UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 0-25965

j2 GLOBAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-1053457
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

6922 Hollywood Boulevard, Suite 500

Los Angeles, California 90028

(Address of principal executive offices)

(323) 860-9200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	JCOM	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ý    No  o   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	ý	Accelerated filer	o	Non-Accelerated filer	o	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐        No ý

As of August 6, 2019, the registrant had 48,917,254 shares of common stock outstanding.

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J2 GLOBAL, INC. AND SUBSIDIARIES 

FOR THE QUARTER ENDED JUNE 30, 2019

INDEX 

			PAGE
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (unaudited)	3
		Condensed Consolidated Statements of Income (unaudited)	4
		Condensed Consolidated Statements of Comprehensive Income (unaudited)	5
		Condensed Consolidated Statements of Cash Flows (unaudited)	6
		Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	7
		Notes to Condensed Consolidated Financial Statements (unaudited)	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	57
	Item 1A.	Risk Factors	57
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
	Item 3.	Defaults Upon Senior Securities	58
	Item 4.	Mine Safety Disclosures	58
	Item 5.	Other Information	58
	Item 6.	Exhibits	58
		Signature	59

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PART I.  FINANCIAL INFORMATION

Item 1.	Financial Statements

J2 GLOBAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except share and per share data)

	June 30, 2019				December 31, 2018
ASSETS
Cash and cash equivalents	$	155,476			$	209,474
Accounts receivable, net of allowances of $11,747 and $10,422, respectively	174,142				221,615
Prepaid expenses and other current assets	35,717				29,242
Total current assets	365,335				460,331
Long-term investments	104,002				83,828
Property and equipment, net	110,697				98,813
Operating lease right-of-use assets	66,922				—
Trade names, net	139,437				142,888
Patent and patent licenses, net	5,988				7,346
Customer relationships, net	233,414				191,208
Goodwill	1,589,704				1,380,376
Other purchased intangibles, net	182,753				185,026
Other assets	11,680				11,014
TOTAL ASSETS	$	2,809,932			$	2,560,830
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	204,692			$	166,521
Income taxes payable, current	9,775				12,915
Deferred revenue, current	147,915				127,568
Operating lease liabilities, current	18,066				—
Other current liabilities	7,265				318
Total current liabilities	387,713				307,322
Long-term debt	1,119,438				1,013,129
Deferred revenue, noncurrent	15,508				13,200
Operating lease liabilities, noncurrent	53,079				—
Income taxes payable, noncurrent	11,675				11,675
Liability for uncertain tax positions	49,148				59,644
Deferred income taxes, noncurrent	81,550				69,048
Other long-term liabilities	19,723				51,068
TOTAL LIABILITIES	1,737,834				1,525,086
Commitments and contingencies	—				—
Preferred stock, $0.01 par value. Authorized 1,000,000 and none issued	—				—
Preferred stock - Series A, $0.01 par value. Authorized 6,000; total issued and outstanding zero	—				—
Preferred stock - Series B, $0.01 par value. Authorized 20,000; total issued and outstanding zero	—				—
Common stock, $0.01 par value. Authorized 95,000,000; total issued 47,765,869 and 48,082,800 shares at June 30, 2019 and December 31, 2018, respectively; total outstanding 47,765,869 and 47,482,800 shares at June 30, 2019 and December 31, 2018, respectively.	478				481
Additional paid-in capital	365,687				354,210
Treasury stock, at cost (zero and 600,000 shares, at June 30, 2019 and December 31, 2018, respectively).	—				(42,543		)
Retained earnings	752,040				769,575
Accumulated other comprehensive loss	(46,107		)		(45,979		)
TOTAL STOCKHOLDERS’ EQUITY	1,072,098				1,035,744
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,809,932			$	2,560,830

See Notes to Condensed Consolidated Financial Statements

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J2 GLOBAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands except share and per share data)

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Total revenues	$	322,432			$	287,889			$	622,325			$	568,512
Cost of revenues (1)	60,266				47,749				111,279				95,894
Gross profit	262,166				240,140				511,046				472,618
Operating expenses:
Sales and marketing (1)	88,446				83,171				175,326				169,482
Research, development and engineering (1)	11,938				11,252				24,922				23,462
General and administrative (1)	105,168				91,334				203,322				179,133
Total operating expenses	205,552				185,757				403,570				372,077
Income from operations	56,614				54,383				107,476				100,541
Interest expense, net	17,335				15,502				33,354				31,254
Other (income) expense, net	(377		)		394				1,838				4,912
Income before income taxes and net (income) loss in earnings of equity method investment	39,656				38,487				72,284				64,375
Income tax expense	11,148				7,037				10,853				14,055
Net (income) loss in earnings of equity method investment	(4,081		)		2,971				(3,607		)		2,971
Net income	$	32,589			$	28,479			$	65,038			$	47,349
Net income per common share:
Basic	$	0.67			$	0.59			$	1.35			$	0.98
Diluted	$	0.66			$	0.57			$	1.32			$	0.95
Weighted average shares outstanding:
Basic	47,727,786				47,951,326				47,644,729				47,912,383
Diluted	49,102,879				49,218,521				48,806,492				48,962,835
(1) Includes share-based compensation expense as follows:
Cost of revenues	$	131			$	129			$	263			$	250
Sales and marketing	389				467				793				832
Research, development and engineering	361				355				719				788
General and administrative	5,981				6,116				10,173				11,617
Total	$	6,862			$	7,067			$	11,948			$	13,487

 

See Notes to Condensed Consolidated Financial Statements

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J2 GLOBAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Net income	$	32,589			$	28,479			$	65,038			$	47,349
Other comprehensive loss, net of tax:
Foreign currency translation adjustment	(1,177		)		(14,648		)		(686		)		(8,338		)
Change in fair value on available-for-sale investments, net of tax expense (benefit) of $7 and $184 for the three and six months ended June 30, 2019, respectively, and ($512) and ($512) for the three and six months ended June 30, 2018, respectively	(2		)		923				558				(1,577		)
Other comprehensive loss, net of tax	(1,179		)		(13,725		)		(128		)		(9,915		)
Comprehensive income	$	31,410			$	14,754			$	64,910			$	37,434

See Notes to Condensed Consolidated Financial Statements

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J2 GLOBAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended June 30,
	2019				2018
Cash flows from operating activities:
Net income	$	65,038			$	47,349
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	106,212				86,475
Amortization of financing costs and discounts	5,995				5,749
Amortization of operating lease assets	9,038				—
Share-based compensation	11,948				13,487
Provision for doubtful accounts	5,686				8,729
Deferred income taxes, net	3,908				453
Changes in fair value of contingent consideration	8,475				9,900
(Income) loss on equity investments	(4,765		)		7,614
Decrease (increase) in:
Accounts receivable	42,930				50,306
Prepaid expenses and other current assets	(3,277		)		649
Other assets	(1,233		)		2,252
Increase (decrease) in:
Accounts payable and accrued expenses	(12,452		)		(30,296		)
Income taxes payable	(3,810		)		(2,436		)
Deferred revenue	(3,292		)		4,637
Operating lease liabilities	(8,833		)		—
Liability for uncertain tax positions	(10,811		)		2,440
Other long-term liabilities	1,454				(1,015		)
Net cash provided by operating activities	212,211				206,293
Cash flows from investing activities:
Purchases of equity method investment	(14,668		)		(21,684		)
Purchases of available-for-sale investments	—				(500		)
Purchases of property and equipment	(30,791		)		(28,558		)
Acquisition of businesses, net of cash received	(266,000		)		(103,202		)
Purchases of intangible assets	—				(183		)
Net cash used in investing activities	(311,459		)		(154,127		)
Cash flows from financing activities:
Proceeds from line of credit	100,000				—
Repurchase of common stock	(3,807		)		(3,356		)
Issuance of common stock under employee stock purchase plan	1,995				135
Exercise of stock options	5,274				1,340
Dividends paid	(43,507		)		(39,897		)
Deferred payments for acquisitions	(14,269		)		(1,308		)
Other	(887		)		(138		)
Net cash provided by (used in) financing activities	44,799				(43,224		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	451				(2,120		)
Net change in cash, cash equivalents and restricted cash	(53,998		)		6,822
Cash, cash equivalents and restricted cash at beginning of period	209,474				350,945
Cash, cash equivalents and restricted cash at end of period	$	155,476			$	357,767

See Notes to Condensed Consolidated Financial Statements

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J2 GLOBAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months Ended June 30, 2018 and 2019

(unaudited, in thousands, except share amounts)

																	Accumulated
	Common stock					Additional paid-in			Treasury stock					Retained			other comprehensive			Total Stockholders’
	Shares		Amount			capital			Shares		Amount			earnings			income/(loss)			Equity
Balance, April 1, 2018	47,893,150		$	479		$	332,407		—		$	—		$	723,562		$	(25,280	)	$	1,031,168
Net income	—		—			—			—		—			28,479			—			28,479
Other comprehensive income, net of tax benefit of $512	—		—			—			—		—			—			(13,725		)	(13,725		)
Dividends ($0.4150 per share)	—		—			—			—		—			(20,452		)	—			(20,452		)
Exercise of stock options	32,329		—			746			—		—			—			—			746
Issuance of shares under Employee Stock Purchase Plan	930		—			71			—		—			—			—			71
Vested restricted stock	100,235		1			(1		)	—		—			—			—			—
Repurchase and retirement of common stock	(31,839	)	—			(1,848		)	—		—			(897		)	—			(2,745		)
Share based compensation	—		—			7,034			—		—			33			—			7,067
Balance, June 30, 2018	47,994,805		$	480		$	338,409		—		$	—		$	730,725		$	(39,005	)	$	1,030,609

																	Accumulated
	Common stock					Additional paid-in			Treasury stock					Retained			other comprehensive			Total Stockholders’
	Shares		Amount			capital			Shares		Amount			earnings			income/(loss)			Equity
Balance, April 1, 2019	47,661,015		$	477		$	358,932		—		$	—		$	742,173		$	(44,928	)	$	1,056,654
Net income	—		—			—			—		—			32,589			—			32,589
Other comprehensive income, net of tax expense of $7	—		—			—			—		—			—			(1,179		)	(1,179		)
Dividends ($0.4550 per share)	—		—			—			—		—			(22,208		)	—			(22,208		)
Exercise of stock options	500		—			15			—		—			—			—			15
Issuance of shares under Employee Stock Purchase Plan	32,154		—			1,995			—		—			—			—			1,995
Vested restricted stock	101,680		1			(1		)	—		—			—			—			—
Repurchase and retirement of common stock	(29,480	)	—			(2,086		)	—		—			(544		)	—			(2,630		)
Share based compensation	—		—			6,832			—		—			30			—			6,862
Balance, June 30, 2019	47,765,869		$	478		$	365,687		—		$	—		$	752,040		$	(46,107	)	$	1,072,098

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																	Accumulated
	Common stock					Additional paid-in			Treasury stock					Retained			other comprehensive			Total Stockholders’
	Shares		Amount			capital			Shares		Amount			earnings			income/(loss)			Equity
Balance, January 1, 2018	47,854,510		$	479		$	325,854		—		$	—		$	723,062		$	(29,090	)	$	1,020,305
Cumulative effect of change in accounting principle	—		—			—			—		—			1,599			—			1,599
Net income	—		—			—			—		—			47,349			—			47,349
Other comprehensive income, net of tax benefit of $512	—		—			—			—		—			—			(9,915		)	(9,915		)
Dividends ($0.8200 per share)	—		—			—			—		—			(40,335		)	—			(40,335		)
Exercise of stock options	60,008		—			1,340			—		—			—			—			1,340
Issuance of shares under Employee Stock Purchase Plan	1,781		—			135			—		—			—			—			135
Vested restricted stock	118,287		1			(1		)	—		—			—			—			—
Repurchase and retirement of common stock	(39,781	)	—			(2,343		)	—		—			(1,013		)	—			(3,356		)
Share based compensation	—		—			13,424			—		—			63			—			13,487
Balance, June 30, 2018	47,994,805		$	480		$	338,409		—		$	—		$	730,725		$	(39,005	)	$	1,030,609

																	Accumulated
	Common stock					Additional paid-in			Treasury stock					Retained			other comprehensive			Total Stockholders’
	Shares		Amount			capital			Shares		Amount			earnings			income/(loss)			Equity
Balance, January 1, 2019	48,082,800		$	481		$	354,210		(600,000	)	$	(42,543	)	$	769,575		$	(45,979	)	$	1,035,744
Net income	—		—			—			—		—			65,038			—			65,038
Other comprehensive income, net of tax expense $184	—		—			—			—		—			—			(128		)	(128		)
Dividends ($0.9000 per share)	—		—			—			—		—			(43,966		)	—			(43,966		)
Exercise of stock options	156,038		2			5,272			—		—			—			—			5,274
Issuance of shares under Employee Stock Purchase Plan	32,154		—			1,995			—		—			—			—			1,995
Vested restricted stock	140,757		1			(1		)	—		—			—			—			—
Repurchase and retirement of common stock	(45,880	)	—			(3,287		)	—		—			(520		)	—			(3,807		)
Retirement of treasury stock	(600,000	)	(6		)	(4,385		)	600,000		42,543			(38,152		)	—			—
Share based compensation	—		—			11,883			—		—			65			—			11,948
Balance, June 30, 2019	47,765,869		$	478		$	365,687		—		$	—		$	752,040		$	(46,107	)	$	1,072,098

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

1.	Basis of Presentation

J2 Global, Inc., together with its subsidiaries (“J2 Global”, the “Company”, “our”, “us”, or “we”), is a leading provider of internet services. Through our Cloud Services business, we provide cloud services to consumers and businesses and license our intellectual property (“IP”) to third parties. In addition, the Cloud Services business includes fax, voice, backup, security, consumer privacy and protection (“CPP”), and email marketing products. Our Digital Media business specializes in the technology, gaming, broadband, business to business (“B2B”), healthcare, and international markets, offering content, tools and services to consumers and businesses.

