ZIFF DAVIS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. 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) and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (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, including inflation, supply chain and other factors and their related impacts on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines; ◦ Maintain and increase our customer base and average revenue per user; ◦ Generate sufficient cash flow to make interest and debt payments, 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; ◦ 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 security breach; effectively maintaining and managing our billing systems; time and resources required to manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures; ◦ Compete with other similar providers with regard to price, service, and functionality; ◦ Achieve business and financial objectives in light of burdensome domestic and international telecommunications, internet or other regulations, including regulations related to data privacy, access, security, retention, and sharing; ◦ 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; -38- ◦ 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; ◦ Recruit and retain key personnel; and ◦ Realize the expected benefits of the cloud fax 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. Overview Ziff Davis, Inc. (formerly J2 Global, Inc.) was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure. Our Cybersecurity and Martech businesses are operated by our wholly owned subsidiary, J2 Global Ventures, LLC. Prior to the spin-off of Consensus Cloud Solutions, Inc. (“Consensus”), our Cybersecurity and Martech businesses were operated by our former wholly owned subsidiary J2 Cloud Services, LLC (formerly J2 Cloud Services, Inc.), which was founded in 1995, and subsidiaries of J2 Cloud Services, LLC. Ziff Davis, Inc., together with its subsidiaries (“Ziff Davis”, “the Company”, “our”, “us” or “we”), is a vertically focused digital media and internet company. Our Digital Media business specializes in the technology, shopping, gaming, and healthcare markets, offering content, tools and services to consumers and businesses. Our Cybersecurity and Martech business provides cloud-based subscription services to consumers and businesses including cybersecurity, privacy and marketing technology. In February 2021, we sold certain Voice assets in the United Kingdom and in September 2021, we sold our B2B Backup business. In October 2021 we completed the separation of our cloud fax business (the “Separation”) into an independent publicly traded company, Consensus. The accounting requirements for reporting the Separation of Consensus as a discontinued operation were met when the Separation was completed on October 7, 2021. Accordingly, the accompanying condensed consolidated financial statements for all periods presented reflect the results of the Consensus business as a discontinued operation. Ziff Davis retained a 19.9 % interest in Consensus following the Separation (the “Retained Consensus Shares”). Ziff Davis did not retain a controlling interest in Consensus and therefore, the fair value of the Retained Consensus Shares and subsequent fair value changes are included in our assets and results from continuing operations. Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees. Our Cybersecurity and Martech business generates revenues primarily from recurring fixed and variable usage-based subscription and licensing 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 two basic business models, each with different financial profiles and variability. 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 Cybersecurity and Martech business is driven primarily by subscription revenues with relatively stable and predictable margins from quarter to 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. Performance Metrics Revenues from external customers classified by revenue source are as follows (in thousands): -39- Three Months Ended March 31, 2022 2021 Digital Media Advertising (1) $ 170,067 $ 177,288 Subscription (1) 55,576 45,625 Other (1) 9,184 3,961 Total Digital Media revenues $ 234,827 $ 226,874 Cybersecurity and Martech Subscription $ 80,494 $ 84,901 Other — — Total Cybersecurity and Martech revenues $ 80,494 $ 84,901 Corporate $ — $ — Elimination of inter-segment revenues ( 253 ) ( 118 ) Total Revenues $ 315,068 $ 311,657 (1) During the three months ended March 31, 2021, the Company reclassified approximately $ 3.2 million of revenue from ‘Subscription’ to ‘Advertising’ and reclassified approximately $ 2.1 million of revenue from ‘Subscription’ to ‘Other’ to conform with current period presentation. These reclassifications were made in order to separate games publishing revenue from traditional advertising revenue and to move job posting related revenue from subscriptions to advertising. We use certain metrics to generally assess the operational and financial performance of our businesses. We have changed these metrics during the first quarter of 2022, and the following descriptions align with the metrics management now uses to monitor the performance of its various advertising and subscription-based businesses. For our advertising businesses, net advertising revenue retention is an indicator of our ability to retain the spend of our existing advertisers year over year, which we view as a reflection of the effectiveness of our advertising platform. Similarly, we monitor the number of our advertisers and the revenue per advertiser (as defined) as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions. For our