Unified Communications Industry News

TMCNet:  j2 Global Reports Fourth Quarter and Year End 2016 Results and Provides 2017 Outlook

[February 09, 2017]

j2 Global Reports Fourth Quarter and Year End 2016 Results and Provides 2017 Outlook

j2 Global, Inc. (NASDAQ: JCOM) today reported financial results for the fourth quarter and year ended December 31, 2016, provided fiscal 2017 financial estimates and announced that its Board of Directors has declared an increased quarterly cash dividend of $0.3650 per share.

FOURTH QUARTER 2016 RESULTS

Q4 2016 quarterly revenues increased 22.9% to a Q4 record of $251.8 million compared to $204.8 million for Q4 2015.

Net cash provided by operating activities increased by 11.6% to $89.8 million compared to $80.5 million for Q4 2015. Q4 2016 free cash flow(1) increased by 10.1% to $82.7 million compared to $75.1 million for Q4 2015.

GAAP earnings per diluted share(2) increased 23.6% to $0.89 in Q4 2016 compared to $0.72 for Q4 2015. Adjusted non-GAAP earnings per diluted share(2)(3) for the quarter increased 15.5% to $1.49 compared to $1.29 for Q4 2015.

GAAP net income increased by 21.7% to $43.2 million compared to $35.5 million for Q4 2015.

Quarterly Adjusted EBITDA(4) increased 16.4% to $116.5 million compared to $100.1 million for Q4 2015.

j2 ended the quarter with approximately $124.0 million in cash and investments after deploying approximately $508.2 million during the quarter for acquisitions and the payment of j2's regular quarterly dividend.

Key financial results for Q4 2016 versus Q4 2015 are set forth in the following table (in millions, except per share amounts). Reconciliations of Adjusted non-GAAP earnings per diluted share, Adjusted EBITDA and free cash flow to their nearest comparable GAAP financial measures are attached to this Press Release.



             
    Q4 2016   Q4 2015   % Change
Revenues            
Cloud Services   $141.8 million   $133.8 million   6.0%
Digital Media   $108.8 million   $69.9 million   55.7%
IP Licensing   $1.2 million   $1.1 million   9.1%

Total Revenue:

  $251.8 million   $204.8 million   22.9%
Operating Income   $68.2 million   $53.1 million   28.4%
Net Cash Provided by Operating Activities   $89.8 million   $80.5 million   11.6%
Free Cash Flow (1)   $82.7 million   $75.1 million   10.1%
GAAP Earnings per Diluted Share (2)   $0.89   $0.72   23.6%
Adjusted Non-GAAP Earnings per Diluted Share (2) (3)   $1.49   $1.29   15.5%
GAAP Net Income   $43.2 million   $35.5 million   21.7%
Non-GAAP Net Income   $72.2 million   $63.1 million   14.4%
Adjusted EBITDA (4)   $116.5 million   $100.1 million   16.4%
Adjusted EBITDA Margin (4)   46.3%   48.9%   (2.6)%
     

FULL YEAR 2016 RESULTS

2016 revenues increased 21.3% to a record of $874.3 million compared to $720.8 million for 2015.

Net cash provided by operating activities increased by 23.3% to $282.4 million compared to $229.1 million for 2015. 2016 free cash flow(1) increased by 16.4% to $259.9 million compared to $223.2 million for 2015.

GAAP earnings per diluted share(5) increased 14.7% to $3.13 in 2016 compared to $2.73 for 2015. Adjusted non-GAAP earnings per diluted share(5)(6) for the year increased 19.7% to $4.99 compared to $4.17 for 2015.

GAAP net income increased by 14.1% to $152.4 million compared to $133.6 million for 2015.

Annual Adjusted EBITDA(4) increased 18.8% to $396.1 million compared to $333.3 million for 2015.

j2 ended the year with approximately $124.0 million in cash and investments after deploying approximately $719.4 million during the year with respect to the repurchase of approximately 935,000 shares of j2 common stock, twenty-two acquisitions and j2's regular quarterly dividends.

Key financial results for 2016 versus 2015 are set forth in the following table (in millions, except per share amounts). Reconciliations of Adjusted non-GAAP earnings per diluted share, Adjusted EBITDA and free cash flow to their nearest comparable GAAP financial measures are attached to this Press Release.

             
    2016   2015   % Change
Revenues            
Cloud Services   $562.4 million   $498.9 million   12.7%
Digital Media   $307.3 million   $216.1 million   42.2%
IP Licensing   $4.6 million   $5.8 million   (20.7)%

Total Revenue:

  $874.3 million   $720.8 million   21.3%
Operating Income   $242.6 million   $199.4 million   21.7%
Net Cash Provided by Operating Activities   $282.4 million   $229.1 million   23.3%
Free Cash Flow (1)   $259.9 million   $223.2 million   16.4%
GAAP Earnings per Diluted Share (5)   $3.13   $2.73   14.7%
Adjusted Non-GAAP Earnings per Diluted Share (5) (6)   $4.99   $4.17   19.7%
GAAP Net Income   $152.4 million   $133.6 million   14.1%
Non-GAAP Net Income   $243.9 million   $203.0 million   20.1%
Adjusted EBITDA (4)   $396.1 million   $333.3 million   18.8%
Adjusted EBITDA Margin (4)   45.3%   46.2%   (0.9)%
     

"2016 was a remarkable year," said Hemi Zucker, CEO of j2 Global. "We exceeded our revenue expectations and achieved the high end of our EPS range. Fueled by our acquisition of Everyday Health, our largest ever, we are forecasting more than $1.1 billion in revenue, balanced between our Cloud and Media segments for this year. We are very excited about 2017 and are focused on our execution strength and planning for continued growth."

