ZIFF DAVIS, INC. Forward-Looking Information
In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - "Risk Factors" of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (together, the "Risk Factors"), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures About Market Risk." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with theSEC . Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to: •Sustain growth or profitability, particularly in light of an uncertainU.S. or worldwide economy, including inflation, supply chain and other factors and their related impacts on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;
•Maintain and increase our customer base and average revenue per user;
•Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations;
•Acquire businesses on acceptable terms and successfully integrate and realize anticipated synergies from such acquisitions;
•Continue to expand our businesses and operations internationally in the wake of numerous risks, including adverse currency fluctuations, difficulty in staffing and managing international operations, higher operating costs as a percentage of revenues, or the implementation of adverse regulations; •Maintain our financial position, operating results and cash flows in the event that we incur new or unanticipated costs or tax liabilities, including those relating to federal and state income tax and indirect taxes, such as sales, value-added and telecommunication taxes;
•Accurately estimate the assumptions underlying our effective worldwide tax rate;
•Maintain favorable relationships with critical third-party vendors whose financial condition will not negatively impact the services they provide;
•Create compelling digital media content causing increased traffic and advertising levels; additional advertisers or an increase in advertising spend; and effectively target digital media advertisements to desired audiences;
•Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure or security breach; effectively maintaining and managing our billing systems; time and resources required to manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures;
•Compete with other similar providers with regard to price, service, and functionality;
•Achieve business and financial objectives in light of burdensome domestic and international telecommunications, internet or other regulations, including regulations related to data privacy, access, security, retention, and sharing;
•Successfully manage our growth, including but not limited to our operational and personnel-related resources, and integration of newly acquired businesses;
•Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return;
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•Successfully develop and protect our intellectual property, both domestically
and internationally, including our brands, patents, trademarks and domain names,
and avoid infringing upon the proprietary rights of others;
•Recruit and retain key personnel; and
•Realize the expected benefits of the cloud fax spin-off transaction or the sale of the B2B Backup business.
In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics including the COVID-19 outbreak and other catastrophic events outside of our control, including as to COVID-19 the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us. OverviewZiff Davis, Inc. (formerlyJ2 Global, Inc. ) was incorporated in 2014 as aDelaware corporation through the creation of a holding company structure. Our Cybersecurity andMartech businesses are operated by our wholly owned subsidiary,J2 Global Ventures, LLC . Prior to the spin-off of Consensus Cloud Solutions, Inc. ("Consensus"), our Cybersecurity andMartech businesses were operated by our former wholly owned subsidiaryJ2 Cloud Services, LLC (formerlyJ2 Cloud Services, Inc. ), which was founded in 1995, and subsidiaries ofJ2 Cloud Services, LLC .Ziff Davis, Inc. , together with its subsidiaries ("Ziff Davis", "the Company", "our", "us" or "we"), is a vertically focused digital media and internet company. Our Digital Media business specializes in the technology, shopping, gaming, and healthcare markets, offering content, tools and services to consumers and businesses. Our Cybersecurity andMartech business provides cloud-based subscription services to consumers and businesses including cybersecurity, privacy and marketing technology. InFebruary 2021 , we sold certain Voice assets in theUnited Kingdom and inSeptember 2021 , we sold our B2B Backup business. InOctober 2021 we completed the separation of our cloud fax business (the "Separation") into an independent publicly traded company, Consensus. The accounting requirements for reporting the Separation of Consensus as a discontinued operation were met when the Separation was completed onOctober 7, 2021 . Accordingly, the accompanying Condensed Consolidated Financial Statements for all periods presented reflect the results of the Consensus business as a discontinued operation. Ziff Davis retained a 19.9% interest in Consensus following the Separation (the "Investment in Consensus"). Ziff Davis did not retain a controlling interest in Consensus. OnJune 10, 2022 , the Company entered into a Fifth Amendment to its Credit Agreement and onSeptember 15, 2022 , the Company entered into a Sixth Amendment to its Credit Agreement, each withMUFG 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. DuringJune 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. DuringSeptember 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 ofSeptember 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. Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees. Our Cybersecurity andMartech business generates revenues primarily from recurring fixed and variable usage-based subscription and licensing fees. -48- -------------------------------------------------------------------------------- In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel and enter into new markets.
