 

Changes in fair value of contingent consideration

8,044

 

 

14,400

 

(Income) loss on equity investments

(166

)

 

8,421

 

Decrease (increase) in:

 

 

 

Accounts receivable

29,953

 

 

49,937

 

Prepaid expenses and other current assets

(10,094

)

 

(3,771

)

Other assets

(1,528

)

 

1,714

 

Increase (decrease) in:

 

 

 

Accounts payable and accrued expenses

3,008

 

 

(38,508

)

Income taxes payable

(15,179

)

 

(4,304

)

Deferred revenue

777

 

 

7,042

 

Operating lease liabilities

(13,612

)

 

 

Liability for uncertain tax positions

(9,144

)

 

3,678

 

Other long-term liabilities

(566

)

 

(51

)

Net cash provided by operating activities

311,692

 

 

294,116

 

Cash flows from investing activities:

 

 

 

Distribution from equity method investment

10,288

 

 

 

Purchases of equity method investment

(22,338

)

 

(34,558

)

Purchases of available-for-sale investments

 

 

(500

)

Purchases of property and equipment

(49,483

)

 

(44,928

)

Acquisition of businesses, net of cash received

(411,349

)

 

(191,567

)

Purchases of intangible assets

(46

)

 

(183

)

Net cash used in investing activities

(472,928

)

 

(271,736

)

Cash flows from financing activities:

 

 

 

Payment of note payable

(5,100

)

 

 

Proceeds from line of credit

185,000

 

 

 

Repayment of line of credit

(57,000

)

 

 

Repurchase of common stock

(20,562

)

 

(4,167

)

Issuance of stock, net of costs

7,269

 

 

1,554

 

Dividends paid

(43,507

)

 

(60,654

)

Deferred payments for acquisitions

(17,734

)

 

(3,558

)

Other

(1,514

)

 

(330

)

Net cash provided by (used in) financing activities

46,852

 

 

(67,155

)

Effect of exchange rate changes on cash and cash equivalents

(520

)

 

(2,646

)

Net change in cash and cash equivalents

(114,904

)

 

(47,421

)

Cash and cash equivalents at beginning of period

209,474

 

 

350,945

 

Cash and cash equivalents at end of period

$

94,570

 

 

$

303,524

 

 

J2 GLOBAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

Non-GAAP net income is GAAP net income with the following modifications: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; (5) elimination of change in value on investment; (6) elimination of additional tax expense/benefit from prior years; and (7) elimination of dilutive effect of the convertible debt.

 
 

 

Three Months Ended September 30,

 

2019

Per Diluted
Share *

 

2018

Per Diluted
Share *

Net income

$

30,745

 

$

0.62

 

 

$

30,723

 

$

0.61

 

Plus:

 

 

 

 

 

Share based compensation (1)

4,305

 

0.09

 

 

5,970

 

0.12

 

Acquisition related integration costs (2)

6,355

 

0.13

 

 

5,959

 

0.12

 

Interest costs (3)

1,433

 

0.03

 

 

1,561

 

0.03

 

Amortization (4)

38,708

 

0.81

 

 

30,005

 

0.62

 

Investments (5)

3,481

 

0.07

 

 

588

 

0.01

 

Tax (benefit) expense from prior years (6)

(2,271

)

(0.05

)

 

337

 

0.01

 

Convertible debt dilution (7)

 

0.02

 

 

 

0.01

 

Adjusted non-GAAP net income

$

82,756

 

$

1.70

 

 

$

75,143

 

$

1.53

 

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

 

Nine Months Ended September 30,

 

2019

Per Diluted
Share *

 

2018

Per Diluted
Share *

Net income

$

95,783

 

$

1.93

 

 

$

78,072

 

$

1.57

 

Plus:

 

 

 

 

 

Share based compensation (1)

13,858

 

0.29

 

 

15,256

 

0.32

 

Acquisition related integration costs (2)

13,976

 

0.29

 

 

19,139

 

0.40

 

Interest costs (3)