BUSINESS OUTLOOK

For fiscal 2017, the Company estimates that it will achieve revenues between $1.130 and $1.170 billion and Adjusted non-GAAP earnings per diluted share of between $5.60 and $6.00.

Adjusted non-GAAP earnings per diluted share for 2017 excludes share-based compensation of between $14 and $16 million, amortization of acquired intangibles and the impact of any currently unanticipated items, in each case net of tax.

It is anticipated that the non-GAAP effective tax rate for 2017 (exclusive of the release of reserves for uncertain tax positions) will be between 28.5% and 30.5%.

The Company has not reconciled the Adjusted non-GAAP earnings per diluted share and tax rate guidance included in this release to the most directly comparable GAAP measure because this cannot be done without unreasonable effort due to the variability with respect to costs related to acquisitions and taxation, which are potential adjustments to future earnings. We expect the variability of these items to have a potentially unpredictable and significant impact on our future GAAP financial results.

DIVIDEND

j2's Board of Directors has approved a quarterly cash dividend of $0.3650 per common share, a $0.01, or 2.8% increase versus last quarter's dividend. This is j2's twenty-second consecutive quarterly dividend increase since its first quarterly dividend in September 2011. The dividend will be paid on March 9, 2017 to all shareholders of record as of the close of business on February 22, 2017. Future dividends will be subject to Board approval.

EXTENSION OF SHARE REPURCHASE PROGRAM

The Company has extended its one-year five million share repurchase program set to expire February 20, 2017 by an additional year. Approximately 1.9 million shares remain available for purchase under the program.

Notes:

  (1)   Free cash flow is defined as net cash provided by operating activities, less purchases of property, plant and equipment, plus excess tax benefit from share-based compensation. Free cash flow amounts are not meant as a substitute for GAAP, but are solely for informational purposes.
(2) The estimated GAAP effective tax rates were approximately 25.8% for Q4 2016 and 16.4% for Q4 2015. The estimated Adjusted non-GAAP effective tax rates were approximately 29.0% for Q4 2016 and 27.6% for Q4 2015.
(3) For Q4 2016, Adjusted non-GAAP earnings per diluted share excludes share-based compensation, certain acquisition-related integration costs, interest costs in excess of the coupon rate associated with convertible notes, amortization of acquired intangibles, additional tax benefit from prior years and diluted effect of convertible debt, in each case net of tax, totaling $0.61 per diluted share. For Q4 2015, Adjusted non-GAAP earnings per diluted share excludes share-based compensation, certain acquisition-related integration costs, interest costs in excess of the coupon rate associated with convertible notes, amortization of acquired intangibles, additional tax benefit from prior years and dilutive effect of convertible debt, in each case net of tax, totaling $0.60 per diluted share.
(4) Adjusted EBITDA is defined as earnings before interest and other expense, net; income tax expense; depreciation and amortization; and the items used to reconcile EPS to Adjusted non-GAAP EPS referred to in Note (3) above. Adjusted EBITDA amounts are not meant as a substitute for GAAP, but are solely for informational purposes.
(5) The estimated GAAP effective tax rates were approximately 27.9% for 2016 and 14.8% for 2015. The estimated Adjusted non-GAAP effective tax rates were approximately 28.8% for 2016 and 28.4% for 2015.
(6) For 2016, Adjusted non-GAAP earnings per diluted share excludes share-based compensation, certain acquisition-related integration costs, interest costs in excess of the coupon rate associated with convertible notes, amortization of acquired intangibles, additional tax benefit from prior years, sale of investments and diluted effect of convertible debt, in each case net of tax, totaling $1.92 per diluted share. For 2015, Adjusted non-GAAP earnings per diluted share excludes share-based compensation, certain acquisition-related integration costs, interest costs in excess of the coupon rate associated with convertible notes, amortization of acquired intangibles, additional tax benefit from prior years, certain tax consulting fees and diluted effect of convertible debt, in each case net of tax, totaling $1.46 per diluted share.
 