Our consolidated revenues are currently generated from two basic business
models, each with different financial profiles and variability. Our Digital
Media business is driven primarily by advertising revenues, has relatively
higher sales and marketing expense and has seasonal strength in the fourth
quarter. Our Cybersecurity and
Performance Metrics
Revenues from external customers classified by revenue source are as follows (in
thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Digital Media
Advertising(1) $ 186,921 $ 198,794 $ 546,186 $ 574,465
Subscription(1) 64,780 52,010 179,257 145,935
Other(1) 12,195 11,625 31,980 22,880
Total Digital Media revenues $ 263,896 $ 262,429 $ 757,423 $ 743,280
Cybersecurity and Martech
Subscription $ 78,192 $ 93,071 $ 237,596 $ 265,580 Total Cybersecurity and
Elimination of inter-segment revenues (215) (356) (722) (766) Total Revenues$ 341,873 $ 355,144 $ 994,297 $ 1,008,094 We use certain metrics to generally assess the operational and financial performance of our businesses. We have changed these metrics effectiveJanuary 1, 2022 , and the following descriptions align with the metrics management now uses to monitor the performance of its various advertising and subscription-based businesses. For our advertising businesses, net advertising revenue retention is an indicator of our ability to retain the spend of our existing advertisers year over year, which we view as a reflection of the effectiveness of our advertising platform. Similarly, we monitor the number of our advertisers and the revenue per advertiser (as defined) as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions. For our subscription and licensing businesses, the number of subscribers that we serve is an indicator of our customer retention and growth. The average monthly revenue per subscriber and the churn rate also contribute to insights that contribute to certain of our business planning decisions. -49- -------------------------------------------------------------------------------- The following table sets forth certain key operating metrics for our Digital Media advertising business for the three months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 Net advertising revenue retention (1) 94.1 % 114.1 % Advertisers (2)$ 1,953
1,908
Quarterly revenue per advertiser (3)$ 95,710 $ 104,189 (1) Net advertising revenue retention equals (i) the trailing twelve month revenue recognized related to prior year advertisers in the current year period (excluding revenue from acquisitions during the stub period) divided by (ii) the trailing twelve month revenue recognized related to prior year advertisers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes advertisers that generated less than$10,000 of revenue in the measurement period. (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 andMartech subscription and licensing businesses for the three months endedSeptember 30, 2022 and 2021:
Three Months Ended
2021 (excluding 2021 (including
2022 disposed assets)(1) disposed assets) (1)
Subscribers (in thousands) (2) 3,050 2,290 2,318
Average quarterly revenue per subscriber (3) $46.87 $59.08 $62.51
Churn rate (4) 3.55% 2.99% 2.86%
(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 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. The presentation of this
financial information is not intended to be considered in isolation or as a
substitute for, or superior to, the financial information prepared and presented
in accordance with U.S. GAAP.
(2) Represents the quarterly average of the end of month subscriber counts for
both the Digital Media and Cybersecurity and Martech businesses. Cybersecurity
and Martech subscribers are defined as a direct customer, including customers
who have paused but not cancelled their subscription. If the company provides
services through a reseller or a partner and the Company does not have
visibility into the number of underlying subscribers, the reseller or partner is
counted as one subscriber.
(3) Represents quarterly subscription revenues divided by customers in the table
above.
(4) Churn rate is calculated as (i) the average revenue per subscription in the
prior month multiplied by the number of cancellations in the current month,
calculated at each business and aggregated; divided by (ii) subscription revenue
in the current month, calculated at each business and aggregated. For Ookla,
this is calculated by taking the sum of the monthly revenue from the specific
cancelled agreements.
