What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 141 added, 207 removed, 207 unchanged (63% of the section changed)

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For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our 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), in Part II Item 1A - “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 (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.

Our 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, 2020 (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.

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◦ Recruit and retain key personnel;

◦ The form, terms, timing and ability to complete the proposed spin-off transaction or the sale of the B2B Backup business.

In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics including the COVID-19 outbreak and other catastrophic events outside of our control, including as to COVID-19 the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.

J2 Global, Inc., together with its subsidiaries (“J2 Global”, “the Company”, “our”, “us” or “we”), is a leading provider of internet services.

Through our Cloud Services business, we provide cloud services to consumers and businesses and license our intellectual property (“IP”) to third parties.

In addition, the Cloud Services business includes fax, voice, backup, security, consumer privacy and protection (“CPP”) and email marketing products.

Our Digital Media business specializes in the technology, gaming, broadband, business to business, and healthcare offering content, tools and services to consumers and businesses.

J2 Global was incorporated in 2014 as a Delaware corporation through the creation of a new holding company structure, and our Cloud Services business, operated by our wholly-owned subsidiary, J2 Cloud Services, LLC (formerly J2 Cloud Services, Inc.), and its subsidiaries, was founded in 1995.

We manage our operations through two businesses:

Cloud Services and Digital Media.

Information regarding revenue and operating income attributable to each of our businesses is included within Note 16 - Segment Information of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Our Cloud Services business generates revenues primarily from customer subscription and usage fees and from IP licensing fees.

J2 Global, Inc., together with its subsidiaries (“J2 Global”, “our”, “us” or “we”), is a leading provider of internet information and services.

Our Digital Media business specializes in the technology, shopping, gaming, and healthcare markets, offering content, tools and services to consumers and businesses.

Our Cloud Services business provides cloud-based subscription services to consumers and businesses including cloud fax, cybersecurity, privacy and marketing technology.

Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees.

Our Cloud Services business generates revenues primarily from customer subscription and usage fees.

In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel and enter into new markets.

Our consolidated revenues are currently generated from three basic business models, each with different financial profiles and variability.

Our Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some seasonal weakness in the fourth quarter.

The Cloud Services business also includes the results of our IP licensing business, which can vary dramatically in both revenues and profitability from period to period.

Our Digital Media business is driven primarily by advertising revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter.

Our Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some minor seasonal weakness in the fourth quarter.

We continue to pursue additional acquisitions, which may include companies operating under business models that differ from those we operate under today.

Such acquisitions could impact our consolidated profit margins and the variability of our revenues.

In March 2020, the World Health Organization declared the COVID-19 outbreak as a pandemic, and we anticipate our customers and our operations in all locations will be affected as the virus continues to proliferate and as a result of the governmental responses to the pandemic.

The impact of the COVID-19 pandemic has had a negative effect on the global economy, disrupting the financial markets and creating increasing volatility and overall uncertainty.

Given this disruption, volatility and uncertainty, our quarterly results may be adversely affected due to various factors affecting our performance.

The Company has adjusted certain aspects of our operations to protect our employees and customers while still seeking to meet customers’ needs for our vital cloud internet services and digital media services.

Management is actively monitoring the global situation and will take further action to alter our operations as may be required by federal, foreign, state and local authorities or that we determine are otherwise necessary or appropriate under the circumstances.

The full extent, duration and overall impact of the COVID-19 pandemic is currently unknown and depends on future developments that are uncertain and unpredictable.

Therefore, we are continuing to assess the impact to our results of

operations, financial position and liquidity based on our current assessment of the situation which could change based on the spread of the pandemic and additional government action which could limit economic activity or cause for a slower reopening of the economy.

J2 Global was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure, and our Cloud Services business, operated by our wholly owned subsidiary, J2 Cloud Services, LLC (formerly J2 Cloud Services, Inc.), and its subsidiaries, was founded in 1995.

In March 2020, the World Health Organization declared the COVID-19 outbreak as a pandemic, which continues to impact the U.S.

and the world.

The Company is unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q.

Therefore, the Company will continue to evaluate the nature and extent of the impact to our business, results of operations, financial condition and liquidity.

Digital Media Performance Metrics

We use certain metrics to generally assess the operational and financial performance of our Digital Media business.

The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services.

We believe highly engaged consumers are more likely to participate in advertising programs and other activities that derive our multiple revenue streams.

We define a visit as a group of interactions by users with our mobile and desktop applications and websites.

A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices.

We measure visits with Google Analytics and through partner platform measures.

Page views are measured each time a page on our websites is loaded in a browser.

The following table sets forth certain key operating metrics for our Digital Media business for the three months ended March 31, 2021 and 2020 (in millions):

Three Months Ended

2021 2020 (1)

Visits 2,291 2,145

Page views 7,530 7,167

Google Analytics and Partner Platforms and test results in connection with Ookla

(1) To more accurately reflect customer activity at Ookla, we have shifted to using tests as the basis instead of Google Analytics, resulting in pro-forma adjustments to data in Q1 2020.