About j2 Global

j2 Global, Inc. (NASDAQ: JCOM) provides Internet services through two segments: Business Cloud Services and Digital Media. The Business Cloud Services segment offers Internet fax, virtual phone, unified communications, hosted email, email marketing, online backup and CRM solutions. It markets its services principally under the brand names eFax ®, eVoice ®, Onebox ®, FuseMail ®, Campaigner ®, KeepItSafe ®, Livedrive® and LiveVault®, and operates a messaging network spanning 50 countries on six continents. The Digital Media segment offers technology, gaming, lifestyle and healthcare content through its digital properties, which include PCMag, IGN, AskMen, Speedtest, Offers, ExtremeTech, Geek, Toolbox, Techbargains, emedia, and Salesify and others. As of December 31, 2016, j2 had achieved 21 consecutive fiscal years of revenue growth. For more information about j2, please visit www.j2global.com.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: Certain statements in this Press Release are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995, particularly those contained in Hemi Zucker's quote and the "Business Outlook" portion regarding the Company's expected fiscal 2017 financial performance. These forward-looking statements are based on management's current expectations or beliefs and are subject to numerous assumptions, risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors and uncertainties include, among other items: the Company's ability to grow non-fax revenues, profitability and cash flows; the Company's ability to identify, close and successfully transition acquisitions; subscriber growth and retention; variability of the Company's revenue based on changing conditions in particular industries and the economy generally; protection of the Company's proprietary technology or infringement by the Company of intellectual property of others; the risk of adverse changes in the U.S. or international regulatory environments, including but not limited to the imposition or increase of taxes or regulatory-related fees; and the numerous other factors set forth in j2 Global's filings with the Securities and Exchange Commission ("SEC"). For a more detailed description of the risk factors and uncertainties affecting j2 Global, refer to the 2015 Annual Report on Form 10-K filed by j2 Global on February 29, 2016, and the other reports filed by j2 Global from time-to-time with the SEC, each of which is available at www.sec.gov. The forward-looking statements provided in this press release and particularly those contained in Hemi Zucker's quote and the "Business Outlook" portion regarding the Company's expected fiscal 2017 financial performance are based on limited information available to the Company at this time, which is subject to change. Although management's expectations may change after the date of this press release, the Company undertakes no obligation to revise or update these statements.

About non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following Adjusted non-GAAP financial measures: Adjusted non-GAAP net income, Adjusted non-GAAP earnings per diluted share, Adjusted EBITDA and free cash flow. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these Adjusted non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our management believes that these Adjusted non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures that may not be indicative of our recurring core business operating results. We believe that both management and investors benefit from referring to these Adjusted non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These Adjusted non-GAAP financial measures also facilitate management's internal comparisons to our historical performance and liquidity. We believe these Adjusted non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

For more information on these Adjusted non-GAAP financial measures, please see the appropriate GAAP to Adjusted non-GAAP reconciliation tables included within the attached Exhibit to this release.

   
j2 GLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
 
December 31,
2016
December 31,
2015
ASSETS
Cash and cash equivalents $ 123,950 $ 255,530
Short-term investments 60 79,655
Accounts receivable, net of allowances of $7,988 and $4,261, respectively 199,871 114,680
Prepaid expenses and other current assets 24,118 25,722
Deferred income taxes, current -   7,218  
Total current assets 347,999 482,805
Long-term investments - 78,563
Property and equipment, net 68,094 57,442
Goodwill 1,122,810 807,661
Other purchased intangibles, net 511,691 352,641
Deferred income taxes, non-current 5,289 -
Other assets 6,445   4,607  
TOTAL ASSETS $ 2,062,328   $ 1,783,719  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 178,071 $ 114,384
Income taxes payable 16,753 5,589
Deferred revenue, current 80,384 76,104
Line of credit 178,817 -
Capital lease, current 64 214
Deferred income taxes, current -   363  
Total current liabilities 454,089 196,654
Long-term debt 601,746 592,037
Deferred revenue, non-current 1,588 6,538
Capital lease, non-current - 148
Liability for uncertain tax positions 46,537 35,917
Deferred income taxes, non-current 40,357 43,989
Other long-term liabilities 3,475   18,228  
TOTAL LIABILITIES 1,147,792   893,511  
 
Commitments and contingencies
 
Preferred stock - -
Common stock 474 479
Additional paid-in capital 308,329 292,064
Retained earnings 660,382 626,789
Accumulated other comprehensive loss (54,649 ) (29,124 )
TOTAL STOCKHOLDERS' EQUITY 914,536   890,208  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,062,328   $ 1,783,719  
 
 
j2 GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
   

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2016   2015 2016   2015
Total revenues $ 251,837 $ 204,823 $ 874,255 $ 720,815
 
Cost of revenues (1) 40,229   34,608   147,100   122,958
Gross profit 211,608   170,215   727,155   597,857
 
Operating expenses:
Sales and marketing (1) 63,717 42,189 206,871 159,009
Research, development and engineering (1) 10,881 8,625 38,046 34,329
General and administrative (1) 68,849   66,347   239,672   205,137
Total operating expenses 143,447   117,161   484,589   398,475
Income from operations 68,161 53,054 242,566 199,382
Interest expense, net 10,400 11,005 41,370 42,458
Other expense (income), net (438 ) (384 ) (10,243 ) 5
Income before income taxes 58,199 42,433 211,439 156,919
Income tax expense 15,041   6,966   59,000   23,283
Net income $ 43,158   $ 35,467   $ 152,439   $ 133,636
 
Basic net income per common share:
Net income attributable to j2 Global, Inc. common shareholders $ 0.90   $ 0.73   $ 3.15   $ 2.76
 