Critical Accounting Policies and Estimates
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2021 Annual Report on Form 10-K filed with theSEC onMarch 15, 2022 . During the three and nine months endedSeptember 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. -50- --------------------------------------------------------------------------------
Results of Operations for the Three and Nine Months Ended
Digital Media
We expect revenue for fiscal year 2022 to be higher compared to the prior year driven by acquisitions and organic growth in certain of our businesses. We expect the Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, and we continue to expand our advertising platforms. The main focus of our platform monetization programs is to provide relevant and useful advertising to visitors to our websites, provide meaningful content that informs and shapes purchase intent, and leverage our brand and editorial assets into subscription platforms. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks, and improve the effectiveness of our content in driving purchase decisions and subscriptions.
The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising revenues from our websites has generally exceeded that from third-party websites. This trend has had a positive impact on our operating margins, and we expect that this will continue for the foreseeable future.
We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space, but with different business models, may impact Digital Media's overall operating profit margins.
Cybersecurity and
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 andMartech service offerings is to reduce or eliminate costs, increase sales and enhance productivity, mobility, business continuity and security of our customers as the technologies and devices they use evolve over time. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers. We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space but with different business models, may impact Cybersecurity andMartech ' overall operating profit margins.
Consolidated
Based on the trends discussed above with respect to our Digital Media and Cybersecurity andMartech businesses, we anticipate our consolidated revenue for fiscal year 2022 to be slightly below the prior year. We expect operating profit as a percentage of revenues to be generally consistent with 2021's operating profit margins. Revenues (in thousands, except
percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2022 2021 2022 2021
Revenues $ 341,873 $ 355,144 (4)% $ 994,297 $ 1,008,094 (1)%
Our revenues consist of revenues from our Digital Media and Cybersecurity and
Martech businesses. Digital Media revenues primarily consist of advertising
revenues and subscriptions earned through the granting of access to, or delivery
of, certain data products or services to customers, fees paid for generating
business leads, and licensing and sale of editorial content
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and trademarks. Cybersecurity and Martech revenues primarily consist of revenues
from "fixed" customer subscription revenues and "variable" revenues generated
from actual usage of our services.
Our revenues 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 Three Months Ended September
percentages) 30, Percentage Change Nine Months Ended September 30, Percentage Change
2022 2021 2022 2021
Cost of revenue $ 52,603 $ 49,698 6% $ 144,707 $ 142,335 2%As a percent of revenue 15 % 14 % 15 % 14 % Cost of revenues is primarily comprised of costs associated with content fees, editorial and production costs and hosting costs. The increase in cost of revenues for the three months endedSeptember 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 endedSeptember 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$12.8 million less in cost of revenues related to the sale of the B2B Backup business. Operating Expenses Sales and Marketing. (in thousands, except percentages) Three Months Ended September 30, Percentage Change Nine Months Ended September 30, Percentage Change 2022 2021 2022 2021 Sales and Marketing$ 119,474 $ 126,577 (6)%$ 361,013 $ 354,949 2% As a percent of revenue 35 % 36 % 36 % 35 % Our sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers. The decrease in sales and marketing expenses during the three months endedSeptember 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 andMartech 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 endedSeptember 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. -52- --------------------------------------------------------------------------------
Research, Development and Engineering.
(in thousands, except Three Months Ended September percentages)
30, Percentage
Change Nine Months Ended
2022 2021 2022 2021
Research, Development and $ 17,735 $ 19,619 (10)% $ 55,883 $ 56,999 (2)%
Engineering
As a percent of revenue 5 % 6 % 6 % 6 % Our research, development and engineering costs consist primarily of personnel-related expenses. The decrease in research, development and engineering costs for the three months endedSeptember 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 endedSeptember 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 September 30, Percentage Change Nine Months Ended September 30, Percentage Change
2022 2021 2022 2021
General and $ 95,658 $ 114,240 (16)% $ 299,842 $ 339,236 (12)%
Administrative
As a percent of revenue 28 % 32 % 30 % 34 %
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 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 $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.
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Share-Based Compensation
The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of revenues $ 63$ 70 $ 289$ 220 Operating expenses: Sales and marketing 772 335 2,447 879 Research, development and engineering 567 514 2,048 1,390 General and administrative 4,984 5,484 16,022 15,513 Total $ 6,386$ 6,403 $ 20,806$ 18,002
Non-Operating Income and Expenses
Interest expense, net. 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$8.6 million and$14.5 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$28.4 million and$57.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Interest expense, net decreased during the three months endedSeptember 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 endedSeptember 30, 2022 primarily due to approximately$11.5 million less interest expense due to the redemption of our 3.25% Convertible Notes inAugust 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 endedSeptember 30, 2022 and 2021, respectively, and$11.5 million and zero during the nine months endedSeptember 30, 2022 and 2021, respectively. The gains on debt extinguishment during the three and nine months endedSeptember 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 endedSeptember 30, 2022 and 2021, respectively. Loss on sale of businesses, net was zero and$21.8 million for the nine months endedSeptember 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 endedSeptember 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 theUnited 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 endedSeptember 30, 2022 and 2021, respectively, and our unrealized loss on short-term investment was$14.2 million and zero during the nine months endedSeptember 30, 2022 and 2021, respectively. The unrealized gain (loss) recorded during the three and nine months endedSeptember 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$0.5 million and zero for the three months endedSeptember 30, 2022 and 2021, respectively, and$(47.8) million and$(16.7) million for the nine months endedSeptember 30, 2022 and 2021, respectively. Our gain on investments, net increased for the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 was due to an impairment on certain investments. -54- -------------------------------------------------------------------------------- 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$4.2 million and$0.1 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$13.0 million and$(0.5) million for the nine months endedSeptember 30, 2022 and 2021, respectively. Other income (loss), net increased for the three and nine months endedSeptember 30, 2022 compared to the prior year periods due primarily to gains on foreign currency exchange.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized. Provision for income taxes amounted to income tax (expense) benefit of$(18.1) million and$2.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$(33.2) million and$19.9 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Our effective tax rate was 45.9% and (44.2)% for the three months endedSeptember 30, 2022 and 2021, respectively, and 83.9% and 142.3% for the nine months endedSeptember 30, 2022 and 2021, respectively. Our effective tax rate for the three and nine months endedSeptember 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 ofSeptember 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 endedSeptember 30, 2022 .
The increase in our effective income tax rate for the three months ended
1.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 ; and 2.an increase in our effective income tax rate during 2022 forU.S. state and local taxes due to a greater portion of our income being subject to tax in theU.S. ; partially offset by
3.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
1.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 otherU.S. investments with corresponding tax benefits recognized; and 2.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 endedSeptember 30, 2022 ; partially offset by 3.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$11.3 million . Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient. -55- --------------------------------------------------------------------------------
(Loss) income from equity method investment, net. (Loss) income from equity method investment, net is generated from our investment in theOCV Fund I, LP (the "Fund") for which we receive annual audited financial statements. The investment in the Fund, including management fees, is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from the Fund. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline. The (loss) income from equity method investment, net was$(3.2) million and$(1.9) million net of tax benefit for the three months endedSeptember 30, 2022 and 2021, respectively, and$(10.1) million and$16.6 million , for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in income from equity method investment, net during the three and nine months endedSeptember 30, 2022 was primarily due to a decrease in the value of the underlying investments. During the three months endedSeptember 30, 2022 . the Company recognized no expense for management fees, and during the three months endedSeptember 30, 2021 , the Company recognized expense for management fees of$0.8 million , net of tax benefit. During the nine months endedSeptember 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
Our businesses are based on the organization structure used by management for making operating and investment decisions and for assessing performance and have been aggregated into two reportable segments: (i) Digital Media and (ii) Cybersecurity andMartech . 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. Identifiable assets by business are those assets used in the respective business' operations. Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets. All significant inter-business amounts are eliminated to arrive at our consolidated financial results.