5,169

 

0.11

 

 

4,164

 

0.09

 

Amortization (4)

100,148

 

2.10

 

 

85,676

 

1.78

 

Investments (5)

(126

)

 

 

5,965

 

0.12

 

Tax expense from prior years (6)

72

 

 

 

337

 

0.01

 

Convertible debt dilution (7)

 

0.05

 

 

 

0.03

 

Adjusted non-GAAP net income

$

228,880

 

$

4.70

 

 

$

208,609

 

$

4.24

 

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

J2 GLOBAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Non-GAAP net income is GAAP net income with the following modifications: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; (5) elimination of change in value on investment; (6) elimination of additional tax expense/benefit from prior years; and (7) elimination of dilutive effect of the convertible debt.

 

Three Months Ended September 30,

 

2019

 

2018

Cost of revenues

$

61,716

 

 

$

49,217

 

Plus:

 

 

 

Share based compensation (1)

(127

)

 

(128

)

Acquisition related integration costs (2)

(270

)

 

(304

)

Amortization (4)

(460

)

 

(546

)

Adjusted non-GAAP cost of revenues

$

60,859

 

 

$

48,239

 

 

 

 

 

Sales and marketing

$

98,486

 

 

$

80,708

 

Plus:

 

 

 

Share based compensation (1)

(419

)

 

(548

)

Acquisition related integration costs (2)

(3,420

)

 

(1,001

)

Adjusted non-GAAP sales and marketing

$

94,647

 

 

$

79,159

 

 

 

 

 

Research, development and engineering

$

13,770

 

 

$

11,950

 

Plus:

 

 

 

Share based compensation (1)

(373

)

 

(399

)

Acquisition related integration costs (2)

(2,087

)

 

(10

)

Adjusted non-GAAP research, development and engineering

$

11,310

 

 

$

11,541

 

 

 

 

 

General and administrative

$

110,810

 

 

$

93,792

 

Plus:

 

 

 

Share based compensation (1)

(5,527

)

 

(6,831

)

Acquisition related integration costs (2)

(2,265

)

 

(6,037

)

Amortization (4)

(50,457

)

 

(35,795

)

Tax benefit (expense) from prior years (6)

3,268

 

 

(378

)

Adjusted non-GAAP general and administrative

$

55,829

 

 

$

44,751

 

 

 

 

 

Interest expense, net

$

17,271

 

 

$

15,175

 

Plus:

 

 

 

Acquisition related integration costs (2)

 

 

(23

)

Interest costs (3)

(2,308

)

 

(2,179

)

Tax expense from prior years (6)

 

 

(57

)

Adjusted non-GAAP interest expense, net

$

14,963

 

 

$

12,916

 

 

 

 

 

Other expense, net

$

864

 

 

$

1,239

 

Adjusted non-GAAP other expense, net

$

864

 

 

$

1,239

 

 

 

 

 

 

 

 

 

Income tax provision

$

6,998

 

 

$

9,310

 

Plus:

 

 

 

Share based compensation (1)

2,141

 

 

1,936

 

Acquisition related integration costs (2)

1,687

 

 

1,416

 

Interest costs (3)

875

 

 

618

 

Amortization (4)

12,209

 

 

6,336

 

Investments (5)

 

 

22

 

Tax (benefit) expense from prior years (6)

(997

)

 

98

 

Adjusted non-GAAP income tax provision

$

22,913

 

 

$

19,736

 

 

 

 

 

Net loss in earnings of equity method investment

$

3,481

 

 

$

610

 

Plus:

 

 

 

Investments (5)

(3,481

)

 

(610

)

Adjusted non-GAAP net loss in earnings of equity method investment

$

 

 

$

 

 

 

 

 

Total adjustments

$

(52,011

)

 

$

(44,420

)

 

 

 

 

GAAP earnings per diluted share

$

0.62

 

 

$

0.61

 

Adjustments *

$

1.08

 

 

$

0.91

 

Adjusted non-GAAP earnings per diluted share

$

1.70

 

 

$

1.53

 

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

The Company discloses Adjusted non-GAAP Earnings Per Share (“EPS”) as a supplemental Non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Adjusted non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company’s performance. Accordingly, the Company believes that the presentation of this Adjusted non-GAAP financial measure provides useful information to investors.