Cloud Services Performance Metrics

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We also use this metric, in conjunction with the cancel rate, to help provide a directional indicator of Cloud Services revenue and calculate the lifetime value of customers within each of our business units.

The following table sets forth certain key operating metrics for our Cloud Services business as of and for the three and nine months ended September 30, 2020 and 2019 (in thousands, except for percentages):

The following table sets forth certain key operating metrics for our Cloud Services business as of and for the three months ended March 31, 2021 and 2020 (in thousands, except for percentages):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Subscriber revenues:

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(1) The first quarter 2020 disclosure of $144.8 million in fixed subscriber revenue included $3.3 million of revenue which was subsequently determined to be variable subscriber revenue.

As a result, the fixed and variable subscriber revenue for the nine months ended September 30, 2020 has been corrected in the table above.

As a result, the fixed and variable subscriber revenue have been corrected in the table above.

(2) 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.

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Calculated monthly and expressed as an average over the three months of the quarter.

Digital Media Performance Metrics

We use certain metrics to generally assess the operational and financial performance of our Digital Media business.

The number of visits is an important metric because it is an indicator of consumers’ level of engagement with our mobile applications, websites and other services.

We believe highly engaged consumers are more likely to participate in advertising programs and other activities that derive our multiple revenue streams.

We define a visit as a group of interactions by users with our mobile and desktop applications and websites.

A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices.

We measure visits with Google Analytics and through partner platform measures.

Page views are measured each time a page on our websites is loaded in a browser.

The following table sets forth certain key operating metrics for our Digital Media business for the three and nine months ended September 30, 2020 and 2019 (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

2,197 1,857 6,701 5,282

Page views 7,244 7,008 22,777 20,587

Google Analytics and Partner Platforms

(1) Page views for the nine months ended September 30, 2020 include an adjustment of 0.6 billion views not previously reported

Critical Accounting Policies and Estimates

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Our critical accounting policies are described in our 2020 Annual Report on Form 10-K filed with the SEC on March 1, 2021.

During the three months ended September 30, 2020, there were no significant changes in our critical accounting policies and estimates.

Results of Operations for the Three and Nine Months Ended September 30, 2020

Cloud Services

Given the uncertainty of the current macroeconomic environment and the impact of the COVID-19 pandemic, we expect the revenue for the remainder of fiscal year 2020 to be flat to modestly lower compared to the prior-year comparable period.

The main focus of our 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 in this business;

however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions.

In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods.

Moreover, future acquisitions of businesses within this space but with different business models may impact Cloud Services’ overall profit margins.

Also, as IP licensing often involves litigation, the timing of licensing transactions is unpredictable and can and does vary significantly from period to period.

This variability can cause the overall business’s financial results to materially vary from period to period.

During the three months ended March 31, 2021, there were no significant changes in our critical accounting policies and estimates.

Results of Operations for the Three Months Ended March 31, 2021

Digital Media

We expect the revenue for the remainder of fiscal year 2020 to be higher compared to the prior-year comparable period due to the acquisition of RetailMeNot, subject to the continued risk of the COVID-19 pandemic.

We expect the revenue for the remainder of fiscal year 2021 to be higher compared to the prior-year comparable period due to the acquisition of RetailMeNot and organic growth, subject to the continued risk of the COVID-19 pandemic.

We expect the Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, but these initiatives will be offset by the impact of COVID-19 in the near term.

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Moreover, future acquisitions of businesses within this space but with different business models may impact Digital Media’s overall profit margins.

Cloud Services

Assuming a stable or improving economic environment, and, subject to our risk factors, we expect 2021 revenue to be higher compared to the prior-year.

The main strategic focus of our 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 in this business;

however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions.

In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods.

Moreover, future acquisitions of businesses within this space but with different business models may impact Cloud Services’ overall profit margins.

J2 Global Consolidated

Based on the trends discussed above with respect to our Cloud Services and Digital Media businesses, we anticipate our consolidated revenue for the remainder of fiscal year 2020 to be higher compared to the prior-year comparable period.

Based on the trends discussed above with respect to our Cloud Services and Digital Media businesses, we anticipate our consolidated revenue for fiscal year 2021 to be higher compared to the prior-year comparable period.

We expect operating profit as a percentage of revenues to generally decrease in the future primarily due to the fact that revenue with respect to our Digital Media business (i) is increasing as a percentage of our revenue on a consolidated basis and (ii) has historically operated at a lower operating margin.

(in thousands, except percentages)

Three Months Ended

September 30, Percentage Change Nine Months Ended

September 30, Percentage Change

2020 2019 2020 2019

Three Months Ended March 31, Percentage Change

Revenues $398,185 $332,393 20%

Our revenues consist of revenues from our Cloud Services business and from our Digital Media 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 Cloud Services revenues from IP licensing.