The accompanying interim condensed consolidated financial statements include the accounts of J2 Global and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements although the Company believes that the disclosures made are adequate to make that information not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report (Form 10-K) filed with the SEC on March 1, 2019. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

 

The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including judgments about investment classifications and the reported amounts of net revenue and expenses during the reporting period. The Company believes that its most significant estimates are those related to revenue recognition, valuation and impairment of investments, its assessment of ownership interests as variable interest entities and the related determination of consolidation, share-based compensation expense, assets acquired and liabilities assumed in connection with business combinations, long-lived and intangible asset impairment, contingent consideration, income taxes and contingencies and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors that the Company believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.

Allowances for Doubtful Accounts

J2 Global reserves for receivables it may not be able to collect. The reserves for the Company’s Cloud Services business are typically driven by the volume of credit card declines and past due invoices and are based on historical experience as well as an evaluation of current market conditions. The reserves for the Company’s Digital Media business are typically driven by past due invoices based on historical experience. On an ongoing basis, management evaluates the adequacy of these reserves.

Revenue Recognition

J2 Global recognizes revenue when the Company satisfies its obligation by transferring control of the goods or services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services (see Note 3 - Revenues).

Principal vs. Agent

The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company

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reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance under Topic 606 for principal-agent considerations and assesses: (i) if another party is involved in providing goods or services to the customer and (ii) whether the Company controls the specified goods or services prior to transferring control to the customer.

Sales Taxes

The Company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by the Company from a customer.

Fair Value Measurements

J2 Global complies with the provisions of the Financial Accounting Standards Board (“FASB”) ASC Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements. ASC 820 provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities.

As of June 30, 2019, the carrying value of cash and cash equivalents, accounts receivable, interest receivable, accounts payable, accrued expenses, interest payable, customer deposits and long-term debt are reflected in the financial statements at cost. With the exception of certain investments and long-term debt, cost approximates fair value due to the short-term nature of such instruments. The fair value of the Company’s outstanding debt was determined using the quoted market prices of available debt instruments with similar terms and maturities. As of the same dates, the carrying value of other long-term liabilities approximated fair value as the related interest rates approximate rates currently available to J2 Global.

Investments

The Company accounts for its investments in debt securities in accordance with ASC Topic No. 320, Investments - Debt Securities (“ASC 320”). Debt investments are typically comprised of corporate debt securities. J2 Global determines the appropriate classification of its investments at the time of acquisition and evaluates such determination at each balance sheet date. Trading securities are those investments that the Company intends to sell within a few hours or days and are carried at fair value, with unrealized gains and losses included in investment income. Available-for-sale debt securities are those investments J2 Global does not intend to hold to maturity and can be sold. Available-for-sale securities are carried at fair value with unrealized gains and losses included in other comprehensive income. Held-to-maturity securities are those investments which the Company has the ability and intent to hold until maturity and are recorded at amortized cost. All debt securities are accounted for on a specific identification basis.

The Company accounts for its investments in equity securities in accordance with ASC Topic No. 321, Investments - Equity Securities (“ASC 321”) which requires the accounting for equity investments (other than those accounted for using the equity method of accounting) generally be measured at fair value for equity securities with readily determinable fair values. For equity securities without a readily determinable fair value that are not accounted for by the equity method, the Company measures the equity security using cost, less impairment, if any, and plus or minus observable price changes arising from orderly transactions in the same or similar investment from the same issuer. Any unrealized gains or losses will be reported in current earnings (see Note 5 - Investments).

Variable Interest Entities (“VIE”)

A VIE requires consolidation by the entity’s primary beneficiary. The Company evaluates its investments in entities in which it is involved to determine if the entity is a VIE and if so, whether it holds a variable interest and is the primary beneficiary. The Company has determined that it holds a variable interest in its investment as a limited partner in the OCV Fund I, LP (“OCV Fund”, “OCV” or the “Fund”). In determining whether the Company is deemed to be the primary beneficiary of the VIE, both of the following characteristics must be present:

a) the Company has the power to direct the activities of the VIE that most significantly impacts the VIEs economic performance (the power criterion); and

b) the Company has the obligation to absorb losses of the VIE, or the right to receive benefits of the VIE, that could potentially be significant to the VIE (the economic criterion).

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The Company has concluded that, as a limited partner, although the obligations to absorb losses or benefit from the gains is not insignificant, the Company does not have “power” over OCV because it does not have the ability to direct the significant decisions which impact the economics of OCV. J2 believes that the OCV general partner, as a single decision maker, holds the ability to make the decisions about the activities that most significantly impacts the OCV Fund’s economic performance. As a result, the Company has concluded that it will not consolidate OCV, as it is not the primary beneficiary of the OCV Fund, and will account for this investment under the equity-method of accounting. See Note 5, “Investments”.

OCV qualifies as an investment company under ASC 946 - Financial Services, Investment Companies (“ASC 946”). Under ASC Topic 323, Investments - Equity Method and Joint Ventures, an investor that holds investments that qualify for specialized industry accounting for investment companies in accordance with ASC 946 should record its share of the earnings or losses, realized or unrealized, as reported by its equity method investees in the Condensed Consolidated Statements of Income.

The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag due to the timing and availability of financial information from OCV. 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.

Debt Issuance Costs and Debt Discount

J2 Global capitalizes costs incurred with borrowing and issuance of debt securities and records debt issuance costs and discounts as a reduction to the debt amount. These costs and discounts are amortized and included in interest expense over the life of the borrowing using the effective interest method. Debt issuance costs associated with entering into the Credit Facility are recorded on the Condensed Consolidated Balance Sheets as an asset and amortized and included in interest expense over the contractual term of the Credit Agreement.

Property and Equipment

Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of the minimum lease payments. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property and equipment range from 1 to 10 years. Fixtures, which are comprised primarily of leasehold improvements and equipment under capital leases, are amortized on a straight-line basis over their estimated useful lives or for leasehold improvements, the related lease term, if less. The Company has capitalized certain internal use software and website development costs which are included in property and equipment. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from 1 to 5 years.

 

Contingent Consideration

J2 Global measures the contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (see Note 6 - Fair Value Measurements). The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses a probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and the amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.

J2 Global reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating income. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.

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Self-Insurance Program

J2 Global provides health and dental insurance plans for certain of its employees through a self-insurance structure. The Company has secured reinsurance in the form of a two tiered stop-loss coverage that limits the exposure arising from any claims made. Self-insurance claims filed and claims incurred but not reported are accrued based on management’s estimate of the discounted ultimate costs for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to reasonably estimate losses related to claims, it is possible that actual results could materially differ from recorded self-insurance liabilities.

Segment Reporting

Accounting guidance establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Accounting guidance also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company’s business segments are based on the organization structure used by the chief operating decision maker for making operating and investment decisions and for assessing performance. The chief operating decision maker views the Company in two businesses: Cloud Services and Digital Media. However, in accordance with the aggregation criteria within the accounting guidance, J2 Global’s operating segments have been aggregated into three reportable segments: (i) Fax and Martech (formerly Email Marketing); (ii) Voice, Backup, Security, and Consumer Privacy and Protection; and (iii) Digital Media.

Reclassifications

Certain prior year reported amounts have been reclassified to conform to the 2019 presentation.

2.    Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments in this ASU align the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements. In addition, the amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20; instead impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842: Leases. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 Financial Instruments. The amendments in this ASU further clarify certain aspects of ASU No. 2016-13. For entities that have not yet adopted ASU No. 2016-13, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU provide transition relief for ASU No. 2016-13 by providing an option to irrevocably elect the fair value option for certain financial assets measured at an amortized cost basis. For entities that have not yet adopted ASU No. 2016-13, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of these ASUs is not expected to have a material impact on the Company’s financial statements and related disclosures.

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In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, add, and modify certain disclosures. The ASU removes the following disclosure requirements from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation process for Level 3 fair value measurements; and (4) certain other requirements for nonpublic entities. The ASU adds the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, disclosure of other quantitative information may be more appropriate if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU modifies disclosure requirements in Topic 820 relating to timing of liquidation of an investee’s assets, the disclosure of the date when restrictions from redemption might lapse, the intention of the measurement uncertainty disclosure, and certain other requirements for nonpublic entities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software). The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service to (1) determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense; (2) expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement; (3) apply the existing impairment guidance to the capitalized implementation costs as if the costs were long-lived assets; (4) present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting arrangements; and (5) present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the effect of this ASU on its financial statements and related disclosures.

3.Revenues

Digital Media

Digital Media revenues are earned primarily from the delivery of advertising services, from subscriptions to services, data and information, and from licensing.

Revenue is earned from the delivery of advertising services on the Company’s owned and operated websites and on those websites that are part of Digital Media’s advertising network. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the following performance obligations are satisfied: (i) when an advertisement is placed for viewing, (ii) when a qualified sales lead is delivered, (iii) when a visitor “clicks through” on an advertisement or (iv) when commissions are earned upon the sale of an advertised product.

Revenue from subscriptions is earned through the granting of access to, or delivery of, data products or services to customers. Subscriptions cover video games and related content, health information, data and other copyrighted material. Revenues under such agreements are recognized over the contract term for use of the service. Revenues are also earned from listing fees, subscriptions to online publications, and from other sources. Subscription revenues are recognized over time.

J2 Global generates Digital Media revenues through the license of certain assets to clients. Assets are licensed for clients’ use in their own promotional materials or otherwise. Such assets may include logos, editorial reviews, or other copyrighted material. Revenues under such license agreements are recognized over the contract term for use of the asset. Technology assets are also licensed to clients. These assets are recognized over the term of the access period. The Digital Media business also generates revenue from other sources which include marketing and production services. Such other revenues are generally recognized over the period in which the products or services are delivered.

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J2 Global also generates Digital Media revenues from transactions involving the sale of perpetual software licenses, related software support and maintenance, hardware used in conjunction with its software, and other related services. Revenue is recognized for these software transactions with multiple performance obligations after (i) the Company has had an approved contract and is committed to perform the respective obligations and (ii) the Company can identify and quantify each obligation and its respective selling price. Once the respective performance obligations have been identified and quantified, revenue will be recognized when the obligations are met, either over time or at a point in time depending on the nature of the obligation.

Revenues from software license performance obligations are generally recognized upfront at the point in time that the software is made available to the customer to download and use. Revenues for related software support and maintenance performance obligations are related to technical support provided to customers as needed and unspecified software product upgrades, maintenance releases and patches during the term of the support period when they are available. The Company is obligated to make the support services available continuously throughout the contract period. Therefore, revenues for support contracts are generally recognized ratably over the contractual period the support services are provided. Hardware product and related software performance obligations, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a bundled performance obligation. The revenues for this bundled performance obligation are generally recognized at the point in time that the hardware and software products are delivered and ownership is transferred to the customer. Other service revenues are generally recognized over time as the services are performed.

The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned and operated web properties, on third-party sites or on unaffiliated advertising networks, (ii) through the Company’s lead-generation business and (iii) through the Company’s subscriptions. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party sites.

Cloud Services

The Company’s Cloud Services revenues substantially consist of monthly recurring subscription and usage-based fees, which are primarily paid in advance by credit card. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned.

Along with our numerous proprietary Cloud Services solutions, the Company also generates revenues by reselling various third-party solutions, primarily through our email security and online backup lines of business. These third-party solutions, along with our proprietary products, allow the Company to offer customers a variety of solutions to better meet their needs. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer.

J2 Global’s Cloud Services also include patent license revenues generated under license agreements that provide for the payment of contractually determined fully paid-up or royalty-bearing license fees to J2 Global in exchange for the grant of non-exclusive, retroactive and future licenses to our intellectual property, including patented technology. Patent revenues may also consist of revenues generated from the sale of patents. Patent license arrangements are evaluated to determine if they grant the customer a right to access the Company’s intellectual property which is generally recognized over the life of the arrangement or a right to use the Company’s intellectual property which is generally recognized at the point in time the license is granted. With regard to royalty-bearing license arrangements, the Company recognizes revenues of license fees earned during the applicable period. 

The Cloud Services business also generates revenues by licensing certain technology to third parties. Generally, revenue is recognized over time as the third party uses the licensed technology over the period.