Adjusted non-GAAP EPS is not in accordance with, or an alternative to, net income per share and may be different from Non-GAAP measures with similar or even identical names used by other companies. In addition, this Adjusted non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company’s results of operations determined in accordance with GAAP.

J2 GLOBAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Non-GAAP net income is GAAP net income with the following modifications: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; (5) elimination of change in value on investment; (6) elimination of additional tax expense/benefit from prior years; and (7) elimination of dilutive effect of the convertible debt.

 

Nine Months Ended September 30,

 

2019

 

2018

Cost of revenues

$

172,995

 

 

$

145,112

 

Plus:

 

 

 

Share based compensation (1)

(390

)

 

(378

)

Acquisition related integration costs (2)

(325

)

 

(347

)

Amortization (4)

(1,443

)

 

(1,686

)

Adjusted non-GAAP cost of revenues

$

170,837

 

 

$

142,701

 

 

 

 

 

Sales and marketing

$

273,812

 

 

$

250,190

 

Plus:

 

 

 

Share based compensation (1)

(1,212

)

 

(1,380

)

Acquisition related integration costs (2)

(3,144

)

 

(1,925

)

Adjusted non-GAAP sales and marketing

$

269,456

 

 

$

246,885

 

 

 

 

 

Research, development and engineering

$

38,692

 

 

$

35,412

 

Plus:

 

 

 

Share based compensation (1)

(1,092

)

 

(1,187

)

Acquisition related integration costs (2)

(2,087

)

 

(285

)

Adjusted non-GAAP research, development and engineering

$

35,513

 

 

$

33,940

 

 

 

 

 

General and administrative

$

314,132

 

 

$

272,926

 

Plus:

 

 

 

Share based compensation (1)

(15,700

)

 

(18,448

)

Acquisition related integration costs (2)

(12,546

)

 

(20,461

)

Amortization (4)

(132,270

)

 

(102,664

)

Tax expense from prior years (6)

(104

)

 

(378

)

Adjusted non-GAAP general and administrative

$

153,512

 

 

$

130,975

 

 

 

 

 

Interest expense, net

$

50,625

 

 

$

46,428

 

Plus:

 

 

 

Acquisition related integration costs (2)

27

 

 

(68

)

Interest costs (3)

(6,828

)

 

(6,443

)

Tax expense from prior years (6)

 

 

(57

)

Adjusted non-GAAP interest expense, net

$

43,824

 

 

$

39,860

 

 

 

 

 

Other expense, net

$

2,702

 

 

$

6,150

 

Plus:

 

 

 

Investments (5)

 

 

(2,900

)

Adjusted non-GAAP other expense, net

$

2,702

 

 

$

3,250

 

 

 

 

 

 

 

 

 

Income tax provision

$

17,851

 

 

$

23,365

 

Plus:

 

 

 

Share based compensation (1)

4,536

 

 

6,137

 

Acquisition related integration costs (2)

4,099

 

 

3,947

 

Interest costs (3)

1,659

 

 

2,279

 

Amortization (4)

33,565

 

 

18,674

 

Investments (5)

 

 

516

 

Tax expense from prior years (6)

32

 

 

98

 

Adjusted non-GAAP income tax provision

$

61,742

 

 

$

55,016

 

 

 

 

 

Net (income) loss in earnings of equity method investment

$

(126

)

 

$

3,581

 

Plus:

 

 

 

Investments (5)

126

 

 

(3,581

)

Adjusted non-GAAP net (income) loss in earnings of equity method investment

$

 

 

$

 

 

 

 

 

Total adjustments

$

(133,097

)

 

$

(130,537

)

 

 

 

 

GAAP earnings per diluted share

$

1.93

 

 

$

1.57

 

Adjustments *

$

2.77

 

 

$

2.67

 

Adjusted non-GAAP earnings per diluted share

$

4.70

 

 

$

4.24

 

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

The Company discloses Adjusted non-GAAP Earnings Per Share (“EPS”) as a supplemental Non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Adjusted non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company’s performance. Accordingly, the Company believes that the presentation of this Adjusted non-GAAP financial measure provides useful information to investors.