Our revenues consist of revenues from our Digital Media and Cloud Services businesses.

Digital Media revenues primarily consist of advertising revenues, subscriptions earned through the granting of access to, or delivery of, certain data products or services to customers, fees paid for generating business leads, and licensing and sale of editorial content and trademarks.

Our revenues in 2020 have increased over the comparable three and nine month periods of 2019 primarily due to a combination of acquisitions and organic growth;

Cloud Services revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services.

Our revenues in 2021 have increased over the comparable three month period of 2020 primarily due to a combination of acquisitions and organic growth;

partially offset by declines in certain areas of both the Digital Media and Cloud Services businesses.

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(in thousands, except percentages)

Three Months Ended

September 30, Percentage Change Nine Months Ended

September 30, Percentage Change

2020 2019 2020 2019

Three Months Ended March 31, Percentage Change

Cost of revenue $57,822 $59,131 (2)%

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Cost of revenues is primarily comprised of costs associated with network operations, content fees, editorial and production costs, database hosting and online processing fees.

The decrease in cost of revenues for the three months ended September 30, 2020 was primarily due to lower content fees, campaign fulfillment cost, other editorial and production costs and customer service;

The decrease in cost of revenues for the three months ended March 31, 2021 was primarily due to lower content fees, campaign fulfillment cost and other editorial and production costs;

partially offset by an increase in depreciation and amortization.

The decrease in cost of revenues for the nine months ended September 30, 2020 was primarily due to lower content fees, campaign fulfillment cost and other editorial and production costs;

partially offset by an increase in depreciation and amortization and database hosting.

Operating Expenses

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(in thousands, except percentages)

Three Months Ended

September 30, Percentage Change Nine Months Ended

September 30, Percentage Change

2020 2019 2020 2019

Three Months Ended March 31, Percentage Change

Sales and Marketing $121,186 $99,438 22%

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Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers.

Advertising cost for the three months ended September 30, 2020 was $35.4 million (primarily consists of $19.8 million of third-party advertising costs and $12.8 million of personnel costs) compared to 2019 of $40.6 million (primarily consists of $28.3 million of third-party advertising costs and $11.3 million of personnel costs).

Advertising cost for the nine months ended September 30, 2020 was $108.0 million (primarily consists of $57.8 million of third-party advertising costs and $39.4 million of personnel costs) compared to 2019 of $115.3 million (primarily consists of $81.5 million of third-party advertising costs and $30.7 million of personnel costs).The decrease in sales and marketing expenses for the three months ended September 30, 2020 versus the prior comparable period was primarily due to lower advertising costs;

partially offset by higher personnel costs and partner revenue share associated with the acquisition of businesses acquired in and subsequent to the third quarter 2019 within the Digital Media and Cloud Services businesses.

The increase in sales and marketing expenses for the nine months ended September 30, 2020 versus the prior comparable period was primarily due to increased personnel costs and partner revenue share, software licenses and consulting fees;

partially offset by lower advertising associated with the acquisition of businesses acquired in and subsequent to the third quarter 2019 within the Digital Media and Cloud Services businesses.

Advertising cost for the three months ended March 31, 2021 was $54.0 million (primarily consists of $26.8 million of third-party advertising costs and $22.5 million of personnel costs) compared to the first quarter of 2020 of $38.9 million (primarily consists of $27.3 million of third-party advertising costs and $11.9 million of personnel costs.

The increase in sales and marketing expenses for the three months ended March 31, 2021 versus the prior comparable period was primarily due to increased creative services, sales, advertising operations and advertising costs;

partially offset by lower editorial costs associated with the acquisition of businesses acquired in and subsequent to the first quarter 2020 within the Digital Media and Cloud Services businesses.

Research, Development and Engineering.

(in thousands, except percentages)

Three Months Ended

September 30, Percentage Change Nine Months Ended

September 30, Percentage Change

2020 2019 2020 2019

Three Months Ended March 31, Percentage Change

Research, Development and Engineering $21,351 $15,406 39%

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Our research, development and engineering costs consist primarily of personnel-related expenses.

The increase in research, development and engineering costs for the three and nine months ended September 30, 2020 versus the prior comparable periods was primarily due to an increase in costs associated with businesses acquired in and subsequent to the third quarter 2019.

The increase in research, development and engineering costs for the three months ended March 31, 2021 versus the prior comparable period was primarily due to an increase in costs associated with businesses acquired in and subsequent to the first quarter 2020.

General and Administrative.

(in thousands, except percentages)

Three Months Ended

September 30, Percentage Change Nine Months Ended

September 30, Percentage Change

2020 2019 2020 2019

Three Months Ended March 31, Percentage Change

General and Administrative $119,346 $103,171 16%

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Our general and administrative costs consist primarily of personnel-related expenses, depreciation and amortization, changes in the fair value associated with contingent consideration, share-based compensation expense, bad debt expense, professional fees, severance and insurance costs.

