What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 152 added, 99 removed, 207 unchanged (55% of the section changed)

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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.

Ziff Davis retained a 19.9% interest in Consensus following the Separation (the “Investment in Consensus”).

Ziff Davis did not retain a controlling interest in Consensus.

On June 10, 2022, the Company entered into a Fifth Amendment to its Credit Agreement with MUFG Union Bank, N.A., as administrative agent and collateral agent and the lenders party thereto to effectuate the debt-for equity exchange of the portion of the Investment in Consensus.

The Fifth Amendment to the Credit Agreement (i) provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $90.0 million (the “Term Loan Facility”) and (ii) certain other changes to the Credit Agreement.

Refer to Note 8 - Debt 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.

During the three months ended June 30, 2022, the Company borrowed approximately $90.0 million under the Term Loan Facility and completed a non-cash exchange of 2.3 million shares of the Investment in Consensus with a carrying value of $138.3 million to settle its obligation to repay the $90.0 million outstanding aggregate principal amount of the Term Loan Facility plus related interest (the “Debt-for-Equity Exchange”).

As of June 30, 2022, the Company holds 1.7 million shares of the common stock of Consensus.

The Investment in Consensus represents an investment into equity securities for which the Company elected the fair value option and subsequent fair value changes in the Consensus shares are included in the assets of and results from continuing operations.

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

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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 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.

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Revenues from external customers classified by revenue source are as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Digital Media

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58,901 48,299 114,477 93,924

10,601 7,293 19,785 11,253

Total Digital Media revenues $ 258,700 $ 253,977 $ 493,527 $ 480,850

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Total Cybersecurity and Martech revenues $ 78,910 $ 87,608 $ 159,404 $ 172,510

Corporate $ — $ —

Elimination of inter-segment revenues (254) (292) (507) (410)

Total Revenues $ 337,356 $ 341,293 $ 652,424 $ 652,950

(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.

(1) During the three and six months ended June 30, 2021, the Company reclassified approximately $1.5 million and $4.7 million of revenue from ‘Subscription’ to ‘Advertising’ and reclassified approximately $4.4 million and $6.5 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.

We have changed these metrics effective January 1, 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.

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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,

The following table sets forth certain key operating metrics for our Digital Media advertising business for the three months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Net advertising revenue retention (1)

99.6 % 111.2 %

Advertisers (2)

$ 2,016 1,913

Quarterly revenue per advertiser (3)

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(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.

This excludes advertisers that generated less than $10,000 of revenue in the measurement period.

Due to the aggregation of certain reporting systems related to the integration of acquisitions, retention data for the second quarter of 2021 reflects certain estimates.

(2) Excludes advertisers that spent less than $2,500 in the quarter within certain divisions.

(3) Represents total gross quarterly advertising revenues divided by advertisers as defined in footnote (2).

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,

Three Months Ended June 30,

2022 2021 (excluding disposed assets) (1)

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2,393 2,340 2,368

Average monthly revenue per subscriber (3)

Average quarterly revenue per subscriber (3)

$57.64 $53.17 $57.32

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2.92% 2.51% 2.44%

(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.

(1) The metrics in the table above are shown exclusive and inclusive of the B2B Backup business that was sold during the third quarter of 2021.

The metric of average monthly revenue per subscriber excluding disposed assets for the three and six months ended June 30, 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.

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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

During the three and six months ended June 30, 2022, there were no significant changes in our critical accounting policies and estimates.

See Note 1 to the Condensed Consolidated Financial Statements for additional description of significant accounting policies of the Company.

Results of Operations for the Three and Six Months Ended June 30, 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 revenue for fiscal year 2022 to be higher compared to the prior year driven by acquisitions and organic growth in certain of our businesses.

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.

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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.

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 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.

We expect 2022 revenue to be lower compared to the prior year driven by the divestitures of our B2B Backup business and Voice assets, partially offset by 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.

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Moreover, future acquisitions of businesses within this space but with different business models, may impact Cybersecurity and Martech’ overall operating profit margins.