subscription and licensing businesses, the number of subscribers that we serve is an indicator of our customer retention and growth. The average monthly revenue per subscriber and the churn rate also contribute to insights that contribute to certain of our business planning decisions. The following table sets forth certain key operating metrics for our Digital Media advertising business for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Net advertising revenue retention (1) 107% 104% Advertisers (2) 1,950 1,705 Quarterly revenue per advertiser (3) $87,214 $103,981 (1) Net advertising revenue retention equals (i) the trailing twelve month revenue recognized related to prior year advertisers in the current year period (excluding revenue from acquisitions during the stub period) divided by (ii) the trailing twelve month revenue recognized related to prior year advertisers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes advertisers that generated less than $10,000 of revenue on a trailing twelve month basis. Due to the aggregation of certain reporting systems related to the integration of acquisitions, retention data for the first quarter of 2021 reflects certain estimates. (2) Excludes advertisers that spent less than $2,500 in the quarter. (3) Represents total gross quarterly advertising revenues divided by advertisers as defined in footnote (2). -40- The following table sets forth certain key operating metrics for our Digital Media and Cybersecurity and Martech subscription and licensing businesses for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 (excluding disposed assets) (1) 2021 (including disposed assets) (1) Subscribers (in thousands) (2) 2,131 2,332 2,361 Average monthly revenue per subscriber (3) $21.28 $16.85 $18.28 Churn rate (4) 3.2% 2.8% 2.6% (1) The metrics in the table above are shown exclusive and inclusive of the B2B Back-up business that was sold during the third quarter of 2021. The metric of average monthly revenue per subscriber excluding disposed assets for the three months ended March 31, 2021 is considered a non-GAAP measure. The Company believes this provides useful information to allow for comparability of these metrics without disposed assets in both periods. 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. (2) Represents the quarterly average of the end of month subscriber counts for both the Digital Media and Cybersecurity and Martech businesses. Cybersecurity and Martech subscribers are defined as a direct customer, including customers who have paused but not cancelled their subscription. If the company provides services through a reseller or a partner and the Company does not have visibility into the number of underlying subscribers, the reseller or partner is counted as one subscriber. (3) Represents quarterly subscription revenues divided by customers in the table above. (4) Churn rate is calculated as (i) the average revenue per subscription in the prior month multiplied by the number of cancellations in the current month, calculated at each business and aggregated; divided by (ii) subscription revenue in the current month, calculated at each business and aggregated. For Ookla, this is calculated by taking the sum of the monthly revenue from the specific cancelled agreements. 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 2021 Annual Report on Form 10-K filed with the SEC on March 15, 2022. During the three months ended March 31, 2022, there were no significant changes in our critical accounting policies and estimates. Results of Operations for the Three Months Ended March 31, 2022 Digital Media We expect revenue for fiscal year 2022 to be higher compared to the prior year driven by prior year acquisitions and organic growth. 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, and we continue to expand our advertising platforms. The main focus of our platform monetization programs is to provide relevant and useful advertising to visitors to our websites, provide meaningful content that informs and shapes purchase intent, and leverage our brand and editorial assets into subscription platforms. 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, and improve the effectiveness of our content in driving purchase decisions and subscriptions. 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. 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 -41- 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 Digital Media’s overall operating profit margins. Cybersecurity and Martech We expect 2022 revenue to be higher compared to the prior year driven by prior year acquisitions and organic growth in certain of our businesses. The main focus of our Cybersecurity and Martech service 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 Cybersecurity and Martech’ overall operating profit margins. Consolidated Based on the trends discussed above with respect to our Digital Media and Cybersecurity and Martech businesses, we anticipate our consolidated revenue for fiscal year 2022 to be higher compared to the prior year. We expect operating profit as a percentage of revenues to be generally consistent with 2021’s operating profit margins. Revenues (in thousands, except percentages) Three Months Ended March 31, Percentage Change 2022 2021 Revenues $ 315,068 $ 311,657 1% Our revenues consist of revenues from our Digital Media and Cybersecurity and Martech businesses. Digital Media revenues primarily consist of advertising revenues and 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. Cybersecurity and Martech revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services. Our revenues increased primarily