Adjusted non-GAAP EPS is not in accordance with, or an alternative to, net income per share and may be different from Non-GAAP measures with similar or even identical names used by other companies. In addition, this Adjusted non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company’s results of operations determined in accordance with GAAP.

Non-GAAP Financial Measures

To supplement its condensed consolidated financial statements, which are prepared and presented in accordance with US GAAP, the Company uses the following Non-GAAP financial measures: Adjusted EBITDA, Adjusted non-GAAP Net Income, and Adjusted non-GAAP Diluted EPS (collectively the “Non-GAAP financial measures”). The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. The Company uses these Non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that they provide useful information about core operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.

(1) Share Based Compensation. The Company excludes stock-based compensation because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. The Company further believes this measure is useful to investors in that it allows for greater transparency to certain line items in its financial statements. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(2) Acquisition Related Integration Costs. The Company excludes certain acquisition and related integration costs such as adjustments to contingent consideration, severance, lease terminations, retention bonuses and other acquisition-specific items. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(3) Interest Costs. In June 2014, the Company issued $402.5 million aggregate principal amount of 3.25% convertible senior notes. In accordance with GAAP, the Company separately accounts for the value of the liability and equity features of its outstanding convertible senior notes in a manner that reflects the Company’s non-convertible debt borrowing rate. The value of the conversion feature, reflected as a debt discount, is amortized to interest expense over time. Accordingly, the Company recognizes imputed interest expense on its convertible senior notes of approximately 5.8% in its income statement. The Company excludes the difference between the imputed interest expense and the coupon interest expense of 3.25% because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding core operational performance. The Company has determined excluding these items from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(4) Amortization. The Company excludes amortization of patents and acquired intangible assets because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(5) Change in Value on Investments. The Company excludes the change in value on its equity investments. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

(6) Tax Expense/Benefit from Prior Years. The Company excludes certain income tax-related items in respect of income tax audit settlements and their related accrual reversals of uncertain tax positions under ASC 740. The Company believes that the Non-GAAP financial measures excluding these items provide meaningful supplemental information regarding operational performance. In addition, excluding these items from the Non-GAAP measures facilitates comparisons to historical operating results.

(7) Convertible Debt Dilution. The Company excludes convertible debt dilution from diluted EPS. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

The Company presents Adjusted non-GAAP Cost of Revenues, Adjusted non-GAAP Research, Development and Engineering, Adjusted non-GAAP Sales and Marketing, Adjusted non-GAAP General and Administrative, Adjusted non-GAAP Interest Expense, Adjusted non-GAAP Other Expense, Adjusted non-GAAP Income Tax Provision, Adjusted non-GAAP Net Loss (Income) in Equity Method Investment and Adjusted non-GAAP Net Income because the Company believes that these provide useful information about our operating results and enhance the overall understanding of past financial performance and future prospects.

J2 GLOBAL, INC. AND SUBSIDIARIES
NET INCOME TO ADJUSTED EBITDA RECONCILIATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED, IN THOUSANDS)

The following table sets forth a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Net income

$

30,745

 

 

$

30,723

 

 

$

95,783

 

 

$

78,072

 

Plus:

 

 

 

 

 

 

 

Interest expense, net

17,271

 

 

15,175

 

 

50,625

 

 

46,428

 

Other expense, net

864

 

 

1,239

 

 

2,702

 

 

6,150

 

Income tax expense

6,998

 

 

9,310

 

 

17,851

 

 

23,365

 

Depreciation and amortization

64,197

 