The increase in general and administrative expense for the three months ended September 30, 2020 versus the prior comparable period was primarily due to the recognition of lease asset impairments and additional depreciation due to leasehold impairments;

partially offset by decreased amortization of intangible assets.

The decrease in general and administrative expense for the nine months ended September 30, 2020 versus the prior comparable period was primarily due to decreased amortization of intangible assets;

partially offset by increased depreciation due to leasehold impairments.

The increase in general and administrative expense for the three months ended March 31, 2021 versus the prior comparable period was primarily due to increased amortization of intangible assets, salary and related costs and professional fees.

Share-Based Compensation

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (in thousands):

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Cost of revenues $ 132 $ 134

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Our interest expense, net is generated primarily from interest expense due to outstanding debt, partially offset by interest income earned on cash, cash equivalents and investments.

Interest expense, net was $22.7 million and $17.3 million for the three months ended September 30, 2020 and 2019, respectively, and $65.9 million and $50.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Interest expense, net increased over the prior comparable periods primarily due to the issuance of our 1.75% Convertible Senior Notes in the fourth quarter 2019.

Interest expense, net was $21.7 million and $21.0 million for the three months ended March 31, 2021 and 2020, respectively.

Interest expense, net increased over the prior comparable periods primarily due to lower interest income earned between the comparable periods.

Gain on sale of businesses.

Our gain on sale of businesses is generated primarily from the sale of certain Voice assets in Australia and New Zealand in the third quarter of 2020.

Gain on sale of businesses was $17.1 million and zero for the three months ended September 30, 2020 and 2019, respectively, and $17.1 million and zero for the nine months ended September 30, 2020 and 2019, respectively.

Our gain on sale of businesses is generated primarily from the sale of certain Voice assets in the United Kingdom in the first quarter of 2021.

Gain on sale of businesses was $2.0 million and zero for the three months ended March 31, 2021 and 2020, respectively.

Loss on investments, net.

Our loss on investments, net is generated from gains or losses from investments in equity and debt securities.

Our loss on investments, net was $156 thousand and $7 thousand for the three months ended September 30, 2020 and 2019, respectively, and $21.0 million and $45.0 thousand for the nine months ended September 30, 2020 and 2019,

respectively.

Our loss on investments, net for the three month ended September 30, 2020 was consistent to the prior period.

Our net loss on investments, net increased for the nine months ended September 30, 2020 versus the prior comparable period due to net losses realized on certain investments as the result of changes in the investee’s capital structure and overall market volatility.

Our loss on investments, net was zero and $20.8 million for the three months ended March 31, 2021 and 2020.

Our net loss on investments, net decreased for the three months ended March 31, 2021 versus the prior comparable period due to net losses realized on certain investments as the result of changes in the investee’s capital structure and overall market volatility recognized in the prior comparable period.

Other (income) expense, net.

Our other (income) expense, net is generated primarily from miscellaneous items and gain or losses on currency exchange.

Other (income) expense, net was $(14.2) million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively, and $(16.4) million and $2.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Other (income) expense, net increased for the three and nine months ended September 30, 2020 versus the prior comparable periods primarily due to increased gains on currency exchange.

Other (income) expense, net was $(0.6) million and $6.9 million for the three months ended March 31, 2021 and 2020, respectively.

Other (income) expense, net increased for the three months ended March 31, 2021 versus the prior comparable periods primarily due to decreased losses on currency exchange.

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate.

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When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

Provision for income taxes amounted to $24.3 million and $7.0 million for the three months ended September 30, 2020 and 2019, respectively, and $49.0 million and $17.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Our effective tax rate was 28.3% and 17.0% for the three months ended September 30, 2020 and 2019, respectively, and 32.2% and 15.7% for the nine months ended September 30, 2020 and 2019, respectively.

The increase in our effective income tax rate for the three months ended September 30, 2020 was primarily attributable to the following:

a decrease in the benefit of a portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S.;

an increase in tax expense due to the discrete tax cost for the disposition of certain foreign subsidiaries and establishing the related valuation allowance on deferred tax assets resulting from the disposition;

partially offset by

a decrease in tax expense in 2020 due to a reduction in foreign income subject to U.S.

Provision for income taxes amounted to $5.7 million and $8.7 million for the three months ended March 31, 2021 and 2020, respectively.

Our effective tax rate was 9.6% and 132.5% for the three months ended March 31, 2021 and 2020, respectively.