due to contributions from recently acquired businesses and organic growth in certain parts of both the Digital Media and Cybersecurity and Martech businesses, offset in part by declines in other parts of both the Digital Media and Cybersecurity and Martech businesses, as well as the absence of revenues in the first quarter of 2022 associated with recently divested businesses. Revenue in the first quarter of 2022 included approximately $24.8 million of revenue related to businesses acquired in 2021 and in the first quarter of 2022. Revenue in the first quarter of 2021 included approximately $12.6 million of revenue from the divested B2B Back-up business and Voice assets. Cost of Revenues (in thousands, except percentages) Three Months Ended March 31, Percentage Change 2022 2021 Cost of revenue $ 46,100 $ 43,852 5% As a percent of revenue 15 % 14 % Cost of revenues is primarily comprised of costs associated with content fees, editorial and production costs and hosting costs. The increase in cost of revenues for the three months ended March 31, 2022 was primarily due to higher database hosting services, network and customer service costs, field operations costs and higher media inventory and operations costs, including content fees, editorial and production costs, partially offset by lower cost of revenues due to the sale of the B2B Back-up business. -42- Operating Expenses Sales and Marketing. (in thousands, except percentages) Three Months Ended March 31, Percentage Change 2022 2021 Sales and Marketing $ 117,762 $ 107,951 9% As a percent of revenue 37 % 35 % Our sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs and other business development-related expenses. 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 costs for the three months ended March 31, 2022 was $60.0 million (primarily consisting of $27.2 million of third-party advertising costs and $22.7 million of personnel costs) compared to $52.7 million (primarily consisting of $26.6 million of third-party advertising costs and $22.0 million of personnel costs) in the prior year period. The increase in sales and marketing expenses from the first quarter of 2021 to the first quarter of 2022 was primarily due to increased advertising costs related to outside sales commissions, professional and consulting services and software licenses. Research, Development and Engineering. (in thousands, except percentages) Three Months Ended March 31, Percentage Change 2022 2021 Research, Development and Engineering $ 18,427 $ 19,675 (6)% As a percent of revenue 6 % 6 % Our research, development and engineering costs consist primarily of personnel-related expenses. The decrease in research, development and engineering costs for the three months ended March 31, 2022 compared to the prior year period was primarily due to a decrease in engineering costs of approximately $1.8 million, primarily associated with increased capitalized payroll costs and lower software purchases and licenses. General and Administrative. (in thousands, except percentages) Three Months Ended March 31, Percentage Change 2022 2021 General and Administrative $ 102,217 $ 113,298 (10)% As a percent of revenue 32 % 36 % 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 decrease in general and administrative expense from the first quarter of 2021 to the first quarter of 2022 was primarily due to a decrease in legal and finance costs, the absence of general and administrative costs related to the B2B Backup business, and lower depreciation and amortization expense. -43- 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 months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Cost of revenues $ 84 $ 83 Operating expenses: Sales and marketing 569 266 Research, development and engineering 629 418 General and administrative 5,435 4,963 Total $ 6,717 $ 5,730 Non-Operating Income and Expenses Interest expense, net. 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 $11.5 million and $21.5 million for the three months ended March 31, 2022 and 2021, respectively. Interest expense, net decreased during the three months ended March 31, 2022 primarily due to approximately $6.2 million less interest expense due to the redemption of our 3.25% Convertible Notes in August 2021 and the adoption of ASU 2020-06 during the first quarter of 2022, which resulted in approximately $3.8 million less interest expense due to our no longer amortizing a debt discount on the 1.75% Convertible Notes. Unrealized gain on short-term investment. Unrealized gain on short-term investment was $9.0 million and zero during the three months ended March 31, 2022 and 2021, respectively. The increase in the first quarter of 2022 was due to the unrealized gain on our investment in Consensus recorded during the first quarter of 2022. Other income, net. Our other income, net is generated primarily from miscellaneous items and gain or losses on currency exchange. Other income, net was $2.4 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively. Other income, net changed for the three months ended March 31, 2022 compared to the prior year period due to certain miscellaneous items and changes in gain or losses on currency exchange. Income Taxes 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. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. 