Diluted net income per common share:
Net income attributable to j2 Global, Inc. common shareholders $ 0.89   $ 0.72   $ 3.13   $ 2.73
 
Basic weighted average shares outstanding 47,348,372 47,849,748 47,668,357 47,627,853
Diluted weighted average shares outstanding 47,862,218 48,772,061 47,963,226 48,087,760
 
 
 
 
(1) Includes share-based compensation expense as follows:
Cost of revenues $ 123 $ 100 $ 436 $ 373
Sales and marketing 393 624 1,782 2,435
Research, development and engineering 240 229 904 863
General and administrative 2,947   1,898   10,528   8,122
Total $ 3,703   $ 2,851   $ 13,650   $ 11,793
 
 
j2 GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, IN THOUSANDS)

 

 

Twelve Months Ended December 31,
2016   2015
Cash flows from operating activities:
Net income $ 152,439 $ 133,636
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 122,091 93,213
Accretion and amortization of discount and premium of investments 1,031 1,207
Amortization of financing costs and discounts 9,818 9,105
Share-based compensation 13,650 11,793
Excess tax benefits from share-based compensation (2,271 ) (4,486 )
Provision for doubtful accounts 13,169 6,872
Deferred income taxes, net (13,779 ) (17,083 )
Gain on sale of available-for-sale investments (7,716 ) (549 )
Decrease (increase) in:
Accounts receivable (30,687 ) (18,508 )
Prepaid expenses and other current assets (957 ) 1,461
Other assets 743 (602 )
Increase (decrease) in:
Accounts payable and accrued expenses 6,363 8,757
Income taxes payable 25,409 3,578
Deferred revenue (4,213 ) (3,480 )
Liability for uncertain tax positions 10,620 (5,718 )
Other long-term liabilities (13,323 ) 9,865  
Net cash provided by operating activities 282,387   229,061  
Cash flows from investing activities:
Maturity of certificates of deposit - 65
Purchase of certificates of deposit - (62 )
Maturity of available-for-sale investments 241,817 121,687
Purchase of available-for-sale investments (80,918 ) (135,832 )
Purchases of property and equipment (24,746 ) (17,297 )
Purchases of intangible assets (4,321 ) (1,455 )
Acquisition of businesses, net of cash received (580,691 ) (302,809 )
Net cash used in investing activities (448,859 ) (335,703 )
Cash flows from financing activities:
Proceeds from line of credit, net 178,710 -
Repurchases of common and restricted stock (56,495 ) (3,674 )
Issuance of stock, net of costs 3,824 5,218
Dividends paid (65,835 ) (58,826 )
Excess tax benefits from share-based compensation 2,271 4,486
Deferred payments for acquisitions (20,832 ) (14,271 )
Other (492 ) (296 )
Net cash provided by (used in) financing activities 41,151   (67,363 )
Effect of exchange rate changes on cash and cash equivalents (6,259 ) (4,128 )
Net change in cash and cash equivalents (131,580 ) (178,133 )
Cash and cash equivalents at beginning of period 255,530   433,663  
Cash and cash equivalents at end of period $ 123,950   $ 255,530  
 
 

j2 GLOBAL, INC.

RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES

THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
Non-GAAP net income is GAAP net income with the following modifications, net of tax: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition-related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; (5) elimination of additional tax or indirect tax related benefit from prior years; (6) sale of investments; (7) IRS consulting fee; and (8) dilutive effect of the convertible debt.
  Three Months Ended December 31,
2016   Per Diluted Share *   2015   Per Diluted Share *
Net income $ 43,158   $ 0.89 $ 35,467   $ 0.72
Plus:

Share based compensation (1)

1,366 0.03 1,842 0.04

Acquisition related integration costs (2)

8,788 0.18 9,578 0.20

Interest costs (3)

(850 ) (0.02 ) 1,399 0.03

Amortization (4)

21,316 0.45 18,581 0.39

Tax benefit from prior years (5)

(1,574 ) (0.03 ) (3,770 ) (0.08 )

Convertible debt dilution (8)

-   0.01 -   0.01
Adjusted non-GAAP net income $ 72,204   $ 1.49 $ 63,097   $ 1.29
 
 
Twelve Months Ended December 31,
2016   Per Diluted Share * 2015   Per Diluted Share *
Net income

$

152,439 $ 3.13 $ 133,636 $ 2.73
Plus:

Share based compensation (1)

8,598 0.18 8,413 0.18

Acquisition related integration costs (2)

12,564 0.26 16,568 0.35

Interest costs (3)

3,467 0.07 5,511 0.12

Amortization (4)

73,022 1.53 55,606 1.16

Tax benefit from prior years (5)

(1,520 ) (0.03 ) (16,558 ) (0.35 )
Sale of investments (6) (4,675 ) (0.10 ) - -
IRS consulting fee (7) - - (157 ) -
Convertible debt dilution (8) -   0.01 -   0.01
Adjusted non-GAAP net income

$

243,895   $ 4.99 $ 203,019   $ 4.17

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

 

j2 GLOBAL, INC.

RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES

THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
Non-GAAP net income is GAAP net income with the following modifications: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition-related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; and (5) elimination of additional tax or indirect tax related (expense) benefit from prior years.
  Three Months Ended December 31,
2016   2015
Cost of revenues $ 40,229 $ 34,608
Plus:

Share based compensation (1)

(123 ) (100 )
Acquisition related integration costs (2) - (327 )

Amortization (4)

(1,490 ) (1,314 )
Adjusted non-GAAP cost of revenues $ 38,616   $ 32,867  
Sales and marketing $ 63,717 $ 42,189
Plus:

Share based compensation (1)

(393 ) (624 )

Acquisition related integration costs (2)

(4,327 ) (395 )
Adjusted non-GAAP sales and marketing $ 58,997   $ 41,170  
Research, Development and Engineering $ 10,881 $ 8,625
Plus:

Share based compensation (1)

(240 ) (229 )

Acquisition related integration costs (2)

(947 ) (1 )
Adjusted non-GAAP research, development and engineering $ 9,694   $ 8,395  
General and administrative $ 68,849 $ 66,347
Plus:

Share based compensation (1)

(2,947 ) (1,898 )

Acquisition related integration costs (2)

(7,699 ) (13,940 )

Amortization (4)

(25,906 ) (23,322 )
Tax benefit from prior years (5) 1,900   -  
Adjusted non-GAAP general and administrative $ 34,197   $ 27,187  
Interest expense, net $ 10,400 $ 11,005
Plus:

Acquisition related integration costs (2)

(8 ) -
Interest costs (3) (1,448 ) (2,567 )
Tax benefit from prior years (5) 171   -  
Adjusted non-GAAP interest expense, net $ 9,115   $ 8,438  
 
Income Tax Provision $ 15,041 $ 6,966
Plus:

Share based compensation (1)

2,337 1,009

Acquisition related integration costs (2)

4,193 5,085
Interest costs (3) 2,298 1,168

Amortization (4)

6,080 6,055
Tax (expense) benefit from prior years (5) (497 ) 3,770  
Adjusted non-GAAP income tax provision $ 29,452   $ 24,053  
 
Total adjustments $ (29,046 ) $ (27,630 )
 
GAAP earnings per diluted share $ 0.89 $ 0.72
Adjustments * $ 0.61 $ 0.60
Adjusted non-GAAP earnings per diluted share $ 1.49 $ 1.29

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

The Company discloses Adjusted non-GAAP Earnings Per Share ("EPS") as a supplemental non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Adjusted non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company's performance. Accordingly, the Company believes that the presentation of this Adjusted non-GAAP financial measure provides useful information to investors.

Adjusted non-GAAP EPS is not in accordance with, or an alternative to, net income per share and may be different from non-GAAP measures with similar or even identical names used by other companies. In addition, this Adjusted non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company's results of operations determined in accordance with GAAP.

 

j2 GLOBAL, INC.

RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES

TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015

(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
Non-GAAP net income is GAAP net income with the following modifications, net of tax: (1) elimination of share-based compensation and the associated payroll tax expense; (2) elimination of certain acquisition-related integration costs; (3) elimination of interest costs in excess of the coupon rate associated with the convertible notes; (4) elimination of amortization of patents and intangible assets that we acquired; (5) elimination of additional tax or indirect tax related (expense) benefit from prior years; (6) sale of investments; and (7) IRS consulting fee
  Twelve Months Ended December 31,
2016   2015
Cost of revenues $ 147,100 $ 122,958
Plus:
Share based compensation (1) (436 ) (373 )
Acquisition related integration costs (2) - (327 )
Amortization (4) (5,380 ) (3,376 )
Adjusted non-GAAP cost of revenues $ 141,284   $ 118,882  
Sales and marketing $ 206,871 $ 159,009
Plus:
Share based compensation (1) (1,782 ) (2,435 )
Acquisition related integration costs (2) (5,859 ) (1,110 )
Adjusted non-GAAP sales and marketing $ 199,230   $ 155,464  
Research, development and engineering $ 38,046 $ 34,329
Plus:
Share based compensation (1) (904 ) (863 )
Acquisition related integration costs (2) (997 ) (81 )
Adjusted non-GAAP research, development and engineering $ 36,145   $ 33,385  
General and administrative $ 239,672 $ 205,137
Plus:
Share based compensation (1) (10,528 ) (8,122 )
Acquisition related integration costs (2) (11,926 ) (23,930 )
Amortization (4) (95,561 ) (73,902 )
Tax benefit (expense) from prior years (5) 1,000 (3,651 )
IRS consulting fee (7) -   204  
Adjusted non-GAAP general and administrative $ 122,657   $ 95,736  
Interest expense, net $ 41,370 $ 42,458
Plus:
Acquisition related integration costs (2) (8 ) -
Interest costs (3) (7,186 ) (7,982 )
Tax benefit (expense) from prior years (5) 171   (472 )
Adjusted non-GAAP interest expense, net $ 34,347   $ 34,004  
Other expense (income), net $ (10,243 ) $ 5
Plus:
Tax benefit from prior years (5) 811 -
Sale of investments (6) 7,540   -  
Adjusted non-GAAP other expense (income), net $ (1,892 ) $ 5  
 