The decrease in our effective income tax rate for the three months ended March 31, 2021 was primarily attributable to the following:

a decrease in tax expense during 2021 due to the release of a valuation allowance on deferred tax assets related to the impairment of certain investments;

a decrease in tax expense during 2021 due to a reduction in foreign income subject to U.S.

income tax (Global Intangible Low-Taxed Income or “GILTI”) as part of the Tax Cuts and Jobs Act of 2017;

The increase in our effective income tax rate for the nine months ended September 30, 2020 was primarily attributable to the following:

an increase in tax expense during 2020 due to establishing a valuation allowance on deferred tax assets related to the impairment of certain investments;

an increase in tax expense due to discrete tax benefits related to a reduction in our net reserve for uncertain tax positions that was recorded for the nine months ended September 30, 2019 with no similar events for the nine months ended September 30, 2020;

a decrease in the benefit of a portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S.;

partially offset by

a decrease in tax expense in 2020 due to a reduction in foreign income subject to U.S.

income tax (GILTI) as part of the Tax Cuts and Jobs Act of 2017.

an increase in our effective income tax rate during 2021 for U.S.

state and local taxes due to a greater portion of our income being subject to tax in the U.S.

Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis.

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Equity Method Investment

Net loss (income) in earnings of equity method investment.

Net loss (income) in earnings of equity method investment is generated from our investment in the OCV Fund for which we receive annual audited financial statements.

(Income) loss from equity method investment, net.

(Income) loss from equity method investment, net is generated from our investment in the OCV Fund for which we receive annual audited financial statements.

The investment in the OCV Fund is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from OCV.

If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.

The net loss (income) in earnings of equity method investment was $0.7 million and $3.5 million, net of tax benefit for the three months ended September 30, 2020 and 2019, respectively, and $10.8 million and $(0.1) million, net of tax benefit (expense) for the nine months ended September 30, 2020 and 2019, respectively.

The fiscal 2020 loss was primarily a result of the impairment of two of its investments as a result of COVID-19 in the amount of $7.0 million, net of tax benefit.

In addition, the Company recognized an investment loss in fiscal 2020 in the amount of $3.8 million, net of tax benefit.

During the three months ended September 30, 2020 and 2019, the Company recognized management fees of $0.8 million and $0.8 million, net of tax benefit, respectively, and for the nine months ended September 30, 2020 and 2019, the Company recognized management fees of $2.3 million and $2.3 million, net of tax benefit, respectively.

Cloud Services and Digital Media Results

The (income) loss from equity method investment, net was $(24.3) million and $4.3 million, net of tax benefit (expense) for the three months ended March 31, 2021 and 2020, respectively.

The first quarter 2021 gain was primarily a result of a gain on the underlying investments.

The first quarter 2020 loss was primarily a result of the impairment of two of its investments as a result of COVID-19 in the amount of $7.0 million, net of tax benefit.

During the three months ended March 31, 2021 and 2020, the Company recognized management fees of $0.8 million and $0.8 million, net of tax benefit, respectively.

Digital Media and Cloud Services Results

Our businesses are based on the organization structure used by management for making operating and investment decisions and for assessing performance and have been aggregated into two businesses:

(i) Cloud Services;

and (ii) Digital Media.

(i) Digital Media;

and (ii) Cloud Services.

We evaluate the performance of our businesses based on revenues, including both external and interbusiness net sales, and operating income.

We account for interbusiness sales and transfers based primarily on standard costs with reasonable mark-ups established between the businesses.

Identifiable assets by business are those assets used in the respective business’s operations.

Identifiable assets by business are those assets used in the respective business’ operations.

Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets.

All significant interbusiness amounts are eliminated to arrive at our consolidated financial results.

Cloud Services

The following results are presented for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Digital Media

The following results are presented for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

External net sales $ 226,806 $ 162,608

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Operating income $ 30,653 $ 4,952

Cloud Services’ net sales of $170.2 million for the three months ended September 30, 2020 decreased $0.9 million, or 0.5%, from the prior comparable period due to the impact of the COVID-19 pandemic.

Net sales of $507.1 million for the nine months ended September 30, 2020 increased $14.6 million, or 3.0%, from the prior comparable period primarily due to business acquisitions acquired in and subsequent to the third quarter 2019.

Cloud Services’ gross profit of $131.8 million for the three months ended September 30, 2020 decreased $1.1 million, or 0.8%, and gross profit of $390.9 million for the nine months ended September 30, 2020 increased $5.7 million, or 1.5%, from the prior comparable periods primarily due to business acquisitions acquired in and subsequent to the third quarter 2019;

partially offset by increased depreciation and amortization and the impact of the COVID-19 pandemic.

Cloud Services’ operating expenses of $66.1 million for the three months ended September 30, 2020 decreased $5.9 million from the prior comparable period primarily due to lower amortization of intangible assets.

Operating expenses of $207.4 million for the nine months ended September 30, 2020 increased $4.0 million from the prior comparable period primarily due to expense associated with businesses acquired in and subsequent to the prior comparable period including (a) marketing and advertising costs;

(b) non-income taxes;

and (c) additional salary and related costs.