The Company adopted ASU 2014-09 and its related standard updates in January 2018 using a modified-retrospective approach with the cumulative effect of initially applying the Update recognized at the date of application in retained earnings. The change in accounting principle in the first quarter of 2018 resulted in an adjustment to the Company’s retained earnings of $1.6 million (see Condensed Consolidated Statements of Shareholders’ Equity).

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

	Three Months Ended June 30,								Six Months Ended June 30,
Digital Media	2019				2018				2019				2018
Advertising	$	109,961			$	106,251			$	215,561			$	207,824
Subscription	40,976				31,340				81,354				60,928
Other	2,422				—				4,127				—
Total Digital Media revenues	$	153,359			$	137,591			$	301,042			$	268,752
Cloud Services
Subscription	$	168,909			$	150,127			$	320,698			$	299,448
Other	223				170				679				333
Total Cloud Services revenues	$	169,132			$	150,297			$	321,377			$	299,781
Corporate	$	2			$	1			$	3			$	3
Elimination of inter-segment revenues	(61		)		—				(97		)		(24		)
Total Revenues	$	322,432			$	287,889			$	622,325			$	568,512
Timing of revenue recognition
Point in time (1)	$	7,139			$	866			$	13,944			$	1,941
Over time	315,293				287,023				608,381				566,571
Total	$	322,432			$	287,889			$	622,325			$	568,512

⁽¹⁾ The first quarter disclosure of $1.4 million in point in time revenue for the three months ended March 31, 2019 excluded $5.4 million of revenue; such revenue was presented as over time revenue. As a result, the timing of revenue recognition for the six months ended June 30, 2019 has been corrected in the table above. There is no change to the Company’s income from continuing operations or net income for the three months ended March 31, 2019 period.

The Company has recorded $31.3 million and $21.1 million of revenue for the three months ended June 30, 2019 and 2018, respectively, and $84.5 million and $56.9 million of revenue for the six months ended June 30, 2019 and 2018, respectively, which was previously included in the contract liability balance as of the beginning of the each respective year.

As of June 30, 2019, the Company acquired $26.3 million of deferred revenue in connection with the Company’s business acquisitions (see Note 4 - Business Acquisitions) which are subject to purchase accounting adjustments.

Performance Obligations

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on its relative standalone selling price.

The Company satisfies its performance obligations within the Digital Media business upon delivery of services to its customers. In addition, the Company provides content to its advertising partners which the Company sells to its partners’ customer base and receives a revenue share based on the terms of the agreement.

The Company satisfies its performance obligations within the Cloud Services business upon delivery of services to its customers. Payment terms vary by type and location of our customers and the services offered. The term between invoicing and when payment is due is not significant. Due to the nature of the services provided, there are no obligations for returns.

Significant Judgments

In determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is also required to determine the standalone selling price for each distinct performance obligation.

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Performance Obligations Satisfied Over Time

The Company’s Digital Media business consists primarily of performance obligations that are satisfied over time. This was determined based on a review of the contracts and the nature of the services offered, where the customer simultaneously receives and consumes the benefit of the services provided. Satisfaction of these performance obligations is evidenced in the following ways:

Advertising

•	Website reporting by the Company, the customer, or a third-party contains the delivery evidence needed to satisfy the performance obligations within the advertising contract

•	Successfully delivered leads are evidenced by either delivery reports from the Company’s internal lead management systems or through e-mail communication and/or other evidence of delivery showing acceptance of leads by the customer

•	Commission is evidenced by direct site reporting from the affiliate or via direct confirmation from the customer

Subscription

•	Evidence of delivery is contained in the Company’s systems or from correspondence with the customer which tracks when a customer accepts delivery of any assets, digital keys or download links

The Company has concluded revenue is recognized based on delivery of services over the contract period for advertising and on a straight-line basis over the contract period for subscriptions. The Company believes that the methods described are a faithful depiction of the transfer of goods and services.

The Company’s Cloud Services business consists primarily of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are subscription based and include fax, voice, backup, security, CPP, and email marketing products where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services or not. Depending on the individual contracts with the customer, revenue for these services are recognized over the contract period when any of the following materially distinct performance obligations are satisfied: 

•	Faxing capabilities are provided

•	Voice services are delivered

•	Email marketing services are delivered

•	Consumer privacy services are provided

•	Security solutions, including email and endpoint are provided

•	Online data backup capabilities are provided

The Company has concluded that the best measure of progress toward the complete satisfaction of the performance obligation over time is a time-based measure. The Company recognizes revenue on a straight-line basis throughout the subscription period and believes that the method used is a faithful depiction of the transfer of goods and services.

Performance Obligations Satisfied at a Point in Time

The Company’s Digital Media business has technology subscriptions that have standalone functionality. As a result, they are considered to be functional intellectual property where the performance obligations are satisfied at a point in time. This is evidenced once a digital key is delivered to the customer. Once the key is delivered to the customer, the customer has full control of the technology and the Company has no further performance obligations. The Company has concluded that revenue is recognized once the digital key is delivered. The Company believes that this method is a faithful depiction of the transfer of goods and services.

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Practical Expedients

Existence of a Significant Financing Component in a Contract

As a practical expedient, the Company has not assessed whether a contract has a significant financing component because the Company expects at contract inception that the period between payment by the customer and the transfer of promised goods or services by the Company to the customer will be one year or less. In addition, the Company has determined that the payment terms that the Company provides to its customers are structured primarily for reasons other than the provision of finance to the Company. The Company typically charges a single upfront amount for the services because other payment terms would affect the nature of the risk assumed by the Company to provide service given the costs of the customer acquisition and the highly competitive and commoditized nature of the business we operate which allows customers to easily move from one provider to another. This additional risk may make it uneconomical to provide the service.

Costs to Fulfill a Contract

The Company’s revenues are primarily generated from customer contracts that are for one year or less. Costs primarily consist of incentive compensation paid based on the achievements of sales targets in a given period for related revenue streams and are recognized in the month when the revenue is earned. Incentive compensation is paid on the issuance or renewal of the customer contract. As a practical expedient, for amortization periods which are determined to be one year or less, the Company expenses any incremental costs of obtaining the contract with a customer when incurred. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.

In addition, the Company partners with various affiliates in order to generate a portion of its revenue for certain lines of business. The commissions earned by the Company’s affiliates are incentive based and are paid based on the acquisition of new customers in a given period. For those customers with amortization periods determined to be greater than one year, the Company capitalizes and amortizes the expenses over the period of benefit.

Revenues Invoiced

The Company has applied the practical expedient for certain revenue streams to exclude the value of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.

4.Business Acquisitions

The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expand and diversify its service offerings, enhance its technology, and acquire skilled personnel.

The Company completed the following acquisitions during the first six months of fiscal 2019, paying the purchase price with a combination of cash and note payable: (a) an asset purchase of iContact, LLC, acquired on January 22, 2019, a North Carolina-based provider of email marketing solutions; (b) a share purchase of the entire issued capital of Safe Send AS, acquired on March 29, 2019, a Norwegian-based provider of email security solutions; (c) a share purchase of the entire issued capital of Highwinds Capital, Inc. and Cloak Holdings, LLC, acquired on April 2, 2019, a Texas-based provider in solutions for virtual private network (“VPN”) services; and (d) other immaterial acquisitions of online data backup and digital media businesses.

The condensed consolidated statement of income since the date of each acquisition and balance sheet as of June 30, 2019, reflect the results of operations of all 2019 acquisitions. For the six months ended June 30, 2019, these acquisitions contributed $26.8 million to the Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to J2 Global’s integration activities and is impracticable to provide. Total consideration for these transactions was $276.1 million, net of cash acquired and assumed liabilities and is subject to certain post-closing adjustments which may increase or decrease the final consideration paid.

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The following table summarizes the allocation of the purchase consideration for these acquisitions (in thousands):

Assets and Liabilities		Valuation
Accounts receivable	$	1,583
Prepaid expenses and other current assets		199
Property and equipment		2,211
Trade names		3,548
Customer relationships		76,934
Goodwill		211,901
Trademarks		21,260
Other intangibles		15,452
Other long-term assets		75
Accounts payable and accrued expenses		(19,625	)
Deferred revenue		(26,344	)
Income taxes payable		(619	)
Liability for uncertain tax positions		(379	)
Deferred tax liability		(10,120	)
Total	$	276,076

During the six months ended June 30, 2019, the purchase price accounting has been finalized for the following acquisitions: (i) Mosaik Solutions, LLC and (ii) The Communicator Corporation Limited. The initial accounting for all 2019 acquisitions is incomplete and subject to change, which may be significant. J2 Global has recorded provisional amounts which may be based upon past acquisitions with similar attributes for certain intangible assets (including trade names, software and customer relationships), preliminary acquisition date working capital and related tax items.

During the six months ended June 30, 2019, the Company recorded adjustments to prior period acquisitions due to the finalization of the purchase accounting in the Fax and Martech business which resulted in a net increase in goodwill of $0.1 million. In addition, the Company recorded adjustments to the initial working capital related to prior period acquisitions in the Digital Media business, which resulted in a net decrease in goodwill of $1.4 million (see Note 7 - Goodwill and Intangible Assets). Such adjustments had an immaterial impact on the amortization expense within the condensed consolidated statement of income for the six months ended June 30, 2019.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized associated with these acquisitions during the six months ended June 30, 2019 is $211.9 million, of which $46.0 million is expected to be deductible for income tax purposes.

Pro Forma Financial Information for All 2019 Acquisitions

The following unaudited pro forma supplemental information is based on estimates and assumptions that J2 Global believes to be reasonable. However, this information is not necessarily indicative of the Company’s consolidated results of income in future periods or the results that actually would have been realized had J2 Global and the acquired businesses been combined companies during the periods presented. These pro forma results exclude any savings or synergies that would have resulted from these business acquisitions had they occurred on January 1, 2018. This unaudited pro forma supplemental information includes incremental intangible asset amortization and other charges as a result of the acquisitions, net of the related tax effects.

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The supplemental information on an unaudited pro forma financial basis presents the combined results of J2 Global and its 2019 acquisitions as if each acquisition had occurred on January 1, 2018 (in thousands, except per share amounts):

	Six Months Ended June 30,
	2019				2018
	(unaudited)				(unaudited)
Revenues	$	648,005			$	620,934
Net income	$	69,398			$	49,262
EPS - Basic	$	1.44			$	1.01
EPS - Diluted	$	1.40			$	0.99

5.Investments

Investments consist of equity and debt securities. 

The Company determined the equity securities that were received as part of the consideration for the sale of Tea Leaves Health, LLC (“Tea Leaves”) in fiscal year 2017 are without a readily determinable fair value because these securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. As a result, management has elected to alternatively measure this investment at cost, less impairment, adjusted for subsequent observable price changes to estimate fair value. The Company will make a “reasonable effort” to identify any observable price changes for identical or similar investments with the issuer that are known are can be reasonably known. Any changes in the carrying value of the equity securities will be reported in current earnings as Other expense, net. In addition, the Company determined that the shares of redeemable preferred stock that were also received as part of the consideration for the sale of Tea Leaves are corporate debt securities and are classified as available-for-sale securities.

The following table summarizes the gross unrealized gains and losses and estimated fair values for the Company’s securities without a readily determinable fair value (in thousands):

	Cost				Impairment				Adjustments				Fair Value
June 30, 2019
Equity securities	$	34,977			$	—			$	(3,678	)		$	31,299
Total	$	34,977			$	—			$	(3,678	)		$	31,299
December 31, 2018
Equity securities	$	34,977			$	—			$	(3,678	)		$	31,299
Total	$	34,977			$	—			$	(3,678	)		$	31,299

During the year ended December 31, 2018, the Company recorded an unrealized loss to earnings because an observable price for a similar instrument was observed in the market at an amount that was below the original carrying price of the investment (see Note 6 - Fair Value Measurements).

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 The following table summarizes the gross unrealized gains and losses and fair values for investments classified as available-for-sale investments (in thousands):

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
June 30, 2019
Corporate debt securities	$	23,256			$	84			$	(1,220	)		$	22,120
Total	$	23,256			$	84			$	(1,220	)		$	22,120
December 31, 2018
Corporate debt securities	$	23,256			$	21			$	(1,899	)		$	21,378
Total	$	23,256			$	21			$	(1,899	)		$	21,378

At June 30, 2019, the Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income.

The following table summarizes J2 Global’s corporate debt securities designated as available-for-sale, classified by the contractual maturity date of the security (in thousands):

	June 30, 2019				December 31, 2018
Due within 1 year	$	—			$	—
Due within more than 1 year but less than 5 years	22,120				21,378
Due within more than 5 years but less than 10 years	—				—
Due 10 years or after	—				—
Total	$	22,120			$	21,378

Recognition and Measurement of Other-Than-Temporary Impairment of Debt Securities

Regardless of the classification of the debt securities as available-for-sale or held-to-maturity, the Company has assessed each position for impairment. J2 Global regularly reviews and evaluates each investment that has an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities.