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.

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Revenues $ 337,356 $ 341,293 (1)% $ 652,424 $ 652,950 0%

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.

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.

Our revenues decreased during the three and six months ended June 30, 2022 primarily due to declines in parts of both the Digital Media and Cybersecurity and Martech businesses and the absence of revenues associated with recently divested businesses, partially offset by contributions from recently acquired businesses and organic growth in certain parts of both the Digital Media and Cybersecurity and Martech businesses.

Revenue in the second quarter of 2021 and the first six months of 2021 included approximately $11.3 million and $23.9 million, respectively, of revenue from the divested B2B Backup business and Voice assets.

Revenue in the second quarter of 2022 and the first six months of 2022 included approximately $26.2 million and $51.0 million, respectively, of revenue related to businesses acquired during the twelve months prior to the beginning of the respective period.

Cost of Revenues

(in thousands, except percentages)

Three Months Ended March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Cost of revenue $ 46,004 $ 48,785 (6)% $ 92,104 $ 92,637 (1)%

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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.

The decrease in cost of revenues for the three months ended June 30, 2022 was primarily due to approximately $4.1 million less in costs of revenue related to the sale of the B2B Backup business, partially offset by higher media inventory and operations costs, including content fees, editorial and production costs and higher database hosting services.

The decrease in cost of revenues for the six months ended June 30, 2022 was primarily due to approximately $9.4 million less in costs of revenue related to the sale of the B2B Back-up business offset by 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.

Operating Expenses

Sales and Marketing.

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Sales and Marketing $ 123,777 $ 120,421 3% $ 241,539 $ 228,372 6%

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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 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.

Advertising costs for the three months ended June 30, 2022 was $67.9 million (primarily consisting of $28.2 million of third-party advertising costs and $26.8 million of personnel costs) compared to $59.4 million (primarily consisting of $33.4 million of third-party advertising costs and $19.9 million of personnel costs) in the prior year period.

Advertising costs for the six months ended June 30, 2022 was $128.0 million (primarily consisting of $55.4 million of third-party advertising costs and $49.6 million of personnel costs) compared to $112.1 million (primarily consisting of $60.0 million of third-party advertising costs and $41.9 million of personnel costs) in the prior year period.

The increase in sales and marketing expenses during the three and six months ended June 30, 2022 from the comparable periods was primarily from 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

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

Research, Development and Engineering $ 19,721 $ 17,705 11% $ 38,148 $ 37,380 2%

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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.

The increase in research, development and engineering costs for the three months ended June 30, 2022 compared to the prior year period was primarily due to an increase in engineering costs, business intelligence and systems costs.

The increase in research, development and engineering costs for the six months ended June 30, 2022 compared to the prior year period was primarily due to an increase in business intelligence and systems costs, partially offset by lower engineering costs.

General and Administrative.

(in thousands, except percentages) Three Months Ended March 31, Percentage Change

(in thousands, except percentages) Three Months Ended June 30, Percentage Change Six Months Ended June 30, Percentage Change

2022 2021 2022 2021

General and Administrative $ 101,967 $ 111,698 (9)% $ 204,184 $ 224,996 (9)%

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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 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.

The decrease in general and administrative expense from the second quarter of 2021 to the second quarter of 2022 was primarily due to a decrease in general management and finance costs, lower depreciation and amortization expense and the absence of general and administrative costs related to the B2B Backup business.

The decrease in general and administrative expense from the first six months of 2021 to the first six months of 2022 was primarily due to a decrease in legal and finance costs, lower depreciation and amortization expense and the absence of general and administrative costs related to the B2B Backup business.

Goodwill impairment on business.

Goodwill impairment was zero and $32.6 million for the three months ended June 30, 2022 and 2021, respectively, and zero and $32.6 million for the six months ended June 30, 2022 and 2021, respectively.

The goodwill impairment during the three and six months ended June 30, 2021 was generated from the impairment of the B2B Backup business in the second quarter of 2021.

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,

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 six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Cost of revenues $ 142 $ 67 $ 226 $ 150

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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.