Digital Media
The financial results are presented as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
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
Gross profit 232,887 238,650 676,040 673,409
Operating expenses 205,570 188,950 571,980 548,960
Operating income $ 27,317 $ 49,700 $ 104,060 $ 124,449
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
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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
The financial results are presented as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
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
Gross profit 56,595 66,884 174,251 192,638
Operating expenses 42,765 56,208 135,516 191,282
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.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Cash and Cash Equivalents and Investments
As ofSeptember 30, 2022 , we had cash, cash equivalents and investments of$801.0 million compared to$1,046.6 million atDecember 31, 2021 . AtSeptember 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 ofSeptember 30, 2022 , cash, cash equivalents and investments held within domestic and foreign jurisdictions were$682.6 million and$118.5 million , respectively. OnSeptember 25, 2017 , the Company entered into a commitment to invest$200 million (approximately 76.6% of equity) in the "Fund". The manager,OCV Management, LLC , and general partner of the Fund are entities with respect to whichRichard S. Ressler , former Chairman of the Board of Directors (the "Board") of the Company, is indirectly the majority equity holder.Mr. Ressler's tenure with the Board of Directors of the Company ended as ofMay 10, 2022 . As a limited partner in the Fund, prior to the settlement of certain litigation generally related to the Company's investment in the Fund, inJanuary 2022 , the Company paid an annual management fee to the manager equal to 2.0% of capital commitments. In addition, subject to the terms and conditions of the Fund's limited partnership agreement, once the Company has received distributions equal to its invested capital, the Fund's general partner would be entitled to a carried interest equal to 20%. The Fund has a six year investment period, subject to certain exceptions. The commitment was approved by the Audit Committee of the Board in accordance with the Company's related-party transaction approval policy. At the time of the settlement of the litigation, the Company had invested approximately$128.8 million in the Fund. In connection with the settlement of the litigation, among other terms, no further capital calls will be made in connection with our investment in the Fund, nor will any management fees be paid by the Company to the manager. For more information related to the litigation, see Note 9 - Commitments and Contingencies in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated by reference into this Part I Item 2 for additional information.
Financings
OnJune 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. OnSeptember 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"). DuringJune 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. DuringSeptember 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
During the nine months ended
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 ofSeptember 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 endedSeptember 30, 2022 . As ofSeptember 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 ofSeptember 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 endedSeptember 30, 2022 . -58- -------------------------------------------------------------------------------- We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months.
Cash Flows
Our Condensed Consolidated Statements of Cash Flows for the nine months endedSeptember 30, 2021 include the activity from the cloud fax business, which was separated from the Company onOctober 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$293.2 million and$430.3 million for the nine months endedSeptember 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 nine months endedSeptember 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 atSeptember 30, 2022 andDecember 31, 2021 , respectively. Net cash used in investing activities was$199.9 million and$159.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in our net cash used in investing activities during the nine months endedSeptember 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 endedSeptember 30, 2022 and 2021, respectively. The increase in the net cash used in financing activities during the nine months endedSeptember 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
OnAugust 6, 2020 , our Board of Directors approved a program authorizing the repurchase of up to ten million shares of our common stock throughAugust 6, 2025 (the "2020 Program"). In connection with the authorization, the Company entered into certain Rule 10b5-1 trading plans with a broker-dealer to facilitate the repurchase program. During the three months endedSeptember 30, 2022 , the Company repurchased zero shares under the 2020 Program. The number of shares available for purchase as ofSeptember 30, 2022 is 6,327,154 shares of the Company's common stock.
Cumulatively at
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