Factors considered in determining whether a loss is temporary include:

•	the length of time and the extent to which fair value has been below cost;

•	the severity of the impairment;

•	the cause of the impairment and the financial condition and near-term prospects of the issuer;

•	activity in the market of the issuer which may indicate adverse credit conditions; and

•	the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

J2 Global’s review for impairment generally entails:

•	identification and evaluation of investments that have indications of possible impairment;

•	analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period;

•	discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having an other-than-temporary impairment and those that would not support an other-than-temporary impairment;

•	documentation of the results of these analyses, as required under business policies; and

•	information provided by third-party valuation experts.

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For these debt securities, a critical component of the evaluation for other-than-temporary impairments is the identification of credit impairment, where management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. Credit impairment is assessed using a combination of a discounted cash flow model that estimates the cash flows on the underlying securities and a market comparable method, where the security is valued based upon indications from the secondary market of what discounts buyers demand when purchasing similar securities. The cash flow model incorporates actual cash flows from the securities through the current period and then projects the remaining cash flows using relevant interest rate curves over the remaining term. These cash flows are discounted using a number of assumptions, some of which include prevailing implied credit risk premiums, incremental credit spreads and illiquidity risk premiums, among others.

 

Securities that have been identified as other-than-temporarily impaired are written down to their current fair value. For debt securities that are intended to be sold or that management believes it more-likely-than-not that it will be required to sell prior to recovery, the full impairment is recognized immediately in earnings.

 

For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more-likely-than-not that it will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value impairment is recognized in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security.

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 30, 2019 and December 31, 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

	As of June 30, 2019
	Less than 12 Months								12 Months or Greater								Total
	Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Corporate debt securities	$	—			$	—			$	21,525			$	(1,220	)		$	21,525			$	(1,220	)
Total	$	—			$	—			$	21,525			$	(1,220	)		$	21,525			$	(1,220	)
	As of December 31, 2018
	Less than 12 Months								12 Months or Greater								Total
	Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Corporate debt securities	$	20,846			$	(1,899	)		$	—			$	—			$	20,846			$	(1,899	)
Total	$	20,846			$	(1,899	)		$	—			$	—			$	20,846			$	(1,899	)

As of June 30, 2019 and December 31, 2018, we did not recognize any other-than-temporary impairment losses.

On September 25, 2017, the Company entered into a commitment to invest $200 million (approximately 66.7% of equity) in the OCV Fund. The total expected commitment to the OCV Fund is expected to be approximately $300 million. The primary purpose of the Fund is to provide a limited number of select investors with the opportunity to realize long-term appreciation from public and private companies, with a particular focus on the technology and life science industries. The general activities of the OCV Fund is to buy, sell, hold and otherwise invest in securities of every kind and nature and rights and options with respect thereto, including, without limitation, stock, notes, bonds, debentures and evidence of indebtedness; to exercise all rights, powers, privileges and other incidents of ownership or possession with respect to securities held or owned by the OCV Fund; to enter into, make and perform all contracts and other undertakings; and to engage in all activities and transactions as may be necessary, advisable or desirable to carry out the foregoing.

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The manager, OCV Management, LLC, and general partner of the Fund are entities with respect to which Richard S. Ressler, Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder and a related party. As a limited partner in the Fund, the Company will pay an annual management fee to the manager equal to 2.0% (reduced by 10% each year beginning with the sixth year) 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.

In the first six months of 2019, the Company received capital call notices from the management of OCV Management, LLC. for $19.3 million, inclusive of certain management fees, of which $14.7 million has been paid for the six months ended June 30, 2019.

The Company recognizes its equity in the net earnings or losses relating to the investment in OCV on a one-quarter lag due to the timing and availability of financial information from OCV. 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.

During the three months ended June 30, 2019 and 2018, the Company recognized an investment (gain) loss of $(4.1) million and $3.0 million, net of tax (expense) benefit, respectively, and during the six months ended June 30, 2019 and 2018, the Company recognized an investment (gain) loss of $(3.6) million and $3.0 million, net of tax (expense) benefit, respectively. The (income) loss is presented in the Company’s condensed consolidated statement of income as (income) loss from equity investments, net.

During the three months ended June 30, 2019 and 2018, the Company recognized management fees of $0.8 million and $3.0 million, net of tax benefit, respectively, and for the six months ended June 30, 2019 and 2018, the Company recognized management fees of $1.5 million and $3.0 million, net of tax benefit, respectively.

The following table discloses the carrying amount for the Company’s equity method investment (in thousands):

	June 30, 2019				December 31, 2018
Equity securities	$	50,583			$	31,151
Maximum exposure to loss	$	50,583			$	31,151

As a limited partner, the Company’s maximum exposure to loss is limited to its proportional ownership in the partnership. In addition, the Company is not required to contribute capital in an aggregate amount in excess of its capital commitment and any expected losses will not be in excess of the Capital Account. Finally, there are no call or put options, or other types of arrangements, which limit the Company’s ability to participate in losses and returns of the Fund.

 

6.Fair Value Measurements

J2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

	§	Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
	§	Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	§	Level 3 – Unobservable inputs which are supported by little or no market activity.

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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices.

Certain of the Company’s debt securities are classified within Level 2. The Company values these Level 2 investments based on model-driven valuations using significant inputs derived from or corroborated by observable market data.

The fair value of our senior notes is determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. The fair value of the Credit Facility approximates its carrying amount due to its variable interest rate, which approximates a market interest rate, and is considered a Level 2 input. The fair value of long-term debt at June 30, 2019 and December 31, 2018 was $1.3 billion and $1.1 billion, respectively (see Note 8 - Long-Term Debt).

In addition, the Convertible Notes contain terms that may require the Company to pay contingent interest on the Convertible Notes which is accounted for as a derivative with fair value adjustments being recorded to interest expense (see Note 8 - Long Term Debt). The fair value of this derivative is determined using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs.

The Company has a $5.5 million note payable that is short-term in nature. As of June 30, 2019, the carrying value of the note payable approximates fair value and is classified within Level 2.

The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The fair value of the contingent consideration liability was determined using option based approaches. This methodology was utilized because the distribution of payments is not symmetric and amounts are only payable upon certain earnings before interest, tax, depreciation and amortization (“EBITDA”) thresholds being reached. Such valuation approach included a Monte-Carlo simulation for the contingency since the financial metric driving the payments is path dependent. For similar reasons, certain of the Company’s available-for-sale debt securities are classified within Level 3. The fair value of these debt securities was derived using a hybrid approach consisting of two scenarios and subsequent allocation among each of the outstanding securities. Both scenarios consider unobservable inputs in the market such as time to liquidity, volatility, dividend yield, and breakpoints. Significant increases or decreases in either of the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.

 

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The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):

June 30, 2019	Level 1				Level 2				Level 3				Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	407			$	—			$	—			$	407
Corporate debt securities	—				595				21,525				22,120
Total assets measured at fair value	$	407			$	595			$	21,525			$	22,527
Liabilities:
Contingent consideration	$	—			$	—			$	40,145			$	40,145
Contingent interest derivative	—				768				—				768
Total liabilities measured at fair value	$	—			$	768			$	40,145			$	40,913
December 31, 2018	Level 1				Level 2				Level 3				Fair Value
Assets:
Cash equivalents:
Money market and other funds	$	450			$	—			$	—			$	450
Corporate debt securities	—				532				20,846				21,378
Total assets measured at fair value	$	450			$	532			$	20,846			$	21,828
Liabilities:
Contingent consideration	$	—			$	—			$	50,035			$	50,035
Contingent interest derivative	—				768				—				768
Total liabilities measured at fair value	$	—			$	768			$	50,035			$	50,803

At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the six months ended June 30, 2019, there were no transfers that have occurred between levels.

The following table presents a reconciliation of the Company’s derivative instruments (in thousands):

	Amount				Affected line item in the Statement of Income
Derivative Liabilities:
Level 2:
Balance as of January 1, 2019	$	768
Balance as of June 30, 2019	$	768

The following table presents a reconciliation of the Company’s Level 3 financial liabilities related to contingent consideration that are measured at fair value on a recurring basis (in thousands):

	Level 3				Affected line item in the Statement of Income
Balance as of January 1, 2019	$	50,035
Contingent consideration	3,972
Total fair value adjustments reported in earnings	8,475				General and administrative
Contingent consideration payments	(22,337		)		Not Applicable
Balance as of June 30, 2019	$	40,145

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In connection with the acquisition of Humble Bundle, on October 13, 2017, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future EBITDA thresholds and had a fair value of $20.0 million and $40.0 million at June 30, 2019 and December 31, 2018, respectively. Due to the Company’s achievement of certain EBITDA targets for the year ended December 31, 2018 and the amended contingent consideration agreement, $20.0 million was paid in the second quarter of 2019 and an additional $20.0 million remains payable and is classified as a current liability on the consolidated balance sheet.

In connection with the acquisition of Ekahau Inc., on October 10, 2018, contingent consideration of up to $15.0 million may be payable upon achieving certain future revenue thresholds and had a fair value of $12.0 million and $3.7 million at June 30, 2019 and December 31, 2018, respectively.

In connection with the Company’s other acquisition activity, contingent consideration of up to $13.7 million may be payable upon achieving certain future EBITDA, revenue, and/or unique visitor thresholds and had a combined fair value of $6.2 million and $6.3 million at June 30, 2019 and December 31, 2018, respectively. Due to the achievement of certain thresholds, $2.3 million was paid during the first six months of 2019.

During the six months ended June 30, 2019, the Company recorded an increase in the fair value of the contingent consideration of $8.5 million and reported such increase in general and administrative expenses.

7.Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the acquisition method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets are comprised of purchased customer relationships, trademarks and trade names, developed technologies and other intangible assets. The fair values of these identified intangible assets are based upon expected future cash flows or income, which take into consideration certain assumptions such as customer turnover, trade names and patent lives. These determinations are primarily based upon the Company’s historical experience and expected benefit of each intangible asset. If it is determined that such assumptions are not accurate, then the resulting change will impact the fair value of the intangible asset. Identifiable intangible assets are amortized over the period of estimated economic benefit, which ranges from one to 20 years.

The changes in carrying amounts of goodwill for the six months ended June 30, 2019 are as follows (in thousands):

	Fax and Martech				Voice, Backup, Security and CPP				Total Cloud Services				Digital Media				Consolidated
Balance as of January 1, 2019	$	366,270			$	300,718			$	666,988			$	713,388			$	1,380,376
Goodwill acquired (Note 4)	29,000				181,023				210,023				1,878				211,901
Purchase accounting adjustments (1)	109				—				109				(1,371		)		(1,262		)
Foreign exchange translation	(362		)		(1,076		)		(1,438		)		127				(1,311		)
Balance as of June 30, 2019	$	395,017			$	480,665			$	875,682			$	714,022			$	1,589,704

⁽¹⁾ Purchase accounting adjustments relate to measurement period adjustments to goodwill in connection with prior business acquisitions (see Note 4 - Business Acquisitions).

Intangible Assets with Indefinite Lives:

Intangible assets are summarized as of June 30, 2019 and December 31, 2018 as follows (in thousands):

	June 30, 2019				December 31, 2018
Trade names	$	27,379			$	27,379
Other	4,306				4,306
Total	$	31,685			$	31,685

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Intangible Assets Subject to Amortization:

As of June 30, 2019, intangible assets subject to amortization relate primarily to the following (in thousands):

	Weighted-Average   Amortization Period		Historical Cost				Accumulated Amortization				Net
Trade names	10.8 years		$	185,847			$	73,789			$	112,058
Patent and patent licenses	6.5 years		67,882				61,894				5,988
Customer relationships (1)	9.2 years		583,620				350,206				233,414
Other purchased intangibles	4.5 years		343,125				164,678				178,447
Total			$	1,180,474			$	650,567			$	529,907

⁽¹⁾ Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.

During the six months ended June 30, 2019, the Company completed acquisitions which were individually immaterial. The identified intangible assets recognized as part of these acquisition and their respective estimated weighted average amortizations were as follows (in thousands):

	Weighted-Average   Amortization Period		Fair Value
Trade names	6.7 years		$	3,548
Customer relationships	11.6 years		76,934
Trademark	2.9 years		21,260
Other purchased intangibles	2.1 years		15,452
Total			$	117,194

As of December 31, 2018, intangible assets subject to amortization relate primarily to the following (in thousands):

	Weighted-Average   Amortization Period		Historical Cost				Accumulated Amortization				Net
Trade names	10.9 years		$	181,231			$	65,722			$	115,509
Patent and patent licenses	6.5 years		67,887				60,541				7,346
Customer relationships (1)	9.1 years		507,330				316,122				191,208
Other purchased intangibles	4.4 years		307,554				126,834				180,720
Total			$	1,064,002			$	569,219			$	494,783

⁽¹⁾ Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.

Amortization expense, included in general and administrative expense, approximated $44.5 million and $33.8 million for the three months ended June 30, 2019 and 2018, respectively, and $81.8 million and $66.9 million for the six months ended June 30, 2019 and 2018, respectively. Amortization expense is estimated to approximate $80.5 million, $107.7 million, $70.2 million, $54.1 million and $43.5 million for the remaining six months of fiscal year 2019 through fiscal year 2023, respectively, and $173.9 million thereafter through the duration of the amortization period.