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

Interest expense, net was $7.0 million and $21.0 million for the three months ended June 30, 2022 and 2021, respectively, and $18.5 million and $42.5 million for the six months ended June 30, 2022 and 2021, respectively.

Interest expense, net decreased during the three months ended June 30, 2022 primarily due to approximately $6.1 million less interest expense due to the redemption of our 3.25% Convertible Notes in August 2021, approximately $3.9 million less interest expense from the adoption of ASU 2020-06 during 2022, whereby we no longer amortize a debt discount on the 1.75% Convertible Notes and a $3.1 million gain associated with the repurchase of the 4.625% Senior Notes.

Interest expense, net decreased during the six months ended June 30, 2022 primarily due to approximately $12.3 million less interest expense due to the redemption of our 3.25% Convertible Notes in August 2021, approximately $7.7 million less interest expense from the adoption of ASU 2020-06 during 2022 and a $1.9 million net gain associated with the repurchase of the 4.625% Senior Notes.

Gain on sale of businesses.

Our gain on sale of businesses was generated primarily from the sale of certain Voice assets in the United Kingdom in the first quarter of 2021 with a subsequent adjustment in the second quarter of 2021.

Gain on sale of businesses was zero and $0.8 million for the three months ended June 30, 2022 and 2021, respectively.

Gain on sale of businesses was zero and $2.8 million for the six months ended June 30, 2022 and 2021, respectively.

Unrealized loss on short-term investment.

Unrealized loss on short-term investment was $27.3 million and zero during the three months ended June 30, 2022 and 2021, respectively, and $18.4 million and zero during the six months ended June 30, 2022 and 2021, respectively.

The unrealized loss recorded during the three and six months ended June 30, 2022 was due to the unrealized loss on our Investment in Consensus.

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 $48.2 million and $16.7 million for the three months ended June 30, 2022 and 2021, respectively, and $48.2 million and $16.7 million for the six months ended June 30, 2022 and 2021, respectively.

Our loss on investments, net increased for the three and six months ended June 30, 2022 versus the prior comparable period related to the realized loss on the sale of 2.3 million shares from our investment in Consensus resulting from the decrease in the quoted share price of Consensus.

Other income (loss), net.

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

Other income (loss), net was $6.3 million and $(0.8) million for the three months ended June 30, 2022 and 2021, respectively, and $8.7 million and $(0.6) million for the six months ended June 30, 2022 and 2021, respectively.

Other income (loss), net increased for the three and six months ended June 30, 2022 compared to the prior year periods due primarily to gains on foreign 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 $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:

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;

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.;

Provision for income taxes amounted to $10.1 million and $(10.3) million for the three months ended June 30, 2022 and 2021, respectively, and $15.1 million and $(17.2) million for the six months ended June 30, 2022 and 2021, respectively.

Our effective tax rate was (33.2)% and 37.4% for the three months ended June 30, 2022 and 2021, respectively, and 12,760.8% and 86.1% for the six months ended June 30, 2022 and 2021, respectively.

Our effective tax rate for the three and six months ended June 30, 2022 has been disproportionately impacted due to the size of the discrete book loss related to the Disposed Consensus Shares and the Retained Consensus Shares.

The net loss recorded for book purposes for the Investment in Consensus, excluding transaction costs, resulted in no tax benefit.

The loss is not subject to tax since the Company has the ability to dispose of the investment in a tax-free manner based on guidance and requirements set out by the Internal Revenue Service.

The decrease in our effective income tax rate for the three months ended June 30, 2022 was primarily attributable to the following:

a decrease in our effective income tax rate during 2022 due to a loss recorded for book purposes for the Disposed Consensus Shares and Retained Consensus Shares that resulted in no tax benefit since the Company has the ability to dispose of the investment tax-free under certain guidelines;

a tax benefit recognized during the three months ended June 30, 2021 due to the recognition of a deferred tax asset related to goodwill impairment with no similar event in 2022;

partially offset by

an increase in our effective income tax rate during 2022 for U.S.

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

The increase in our effective income tax rate for the six months ended June 30, 2022 was primarily attributable to the following:

an increase in our effective income tax rate during 2022 due to a loss recorded for book purposes for the Disposed Consensus Shares and Retained Consensus Shares that resulted in no tax benefit since the Company has the ability to dispose of the investment tax-free under certain guidelines;

an increase in tax expense during 2022 due to a tax benefit recognized in 2021 for recognizing a deferred tax asset related to goodwill impairment with no similar events for the six months ended June 30, 2022;

an increase in tax expense due to discrete tax benefits related to a reduction in our net reserve for uncertain tax positions recognized in 2021 with no similar events for the six months ended June 30, 2022;

an increase in tax expense due to a tax benefit recognized for the release of a valuation allowance on deferred tax assets related to the impairment of certain U.S.

investments with no similar events for the six months ended June 30, 2022;

partially offset by

a decrease in tax expense during 2022 due to an increase in our U.S.

deduction for foreign derived intangible income (“FDII”);

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.

deduction for foreign derived intangible income.

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

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.

(Loss) income from equity method investment, net.

(Loss) income 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.

The (loss) income from equity method investment, net was $(6.1) million and $(5.8) million net of tax benefit for the three months ended June 30, 2022 and 2021, respectively, and $(6.9) million and $18.5 million, for the six months ended June 30, 2022 and 2021, respectively.

The decrease in income from equity method investment, net during the three and six months ended June 30, 2022 was primarily due to lower gains on the underlying investments.

During the three and six months ended June 30, 2022 and 2021, the Company recognized expense for management fees of $0.8 million and $0.8 million, net of tax benefit, respectively, and $1.5 million and $1.5 million, net of tax benefit, respectively.

Digital Media and Cybersecurity and Martech Results

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The financial results are presented as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Gross sales $ 258,700 $ 253,977 $ 493,527 $ 480,850

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Operating income $ 44,623 $ 44,106 $ 76,743 $ 74,749

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.

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.

Digital Media’s net sales of $258.3 million for the three months ended June 30, 2022 increased $4.6 million, or 1.8%, compared to the prior year period primarily due to business acquisitions and organic growth related to certain of our businesses.

Digital Media’s net sales of $493.0 million for the six months ended June 30, 2022 increased $12.5 million, or 2.6%, 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 $233.4 million for the three months ended June 30, 2022 increased $4.8 million, or 2.1%, compared to the prior year period primarily due to the increase in revenue.

Digital Media’s gross profit of $443.2 million for the six months ended June 30, 2022 increased $8.5 million, or 2.0%, compared to the prior year period primarily due to the increase in revenue.

Digital Media’s operating expenses of $188.8 million for the three months ended June 30, 2022 increased $4.3 million, or 2.3%, compared to the prior year period.

Digital Media’s operating expenses of $366.4 million for the six months ended June 30, 2022 increased $6.5 million, or 1.8%, compared to the prior year period.

The increase in the three and six months ended June 30, 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 $44.6 million for the three months ended June 30, 2022 increased $0.5 million, or 1.2%, compared to the prior year period.

Digital Media’s operating income of $76.7 million for the six months ended June 30, 2022 increased $2.0 million, or 2.7%, compared to the prior year period.

Cybersecurity and Martech

The financial results are presented as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Gross sales $ 78,910 $ 87,608 $ 159,404 $ 172,510

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Operating expenses 45,686 85,090 92,751 135,074

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.

Operating income (loss) $ 12,577 $ (21,195) $ 24,905 $ (9,320)

Cybersecurity and Martech net sales of $79.0 million for the three months ended June 30, 2022 decreased $8.5 million, or 9.7%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021, partially offset by business acquisitions.

Cybersecurity and Martech net sales of $159.4 million for the six months ended June 30, 2022 decreased $13.0 million, or 7.6%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021, partially offset by business acquisitions.

Cybersecurity and Martech gross profit of $58.3 million for the three months ended June 30, 2022 decreased $5.6 million, or 8.8%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021, partially offset by business acquisitions.

Cybersecurity and Martech gross profit of $117.7 million for the six months ended June 30, 2022 decreased $8.1 million, or 6.4%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021, partially offset by business acquisitions.

Cybersecurity and Martech operating expenses of $45.7 million for the three months ended June 30, 2022 decreased $39.4 million, or 46.3%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021.

Cybersecurity and Martech operating expenses of $92.8 million for the six months ended June 30, 2022 decreased $42.3 million, or 31.3%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021.

As a result of these factors, Cybersecurity and Martech operating income of $12.6 million for the three months ended June 30, 2022 increased $33.8 million, or 159.3%, from the prior comparable period.

Cybersecurity and Martech operating income of $24.9 million for the six months ended June 30, 2022 increased $34.2 million, or 367.2%, 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.

As of June 30, 2022, we had cash, cash equivalents and investments of $849.3 million compared to $1,046.6 million at December 31, 2021.

At June 30, 2022, cash, cash equivalents and investments consisted of cash and cash equivalents of $648.3 million, short-term investments in equity securities of $72.5 million and long-term investments of $128.5 million.

As of June 30, 2022, cash, cash equivalents and investments held within domestic and foreign jurisdictions were $730.5 million and $118.8 million, respectively.

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.

Ressler, former Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder.

Ressler’s tenure with the Board of Directors of the Company ended as of May 10, 2022.

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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.

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.

On June 10, 2022, we entered into a Fifth Amendment to our Credit Agreement, which provided for the Term Loan Facility, in an aggregate principal amount of $90.0 million, which had a maturity date that was 60 days following the date of funding of the Term Loan Facility.

During the three months ended June 30, 2022, the Company borrowed approximately $90.0 million under the Term Loan Facility and completed the Debt-for-Equity Exchange of 2,300,000 shares of common stock of

Consensus to settle its obligation to repay the $90.0 million outstanding aggregate principal amount of the Term Loan Facility plus related interest.

As of June 30, 2022 and December 31, 2021, there were no amounts drawn under the Credit Agreement.

During the six months ended June 30, 2022, the Company repurchased approximately $76.1 million in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $73.6 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.

As of June 30, 2022, we and our subsidiaries had outstanding $1.1 billion in aggregate principal amount of indebtedness, of which we repurchased $80.0 million during July and August of 2022.

As of June 30, 2022, our total minimum lease payments are $73.2 million, of which approximately $25.8 million are due in the succeeding twelve months.

As of June 30, 2022, our liability for uncertain tax positions was $43.6 million.

There were no material changes to our cash requirements during the three months ended June 30, 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.

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.

Our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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.

Net cash provided by operating activities was $192.5 million and $290.0 million for the six months ended June 30, 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

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.

The decrease in our net cash provided by operating activities during the six months ended June 30, 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 $648.3 million and $694.8 million at June 30, 2022 and December 31, 2021, respectively.

Net cash used in investing activities was $161.3 million and $152.6 million for the six months ended June 30, 2022 and 2021, respectively.

The increase in our net cash used in investing activities during the six months ended June 30, 2022 compared to 2021 period is primarily related to our 2022 business acquisitions and our investment in available for sale securities, partially offset by the purchase of an equity method investment in 2021.

Net cash used in financing activities was $61.7 million and $31.6 million for the six months ended June 30, 2022 and 2021, respectively.

The increase in the net cash used in financing activities during the six months ended June 30, 2022 compared to 2021 period is primarily related to share repurchases and repurchases of our 4.625% Senior Notes in 2022, partially offset by proceeds from the Term Loan Facility.

Stock Repurchase Program

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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

A summary of share repurchases under the 2020 Program during the three months ended June 30, 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 June 30, 2022

182,247 $ 12.7 $ 69.42 6,327,154

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.

Cumulatively at June 30, 2022, 3,672,846 shares were repurchased at an aggregate cost of $296.9 million (including an immaterial amount of commission fees) under the 2020 Program.

These shares were subsequently retired.

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