As a result of these factors, Cloud Services’ operating income of $65.8 million for the three months ended September 30, 2020 increased $4.8 million, or 7.9%, and operating income of $183.5 million for the nine months ended September 30, 2020 increased $1.6 million, or 0.9%, from the prior comparable periods.

Digital Media

The following results are presented for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Digital Media’s net sales of $226.9 million for the three months ended March 31, 2021 increased $64.2 million, or 39.5%, from the prior comparable period primarily due to business acquisitions.

Digital Media’s gross profit of $206.1 million for the three months ended March 31, 2021 increased $64.2 million, or 45.2%, from the prior comparable period primarily due to business acquisitions.

Digital Media’s operating expenses of $175.4 million for the three months ended March 31, 2021 increased $38.5 million from the prior comparable period.

The increase in the three months ended March 31, 2021 is primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional salary and related costs including severance;

(b) marketing and advertising costs;

and (c) increased amortization of intangible assets.

As a result of these factors, Digital Media’s operating income of $30.7 million for the three months ended March 31, 2021 increased $25.7 million, or 519.0%, from the prior comparable period.

Cloud Services

The following results are presented for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

External net sales $ 171,379 $ 169,784

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Operating income $ 63,464 $ 55,734

Digital Media’s net sales of $186.8 million for the three months ended September 30, 2020 increased $13.8 million, or 8.0%, from the prior comparable period due to business acquisitions.

Net sales of $513.5 million for the nine months ended September 30, 2020 increased $39.4 million, or 8.3%, from the prior comparable period primarily due to business acquisitions.

Digital Media’s gross profit of $169.4 million for the three months ended September 30, 2020 increased $19.9 million, or 13.3%, and gross profit of $458.0 million for the nine months ended September 30, 2020 increased $49.6 million, or 12.1%, from the prior comparable periods primarily due to business acquisitions and lower campaign fulfillment related costs.

Digital Media’s operating expenses of $143.3 million for the three months ended September 30, 2020 decreased $0.7 million, and operating expenses of $410.1 million for the nine months ended September 30, 2020 increased $7.8 million from the prior comparable periods.

The decrease in the three months ended September 30, 2020 is primarily due to lower depreciation and amortization, marketing and advertising costs and reduced corporate allocations;

partially offset by an impairment associated with lease assets and additional expense associated with businesses acquired in and subsequent to the prior comparable period.

The increase in the nine months ended September 30, 2020 is primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional salary and related costs including severance;

(b) marketing and advertising costs;

partially offset by (c) lower amortization of intangible assets.

As a result of these factors, Digital Media’s operating income of $26.1 million for the three months ended September 30, 2020 increased $20.6 million or 374.8%, and operating income of $47.9 million for the nine months ended September 30, 2020 increased $41.8 million, or 696.1%, from the prior comparable periods.

Cloud Services’ net sales of $171.4 million for the three months ended March 31, 2021 increased $1.6 million, or 1.0%, from the prior comparable period primarily due to business acquisitions acquired in;

partially offset by businesses sold subsequent to the first quarter 2020.

Cloud Services’ gross profit of $134.5 million for the three months ended March 31, 2021 increased $3.0 million, or 2.3%, from the prior comparable period primarily due to business acquisitions;

partially offset by businesses sold subsequent to the first quarter 2020.

Cloud Services’ operating expenses of $71.0 million for the three months ended March 31, 2021 decreased $4.7 million from the prior comparable period primarily due to expense associated with businesses acquired in;

partially offset by businesses sold subsequent to the prior comparable period including lower depreciation and amortization costs;

partially offset by increased marketing and advertising costs.

As a result of these factors, Cloud Services’ operating income of $63.5 million for the three months ended March 31, 2021 increased $7.7 million, or 13.9%, from the prior comparable period.

Liquidity and Capital Resources

Cash and Cash Equivalents and Investments

At September 30, 2020, we had cash, cash equivalents and investments of $664.5 million compared to $675.7 million at December 31, 2019.

The decrease in cash and investments resulted primarily from cash used in the repurchase of common stock, purchases of property and equipment (including capitalized labor), investments and business acquisitions;

partially offset by cash provided from operations.

At September 30, 2020, cash and investments consisted of cash and cash equivalents of $567.9 million and long-term investments of $96.6 million.

At March 31, 2021, we had cash, cash equivalents and investments of $511.3 million compared to $340.8 million at December 31, 2020.

The increase in cash and investments resulted primarily from cash provided from operations;

partially offset by cash used in purchases of property and equipment (including capitalized labor) and investments.

At March 31, 2021, cash and investments consisted of cash and cash equivalents of $372.0 million, short-term investments of $0.7 million and long-term investments of $138.7 million.

Our investments consist of equity and debt securities.

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Short-term investments mature within one year of the date of the financial statements and long-term investments mature one year or more from the date of the financial statements.

As of September 30, 2020, cash and investments held within domestic and foreign jurisdictions were $584.3 million and $80.2 million, respectively.

