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JCOM > SEC Filings for JCOM > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for J2 GLOBAL, INC.


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

In addition to historical information, the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - "Risk Factors" of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 (together, the "Risk Factors"), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures About Market Risk." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to:

?          Sustain growth or profitability, particularly in light of an uncertain
           U.S. or worldwide economy and the related impact on customer
           acquisition and retention rates, customer usage levels and credit and
           debit card payment declines;


?          Maintain and increase our cloud services customer base and average
           revenue per user;


?          Generate sufficient cash flow to make interest and debt payments and
           reinvest in our business, and pursue desired activities and businesses
           plans while satisfying restrictive covenants relating to debt
           obligations;


?          Acquire businesses on acceptable terms and successfully integrate and
           realize anticipated synergies from such acquisitions;


?          Continue to expand our businesses and operations internationally in
           the wake of numerous risks, including adverse currency fluctuations,
           difficulty in staffing and managing international operations, higher
           operating costs as a percentage of revenues or the implementation of
           adverse regulations;


?          Maintain our financial position, operating results and cash flows in
           the event that we incur new or unanticipated costs or tax liabilities,
           including those relating to federal and state income tax and indirect
           taxes, such as sales, value-added and telecommunication taxes;


?          Accurately estimate the assumptions underlying our effective worldwide
           tax rate;

? Continue to pay a comparable cash dividend on a quarterly basis;

?          Maintain favorable relationships with critical third-party vendors
           whose financial condition will not negatively impact the services they
           provide;


?          Create compelling digital media content causing increased traffic and
           advertising levels; additional advertisers or an increase in
           advertising spend; and effectively target digital media advertisements
           to desired audiences;


?          Manage certain risks inherent to our business, such as costs
           associated with fraudulent activity, system failure or network
           security breach; effectively maintaining and managing our billing
           systems; time and resources required to manage our legal proceedings;
           or adhering to our internal controls and procedures;


?          Compete with other similar providers with regard to price, service and
           functionality;


?          Cost-effectively procure, retain and deploy large quantities of
           telephone numbers in desired locations in the United States and
           abroad;


?          Achieve business and financial objectives in light of burdensome
           domestic and international telecommunications, Internet or other
           regulations including data privacy, security and retention;


?          Successfully manage our growth, including but not limited to our
           operational and personnel-related resources, and integration of newly
           acquired businesses;


?          Successfully adapt to technological changes and diversify services and
           related revenues at acceptable levels of financial return;

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?          Successfully develop and protect our intellectual property, both
           domestically and internationally, including our brands, patents,
           trademarks and domain names, and avoid infringing upon the proprietary
           rights of others; and

? Recruit and retain key personnel.

In addition, our financial results could be materially impacted by risks associated with new accounting pronouncements.

Overview

j2 Global, Inc., together with its subsidiaries ("j2 Global", the "Company", "our", "us" or "we"), is a leading provider of services delivered through the Internet. Through our Business Cloud Services Division, we provide cloud services to businesses of all sizes, from individuals to enterprises. Our Digital Media Division operates a portfolio of web properties providing technology, gaming and lifestyle content, and an innovative data-driven platform to connect advertisers with visitors to those properties in addition to websites operated by third parties that are part of the Division's advertising network.

We generate revenues primarily from subscription and usage fees for our business cloud services and selling targeted advertising through our digital media businesses. We also generate revenues from intellectual property licensing and sales.
In addition to growing our businesses organically, we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies and acquire skilled personnel. Since December 31, 2000, and including acquisitions closed thus far in 2013, we have completed 44 acquisitions.
On November 9, 2012, we acquired Ziff Davis, Inc. ("Ziff Davis"), a company with extensive digital content holdings within the technology vertical. This acquisition expanded our operations into the digital media market, an area we believe provides attractive profit and expansion opportunities. On February 1, 2013, Ziff Davis acquired IGN Entertainment, Inc. ("IGN"), an online publisher of video games, entertainment and men's lifestyle content. On May 16, 2013, Ziff Davis acquired NetShelter, the largest community of technology publishers dedicated to consumer electronics, computing and mobile communications. For additional information on our acquisitions, see Note 3 - Business Acquisitions in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
j2 Global was founded in 1995 and is a Delaware corporation. We manage our operations through two business segments: Business Cloud Services and Digital Media. Information regarding revenue and operating income attributable to each of our reportable segments is included within Note 13 - Segment Information of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Our Business Cloud Services revenues are impacted by the number of effective business days in a given period. We traditionally experience lower than average Business Cloud Services usage and customer sign-ups in the fourth quarter. Revenues associated with our Digital Media operations are subject to seasonal fluctuations, becoming most active during the fourth quarter holiday period due to increased online retail activity.
Business Cloud Services Segment Performance Metrics

The following table sets forth certain key operating metrics for our Business Cloud Services segment as of and for the three and six months ended June 30, 2013 and 2012 (in thousands, except for percentages):