Income tax provision $ 59,000 $ 23,283

Plus:

Share based compensation (1) 5,052 3,380
Acquisition related integration costs (2) 6,226 8,880
Interest costs (3) 3,719 2,471
Amortization (4) 27,919 21,672
Tax (expense) benefit from prior years (5) (462 ) 20,681
Sale of investments (6) (2,865 ) -
IRS consulting fee (7) -   (47 )
Adjusted non-GAAP income tax provision $ 98,589   $ 80,320  
 
Total adjustments $ (91,456 ) $ (69,383 )
 
GAAP earnings per diluted share $ 3.13 $ 2.73
Adjustments * $ 1.92 $ 1.46
Adjusted non-GAAP earnings per diluted share $ 4.99 $ 4.17

* The reconciliation of net income per share from GAAP to Adjusted non-GAAP may not foot since each is calculated independently.

The Company discloses Adjusted non-GAAP Earnings Per Share ("EPS") as a supplemental non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Adjusted non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company's performance. Accordingly, the Company believes that the presentation of this Adjusted non-GAAP financial measure provides useful information to investors.

Adjusted non-GAAP EPS is not in accordance with, or an alternative to, net income per share and may be different from non-GAAP measures with similar or even identical names used by other companies. In addition, this Adjusted non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company's results of operations determined in accordance with GAAP.

Non-GAAP Financial Measures

To supplement its condensed consolidated financial statements, which are prepared and presented in accordance with US GAAP, the Company uses the following Non-GAAP financial measures: Adjusted EBITDA, Adjusted non-GAAP net income, and Adjusted non-GAAP diluted EPS (collectively the "Non-GAAP financial measures"). The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. The Company uses these Non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. The Company believes that they provide useful information about core operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.

(1) Share Based Compensation. The Company excludes stock-based compensation because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. The Company further believes this measure is useful to investors in that it allows for greater transparency to certain line items in its financial statements. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(2) Acquisition Related Integration Costs. The Company excludes certain acquisition and related integration costs such as severance, lease terminations, retention bonuses and other acquisition-specific items. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(3) Interest Costs. In June 2014, the Company issued $402.5 million aggregate principal amount of 3.25% convertible senior notes. In accordance with GAAP, the Company separately accounts for the value of the liability and equity features of its outstanding convertible senior notes in a manner that reflects the Company's non-convertible debt borrowing rate. The value of the conversion feature, reflected as a debt discount, is amortized to interest expense over time. Accordingly, the Company recognizes imputed interest expense on its convertible senior notes of approximately 5.8% in its income statement. The Company excludes the difference between the imputed interest expense and the coupon interest expense of 3.25% because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding core operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(4) Amortization. The Company excludes amortization of patents and acquired intangible assets because it is non-cash in nature and because the Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results and comparisons to peers, many of which similarly exclude this item.

(5) Tax Benefits from Prior Years. The Company excludes certain income tax-related items in respect of income tax audit settlements and their related FIN 48 accrual reversals. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

(6) Gain on Sale of Investment. The Company excludes the gain on sale of its strategic equity investment in Carbonite, Inc. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

(7) IRS Consulting Fee. The Company excludes IRS consulting fees related to IRS audit appeals and settlements. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

(8) Convertible Debt Dilution. The Company excludes convertible debt dilution from diluted EPS. The Company believes that the Non-GAAP financial measures excluding this item provide meaningful supplemental information regarding operational performance. In addition, excluding this item from the Non-GAAP measures facilitates comparisons to historical operating results.

The Company presents Adjusted non-GAAP Cost of Revenues, Adjusted non-GAAP Research, Development and Engineering, Adjusted non-GAAP Sales and Marketing, Adjusted non-GAAP General and Administrative, Adjusted non-GAAP Interest Expense, Adjusted non-GAAP Other Expense (Income), Adjusted non-GAAP Income Tax Provision and Adjusted non-GAAP Net Income because the Company believes that these provide useful information about our operating results and enhance the overall understanding of past financial performance and future prospects.

   
j2 GLOBAL, INC.
NET INCOME TO ADJUSTED EBITDA RECONCILIATION
THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED, IN THOUSANDS)
 

The following table sets forth a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

 
Three Months Ended December 31, Twelve Months Ended December 31,
2016   2015 2016   2015
 
Net income $ 43,158 $ 35,467 $ 152,439 $ 133,636
Plus:
Interest expense, net 10,400 11,005 41,370 42,458
Other expense (income), net (438 ) (384 ) (10,243 ) 5
Income tax expense 15,041 6,966 59,000 23,283
Depreciation and amortization 33,522 29,578 122,091 93,213
Reconciliation of GAAP to Adjusted non-GAAP financial measures:
Share-based compensation and the associated payroll tax expense 3,703 2,851 13,650 11,793
Acquisition-related integration costs 12,973 14,663 18,782 25,448
Indirect tax (benefit) expense from prior years (1,900 ) - (1,000 ) 3,651
IRS consulting fee - - - (204 )
       
Adjusted EBITDA $ 116,459   $ 100,146   $ 396,089   $ 333,283  

Adjusted EBITDA as calculated above represents earnings before interest and other expense, net, income tax expense, depreciation and amortization and the items used to reconcile GAAP to Adjusted non-GAAP financial measures, including (1) share-based compensation, (2) certain acquisition-related integration costs, (3) additional indirect tax (benefit) expense from prior years, and (4) IRS consulting fee. We disclose Adjusted EBITDA as a supplemental non-GAAP financial performance measure as we believe it is a useful metric by which to compare the performance of our business from period to period. We understand that measures similar to Adjusted EBITDA are broadly used by analysts, rating agencies and investors in assessing our performance. Accordingly, we believe that the presentation of Adjusted EBITDA provides useful information to investors.