On January 7, 2019, J2 Cloud Services, LLC entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as sole lead arranger and as administrative agent for the Lenders (the “Agent”).

Pursuant to the Credit Agreement, as amended in July and August 2019, the Lenders have provided J2 Cloud Services with a credit facility of $200.0 million (the “Credit Facility”) through December 31, 2020.

On November 15, 2019, the Company reduced its borrowing capacity from $200.0 million to $100.0 million.

The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of J2 Cloud and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement.

As of September 30, 2020, there were no amounts outstanding under the Credit Facility.

On October 7, 2020, the Company provided notice of termination of the Credit Agreement.

On October 7, 2020, the Company issued $750 million aggregate principal amount of 4.625% Senior Notes due in 2030.

A portion of the proceeds were deposited with the trustee under the Indenture in an amount sufficient to fund the redemption of the outstanding aggregate principal amount of the 6.0% Senior Notes and to pay the redemption premium due in respect of such redemption and accrued and unpaid interest to, but excluding, the redemption date, which will be December 7, 2020.

Subsequent to the quarter end, the Company is pursuing to reestablish a credit facility at the J2 Global, Inc.

level of $100.0 million expandable to $350.0 million.

On February 6, 2019, the Company’s Board of Directors approved a quarterly cash dividend of $0.4450 per share of J2 Global common stock payable on March 12, 2019 to all stockholders of record as of the close of business on February 25, 2019.

On May 2, 2019, the Company’s Board of Directors approved a quarterly cash dividend of $0.4550 per share of J2 Global common stock payable on June 4, 2019 to all stockholders of record as of the close of business on May 20, 2019.

Future dividends are subject to Board approval.

However, based on the significant number of current investment opportunities within the Company’s portfolio of businesses and the historic returns from prior investments, the Board of Directors suspended dividend payments for the foreseeable future after the June 4, 2019 payment.

As of March 31, 2021, cash and investments held within domestic and foreign jurisdictions were $390.6 million and $120.7 million, respectively.

On April 7, 2021, J2 Global, Inc.

entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as administrative agent, collateral agent and sole lead arranger for the Lenders (the “Agent”).

Pursuant to the Credit Agreement, the Lenders have provided J2 with a revolving credit facility of $100 million (the “Credit Facility”).

Subject to customary conditions, J2 may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $250 million, for a total aggregate commitment of up to $350 million.

The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of J2 and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement.

The final maturity of the Credit Facility will occur on April 7, 2026.

(see Note 18 - Subsequent Events of Notes to Condensed Consolidated Financial Statements).

On September 25, 2017, the Board of Directors of the Company authorized the Company’s entry into a commitment to invest $200 million in an investment fund (the “Fund”) over several years at a fairly ratable rate.

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The commitment was approved by the Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy.

In the first nine months of 2020, the Company received capital call notices from the management of OCV Management, LLC.

for $31.0 million, inclusive of certain management fees, of which $30.0 million has been paid for the nine months ended September 30, 2020.

In the first three months of 2021, the Company received capital call notices from the management of OCV Management, LLC for $7.1 million, inclusive of certain management fees.

Of the outstanding balance, $8.1 million has been paid for the three months ended March 31, 2021.

We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months.

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents.

Net cash provided by operating activities was $356.0 million and $309.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Net cash provided by operating activities was $178.7 million and $102.0 million for the three months ended March 31, 2021 and 2020, respectively.

Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services, employee compensation and interest payments associated with our debt.

The increase in our net cash provided by operating activities in 2020 compared to 2019 was attributable to a decrease in accounts receivables, prepaid expenses and other current assets, higher uncertain tax positions and income taxes payable;

partially offset by a decrease in accounts payable and accrued expenses due to the timing of payments and reduced deferred revenue.

Our cash and cash equivalents were $567.9 million and $575.6 million at September 30, 2020 and December 31, 2019, respectively.

Net cash used in investing activities was $107.3 million and $472.9 million for the nine months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020 and 2019, net cash used in investing activities was primarily due to capital expenditures associated with the purchase of property and equipment (including capitalized labor), the purchase of investments and business acquisitions;

The increase in our net cash provided by operating activities in 2021 compared to 2020 was attributable to lower decrease in accounts payable and accrued expenses, a decrease in accounts receivables, an increase in deferred revenue, lower increase in prepaid expenses and other current assets;

partially offset by a decrease in other long term liabilities.

Our cash and cash equivalents were $372.0 million and $242.7 million at March 31, 2021 and December 31, 2020, respectively.

Net cash used in investing activities was $29.0 million and $69.1 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021 and 2020, net cash used in investing activities was primarily due to capital expenditures associated with the purchase of property and equipment (including capitalized labor) and the purchase of investments;

partially offset by proceeds from the sale of businesses.

The decrease in our net cash used in investing activities in 2021 compared to 2020 was primarily due to fewer business acquisitions.