June 30,
2013 2012
Paying telephone numbers 2,189 2,058

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                                              Three Months Ended June 30,          Six Months Ended June 30,
                                                2013               2012               2013             2012
Subscriber revenues:
Fixed                                     $      75,304       $      72,187     $     146,691       $ 142,414
Variable                                         18,447              15,884            36,562          30,482
Total subscriber revenues                 $      93,751       $      88,071     $     183,253       $ 172,896
Percentage of total subscriber revenues:
Fixed                                              80.3 %              82.0 %            80.0 %          82.4 %
Variable                                           19.7 %              18.0 %            20.0 %          17.6 %
Subscriber revenues:
DID-based                                 $      86,182       $      81,537     $     168,684       $ 160,024
Non-DID-based                                     7,569               6,534            14,569          12,872
Total subscriber revenues                 $      93,751       $      88,071     $     183,253       $ 172,896

Average revenue per paying telephone
number (ARPU)(1)                          $       13.16       $       13.19     $       13.06       $   13.00
Cancel Rate(2)                                      2.2 %               2.3 %

(1) Quarterly ARPU is calculated using our standard convention of applying the average of the quarter's beginning and ending base to the total revenue for the quarter. We believe ARPU provides investors an understanding of the average monthly revenues we recognize associated with each DID deployed to our paying customers. As ARPU varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across our paying DID base.

(2) Cancel rate is defined as cancels related to individual customer DIDs with greater than four months of continuous service (continuous service includes customer DIDs which are administratively canceled and reactivated within the same calendar month).

Digital Media Segment Performance Metrics

Our Digital Media segment was established with our fourth quarter 2012
acquisition of Ziff Davis. As a result, the following performance metrics for
our Digital Media segment for the three and six months ended June 30, 2013 are
presented with no prior comparable period (in millions):
           Three Months Ended June 30,    Six Months Ended June 30,
                       2013                          2013
Visits                             558                          935
Page views                       1,897                        3,146

Sources: Omniture; Google Analytics

Critical Accounting Policies and Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2012 Annual Report on Form 10-K filed with the SEC on March 1, 2013. During the three months ended June 30, 2013, there were no significant changes in our critical accounting policies and estimates.

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Results of Operations for the Three and Six Months Ended June 30, 2013 Business Cloud Services Segment
Assuming a stable or improving economic environment, we expect the revenue and expense trends as included in the results of operations below in our Business Cloud Services segment to continue for the foreseeable future excluding the impact of acquisitions. The main focus of our Business Cloud Services offerings is to reduce or eliminate costs, increase sales and enhance productivity, mobility, business continuity and security of our customers as the technologies and devices they use evolve over time. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers.
We expect acquisitions to remain an important component of our strategy and use of capital; however, we cannot predict whether our current pace of acquisitions will remain the same within this segment. In a given period we may close greater or fewer acquisitions than in prior periods. Digital Media Segment
Assuming a stable or improving economic environment, we expect the revenue trend in our Digital Media segment to improve over the next several quarters as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online. The main focus of our advertising programs is to provide relevant and useful advertising to visitors to our websites and those included within our advertising networks, reflecting our commitment to constantly improve their overall web experience. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks. The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising revenues from our websites has generally exceeded that from third-party websites. This trend has had a positive impact on our operating margins, and we expect that this will continue for the foreseeable future. However, the trend in advertising spend is shifting to mobile devices and other newer advertising formats which generally experience lower margins than those from desktop computers and tablets. We expect this trend to continue to pressure our margins.
We expect acquisitions to remain an important component of our strategy and use of capital; however, we cannot predict whether our current pace of acquisitions will remain the same within this segment. In a given period, we may close greater or fewer acquisitions than in prior periods. j2 Global Consolidated
We anticipate the stable revenue trend in our Business Cloud Services segment combined with the improving revenue trend in our Digital Media segment will result in an overall improved revenue trend for j2 Global on a consolidated basis, excluding the impact of any future acquisitions.
We expect operating profit as a percentage of revenues to generally decline in the future as we expect our less profitable Digital Media segment and the expected increasing pressure on margins as described above to grow at a faster rate than our more profitable Businesses Cloud Services segment, excluding the impact of any future acquisitions.

Revenues

(in thousands, Percentage Percentage except percentages) Three Months Ended June 30, Change Six Months Ended June 30, Change 2013 2012 2013 2012 Revenues $141,361 $89,465 58% $254,978 $176,117 45%

Our revenues consist of revenues from our Business Cloud Services segment and from our Digital Media segment. Business Cloud Services revenues primarily consist of revenues from "fixed" customer subscription revenues and "variable" revenues generated from actual usage of our services. We also generate Business Cloud Services revenues from intellectual property licensing and sales, and advertising.

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Digital Media revenues primarily consist of advertising revenues, fees paid for generating business leads, and licensing and sale of editorial content and trademarks.

Our revenues have increased primarily due to the following factors:

•Our acquisitions of Ziff Davis, IGN and NetShelter in the Digital Media segment;

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