Adjusted EBITDA is not in accordance with, or an alternative to, net income, and may be different from non-GAAP measures used by other companies. In addition, Adjusted EBITDA is not based on any comprehensive set of accounting rules or principles. This Adjusted non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company's results of operations determined in accordance with GAAP.

         
j2 GLOBAL, INC.
NON-GAAP FINANCIAL MEASURES
(UNAUDITED, IN THOUSANDS)
 
Q1 Q2 Q3 Q4 YTD

2016

Net cash provided by operating activities $ 64,524 $ 67,528 $ 60,488 $ 89,847 $ 282,387
Less: Purchases of property and equipment (4,321 ) (4,865 ) (8,261 ) (7,299 ) (24,746 )
Add: Excess tax benefit share-based compensation 264   833   974   200   2,271  
Free cash flows $ 60,467   $ 63,496   $ 53,201   $ 82,748   $ 259,912  
 
 
Q1 Q2 Q3 Q4 YTD

2015

Net cash provided by operating activities $ 45,716 $ 51,894 $ 50,963 $ 80,488 $ 229,061
Less: Purchases of property and equipment (2,401 ) (4,554 ) (4,972 ) (5,370 ) (17,297 )
Add: Excess tax benefit (expense) share-based compensation 334 1,770 2,437 (55 ) 4,486
Add: IRS settlement* - 5,753   1,164   - 6,917  
Free cash flows $ 43,649   $ 54,863   $ 49,592   $ 75,063   $ 223,167  

* Free cash flows of $54.9 million and $49.6 million for Q2 2015 and Q3 2015, respectively, were before the effect of payments associated with taxes for prior periods under audit.

The Company discloses Free Cash Flows as supplemental Non-GAAP financial performance measure, as it believes it is a useful metric by which to compare the performance of its business from period to period. The Company also understands that this Non-GAAP measure is broadly used by analysts, rating agencies and investors in assessing the Company's performance. Accordingly, the Company believes that the presentation of this Non-GAAP financial measure provides useful information to investors.

Free Cash Flows is not in accordance with, or an alternative to, Cash Flows from Operating Activities, and may be different from Non-GAAP measures with similar or even identical names used by other companies. In addition, the Non-GAAP measure is not based on any comprehensive set of accounting rules or principles. This Non-GAAP measure has limitations in that it does not reflect all of the amounts associated with the Company's results of operations determined in accordance with GAAP.

           
j2 GLOBAL, INC.
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE MONTHS ENDED DECEMBER 31, 2016
(UNAUDITED, IN THOUSANDS)
 
Cloud Cloud IP Digital
Connect Services Licensing Media j2 Global, Inc. Total
 
Revenues
GAAP revenues $ 92,982 $ 48,857 $ 1,158 $ 108,840 $ - $ 251,837
 
Gross profit
GAAP gross profit $ 76,452 $ 35,231 $ 1,157 $ 98,768 $ - $ 211,608
Non-GAAP adjustments:
Share-based compensation 103 20 - - - 123
Acquisition Related Integration Costs - - - - - -
Amortization 89 1,401 - - - 1,490
Additional Tax Expense (Benefit) from Prior Years -   -   -   -   -   -  
Adjusted non-GAAP gross profit $ 76,644 $ 36,652 $ 1,157 $ 98,768 $ - $ 213,221
 
Operating profit
GAAP operating profit $ 45,507 $ 11,034 $ (1,243 ) $ 17,460 $ (4,597 ) $ 68,161
Non-GAAP adjustments:
Share-based compensation 950 515 - 711 1,527 3,703
Acquisition related integration costs 50 - - 12,923 - 12,973
Amortization 5,225 11,225 1,569 9,377 - 27,396
Additional Tax Expense (Benefit) from Prior Years (1,900 ) - - - - (1,900 )
Sale of investments -   -   -   -   -   -  
Adjusted non-GAAP operating profit $ 49,832 $ 22,774 $ 326 $ 40,471 $ (3,070 ) $ 110,333
 
Depreciation 1,224   1,320   -   3,582   -   6,126  
Adjusted EBITDA $ 51,056   $ 24,094   $ 326   $ 44,053   $ (3,070 ) $ 116,459  
 
NOTE: Table above excludes certain intercompany allocations
 
 
j2 GLOBAL, INC.
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
THREE MONTHS ENDED DECEMBER 31, 2015
(UNAUDITED, IN THOUSANDS)
           