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8.    Long-Term Debt

6.0% Senior Notes

On June 27, 2017, j2 Cloud Services, LLC (“J2 Cloud”) and J2 Cloud Co-Obligor (the “Co-Issuer” and together with J2 Cloud, the “Issuers”), wholly-owned subsidiaries of the Company, completed the issuance and sale of $650 million aggregate principal amount of their 6.0% senior notes due in 2025 (the “6.0% Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933. The 6.0% Senior Notes are presented as long-term debt, net of deferred issuance costs, on the condensed consolidated balance sheets as of June 30, 2019.

 

The 6.0% Senior Notes bear interest at a rate of 6.0% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2018. The 6.0% Senior Notes mature on July 15, 2025, and are senior unsecured obligations of the Issuers and are guaranteed on an unsecured basis by certain subsidiaries of J2 Cloud (as defined in the Indenture agreement dated June 27, 2017, the “Indenture”). If J2 Cloud or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an insignificant subsidiary (as defined in the Indenture), after the issue date, or any insignificant subsidiary ceases to fit within the definition of insignificant subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Issuers’ obligations under the 6.0% Senior Notes.

The Issuers may redeem some or all of the 6.0% Senior Notes at any time on or after July 15, 2020 at specified redemption prices plus accrued and unpaid interest, if any, to, but excluding the redemption date. Before July 15, 2020, in connection with certain equity offerings, the Issuers also may redeem up to 35% of the 6.0% Senior Notes at a price equal to 106.0% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding the redemption date. In addition, at any time prior to July 15, 2020, the Issuers may redeem some or all of the 6.0% Senior Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus an applicable “make-whole” premium.

The Indenture contains certain restrictive and other covenants applicable to J2 Cloud and subsidiaries designated as restricted subsidiaries including, but not limited to, restrictions on (i) paying dividends or making distributions on J2 Cloud’s membership interests or repurchasing J2 Cloud’s membership interests; (ii) making certain restricted payments; (iii) creating liens or entering into sale and leaseback transactions; (iv) entering into transactions with affiliates; (v) merging or consolidating with another company; and (vi) transferring and selling assets. These covenants include certain exceptions. Violation of these covenants could result in a default which could result in the acceleration of outstanding amounts if such default is not cured or waived within the time periods outlined in the Indenture. Restricted payments, specifically dividend payments, are applicable only if J2 Cloud and subsidiaries designated as restricted subsidiaries has a leverage ratio of greater than 3.0 to 1.0. In addition, if such leverage ratio is in excess of 3.0 to 1.0, the restriction on restricted payments is subject to various exceptions, including an exception for the payment of restricted payments up to $75 million. These contractual provisions did not, as of June 30, 2019, restrict J2 Cloud’s ability to pay dividends to J2 Global, Inc. The company is in compliance with its debt covenants as of June 30, 2019.

As of June 30, 2019 and December 31, 2018, the estimated fair value of the 6.0% Senior Notes was approximately $680.9 million and $645.5 million, respectively, and was based on the quoted market prices of debt instruments with similar terms, credit rating and maturities of the 6.0% Senior Notes which are Level 2 inputs (see Note 6 - Fair Value Measurements).

3.25% Convertible Notes

On June 10, 2014, J2 Global issued $402.5 million aggregate principal amount of 3.25% convertible senior notes due June 15, 2029 (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 3.25% per annum, payable semiannually in arrears on June 15 and December 15 of each year. Beginning with the six-month interest period commencing on June 15, 2021, the Company must pay contingent interest on the Convertible Notes during any six-month interest period if the trading price per $1,000 principal amount of the Convertible Notes for each of the five trading days immediately preceding the first day of such interest period equals or exceeds $1,300. Any contingent interest payable on the Convertible Notes will be in addition to the regular interest payable on the Convertible Notes.

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Holders may surrender their Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date only if one or more of the following conditions is satisfied: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the closing sale price of J2 Global common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs is more than 130% of the applicable conversion price of the Convertible Notes on each such trading day; (ii) during the five consecutive business day period following any ten consecutive trading day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the product of (a) the closing sale price of J2 Global common stock on each such trading day and (b) the applicable conversion rate on each such trading day; (iii) if J2 Global calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the business day prior to the redemption date; (iv) upon the occurrence of specified corporate events; or (v) during either the period beginning on, and including, March 15, 2021 and ending on, but excluding, June 20, 2021 or the period beginning on, and including, March 15, 2029 and ending on, but excluding, the maturity date. J2 Global will settle conversions of Convertible Notes by paying or delivering, as the case may be, cash, shares of J2 Global common stock or a combination thereof at J2 Global’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock, where cash will be used to settle each $1,000 of principal and the remainder, if any, will be settled via shares of the Company’s common stock.

As of June 30, 2019, the conversion rate is 14.7632 shares of J2 Global common stock for each $1,000 principal amount of Convertible Notes, which represents a conversion price of approximately $67.74 per share of J2 Global common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the Convertible Notes, but will not be adjusted for accrued interest. In addition, following certain corporate events that occur on or prior to June 20, 2021, J2 Global will increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such a corporate event.

J2 Global may not redeem the Convertible Notes prior to June 20, 2021. On or after June 20, 2021, J2 Global may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.

Holders have the right to require J2 Global to repurchase for cash all or part of their Convertible Notes on each of June 15, 2021 and June 15, 2024 at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if a fundamental change, as defined in the indenture governing the Convertible Notes, occurs prior to the maturity date, holders may require J2 Global to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; (ii) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.

Accounting for the Convertible Notes

In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible debt that can be settled for cash is required to be separated into the liability and equity component at issuance, with each component assigned a value. The value assigned to the liability component is the estimated fair value, as of the issuance date, of similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the first stated repurchase date on June 15, 2021.

J2 Global estimated the borrowing rates of similar debt without the conversion feature at origination to be 5.79% for the Convertible Notes and determined the debt discount to be $59.0 million. As a result, a conversion premium after tax of $37.7 million was recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance date through the first stated repurchase date on June 15, 2021, which management believes is the expected life of the Convertible Notes using an interest rate of 5.81%. As of June 30, 2019, the remaining period over which the unamortized debt discount will be amortized is 2.0 years.

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The Convertible Notes are carried at face value less any unamortized debt discount and debt issuance costs. The fair value of the Convertible Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the Convertible Notes, which are Level 1 inputs (see Note 6 - Fair Value Measurements). If such information is not available, the fair value is determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of June 30, 2019 and December 31, 2018, the estimated fair value of the Convertible Notes was approximately $562.1 million and $457.0 million, respectively.

Credit Facility

The Company drew $100.0 million on its Credit Facility in the second quarter of 2019. See Note 10, “Commitments and Contingencies” for additional information.

Long-term debt as of June 30, 2019 and December 31, 2018 consists of the following (in thousands):

	June 30, 2019				December 31, 2018
6.0% Senior Notes	$	650,000			$	650,000
3.25% Convertible Notes	402,500				402,500
Line of Credit	100,000				—
Less: Unamortized discount	(28,065		)		(33,191		)
Deferred issuance costs	(4,997		)		(6,180		)
Total long-term debt	1,119,438				1,013,129
Less: Current portion	—				—
Total long-term debt, less current portion	$	1,119,438			$	1,013,129

9.Leases

J2 Global leases certain facilities and equipment under non-cancelable operating and finance leases which expire at various dates through 2026. Office and equipment leases are typically for terms of three to five years and generally provide renewal options for terms up to an additional five years. Some of the Company’s leases include options to terminate within one year.

In certain agreements in which the Company leases office space where the Company is the tenant, it subleases the site to various other companies through a sublease agreement.

The Company has adopted the new lease standard and related amendments as of January 1, 2019 using the optional transitional method. Results for reporting periods beginning after the adoption date are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840. Finance leases are not material to the Company’s condensed consolidated financial statements and are therefore not included in the disclosures. Upon adoption of ASU 2016-02 and its related Updates, the Company recorded approximately $72.0 million of right-of-use assets and approximately $75.0 million of operating lease liabilities.

The components of lease expense were as follows for the six months ended (in thousands):

	Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
Operating lease cost	$	5,806			$	12,059

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Supplemental balance sheet information related to leases was as follows (in thousands):

	June 30, 2019
Operating leases
Operating lease right-of-use assets	$	66,922
Total operating lease right-of-use assets	$	66,922
Operating lease liability, current	$	18,066
Operating lease liabilities, noncurrent	53,079
Total operating lease liabilities	$	71,145

Supplemental cash flow information related to leases was as follows (in thousands):

	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	10,489
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	4,954

Other supplemental operating lease information consists of the following:

Weighted average remaining lease term	4.7 years
Weighted average discount rate	4.25	%

Maturities of operating lease liabilities as of June 30, 2019 were as follows (in thousands):

	Operating Leases
Fiscal Year:
2019	$	9,997
2020	17,923
2021	15,936
2022	13,961
2023	11,993
Thereafter	9,242
Total lease payments	$	79,052
Less: Imputed interest	7,907
Present value of operating lease liabilities	$	71,145

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Rental expense for operating leases classified under ASC 840 for the three and six months ended June 30, 2018 was $5.0 million and $10.3 million, respectively, and was predominantly recorded within general and administrative expenses. As of December 31, 2018, future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows (in thousands):

	Lease Payments
Fiscal Year:
2019	$	19,267
2020	16,196
2021	13,881
2022	12,654
2023	10,977
Thereafter	5,456
Total minimum lease payments	$	78,431

Sublease

Total sublease income for the three months ended June 30, 2019 and 2018 was $0.6 million and $0.6 million, respectively, and was $1.5 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively. Total estimated aggregate sublease income to be received in the future is $7.1 million.

Significant Judgments

Discount Rate

The majority of the J2 Global’s leases are discounted using the Company’s incremental borrowing rate as the rate implicit in the lease is not readily determinable.

Options

The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determined it is reasonably certain of exercising the option at inception or when a triggering event occurs.

Practical Expedients

As a practical expedient, the Company has not separated lease components from nonlease components for its real property operating leases. Certain of the Company’s leases contain nonlease components such as maintenance and certain utility costs.

In addition, the Company elected and applied the available transition practical expedients upon adoption. By electing these practical expedients, the Company did:

•	not reassess whether expired or existing contracts contain leases under the new definition of a lease;

•	not reassess lease classification for expired or existing leases; and

•	not reassess whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.

10.Commitments and Contingencies

Litigation

From time to time, J2 Global and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against J2 Global and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief.

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On February 17, 2011, Emmanuel Pantelakis (“Pantelakis”) filed suit against a J2 Global affiliate in the Ontario Superior Court of Justice (No. 11-50673), alleging that the J2 Global affiliate breached a contract relating to Pantelakis’s use of the Campaigner service. The J2 Global affiliate filed a responsive pleading on March 23, 2011 and responses to undertakings on July 16, 2012. On November 6, 2012, Pantelakis filed a second amended statement of claim, reframing his lawsuit as a negligence action. The J2 Global affiliate filed an amended statement of defense on April 8, 2013. Discovery has closed. A judicial pre-trial conference took place on September 27, 2018. There is an anticipated trial date of January 2020.

On January 17, 2013, the Commissioner of the Massachusetts Department of Revenue (“Commissioner”) issued a notice of assessment to a J2 Global affiliate for sales and use tax for the period of July 1, 2003 through December 31, 2011. On July 22, 2014, the Commissioner denied the J2 Global affiliate’s application for abatement. On September 18, 2014, the J2 Global affiliate petitioned the Massachusetts Appellate Tax Board for abatement of the tax asserted in the notice of assessment (No. C325426). A trial was held on December 16, 2015. On May 18, 2017, the Appellate Board decided in favor of the Commonwealth of Massachusetts and the Company paid and expensed the tax assessment. On February 27, 2019, the Appellate Tax Board promulgated its findings of fact and conclusions of law. The J2 Global affiliate has filed a notice of appeal. On July 5, 2019, the parties amicably settled the matter.

On January 21, 2016, Davis Neurology, P.A. filed a putative class action against two J2 Global affiliates in the Circuit Court for the County of Pope, State of Arkansas (58-cv-2016-40), alleging violations of the TCPA. The case was removed to the U.S. District Court for the Eastern District of Arkansas (No. 4:16-cv-00682). On March 20, 2017, the District Court granted a motion for judgment on the pleadings filed by the J2 Global affiliates and dismissed all claims against the J2 Global affiliates. On July 23, 2018, the Eighth Circuit Court of Appeals vacated the judgment and remanded to district court with instructions to return the case to state court. On January 29, 2019, after further appeals were exhausted, the case was remanded to the Arkansas state court. On April 1, 2019, the state court granted a motion for class certification filed by the plaintiff in 2016. Because the prior removal to federal court had deprived the state court of jurisdiction, the J2 Global affiliates had not yet filed an opposition brief to the 2016 motion when the state court granted the motion. The J2 Global affiliates appealed the order. On July 15, 2019, the J2 Global affiliates removed the case to federal court pursuant to the Class Action Fairness Act of 2005. The plaintiff has moved to remand.

J2 Global does not believe, based on current knowledge, that the foregoing legal proceedings or claims, after giving effect to existing accrued liabilities, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could have a material effect on J2 Global’s consolidated financial position, results of operations, or cash flows in a particular period.