 

46,375

 

 

170,409

 

 

132,850

 

Reconciliation of GAAP to Adjusted non-GAAP financial measures:

 

 

 

 

 

 

 

Share-based compensation and the associated payroll tax expense

6,446

 

 

7,906

 

 

18,394

 

 

21,393

 

Acquisition-related integration costs

8,042

 

 

7,352

 

 

18,102

 

 

23,018

 

Investments

3,481

 

 

610

 

 

(126

)

 

3,581

 

Additional indirect tax (benefit) expense from prior years

(3,268

)

 

378

 

 

104

 

 

378

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

$

134,776

 

 

$

119,068

 

 

$

373,844

 

 

$

335,235

 

Adjusted EBITDA as calculated above represents earnings before interest and other expense, net, income tax expense, depreciation and amortization and the items used to reconcile GAAP to Adjusted non-GAAP financial measures, including (1) share-based compensation, (2) certain acquisition-related integration costs, (3) change in value on investments and (4) additional indirect tax (benefit) expense from prior years. We disclose Adjusted EBITDA as a supplemental Non-GAAP financial performance measure as we believe it is a useful metric by which to compare the performance of our business from period to period. We understand that measures similar to Adjusted EBITDA are broadly used by analysts, rating agencies and investors in assessing our performance. Accordingly, we believe that the presentation of Adjusted EBITDA provides useful information to investors.

Adjusted EBITDA is not in accordance with, or an alternative to, net income, and may be different from Non-GAAP measures used by other companies. In addition, Adjusted EBITDA is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company’s results of operations determined in accordance with GAAP.

J2 GLOBAL, INC. AND SUBSIDIARIES
NON-GAAP FINANCIAL MEASURES
(UNAUDITED, IN THOUSANDS)

 

Q1

 

Q2

 

Q3

 

Q4

 

YTD

2019

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

116,854

 

 

$

95,357

 

 

$

99,481

 

 

$

 

 

$

311,692

 

Less: Purchases of property and equipment

(12,531

)

 

(18,260

)

 

(18,692

)

 

 

 

(49,483

)

Add: Contingent consideration*

 

 

8,698

 

 

(240

)

 

 

 

8,458

 

Free cash flows

$

104,323

 

 

$

85,795

 

 

$

80,549

 

 

$

 

 

$

270,667

 

 

 

 

 

 

 

 

 

 

 

* Free Cash Flows of $85.8 million for Q2 2019 and $80.5 million for Q3 2019 is before the effect of payments associated with certain contingent consideration associated with recent acquisitions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1

 

Q2

 

Q3

 

Q4

 

YTD

2018

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

103,910

 

 

$

102,383

 

 

$

87,823

 

 

$

107,209

 

 

$

401,325

 

Less: Purchases of property and equipment

(13,165

)

 

(15,393

)

 

(16,370

)

 

(11,451

)

 

(56,379

)

Free cash flows

$

90,745

 

 

$

86,990

 

 

$

71,453

 

 

$

95,758

 

 

$

344,946

 

The Company discloses free cash flows as supplemental Non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company’s performance. Accordingly, the Company believes that the presentation of this Non-GAAP financial measure provides useful information to investors.

Free cash flows is not in accordance with, or an alternative to, Cash Flows from Operating Activities, and may be different from Non-GAAP measures with similar or even identical names used by other companies. In addition, the Non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company’s results of operations determined in accordance with GAAP.