Cloud Cloud IP Digital
Connect Services Licensing Media j2 Global, Inc. Total
 
Revenues
GAAP revenues $ 88,906 $ 44,930 $ 1,117 $ 69,870 $ - $ 204,823
 
Gross profit
GAAP gross profit $ 74,676 $ 31,008 $ 1,117 $ 63,414 $ - $ 170,215
Non-GAAP adjustments:
Share-based compensation 100 - - - - 100
Acquisition Related Integration Costs - 327 - - - 327
Amortization 122   1,192   -   -   -   1,314
Adjusted non-GAAP gross profit $ 74,898 $ 32,527 $ 1,117 $ 63,414 $ - $ 171,956
 
Operating profit
GAAP operating profit $ 42,961 $ 6,743 $ (970 ) $ 8,981 $ (4,661 ) $ 53,054
Non-GAAP adjustments:
Share-based compensation 1,219 - - 447 1,185 2,851
Acquisition related integration costs - 647 - 14,016 - 14,663
Amortization 5,205   11,673   1,625   6,133   -   24,636
Adjusted Non-GAAP operating profit $ 49,385 $ 19,063 $ 655 $ 29,577 $ (3,476 ) $ 95,204
 
Depreciation 1,396   974   -   2,572   -   4,942
Adjusted EBITDA $ 50,781   $ 20,037   $ 655   $ 32,149   $ (3,476 ) $ 100,146
 
NOTE: Table above excludes certain intercompany allocations
 
 
j2 GLOBAL, INC.
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
TWELVE MONTHS ENDED DECEMBER 31, 2016
(UNAUDITED, IN THOUSANDS)
           
Cloud Cloud IP Digital
Connect Services Licensing Media j2 Global, Inc. Total
 
Revenues
GAAP Revenues $ 368,682 $ 193,711 $ 4,545 $ 307,317 $ - $ 874,255
 
Gross Profit
GAAP Gross Profit $ 305,061 $ 136,794 $ 4,537 $ 280,763 $ - $ 727,155
Non-GAAP Adjustments:
Share-based Compensation 397 39 - - - 436
Amortization 464   4,916   -   -   -   5,380  
Adjusted Non-GAAP Gross Profit $ 305,922 $ 141,749 $ 4,537 $ 280,763 $ - $ 732,971
 
Operating Profit
GAAP Operating Profit $ 172,116 $ 43,132 $ (4,207 ) $ 50,539 $ (19,014 ) $ 242,566
Non-GAAP Adjustments:
Share-based Compensation 4,632 1,010 - 2,392 5,616 13,650
Acquisition Related Integration Costs 203 - - 18,579 - 18,782
Amortization 20,334 43,443 6,118 31,046 - 100,941
Additional Tax Expense (Benefit) from Prior Years (1,150 ) -   -   150   -   (1,000 )
Adjusted Non-GAAP Operating Profit $ 196,135 $ 87,585 $ 1,911 $ 102,706 $ (13,398 ) $ 374,939
 
Depreciation 5,209   4,429   -   11,512   -   21,150  
Adjusted EBITDA $ 201,344   $ 92,014   $ 1,911   $ 114,218   $ (13,398 ) $ 396,089  
 
NOTE: Table above excludes certain intercompany allocations
 
 
j2 GLOBAL, INC.
RECONCILIATION OF GAAP TO ADJUSTED NON-GAAP FINANCIAL MEASURES
TWELVE MONTHS ENDED DECEMBER 31, 2015
(UNAUDITED, IN THOUSANDS)
           
Cloud Cloud IP Digital
Connect Services Licensing Media j2 Global, Inc. Total
 
Revenues
GAAP Revenues $ 353,893 $ 144,980 $ 5,765 $ 216,177 $ - $ 720,815
 
Gross Profit
GAAP Gross Profit $ 296,508 $ 101,156 $ 5,765 $ 194,428 $ - $ 597,857
Non-GAAP Adjustments:
Share-based Compensation 373 - - - - 373
Acquisition Related Integration Costs - 327 - - - 327
Amortization 489   2,887   -   -   -   3,376  
Adjusted Non-GAAP Gross Profit $ 297,370 $ 104,370 $ 5,765 $ 194,428 $ - $ 601,933
 
Operating Profit
GAAP Operating Profit $ 168,855 $ 23,377 $ (3,520 ) $ 30,240 $ (19,570 ) $ 199,382
Non-GAAP Adjustments:
Share-based Compensation 4,519 - - 1,803 5,471 11,793
Acquisition Related Integration Costs 332 1,326 - 22,975 815 25,448
Amortization 17,972 29,179 7,261 22,865 - 77,277
Additional Tax Expense (Benefit) from Prior Years 3,651 - - - - 3,651
IRS consulting fee (204 ) -   -   -   -   (204 )
Adjusted Non-GAAP Operating Profit $ 195,125 $ 53,882 $ 3,741 $ 77,883 $ (13,284 ) $ 317,347
 
Depreciation 5,515   3,277   -   7,144   -   15,936  
Adjusted EBITDA $ 200,640   $ 57,159   $ 3,741   $ 85,027   $ (13,284 ) $ 333,283  
 
NOTE: Table above excludes certain intercompany allocations


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