The Company has not accrued for any material loss contingencies relating to these legal proceedings because materially unfavorable outcomes are not considered probable by management. It is the Company’s policy to expense as incurred legal fees related to various litigations.

Credit Agreement

On January 7, 2019, J2 Cloud Services, LLC entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as sole lead arranger and as administrative agent for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided J2 Cloud Services with a credit facility of $100.0 million (the “Credit Facility”) with an option to request an increase of up to $50.0 million. On July 1, 2019, the Company increased its Credit Facility to $150.0 million (see Note 17 - Subsequent Events).The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of J2 Cloud and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement. As of June 30, 2019, the Company had drawn $100.0 million on the Credit Facility.

At J2 Cloud’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greatest of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 1/2 of 1% per annum, (y) the rate of interest per annum most recently announced by the Agent as its U.S. Dollar “Reference Rate” and (z) one month LIBOR plus 1.00% or (ii) a rate per annum equal to LIBOR divided by 1.00 minus the LIBOR Reserve Requirements (as defined in the Credit Agreement), in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50% to 1.50% and the applicable margin relating to any LIBOR loan will range from 1.50% to 2.50%, in each case, depending on the total leverage ratio of J2 Cloud.

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The final maturity of the Credit Facility will occur on January 7, 2024. J2 Cloud is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty.

The obligations under the Credit Facility and certain cash management are and will be fully and unconditionally guaranteed by certain of J2 Cloud’s existing and subsequently acquired or organized direct and indirect domestic subsidiaries pursuant to a guarantee agreement and secured by a lien on the equity interests of certain of J2 Cloud’s foreign subsidiaries.

The Credit Agreement contains financial maintenance covenants, including (i) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.00:1.00 for J2 Cloud and its restricted subsidiaries; (ii) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.25:1.00 for J2 and its restricted subsidiaries; and (iii) a minimum EBITDA of not less than $50.0 million for any fiscal quarter for J2 Cloud and its restricted subsidiaries. The Credit Agreement also contains restrictive covenants that limit, among other things, J2 Cloud’s and its restricted subsidiaries’ ability to incur additional indebtedness, create, incur or assume liens, consolidate, merge, liquidate or dissolve, pay dividends or make other distributions or other restricted payments, make or hold any investments, enter into certain transactions with affiliates, sell assets other than on terms specified by the Credit Agreement, amend the terms of certain other indebtedness and organizational documents and change their lines of business and fiscal years, in each case, subject to customary exceptions. The Credit Agreement also sets forth customary events of default, including, among other things, the failure to make timely payments under the Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control and specified events of bankruptcy and insolvency.

The Company has capitalized the total of $0.4 million in debt issuance costs, which are being amortized to interest expense over the life of the Credit Facility. As of June 30, 2019, these debt issuance costs, net of amortization, were $0.4 million. The related interest expense was $1.2 million for the three months ended June 30, 2019 and $1.2 million for the six months ended June 30, 2019.

Non-Income Related Taxes

The Company does not collect and remit sales and use, telecommunication, or similar taxes and fees in jurisdictions where the Company believes such taxes are not applicable or legally required. Several states and other taxing jurisdictions have presented or threatened the Company with assessments, alleging that the Company is required to collect and remit such taxes there. The aggregate assessments at June 30, 2019 were not material.

The June 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No. 17-494, along with the application of existing, new or future rulings and laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.

The Company is currently under audit or is subject to audit for indirect taxes in various states, municipalities and foreign jurisdictions. The Company has a $21.6 million reserve established for these matters. It is reasonably possible that additional liabilities could be incurred resulting in additional expense, which could have a material impact our financial results.

11.Income Taxes

The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate adjusted for discrete interim period tax impacts. Each quarter the Company updates its estimated annual effective tax rate and, if the estimate changes, makes a cumulative adjustment. The Company’s effective tax rate was 28.1% and 18.3% for the three months ended June 30, 2019 and 2018, respectively, and 15.0% and 21.8% for the six months ended June 30, 2019 and 2018, respectively. Income before income taxes included income from domestic operations of $4.0 million and $0.2 million for the six months ended June 30, 2019 and 2018, respectively, and income from foreign operations of $68.3 million and $64.1 million for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019 and December 31, 2018, the Company had $49.1 million and $59.6 million, respectively, in liabilities for uncertain income tax positions. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense on the Company’s consolidated statement of income.

Cash paid for income taxes net of refunds received was $22.4 million and $16.6 million for the six months ended June 30, 2019 and 2018, respectively.

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Certain taxes are prepaid during the year and, where appropriate, included within prepaid expenses and other current assets on the consolidated balance sheet. The Company’s prepaid taxes were zero and zero at June 30, 2019 and December 31, 2018, respectively.

Income Tax Audits:

The Company is in various stages of audit by the U.S. Internal Revenue Service (“IRS”) for its 2012 through 2016 tax years.

J2 Global is under income tax audit by the California Franchise Tax Board (the “FTB”) for its tax years 2012 and 2013. The FTB, however, has suspended its audit for 2012 and 2013 pending the outcome of the IRS audit for such tax years. In August 2018, the FTB notified the Company that it will commence an audit of tax years 2015 and 2016.

The New York State Department of Taxation and Finance (“NYS”) has concluded the audit of the Company’s tax years 2011 through 2014 with no material assessments. In June 2019, NYS notified the Company that it will commence an audit for tax year 2015.

The Company is currently under audit by the French tax authorities for tax years 2011 to 2016. The Company has accrued a reserve for any potential liability that may arise from this audit. The audit is in the final stages.

 

It is reasonably possible that these audits may conclude in the next 12 months and that the uncertain tax positions the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. If the recorded uncertain tax positions are inadequate to cover the associated tax liabilities, the Company would be required to record additional tax expense in the relevant period, which could be material. If the recorded uncertain tax positions are adequate to cover the associated tax liabilities, the Company would be required to record any excess as a reduction in tax expense in the relevant period, which could be material. However, it is not currently possible to estimate the amount, if any, of such change.

12.Stockholders’ Equity

Common Stock Repurchase Program

In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2020. On November 29, 2018, the Company entered into a Rule 10b5-1 trading plan with a broker to facilitate the repurchase program. 600,000 shares were repurchased under the share repurchase program in 2018 at an aggregate cost of $42.5 million and were subsequently retired in March 2019. During the six month period ended June 30, 2019, the Company repurchased zero shares under this program. Cumulatively at June 30, 2019, 2.7 million shares were repurchased at an aggregate cost of $101.1 million (including an immaterial amount of commission fees).

As a result of the purchase of J2 Global common stock through the Company’s share repurchase program, the number of shares available for purchase under the 2012 Program is 1,338,689 shares of J2 Global common stock.

Periodically, participants in J2 Global’s stock plans surrender to the Company shares of J2 Global stock to pay the exercise price or to satisfy tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock. During the three month period ended June 30, 2019, the Company purchased 29,480 shares from plan participants for this purpose.

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Dividends

 

The following is a summary of each dividend declared during fiscal year 2019 and 2018:

Declaration Date		Dividend per Common Share				Record Date		Payment Date
February 2, 2018		$	0.4050			February 22, 2018		March 9, 2018
May 3, 2018		$	0.4150			May 18, 2018		June 1, 2018
August 8, 2018		$	0.4250			August 20, 2018		September 4, 2018
October 29, 2018		$	0.4350			November 19, 2018		December 5, 2018
February 6, 2019		$	0.4450			February 25, 2019		March 12, 2019
May 2, 2019		$	0.4550			May 20, 2019		June 4, 2019

Future dividends are subject to Board approval. Based on the significant number of current investment opportunities within the Company’s portfolio of businesses and the historic returns from prior investments, the Board of Directors suspended dividend payments for the foreseeable future after the June 4, 2019 payment.

13.Stock Options and Employee Stock Purchase Plan

J2 Global’s share-based compensation plans include the 2007 Stock Plan (the “2007 Plan”), 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.

The 2007 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. 4,500,000 shares of J2 Global common stock are authorized to be used for 2007 Plan purposes. Options under the 2007 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of J2 Global’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of J2 Global’s common stock on the date of grant for non-statutory stock options. As of June 30, 2019, 128,739 shares underlying options and 1,940 shares of restricted units were outstanding under the 2007 Plan. The 2007 Plan terminated on February 14, 2017.

The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards and is intended as a successor plan to the 2007 Plan since no further grants will be made under the 2007 Plan. 4,200,000 shares of J2 Global common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100% of the fair market value of J2 Global’s common stock subject to the option on the date the option is granted. As of June 30, 2019, 423,000 shares underlying options and 31,329 shares of restricted stock units were outstanding under the 2015 Plan.

All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).

 

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Stock Options

 

The following table represents stock option activity for the six months ended June 30, 2019:

	Number of Shares			Weighted- Average Exercise Price				Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2019	707,777			$	56.84
Granted	—			—
Exercised	(156,038	)		33.80
Canceled	—			—
Outstanding at June 30, 2019	551,739			$	63.36			6.7		$	14,088,207
Exercisable at June 30, 2019	197,139			$	42.54			3.6		$	9,138,123
Vested and expected to vest at June 30, 2019	424,571			$	59.87			6.2		$	12,321,721

The total intrinsic values of options exercised during the six months ended June 30, 2019 and 2018 were $8.0 million and $3.4 million, respectively.

The Company recognized $0.2 million and $0.2 million of compensation expense related to stock options for the three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, unrecognized stock compensation related to non-vested stock options granted under each of the share-based compensation plans approximated $7.3 million and $6.9 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 6.4 years (i.e., the remaining requisite service period).

Fair Value Disclosure

 

J2 Global uses the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of our employees. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 12.98% and 10.59% as of June 30, 2019 and 2018, respectively.

 Restricted Stock and Restricted Stock Units

 

J2 Global has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board of Directors, five years for senior staff (excluding market-based awards discussed below) and eight years for the Chief Executive Officer.

Restricted Stock - Awards with Market Conditions

J2 Global has awarded certain key employees market-based restricted stock awards pursuant to the 2015 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20-day and 30-day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the six months ended June 30, 2019 and 2018, the Company awarded 74,051 and 473,501 market-based restricted stock awards, respectively. The per share weighted average grant-date fair values of the market-based restricted stock awards granted during the six months ended June 30, 2019 and 2018 were $69.99 and $52.95, respectively.

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The weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions:

	June 30, 2019				June 30, 2018
Underlying stock price at valuation date	$	84.58			$	82.11
Expected volatility	28.3		%		28.4		%
Risk-free interest rate	2.53		%		2.89		%

Restricted stock award activity for the six months ended June 30, 2019 is set forth below:

	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2019	1,207,011			$	64.82
Granted	170,385			78.48
Vested	(132,650	)		73.95
Canceled	(88,607	)		71.92
Nonvested at June 30, 2019	1,156,139			$	65.24

  

Restricted stock unit award activity for the six months ended June 30, 2019 is set forth below:

	Number of Shares			Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2019	41,231
Granted	3,844
Vested	(8,107	)
Canceled	(3,699	)
Outstanding at June 30, 2019	33,269			2.1		$	2,957,281
Vested and expected to vest at June 30, 2019	25,478			1.7		$	2,264,709

The Company recognized $6.4 million and $6.6 million of compensation expense related to restricted stock and restricted stock units for the three months ended June 30, 2019 and 2018, respectively, and $10.8 million and $12.8 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, the Company had unrecognized share-based compensation cost of approximately $58.6 million and $61.6 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 5.3 years for awards and 3.2 years for units.

Employee Stock Purchase Plan

 

The Purchase Plan provides for the issuance of a maximum of two million shares of the Company’s common stock. Under the Purchase Plan, eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of J2 Global common stock at certain plan-defined dates. The price of the J2 Global common stock purchased under the Purchase Plan for the offering periods is equal to 85% of the lesser of the fair market value of a share of common stock of the Company on the beginning or the end of the offering period.

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J2 Global determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the ESPP. The expected volatility is based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 0.78% and 0.10% as of June 30, 2019 and 2018, respectively.

For the six months ended June 30, 2019 and 2018, 32,154 and 1,781 shares were purchased under the Purchase Plan, respectively. Cash received upon the issuance of J2 Global common stock under the Purchase Plan was $1,995,000 and $135,000 for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, 1,557,827 shares were available under the Purchase Plan for future issuance.

The Company recognized $0.3 million and $0.2 million of compensation expense related to the Purchase Plan for the three months ended June 30, 2019 and 2018, respectively, and $0.6 million and $0.2 million of compensation expense related to the Purchase Plan for the six months ended June 30, 2019 and 2018, respectively.