J2 GLOBAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SEPEMBER 30, 2019
(UNAUDITED, IN THOUSANDS)

 

Cloud

 

Digital

 

 

 

 

 

Services

 

Media

 

Corporate

 

Total

Revenues

 

 

 

 

 

 

 

GAAP revenues

$

171,163

 

 

$

172,975

 

 

$

3

 

 

$

344,141

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

GAAP gross profit

$

132,923

 

 

$

149,499

 

 

$

3

 

 

$

282,425

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

Share-based compensation

125

 

 

2

 

 

 

 

127

 

Acquisition related integration costs

55

 

 

215

 

 

 

 

270

 

Amortization

460

 

 

 

 

 

 

460

 

Adjusted non-GAAP gross profit

$

133,563

 

 

$

149,716

 

 

$

3

 

 

$

283,282

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

 

 

GAAP operating profit

$

60,962

 

 

$

5,475

 

 

$

(7,078

)

 

$

59,359

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

Share-based compensation

1,361

 

 

1,211

 

 

3,874

 

 

6,446

 

Acquisition related integration costs

238

 

 

7,804

 

 

 

 

8,042

 

Amortization

21,573

 

 

28,742

 

 

602

 

 

50,917

 

Additional indirect tax benefit from prior years

(3,268

)

 

 

 

 

 

(3,268

)

Adjusted non-GAAP operating profit

$

80,866

 

 

$

43,232

 

 

$

(2,602

)

 

$

121,496

 

 

 

 

 

 

 

 

 

Depreciation

3,032

 

 

10,248

 

 

 

 

13,280

 

Adjusted EBITDA

$

83,898

 

 

$

53,480

 

 

$

(2,602

)

 

$

134,776

 

NOTE 1: Table above excludes certain intercompany allocations

NOTE 2: The table above is impacted by certain expenses associated with the Corporate entity that were allocated to the Cloud Services business and the Digital Media business as these costs are shared costs incurred by the Corporate entity. As a result, expenses were allocated from Corporate to Cloud Services and Digital Media in the amount of $2.6 million and $2.9 million, respectively.

 

The effects noted above reduce Adjusted EBITDA for Cloud Services and Digital Media by $2.6 million and $2.9 million, respectively.

J2 GLOBAL, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SEPTEMBER 30, 2018
(UNAUDITED, IN THOUSANDS)

 

Cloud

 

Digital

 

 

 

 

 

Services

 

Media

 

Corporate

 

Total

Revenues

 

 

 

 

 

 

 

GAAP revenues

$

150,094

 

 

$

142,628

 

 

$

2

 

 

$

292,724

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

GAAP gross profit

$

118,326

 

 

$

125,179

 

 

$

2

 

 

$

243,507

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

Share-based compensation

126

 

 

2

 

 

 

 

128

 

Acquisition related integration costs

267

 

 

37

 

 

 

 

304

 

Amortization

546

 

 

 

 

 

 

546

 

Adjusted non-GAAP gross profit

$

119,265

 

 

$

125,218

 

 

$

2

 

 

$

244,485

 

 

 

 

 

 

 

 

 

Operating profit

 

 

 

 

 

 

 

GAAP operating profit

$

57,117

 

 

$

6,994

 

 

$

(7,054

)

 

$

57,057

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

Share-based compensation

1,561

 

 

2,018

 

 

4,327

 

 

7,906

 

Acquisition related integration costs

851

 

 

6,501

 

 

 

 

7,352

 

Amortization

12,636

 

 

22,956

 

 

749

 

 

36,341

 

Additional indirect tax expense from prior years

378

 

 

 

 

 

 

378

 

Adjusted non-GAAP operating profit

$

72,543

 

 

$

38,469

 

 

$

(1,978

)

 

$

109,034

 

 

 

 

 

 

 

 

 

Depreciation

2,410

 

 

7,624

 

 

 

 

10,034

 

Adjusted EBITDA

$

74,953

 

 

$

46,093

 

 

$

(1,978

)

 

$

119,068

 

NOTE 1: Table above excludes certain intercompany allocations

NOTE 2: The table above is impacted by certain expenses associated with the Corporate entity that were allocated to the Cloud Services business and Digital Media business as these costs are shared costs incurred by the Corporate entity. As a result, expenses were allocated from Corporate to Cloud Services and Digital Media in the amount of $1.5 million and $1.5 million, respectively.

 

The effects noted above reduce Adjusted EBITDA for Cloud Services and Digital Media by $1.5 million and $1.5 million, respectively.

 

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19.11.19