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 $5.1 million and $(6.9) million for the three months ended March 31, 2022 and 2021, respectively. Our effective tax rate was 16.7% and (90.3)% for the three months ended March 31, 2022 and 2021, respectively. The increase in our effective income tax rate for the three months ended March 31, 2022 was primarily attributable to the following: 1. a tax benefit recognized during the three months ended March 31, 2021 due to the release of a valuation allowance on deferred tax assets related to the impairment of certain U.S. investments with no similar event in 2022; and 2. an increase in our effective income tax rate during 2022 due to a decrease in the portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S.; partially offset by 3. a decrease in tax expense during 2022 due to an increase in our U.S. deduction for foreign derived intangible income (“FDII”); and -44- 4. a decrease in our effective income tax rate during 2022 due to a gain recorded for book purposes for the mark-to-market adjustment of our remaining Consensus shares held as of March 31, 2022 that resulted in no tax expense since the Company has the ability to dispose of the investment tax-free under certain guidelines. Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient. Equity Method Investment Income (loss) from equity method investment, net. Income (loss) from equity method investment, net is generated from our investment in the OCV Fund I, LP (the “Fund”) for which we receive annual audited financial statements. The investment in the Fund, including management fees, is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from the Fund. 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 (loss) income from equity method investment, net was $(0.8) million and $24.3 million net of tax benefit (expense) for the three months ended March 31, 2022 and 2021, respectively. The decrease in income from equity method investment, net during the three months ended March 31, 2022 was primarily due to lower gains on the underlying investments. During the three months ended March 31, 2022 and 2021, the Company recognized expense for management fees of $0.8 million and $0.8 million, net of tax benefit, respectively. Digital Media and Cybersecurity and Martech 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 reportable segments: (i) Digital Media and (ii) Cybersecurity and Martech. We evaluate the performance of our segments based on revenues, including both external and inter-business net sales, and operating income. We account for inter-business 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’ operations. Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets. All significant inter-business amounts are eliminated to arrive at our consolidated financial results. Digital Media The financial results are presented as follows (in thousands): Three Months Ended March 31, 2022 2021 Gross sales $ 234,827 $ 226,874 Inter-business net sales (132) (68) Net sales 234,695 226,806 Cost of revenues 24,989 20,725 Gross profit 209,706 206,081 Operating expenses 177,586 175,428 Operating income $ 32,120 $ 30,653 Digital Media’s net sales of $234.7 million for the three months ended March 31, 2022 increased $7.9 million, or 3.5%, compared to the prior year period primarily due to business acquisitions and organic growth related to certain of our businesses. Digital Media’s gross profit of $209.7 million for the three months ended March 31, 2022 increased $3.6 million, or 1.8%, compared to the prior year period primarily due to the increase in revenue. -45- Digital Media’s operating expenses of $177.6 million for the three months ended March 31, 2022 increased $2.2 million, or 1.2%, compared to the prior year period. The increase in the three months ended March 31, 2022 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 and (b) creative and selling costs. As a result of these factors, Digital Media’s operating income of $32.1 million for the three months ended March 31, 2022 increased $1.5 million, or 4.8%, compared to the prior year period. Cybersecurity and Martech The financial results are presented as follows (in thousands): Three Months Ended March 31, 2022 2021 Gross sales $ 80,494 $ 84,901 Inter-business net sales (121) (50) Net sales 80,373 84,851 Cost of revenues 20,980 22,944 Gross profit 59,393 61,907 Operating expenses 47,065 50,042 Operating income $ 12,328 $ 11,865 Cybersecurity and Martech net sales of $80.4 million for the three months ended March 31, 2022 decreased $4.5 million, or 5.3%, compared to the prior year period primarily due to the sale of the B2B Back-up business during the third quarter of 2021, partially offset by business acquisitions. Cybersecurity and Martech gross profit of $59.4 million for the three months ended March 31, 2022 decreased $2.5 million, or 4.1%, compared to the prior year period primarily due to the sale of the B2B Back-up business during the third quarter of 2021, partially offset by business acquisitions. Cybersecurity and Martech operating expenses of $47.1 million for the three months ended March 31, 2022 decreased $3.0 million, or 5.9%, compared to the prior year period primarily due to the sale of the B2B Back-up business during the third quarter of 2021. As a result of these factors, Cybersecurity and Martech operating income of $12.3 million for the three months ended March 31, 2022 increased $0.5 million, or 3.9%, from the prior comparable period. Liquidity and Capital Resources Cash and Cash Equivalents and Investments As of March 31, 2022, we had cash, cash equivalents and investments of $988.7 million compared to $1,046.6 million at December 31, 2021. At March 31, 2022, cash and investments consisted of cash and cash equivalents of $629.0 million, short-term investments in equity securities of $238.2 million and long-term investments of $121.6 million. As of March 31, 2022, cash and investments held within domestic and foreign jurisdictions were $847.1 million and $141.6 million, respectively. -46- On September 25, 2017, the Company entered into a commitment to invest $200 million (approximately 76.6% of equity) in the “Fund”. The manager, OCV Management, LLC , and general partner of the Fund are entities with respect to which Richard S. Ressler, former Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder and a related party. Mr. Ressler’s tenure with the Board of Directors of the Company ended as of May 10, 2022. As a limited partner in the Fund, prior to the settlement of certain litigation generally related to the Company’s investment in the Fund, in January 2022, the Company paid an annual management fee to the manager equal to 2.0% of capital commitments. In addition, subject to the terms and conditions of the Fund’s limited partnership agreement, once the Company has received distributions equal to its invested capital, the Fund’s general partner would be entitled to a carried interest equal to 20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Audit Committee of the Board in accordance with the Company’s related-party transaction approval policy. At the time of the settlement of the litigation, the Company had invested approximately $128.8 million in the Fund. In connection with the settlement of the litigation, among other terms, no further capital calls will be made in connection with our investment in the Fund, nor will any management fees be paid by the Company to the manager. For more information related to the litigation, see Note 9 – Commitments and Contingencies in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I Item 2 for additional information. Financings As of March 31, 2022 and December 31, 2021, there were no amounts drawn under the Credit Agreement. During the three months ended March 31, 2022, the Company repurchased approximately $54.6 million in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $55.4 million. Material Cash Requirements Our long-term contractual obligations generally include our debt and related interest payments, noncancellable operating leases, holdback amounts in connection with certain business acquisitions, commitments related to the transition tax on unrepatriated foreign earnings, incurred but not paid amounts of self-insurance as well as other commitments. As of March 31, 2022, we and our subsidiaries had outstanding $1.1 billion in aggregate principal amount of indebtedness, of which none is due in the succeeding twelve months. As of March 31, 2022, our total minimum lease payments are $81.0 million, of which approximately $26.7 million are due in the succeeding twelve months. As of March 31, 2022, our liability for uncertain tax positions was $42.9 million. There were no material changes to our cash requirements during the three months ended March 31, 2022. 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. Cash Flows Our Condensed Consolidated Statements of Cash Flows for three months ended March 31, 2021 include the activity from the cloud fax business, which was separated from the Company on October 7, 2021. Refer to Note 5 – Discontinued Operations in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I Item 2 for additional information. Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $116.5 million and $178.7 million for the three months ended March 31, 2022 and 2021, 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 decrease in our net cash provided by operating activities during the three months ended March 31, 2022 compared to 2021 period is attributable to lower earnings before non-cash adjustments, primarily as a result of the Separation, the timing and amount of collections from our customers and a decrease in deferred revenue, partially offset by income on our investment in the Fund in 2021. Our cash and cash equivalents were $629.0 million and $694.8 million at March 31, 2022 and December 31, 2021, respectively. Net cash used in investing activities was $58.6 million and $29.0 million for the three months ended March 31, 2022 and 2021, respectively. The increase in our net cash used in investing activities during the three months ended March 31, 2022 compared to 2021 period is primarily related to our 2022 business acquisitions and higher capital expenditures associated with -47- the purchase of property and equipment, including capitalized labor, partially offset by the purchase of equity method investment in 2021. Net cash used in financing activities was $120.7 million and $20.1 million for the three months ended March 31, 2022 and 2021, respectively. The increase in the net cash used in financing activities during the three months ended March 31, 2022 compared to 2021 period is primarily related to share repurchases and repurchases of our 4.625% Senior Notes in 2022. Stock Repurchase Program On August 6, 2020, our Board of Directors approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). In connection with the authorization, the Company entered into certain Rule 10b5-1 trading plans with a broker-dealer to facilitate the repurchase program. A summary of share repurchases under the 2020 Program during the three months ended March 31, 2022 is as follows (in millions, except share and per share amounts): Total number of shares repurchased Aggregate purchase price Average price paid per share Shares remaining under repurchase authorization as of March 31, 2022 554,289 $ 58.7 $ 105.87 6,509,401 Cumulatively at March 31, 2022, 3,490,599 shares were repurchased at an aggregate cost of $284.2 million (including an immaterial amount of commission fees) under the 2020 Program. These shares were subsequently retired. -48-