The compensation expense related to the Purchase Plan has been estimated utilizing the following assumptions:

	June 30, 2019		June 30, 2018
Risk-free interest rate	2.43%		2.02%
Expected term (in years)	0.5		0.5
Dividend yield	1.05%		1.03%
Expected volatility	26.80%		22.21%
Weighted average volatility	26.80%		22.21%

14.Earnings Per Share

 

The components of basic and diluted earnings per share are as follows (in thousands, except share and per share data):

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Numerator for basic and diluted net income per common share:
Net income attributable to J2 Global, Inc. common shareholders	$	32,589			$	28,479			$	65,038			$	47,349
Net income available to participating securities (a)	(401		)		(424		)		(825		)		(635		)
Net income available to J2 Global, Inc. common shareholders	$	32,188			$	28,055			$	64,213			$	46,714
Denominator:
Weighted-average outstanding shares of common stock	47,727,786				47,951,326				47,644,729				47,912,383
Dilutive effect of:
Equity incentive plans	64,291				149,967				76,652				136,636
Convertible debt (b)	1,310,802				1,117,228				1,085,111				913,816
Common stock and common stock equivalents	49,102,879				49,218,521				48,806,492				48,962,835
Net income per share:
Basic	$	0.67			$	0.59			$	1.35			$	0.98
Diluted	$	0.66			$	0.57			$	1.32			$	0.95

(a)	Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).

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(b)	Represents the incremental shares issuable upon conversion of the Convertible Notes due June 15, 2029 by applying the treasury stock method when the average stock price exceeds the conversion price of the Convertible Notes (see Note 8 - Long Term Debt).

For the three and six months ended June 30, 2019 and 2018, there were zero options outstanding, respectively, which were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock.

15.	Segment Information

In accordance with ASC Topic 280, Segment Reporting: (Topic 280), the Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”) for making operating and investment decisions and for assessing performance. The CODM views the Company as two businesses: Cloud Services and Digital Media. However, in accordance with the aggregation criteria within ASC Topic 280, J2 Global’s operating segments have been aggregated into three reportable segments: (i) Fax and Martech (formerly Email Marketing); (ii) Voice, Backup, Security, and Consumer Privacy and Protection; and (iii) Digital Media. Prior period segment information has been retrospectively revised to reflect the Company’s new reportable segments, as disclosed in the Company’s audited financial statements for the year ended December 31, 2018. In connection with the Highwinds Capital, Inc. and Cloak Holdings, LLC acquisition in the second quarter of 2019 (see Note 4 - Business Acquisitions), the Company renamed its Voice, Backup and Security reportable segment to include its newly acquired consumer privacy and protection business, now the Voice, Backup, Security and Consumer Privacy and Protection segment.

The Company’s Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some seasonal weakness in the fourth quarter. The Cloud Services business also includes the results of our IP licensing business, which can vary dramatically in both revenues and profitability from period to period. The Company’s Digital Media business is driven primarily by advertising and subscription revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter.

The accounting policies of the businesses are the same as those described in Note 1 - Basis of Presentation. The Company evaluates performance based on revenue, gross margin and profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.

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Information on reportable segments and reconciliation to consolidated income from operations is as follows (in thousands):

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Revenue by reportable segment:
Fax and Martech	$	92,709			$	87,458			$	182,916			$	175,184
Voice, Backup, Security, and CPP	76,423				62,839				138,461				124,597
Cloud Services Total	169,132				150,297				321,377				299,781
Digital Media	153,359				137,591				301,042				268,752
Elimination of inter-segment revenues	(61		)		—				(97		)		(24		)
Total segment revenues	322,430				287,888				622,322				568,509
Corporate (1)	2				1				3				3
Total revenues	$	322,432			$	287,889			$	622,325			$	568,512
Gross profit by reportable segment:
Fax and Martech	$	80,797			$	77,834			$	159,516			$	156,410
Voice, Backup, Security, and CPP	51,737				41,783				92,780				81,690
Cloud Services Total	132,534				119,617				252,296				238,100
Digital Media	129,691				120,522				258,844				234,539
Elimination of inter-segment gross profit	(61		)		—				(97		)		(24		)
Total segment gross profit	262,164				240,139				511,043				472,615
Corporate (1)	2				1				3				3
Total gross profit	$	262,166			$	240,140			$	511,046			$	472,618
Direct costs by reportable segment (2):
Fax and Martech	$	31,333			$	31,634			$	65,435			$	64,955
Voice, Backup, Security, and CPP	38,854				29,801				65,980				58,073
Cloud Services Total	70,187				61,435				131,415				123,028
Digital Media	128,158				117,309				258,326				234,747
Elimination of inter-segment direct costs	(61		)		—				(97		)		(24		)
Total segment direct costs	198,284				178,744				389,644				357,751
Corporate (1)	7,268				7,013				13,926				14,326
Total direct costs (2)	$	205,552			$	185,757			$	403,570			$	372,077
Operating income by reportable segment:
Fax and Marctech	$	49,464			$	46,200			$	94,081			$	91,455
Voice, Backup, Security, and CPP	12,883				11,982				26,800				23,617
Cloud Services Total	62,347				58,182				120,881				115,072
Digital Media	1,533				3,213				518				(208		)
Total segment operating income	63,880				61,395				121,399				114,864
Corporate (1)	(7,266		)		(7,012		)		(13,923		)		(14,323		)
Total income from operations	$	56,614			$	54,383			$	107,476			$	100,541
(1) Corporate includes costs associated with general and administrative and other expenses that are managed on a global basis and that are not directly attributable to any particular segment.
(2) Direct costs for each segment include other operating expenses that are directly attributable to the segment, such as employee compensation expense, local sales and marketing expenses, engineering and network operations expense, depreciation and amortization and other administrative expenses.

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The CODM does not use Balance Sheet and Cash Flow information in connection with operating and investment decisions other than as presented for Cloud Services and Digital Media. Accordingly, the following segment information is presented for Cloud Services and Digital Media.

	June 30, 2019				December 31, 2018
Assets:
Cloud Services	$	1,336,624			$	1,047,245
Digital Media	1,409,494				1,455,620
Total assets from Cloud Services and Digital Media	2,746,118				2,502,865
Corporate	63,814				57,965
Total assets	$	2,809,932			$	2,560,830
	Six Months Ended June 30,
	2019				2018
Capital expenditures:
Cloud Services	$	9,605			$	6,611
Digital Media	21,186				21,947
Total capital expenditures from Cloud Services and Digital Media	30,791				28,558
Corporate	—				—
Total capital expenditures	$	30,791			$	28,558

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Depreciation and amortization:
Cloud Services	$	20,492			$	14,812			$	33,841			$	29,190
Digital Media	35,898				28,056				71,077				55,170
Total depreciation and amortization from Cloud Services and Digital Media	56,390				42,868				104,918				84,360
Corporate	613				989				1,294				2,115
Total depreciation and amortization	$	57,003			$	43,857			$	106,212			$	86,475

J2 Global maintains operations in the U.S., Canada, Ireland, Japan and other countries. Geographic information about the U.S. and all other countries for the reporting periods is presented below. Such information attributes revenues based on jurisdictions where revenues are reported (in thousands).

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Revenues:
United States	$	253,234			$	218,996			$	484,577			$	428,072
Canada	17,300				18,528				34,353				38,150
Ireland	15,440				17,013				31,063				34,114
All other countries	36,458				33,352				72,332				68,176
	$	322,432			$	287,889			$	622,325			$	568,512

	June 30, 2019				December 31, 2018
Long-lived assets:
United States	$	630,626			$	530,785
All other countries	76,899				62,810
Total	$	707,525			$	593,595

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16.Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated balances of other comprehensive income, net of tax, for the three months ended June 30, 2019 (in thousands):

	Unrealized Gains (Losses) on Investments				Foreign Currency Translation				Total
Beginning balance	$	(858	)		$	(44,070	)		$	(44,928	)
Other comprehensive loss	(2		)		(1,177		)		(1,179		)
Net current period other comprehensive loss	(2		)		(1,177		)		(1,179		)
Ending balance	$	(860	)		$	(45,247	)		$	(46,107	)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss), net of tax, for the six months ended June 30, 2019 (in thousands):

	Unrealized Gains (Losses) on Investments				Foreign Currency Translation				Total
Beginning balance	$	(1,418	)		$	(44,561	)		$	(45,979	)
Other comprehensive income (loss)	558				(686		)		(128		)
Net current period other comprehensive income (loss)	558				(686		)		(128		)
Ending balance	$	(860	)		$	(45,247	)		$	(46,107	)

17.Subsequent Events

On July 1, 2019, J2 Cloud Services, LLC and MUFG Union Bank, N.A. (“MUB”) entered into an amendment (the “Amendment”) with respect to the Credit Agreement, dated as of January 7, 2019. Among other things, the Amendment increased the aggregate amount available under the Credit Facility from $100.0 million to $150.0 million.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - “Risk Factors” of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (together, the “Risk Factors”), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

 

Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to:

◦	Sustain growth or profitability, particularly in light of an uncertain U.S. or worldwide economy and the related impact on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;

◦	Maintain and increase our Cloud Services 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;

◦	Cost-effectively procure, retain and deploy large quantities of telephone numbers in desired locations in the United States and abroad;

◦	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; and

◦	Recruit and retain key personnel.

In addition, our financial results could be materially impacted by risks associated with new accounting pronouncements.

Overview

J2 Global, Inc., together with its subsidiaries (“J2 Global”, “the Company”, “our”, “us” or “we”), is a leading provider of internet services. Through our Cloud Services business, we provide cloud services to consumers and businesses and license our intellectual property (“IP”) to third parties. In addition, the Cloud Services business includes fax, voice, backup, security, consumer privacy and protection (“CPP”) and email marketing products. Our Digital Media business specializes in the technology, gaming, broadband, business to business, healthcare, and international markets offering content, tools and services to consumers and businesses.

J2 Global was incorporated in 2014 as a Delaware corporation through the creation of a new holding company structure, and our Cloud Services business, operated by our wholly-owned subsidiary, J2 Cloud Services, LLC (formerly J2 Cloud Services, Inc.), and its subsidiaries, was founded in 1995. We manage our operations through two businesses: Cloud Services and Digital Media. Information regarding revenue and operating income attributable to each of our businesses is included within Note 15 - Segment Information of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Our Cloud Services business generates revenues primarily from customer subscription and usage fees and from IP licensing fees. Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees.

In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel and enter into new markets.

Our consolidated revenues are currently generated from three basic business models, each with different financial profiles and variability. Our Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some seasonal weakness in the fourth quarter. The Cloud Services business also includes the results of our IP licensing business, which can vary dramatically in both revenues and profitability from period to period. 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. We continue to pursue additional acquisitions, which may include companies operating under business models that differ from those we operate under today. Such acquisitions could impact our consolidated profit margins and the variability of our revenues.

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Cloud Services Performance Metrics

The following table sets forth certain key operating metrics for our Cloud Services business as of and for the three and six months ended June 30, 2019 and 2018 (in thousands, except for percentages):

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Subscriber revenues:
Fixed	$	140,352			$	123,648			$	264,661			$	244,487
Variable	28,557				26,479				56,037				54,961
Total subscriber revenues	$	168,909			$	150,127			$	320,698			$	299,448
Other license revenues	223				170				679				333
Total revenues	$	169,132			$	150,297			$	321,377			$	299,781
Percentage of total subscriber revenues:
Fixed	83.1		%		82.4		%		82.5		%		81.6		%
Variable	16.9		%		17.6		%		17.5		%		18.4		%
Total revenues:
Number-based	$	97,379			$	98,488			$	194,447			$	197,179
Non-number-based	71,753				51,809				126,930				102,602
Total revenues	$	169,132			$	150,297			$	321,377			$	299,781
Average monthly revenue per Cloud Business Customer (ARPU) (1)(2)(3)	$	14.01			$	15.68
Cancel Rate(4)	2.5		%		2.0		%

(1)

Quarterly ARPU is calculated using our standard convention of applying the average of the quarter’s beginning and ending base to the total revenue for the quarter. We believe ARPU provides investors an understanding of the average monthly revenues we recognize associated with each Cloud Services customer. As ARPU varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across our Cloud Services customer base.

(2)	As a result of the acquisition of Highwinds Capital, Inc. and Cloak Holdings, LLC (“Net Protect”) at the beginning of the second quarter of 2019, for purposes of the calculation of quarterly ARPU, the acquired customer base was assumed to have been included as of the end of the previous quarter in order to more accurately depict the quarterly ARPU for the three months ended June 30, 2019.

(3)	Cloud Services customers are defined as paying direct inward dialing numbers for fax and voice services, and direct and resellers’ accounts for other services.

(4)

Cancel Rate is defined as cancels of small and medium business and individual Cloud Services customers with greater than four months of continuous service (continuous service includes Cloud Services customers administratively canceled and reactivated within the same calendar month), and enterprise Cloud Services customers beginning with their first day of service. Calculated monthly and expressed as an average over the three months of the quarter.

Digital Media Performance Metrics

The following table sets forth certain key operating metrics for our Digital Media business for the three and six months ended June 30, 2019 and 2018 (in millions):

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	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Visits	1,618			1,760			3,425			3,420
Page views	6,492			6,308			13,579			12,613

Sources: Google Analytics and Partner Platforms

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 2018 Annual Report on Form 10-K filed with the SEC on March 1, 2019. During the three months ended June 30, 2019, there were no significant changes in our critical accounting policies and estimates.