Net cash (used in) provided by financing activities was $(256.9) million and $46.9 million for the nine months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020, net cash used in financing activities was primarily due to repurchase of common stock and business acquisitions.

The change in net cash used in financing activities in 2020 compared to 2019 was primarily attributable repurchase of common stock and net borrowings under the line of credit in 2019 that did not occur in 2020;

partially offset by lower dividend payments.

Net cash used in financing activities was $20.1 million and $78.4 million for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021, net cash used in financing activities was primarily due to repurchase of common stock and business acquisitions.

The change in net cash used in financing activities in 2021 compared to 2020 was primarily attributable to lower repurchases of common stock and business acquisitions.

Stock Repurchase Program

In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2021.

During the nine month period ended September 30, 2020, we repurchased 1,140,819 shares under this program.

Cumulatively at September 30, 2020, 4.1 million shares were repurchased at an aggregate cost of $204.6 million (including an immaterial amount of commission fees).

In July 2016, the Company acquired and subsequently retired 935,231 shares of J2 Global common stock in connection with the acquisitions of Integrated Global Concepts, Inc.

As a result of the purchase of J2 Global common stock, the Company’s Board of Directors approved a reduction in the number of shares available for purchase under the 2012 Program by the same amount.

As a result of the acquired shares through acquisition and the purchase of J2 Global common stock through the Company’s share repurchase program, no shares remain available for purchase under the 2012 Program.

On August 6, 2020, the Company’s Board of Directors approved a program authorizing the repurchase of up to 10 million shares of our common stock through August 6, 2025 (the “2020 Program”).

During the nine month period ended September 30, 2020, we repurchased 2,000,000 shares under this program.

Cumulatively at September 30, 2020, 2,000,000 shares were repurchased at an aggregate cost of $141.8 million (including an immaterial amount of commission fees).

In November 2018 and May 2019, the Company entered into Rule 10b5-1 trading plans with a broker to facilitate the repurchase program.

600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019.

During the year ended December 31, 2019, the Company repurchased 197,870 shares at an aggregate cost of $16.0 million which were subsequently retired in the same year.

During the year ended December 31, 2020, the Company repurchased 1,140,819 shares under this program at an aggregate cost of $87.5 million, which were subsequently retired in the same year.

As of December 31, 2020, all the available shares were repurchased under the 2012 Program at an aggregate cost of $204.6 million (including an immaterial amount of commission fees).

On August 6, 2020, the Company’s Board of Directors approved a program authorizing the repurchase of up to 10 million shares of our common stock through August 6, 2025 (the “2020 Program”) in addition to the five million shares repurchased under the 2012 Program.

During the three month period ended March 31, 2021, we repurchased no shares under this program.

Cumulatively at March 31, 2021, 2,490,599 shares were repurchased at an aggregate cost of $177.8 million (including an immaterial amount of commission fees) under the 2020 Program, which were subsequently retired.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of September 30, 2020:

The following table summarizes our contractual obligations and commitments as of March 31, 2021:

Payments Due in

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Holdback payments (f) 4,134 1,897 — — — — 6,031

Transition Tax (g) — — — — 3,189 8,486 11,675

Self-Insurance (h) 5,815 6,165 — — — — 11,980

Other (i) 388 614 598 — — — 1,600

Contingent consideration payments (g) 5,468 — — — — — 5,468

Transition tax (h) — — — 3,189 8,486 — 11,675

Self-Insurance (i) 16,327 5,530 — — — — 21,857

Other (j) 1,138 598 — — — — 1,736

Total $ 509,290 $ 85,726 $ 69,798 $ 65,981 $ 62,834 $ 1,514,471 $ 2,308,098

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(f) These amounts represent the holdback amounts in connection with certain business acquisitions.

(g) These amounts represent commitments related to the transition tax on unrepatriated foreign earnings reduced by the 2017 overpayment of US Federal Income Tax.

(h) These amounts represent health and dental insurance plans in connection to self-insurance.

(i) These amounts represent certain consulting and Board of Directors fee arrangements, software license and implementation commitments and others.

On October 7, 2020, the Company issued $750 million aggregate principal amount of 4.625% senior notes due 2030.

The principal and interest included in the schedule above do not give effect to the issuance and deposit on October 7, 2020 and the redemption in December 2020.

As of September 30, 2020, our liability for uncertain tax positions was $60.2 million.

(g) These amounts represent the contingent earn-out liabilities in connection with certain business acquisitions.

(h) These amounts represent commitments related to the transition tax on unrepatriated foreign earnings reduced by the 2017 overpayment of US Federal Income Tax.

(i) These amounts represent health and dental insurance plans in connection to self-insurance.

(j) These amounts represent certain consulting and Board of Directors fee arrangements, software license and implementation commitments and others.

As of March 31, 2021, our liability for uncertain tax positions was $58.4 million.

The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with such authorities.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis