What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 131 added, 126 removed, 233 unchanged (52% of the section changed)

49 unchanged sentences

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.

On June 10, 2022, the Company entered into a Fifth Amendment to its Credit Agreement and on September 15, 2022, the Company entered into a Sixth Amendment to its Credit Agreement, each with MUFG Union Bank, N.A., as administrative agent and collateral agent and the lenders party thereto to effectuate two debt-for equity exchanges of the portion of the Investment in Consensus.

The Fifth Amendment to the Credit Agreement 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 the Sixth Amendment to the Credit Agreement provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $22.3 million (the “Term Loan Two Facility”).

Both amendments provided for 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.

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

During September 2022, the Company borrowed approximately $22.3 million under the Term Loan Two Facility and completed a non-cash exchange of 0.5 million shares of the Investment in Consensus to settle its obligation of $22.3 million outstanding aggregate principal amount of the Term Loan Two Facility plus related interest.

As of September 30, 2022, the Company holds approximately 1.2 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.

3 unchanged sentences

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.

3 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

11 unchanged sentences

Total Revenues $ 341,873 $ 355,144 $ 994,297 $ 1,008,094

(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.

4 unchanged sentences

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 June 30, 2022 and 2021:

Three Months Ended June 30,

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

Three Months Ended September 30,

Net advertising revenue retention (1)

6 unchanged sentences

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 June 30, 2022 and 2021:

Three Months Ended June 30,

Three Months Ended September 30,

2022 2021 (excluding disposed assets) (1)

7 unchanged sentences

(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 metric of average monthly revenue per subscriber excluding disposed assets for the three and nine months ended September 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.

11 unchanged sentences

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

During the three and nine months ended September 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

Results of Operations for the Three and Nine Months Ended September 30, 2022

Digital Media

11 unchanged sentences

Cybersecurity and Martech

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.

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 revenue from 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.

4 unchanged sentences

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 in line with 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

(in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

4 unchanged sentences

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 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.

Our revenues decreased during the three and nine months ended September 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 third quarter of 2021 and the first nine months of 2021 included approximately $9.6 million and $33.5 million, respectively, of revenue from the divested B2B Backup business and Voice assets.

Revenue in the third quarter of 2022 and the first nine months of 2022 included approximately $19.1 million and $70.1 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 June 30, Percentage Change Six Months Ended June 30, Percentage Change

(in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

2 unchanged sentences

Cost of revenues is primarily comprised of costs associated with content fees, editorial and production costs and hosting costs.

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.

The increase in cost of revenues for the three months ended September 30, 2022 was primarily due to higher cost of revenues associated with newly acquired businesses, outside conference expense, field operations and media inventory and operations costs, including content fees, editorial and production costs, partially offset by approximately $3.4 million less in cost of revenues related to the sale of the B2B Backup business.

The increase in cost of revenues for the nine months ended September 30, 2022 was primarily due to cost of revenues associated with newly acquired businesses, field operations costs, outside conference expense, customer service costs and database hosting services, partially offset by approximately $12.8 million less in cost of revenues related to the sale of the B2B Backup business.

Operating Expenses

Sales and Marketing.

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

(in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

3 unchanged sentences

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 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.

The decrease in sales and marketing expenses during the three months ended September 30, 2022 from the comparable period was primarily from lower selling and marketing expense within the Digital Media reportable segment due to lower third-party advertising expense, lower marketing expense within the Cybersecurity and Martech reportable segment and approximately $1.4 million lower sales and marketing expense from the absence of those costs related to the B2B Backup business.

The increase in sales and marketing expenses during the nine months ended September 30, 2022 from the comparable period was primarily from higher sales and marketing expense from acquired businesses over the period and higher sales and marketing expenses in other parts of the Digital Media reportable segment, partially offset by $4.9 million lower sales and marketing expense from the absence of those costs related to the B2B Backup business.

Research, Development and Engineering.

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

(in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

2 unchanged sentences

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

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.

The decrease in research, development and engineering costs for the three months ended September 30, 2022 compared to the prior year period was primarily due to a decrease in engineering costs driven in part by lower bonus expense, partially offset by an increase in business intelligence costs.

The decrease in research, development and engineering costs for the nine months ended September 30, 2022 compared to the prior year period was primarily due to a decrease in engineering costs driven in part by lower bonus expense and the absence of engineering costs related to the B2B Backup business, partially offset by an increase in business intelligence and systems costs.

General and Administrative.

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

(in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change

2022 2021 2022 2021

2 unchanged sentences

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 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.

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

The decrease in general and administrative expense from the first nine months of 2021 to the first nine months of 2022 was primarily due to lower depreciation and amortization expense, a decrease in general management, legal and finance costs, 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.

Goodwill impairment was $27.4 million and zero for the three months ended September 30, 2022 and 2021, respectively, and $27.4 million and $32.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The goodwill impairment during the three and nine months ended September 30, 2022 was related to a reporting unit within the Digital Media reportable segment and the goodwill impairment during the nine months ended September 30, 2021 was generated from the impairment of the B2B Backup business in the second quarter of 2021.

Refer to Note 7 - Goodwill and Intangible Assets for further details.

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

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

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, 2022 and 2021 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

8 unchanged sentences

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.

Interest expense, net was $8.6 million and $14.5 million for the three months ended September 30, 2022 and 2021, respectively, and $28.4 million and $57.0 million for the nine months ended September 30, 2022 and 2021, respectively.

Interest expense, net decreased during the three months ended September 30, 2022 primarily due to approximately $4.0 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 approximately $2.9 million less interest expense from the 4.625% Senior Notes related to a lower principal balance over the period as the notes were repurchased.

Interest expense, net decreased during the nine months ended September 30, 2022 primarily due to approximately $11.5 million less interest expense due to the redemption of our 3.25% Convertible Notes in August 2021, approximately $11.7 million less interest expense from the adoption of ASU 2020-06 during 2022 and approximately $6.8 million less interest expense from the 4.625% Senior Notes related to a lower principal balance over the period as the notes were repurchased.

Gain on debt extinguishment, net.

Gain on debt extinguishment, net was $10.1 million and zero during the three months ended September 30, 2022 and 2021, respectively, and $11.5 million and zero during the nine months ended September 30, 2022 and 2021, respectively.

The gains on debt extinguishment during the three and nine months ended September 30, 2022 related primarily to the repurchases of the 4.625% Senior Notes.

Loss on sale of businesses, net.

Loss on sale of businesses, net was zero and $24.6 million for the three months ended September 30, 2022 and 2021, respectively.

Loss on sale of businesses, net was zero and $21.8 million for the nine months ended September 30, 2022 and 2021, respectively.

The loss on the sale of business during the third quarter of 2021 was related to the sale of our B2B Back-up business.

The loss on the sale of businesses during the nine months ended September 30, 2021 was due to the loss on the sale of the B2B Back-up business, partially offset by a gain on 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.

Unrealized gain (loss) on short-term investment.

Our unrealized gain on short-term investment was $4.2 million and zero during the three months ended September 30, 2022 and 2021, respectively, and our unrealized loss on short-term investment was $14.2 million and zero during the nine months ended September 30, 2022 and 2021, respectively.

The unrealized gain (loss) recorded during the three and nine months ended September 30, 2022 was due to the unrealized gain (loss) on our Investment in Consensus.

Gain (loss) on investments, net.

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

Our gain (loss) on investments, net was $0.5 million and zero for the three months ended September 30, 2022 and 2021, respectively, and $(47.8) million and $(16.7) million for the nine months ended September 30, 2022 and 2021, respectively.

Our gain on investments, net increased for the three months ended September 30, 2022 versus the comparable period related to the realized gain on the sale of 500,000 shares from our investment in Consensus during the third quarter of 2022.

The increase in the realized loss on investments, net for the nine months ended September 30, 2022 versus the prior comparable period related to the net realized loss on the sale of 2.8 million shares from our investment in Consensus during the first nine months of 2022 resulting from the decrease in the quoted share price of Consensus over the time period.

The loss on investment during the nine months ended September 30, 2021 was due to an impairment on certain investments.

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.

Other income (loss), net was $4.2 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $13.0 million and $(0.5) million for the nine months ended September 30, 2022 and 2021, respectively.

Other income (loss), net increased for the three and nine months ended September 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.

1 unchanged sentence

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 $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

Provision for income taxes amounted to income tax (expense) benefit of $(18.1) million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $(33.2) million and $19.9 million for the nine months ended September 30, 2022 and 2021, respectively.

Our effective tax rate was 45.9% and (44.2)% for the three months ended September 30, 2022 and 2021, respectively, and 83.9% and 142.3% for the nine months ended September 30, 2022 and 2021, respectively.

Our effective tax rate for the three and nine months ended September 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 Disposed Consensus Shares, excluding transaction costs, resulted in no tax benefit because the loss was not subject to tax since the Company disposed of the investment in a tax-free manner based on guidance and requirements set out by the Internal Revenue Service, within the one-year anniversary of the Separation.

In addition, the Company recognized a tax charge of $11.3 million related to its Retained Consensus Shares due to recording a deferred tax liability as of September 30, 2022 as the Company did not dispose of the Retained Consensus Shares within the one-year anniversary of the Separation.

This increase to tax expense was partially offset by a tax benefit of $6.7 million for recording a deferred tax asset on the impairment of goodwill recorded during the three months ended September 30, 2022.

The increase in our effective income tax rate for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was primarily attributable to the following:

an increase in our effective income tax rate during 2022 due to recognizing a deferred tax liability related to the Retained Consensus Shares resulting in a tax expense of $11.3 million;

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.

a decrease in our effective income tax rate during 2022 due to recognizing a tax benefit for a deferred tax asset related to goodwill impairment.

The decrease in our effective income tax rate for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was primarily attributable to the following:

a disproportionate effective tax rate reported in 2021 due to an overall net loss reported in income from continuing operations before income taxes primarily due to the disposition and impairment of the B2B Backup business and other U.S.

investments with corresponding tax benefits recognized;

a discrete tax benefit recognized in 2021 related to a reduction in our net reserve for uncertain tax positions recognized in 2021 with no similar events for the nine months ended September 30, 2022;

partially offset by

an increase in our effective income tax rate during 2022 due to recognizing a deferred tax liability related to the Retained Consensus Shares resulting in a tax expense of $11.3 million.

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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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 $(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.

The (loss) income from equity method investment, net was $(3.2) million and $(1.9) million net of tax benefit for the three months ended September 30, 2022 and 2021, respectively, and $(10.1) million and $16.6 million, for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in income from equity method investment, net during the three and nine months ended September 30, 2022 was primarily due to a decrease in the value of the underlying investments.

During the three months ended September 30, 2022.

the Company recognized no expense for management fees, and during the three months ended September 30, 2021, the Company recognized expense for management fees of $0.8 million, net of tax benefit.

During the nine months ended September 30, 2022 and 2021, the Company recognized expense for management fees of $1.5 million and $2.3 million, net of tax benefit, respectively.

Digital Media and Cybersecurity and Martech Results

1 unchanged sentence

(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 evaluate the performance of our reportable 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.

4 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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

Inter-business net sales (357) (216) (489) (284)

Net sales 258,343 253,761 493,038 480,566

External sales $ 263,684 $ 262,162 $ 756,722 $ 742,729

Inter-business sales 212 267 701 551

Total sales 263,896 262,429 757,423 743,280

Cost of revenues 30,797 23,779 80,682 69,871

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Operating income $ 27,317 $ 49,700 $ 104,060 $ 124,449

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.

Digital Media’s net sales of $263.9 million for the three months ended September 30, 2022 increased $1.5 million, or 0.6%, compared to the prior year period primarily due to acquisitions and organic growth in certain of its businesses.

Digital Media’s net sales of $757.4 million for the nine months ended September 30, 2022 increased $14.1 million, or 1.9%, compared to the prior year period primarily due to acquisitions and organic growth in certain of its businesses.

Digital Media’s gross profit of $232.9 million for the three months ended September 30, 2022 decreased $5.8 million, or 2.4%, compared to the prior year period primarily due to costs associated with newly acquired businesses.

Digital Media’s gross profit of $676.0 million for the nine months ended September 30, 2022 increased $2.6 million, or 0.4%, compared to the prior year period primarily due to the increase in revenue.

Digital Media’s operating expenses of $205.6 million for the three months ended September 30, 2022 increased $16.6 million, or 8.8%, compared to the prior year period.

Digital Media’s operating expenses of $572.0 million for the nine months

ended September 30, 2022 increased $23.0 million, or 4.2%, compared to the prior year period.

The increase in the three and nine months ended September 30, 2022 is primarily due to impairment of goodwill.

As a result of these factors, Digital Media’s operating income of $27.3 million for the three months ended September 30, 2022 decreased $22.4 million, or 45.0%, compared to the prior year period.

Digital Media’s operating income of $104.1 million for the nine months ended September 30, 2022 decreased $20.4 million, or 16.4%, compared to the prior year period.

Cybersecurity and Martech

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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

Inter-business net sales 103 (76) (18) (76)

Net sales 79,013 87,532 159,386 172,434

External sales $ 78,190 $ 92,982 $ 237,576 $ 265,365

Inter-business sales 2 89 20 215

Total sales 78,192 93,071 237,596 265,580

Cost of revenues 21,595 26,187 63,325 72,942

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Operating expenses 42,765 56,208 135,516 191,282

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.

Operating income $ 13,830 $ 10,676 $ 38,735 $ 1,356

Cybersecurity and Martech net sales of $78.2 million for the three months ended September 30, 2022 decreased $14.9 million, or 16.0%, compared to the prior year period primarily due to the absence of approximately $9.6 million of revenue from the B2B Backup business that was sold during the third quarter of 2021, offset in part by organic growth in certain of its businesses.

Cybersecurity and Martech net sales of $237.6 million for the nine months ended September 30, 2022 decreased $28.0 million, or 10.5%, compared to the prior year period primarily due to the absence of approximately $33.5 million of revenue from the B2B Backup business that was sold during the third quarter of 2021, partially offset by revenue from business acquisitions.

Cybersecurity and Martech gross profit of $56.6 million for the three months ended September 30, 2022 decreased $10.3 million, or 15.4%, 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 organic growth from certain of its businesses.

Cybersecurity and Martech gross profit of $174.3 million for the nine months ended September 30, 2022 decreased $18.4 million, or 9.5%, 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 $42.8 million for the three months ended September 30, 2022 decreased $13.4 million, or 23.9%, 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 $135.5 million for the nine months ended September 30, 2022 decreased $55.8 million, or 29.2%, compared to the prior year period primarily due to the sale of the B2B Backup business during the third quarter of 2021 and related goodwill impairment recorded.

As a result of these factors, Cybersecurity and Martech operating income of $13.8 million for the three months ended September 30, 2022 increased $3.2 million, or 29.5%, from the prior comparable period.

Cybersecurity and Martech operating income of $38.7 million for the nine months ended September 30, 2022 increased $37.4 million, or 2756.6%, from the prior comparable period.

Liquidity and Capital Resources

Cash and Cash Equivalents and Investments

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.

As of September 30, 2022, we had cash, cash equivalents and investments of $801.0 million compared to $1,046.6 million at December 31, 2021.

At September 30, 2022, cash, cash equivalents and investments consisted of cash and cash equivalents of $621.9 million, short-term investments in equity securities of $54.9 million and long-term investments of $124.2 million.

As of September 30, 2022, cash, cash equivalents and investments held within domestic and foreign jurisdictions were $682.6 million and $118.5 million, respectively.

On September 25, 2017, the Company entered into a commitment to invest $200 million (approximately 76.6% of equity) in the “Fund”.

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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.

On September 15, 2022, the Company entered into a Sixth Amendment to its existing Credit Agreement, which provided for the Term Loan Two Facility (together with the Term Loan Facility, collectively, “Term Loan Facilities”).

During June 2022, the Company subsequently completed a non-cash exchange of the 2.3 million shares of its common stock of Consensus with certain selling shareholders of Consensus to settle the Company’s obligations of $90.0 million outstanding aggregate principal amount of the Term Loan Facility plus related interest and the corresponding underwriting fees.

During September 2022, the Company subsequently completed a non-cash exchange of the 0.5 million shares of its common stock of Consensus with certain selling shareholders of Consensus to settle the Company’s obligations of $22.3 million outstanding aggregate principal amount of the Term Loan Two Facility plus related interest and the corresponding underwriting fees.

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

During the nine months ended September 30, 2022, the Company repurchased approximately $181.2 million in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $167.7 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 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.

As of September 30, 2022, we and our subsidiaries had outstanding $1.0 billion in aggregate principal amount of indebtedness, of which we repurchased $105.1 million during the three months ended September 30, 2022.

As of September 30, 2022, our total minimum lease payments are $64.9 million, of which approximately $23.9 million are due in the succeeding twelve months.

As of September 30, 2022, our liability for uncertain tax positions was $45.4 million.

There were no material changes to our cash requirements during the three months ended September 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 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.

Our Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 $192.5 million and $290.0 million for the six months ended June 30, 2022 and 2021, respectively.

Net cash provided by operating activities was $293.2 million and $430.3 million for the nine months ended September 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 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.

The decrease in our net cash provided by operating activities during the nine months ended September 30, 2022 compared to 2021 period is attributable to lower earnings before non-cash adjustments, primarily as a result of the Separation, partially offset by an increase in income tax payable and our gains on equity investments in 2022.

Our cash and cash equivalents were $621.9 million and $694.8 million at September 30, 2022 and December 31, 2021, respectively.

Net cash used in investing activities was $199.9 million and $159.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase in our net cash used in investing activities during the nine months ended September 30, 2022 compared to 2021 period was primarily related to the absence of proceeds from the sale of businesses during 2021 of approximately $48.9 million and higher purchases of investments, net of proceeds, partially offset by lower cash used for the acquisition of business and purchases of property, plant and equipment.

Net cash used in financing activities was $141.8 million and net cash provided by financing activities was $39.8 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase in the net cash used in financing activities during the nine months ended September 30, 2022 compared to 2021 period was primarily related to lower proceeds from debt borrowings, net of repayments and an increase of in share repurchases.

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 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 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.

During the three months ended September 30, 2022, the Company repurchased zero shares under the 2020 Program.

The number of shares available for purchase as of September 30, 2022 is 6,327,154 shares of the Company’s common stock.

Cumulatively at September 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