Results of Operations for the Three and Six Months Ended June 30, 2019

Cloud Services

Assuming a stable or improving economic environment, and subject to our risk factors, we expect the revenue and profits as included in the results of operations below in our Cloud Services business to be stable for the foreseeable future (excluding the impact of acquisitions). The main focus of our Cloud Services 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. Through our IP licensing operations, which are included in the Cloud Services business, we seek to make our IP available for license to third parties, and we expect to continue to attempt to obtain additional IP through a combination of acquisitions and internal development in an effort to increase available licensing opportunities and related revenues.

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. 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 Cloud Services’ overall profit margins. Also, as IP licensing often involves litigation, the timing of licensing transactions is unpredictable and can and does vary significantly from period to period. This variability can cause the overall business’s financial results to materially vary from period to period.

Digital Media

Assuming a stable or improving economic environment, and, subject to our risk factors, we expect the revenue and profits in our Digital Media business to improve over the next several quarters as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online. The main focus of our advertising programs is to provide relevant and useful advertising to visitors to our websites and those included within our advertising networks, reflecting our commitment to constantly improve their overall web experience. 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.

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. However, the trend in advertising spend is shifting to mobile devices and other newer advertising formats which generally experience lower margins than those from desktop computers and tablets. We expect this trend to continue to put pressure on our margins.

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. 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 profit margins.

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J2 Global Consolidated

We anticipate that the stable revenue trend in our Cloud Services business combined with the improving revenue and profits in our Digital Media business will result in overall improved revenue and profits for J2 Global on a consolidated basis, excluding the impact of any future acquisitions which can vary dramatically from period to period.

We expect operating profit as a percentage of revenues to generally decrease in the future primarily due to the fact that revenue with respect to our Digital Media business (i) is increasing as a percentage of our revenue on a consolidated basis and (ii) has historically operated at a lower operating margin.

Revenues

(in thousands, except percentages)

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2019		2018				2019		2018
Revenues	$322,432		$287,889		12%		$622,325		$568,512		9%

Our revenues consist of revenues from our Cloud Services business and from our Digital Media business. Cloud Services revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services. We also generate Cloud Services revenues from IP licensing. Digital Media revenues primarily consist of advertising revenues, subscriptions earned through the granting of access to, or delivery of, certain data products or services to customers, fees paid for generating business leads, and licensing and sale of editorial content and trademarks.

Our revenues in 2019 have increased over the comparable three and six month periods of 2018 primarily due to a combination of acquisitions and organic growth within both the Digital Media and Cloud Services businesses.

Cost of Revenues

(in thousands, except percentages)

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2019		2018				2019		2018
Cost of revenue	$60,266		$47,749		26%		$111,279		$95,894		16%
As a percent of revenue	19%		17%				18%		17%

Cost of revenues is primarily comprised of costs associated with data and voice transmission, numbers, content fees, editorial and production costs, network operations, customer service, software licenses for resale, online processing fees and equipment depreciation. The increase in cost of revenues for the three and six months ended June 30, 2019 was primarily due to an increase in costs associated with businesses acquired in and subsequent to the second quarter 2018 that resulted in additional network, customer service, hardware and processing fee costs. In addition, we incurred increased content fees associated with certain gaming titles within the Media segment in comparison to the prior comparable period.

Operating Expenses

Sales and Marketing.

(in thousands, except percentages)

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2019		2018				2019		2018
Sales and Marketing	$88,446		$83,171		6%		$175,326		$169,482		3%
As a percent of revenue	27%		29%				28%		30%

 

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Our sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers. Advertising cost for the three months ended June 30, 2019 was $38.5 million (primarily consists of $28.1 million of third-party advertising costs and $9.6 million of personnel costs) compared to 2018 of $36.2 million (primarily consists of $23.6 million of third-party advertising costs and $9.8 million of personnel costs). Advertising cost for the six months ended June 30, 2019 was $74.7 million (primarily consists of $53.2 million of third-party advertising costs and $19.4 million of personnel costs) compared to 2018 of $74.7 million (primarily consists of $48.9 million of third-party advertising costs and $20.3 million of personnel costs). The increase in sales and marketing expenses for the three and six months ended June 30, 2019 versus the prior comparable periods was primarily due to increased personnel costs and advertising associated with the acquisition of businesses acquired in and subsequent to the second quarter 2018 within the Cloud Services business.

Research, Development and Engineering.

(in thousands, except percentages)

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2019		2018				2019		2018
Research, Development and Engineering	$11,938		$11,252		6%		$24,922		$23,462		6%
As a percent of revenue	4%		4%				4%		4%

Our research, development and engineering costs consist primarily of personnel-related expenses. The increase in research, development and engineering costs for the three and six months ended June 30, 2019 versus the prior comparable period was primarily due to an increase in costs associated with businesses acquired in and subsequent to the second quarter 2018.

General and Administrative.

(in thousands, except percentages)

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2019		2018				2019		2018
General and Administrative	$105,168		$91,334		15%		$203,322		$179,133		14%
As a percent of revenue	33%		32%				33%		32%

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 increase in general and administrative expense for the three and six months ended June 30, 2019 versus the prior comparable period was primarily due to additional amortization of intangible assets, increased depreciation expense, personnel costs relating to businesses acquired in and subsequent to the second quarter 2018; partially offset by lower bad debt expense.

 

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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 income for the three and six months ended June 30, 2019 and 2018 (in thousands): 

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Cost of revenues	$	131			$	129			$	263			$	250
Operating expenses:
Sales and marketing	389				467				793				832
Research, development and engineering	361				355				719				788
General and administrative	5,981				6,116				10,173				11,617
Total	$	6,862			$	7,067			$	11,948			$	13,487

Non-Operating Income and Expenses

Interest expense, net. Our interest expense, net is generated primarily from interest expense due to outstanding debt, partially offset by interest income earned on cash, cash equivalents and investments. Interest expense, net was $17.3 million and $15.5 million for the three months ended June 30, 2019 and 2018, respectively, and $33.4 million and $31.3 million for the six months ended June 30, 2019 and 2018, respectively. Interest expense, net increased over the prior comparable periods primarily due to our line of credit borrowings.

Other (income) expense, net. Our other (income) expense, net is generated primarily from miscellaneous items, gain or losses on currency exchange and gains or losses on investments. Other (income) expense, net was $(0.4) million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively, and $1.8 million and $4.9 million for the six months ended June 30, 2019 and 2018, respectively. Other (income) expense, net decreased for the three months ended June 30, 2019 versus the prior comparable period primarily due to reduced losses on currency exchange. Other (income) expense, net decreased for the six months ended June 30, 2019 versus the prior comparable period primarily due to decreased losses on equity securities and reduced losses on currency exchange.

Income Taxes

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized. 

Provision for income taxes amounted to $11.1 million and $7.0 million for the three months ended June 30, 2019 and 2018, respectively, and $10.9 million and $14.1 million for the six months ended June 30, 2019 and 2018, respectively. Our effective tax rate was 28.1% and 18.3% for the three months ended June 30, 2019 and 2018, respectively, and 15.0% and 21.8% for the six months ended June 30, 2019 and 2018, respectively.

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The increase in our effective income tax rate for the three months ended June 30, 2019 was primarily attributable to the following:

1.	a decrease in the benefit of a portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S;

2.	an increase in tax expense during 2019 from the settlement of tax issues with the Internal Revenue Service related to the 2013 and 2014 tax years; partially offset by

3.	a decrease in tax expense in 2019 due to an increased benefit from the Foreign-Derived Intangible Income deduction as part of the Tax Cuts and Jobs Act of 2017.

The decrease in our effective income tax rate for the six months ended June 30, 2019 was primarily attributable to the following:

1.	a decrease in tax expense during 2019 from a reduction in our reserve for uncertain tax positions;

2.	a decrease in tax expense during 2019 due to an increased benefit from the Foreign-Derived Intangible Income deduction as part of the Tax Cuts and Jobs Act of 2017; partially offset by

3.	a decrease in the benefit of a portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the US.

Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.

Equity Method Investment

Net (income) loss in earnings of equity method investment. Net (income) loss in earnings of equity method investment is generated from our investment in the OCV Fund for which we receive annual audited financial statements. The investment in the OCV Fund is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from OCV. 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 net (income) loss in earnings of equity method investment was $(4.1) million and $3.0 million, net of tax benefit for the three months ended June 30, 2019 and 2018, respectively, and $(3.6) million and $3.0 million for the six months ended June 30, 2019 and 2018, respectively. During the three months ended June 30, 2019 and 2018, the Company recognized management fees of $0.8 million and $3.0 million, net of tax benefit, respectively, and for the six months ended June 30, 2019 and 2018, the Company recognized management fees of $1.5 million and $3.0 million, net of tax benefit, respectively.

Cloud Services and Digital Media 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 businesses: (i) Cloud Services; and (ii) Digital Media.

We evaluate the performance of our businesses based on revenues, including both external and interbusiness net sales, and operating income. We account for interbusiness 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’s operations. Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets. All significant interbusiness amounts are eliminated to arrive at our consolidated financial results.

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Cloud Services

The following results are presented for the three and six months ended June 30, 2019 and 2018 (in thousands):

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
External net sales	$	169,132			$	150,297			$	321,377			$	299,781
Inter-business net sales	—				—				—				—
Net sales	169,132				150,297				321,377				299,781
Cost of revenues	36,598				30,680				69,081				61,680
Gross profit	132,534				119,617				252,296				238,101
Operating expenses	70,187				61,435				131,415				123,029
Operating income	$	62,347			$	58,182			$	120,881			$	115,072

Cloud Services’ net sales of $169.1 million for the three months ended June 30, 2019 increased $18.8 million, or 12.5%, from the prior comparable period due to business acquisitions. Net sales of $321.4 million for the six months ended June 30, 2019 increased $21.6 million, or 7.2%, from the prior comparable period due to business acquisitions.

Cloud Services’ gross profit of $132.5 million for the three months ended June 30, 2019 increased $12.9 million, or 10.8% and gross profit of $252.3 million for the six months ended June 30, 2019 increased $14.2 million, or 6.0%, from the prior comparable periods primarily due to business acquisitions.

Cloud Services’ operating expenses of $70.2 million for the three months ended June 30, 2019 increased $8.8 million, and operating expenses of $131.4 million for the six months ended June 30, 2019 increased $8.4 million from the prior comparable periods primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional salary and related costs; (b) additional amortization of intangible assets; and (c) increased depreciation expense.

As a result of these factors, Cloud Services’ operating income of $62.3 million for the three months ended June 30, 2019 increased $4.2 million, or 7.2%, and operating income of $120.9 million for the six months ended June 30, 2019 increased $5.8 million, or 5.0% from the prior comparable periods.

Digital Media

 The following results are presented for the three and six months ended June 30, 2019 and 2018 (in thousands):

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
External net sales	$	153,298			$	137,591			$	300,945			$	268,728
Inter-business net sales	61				—				97				24
Net sales	153,359				137,591				301,042				268,752
Cost of revenues	23,668				17,069				42,198				34,213
Gross profit	129,691				120,522				258,844				234,539
Operating expenses	128,158				117,309				258,326				234,747
Operating income (loss)	$	1,533			$	3,213			$	518			$	(208	)

Digital Media’s net sales of $153.4 million for the three months ended June 30, 2019 increased $15.8 million, or 11.5%, and net sales of $301.0 million for the six months ended June 30, 2019 increased $32.3 million, or 12.0%, from the prior comparable periods primarily due to business acquisitions.

Digital Media’s gross profit of $129.7 million for the three months ended June 30, 2019 increased $9.2 million, or 7.6%, and gross profit of $258.8 million for the six months ended June 30, 2019 increased $24.3 million, or 10.4%, from the prior comparable periods primarily due to business acquisitions.

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Digital Media’s operating expenses of $128.2 million for the three months ended June 30, 2019 increased $10.8 million and operating expenses of $258.3 million for the six months ended June 30, 2019 increased $23.6 million from the prior comparable periods primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional amortization of intangible assets; (b) increased depreciation expense; and (c) additional salary and related costs. Also, Digital Media incurred an increased allocation of certain shared Corporate operating costs in comparison to the prior comparable periods.

As a result of these factors, Digital Media’s operating income of $1.5 million for the three months ended June 30, 2019 decreased $1.7 million, or 52.3%, and operating income (loss) of $0.5 million for the six months ended June 30, 2019 increased $0.7 million, or 349.0%, from the prior comparable periods.

Liquidity and Capital Resources

Cash and Cash Equivalents and Investments

At June 30, 2019, we had cash and investments of $259.5 million compared to $293.3 million at December 31, 2018. The decrease in cash and investments resulted primarily from cash used in business acquisitions, dividends paid and purchases of property and equipment; partially offset by cash from provided by operating activities and proceeds from the line of credit. At June 30, 2019, cash and investments consisted of cash and cash equivalents of $155.5 million and long-term investments of $104.0 million. Our investments consist of equity and debt securities. For financial statement presentation, we classify our debt securities primarily as short- and long-term based upon their maturity dates. Short-term investments mature within one year of the date of the financial statements and long-term investments mature one year or more from the date of the financial statements. As of June 30, 2019, cash and investments held within domestic and foreign jurisdictions were $196.8 million and $62.7 million, respectively.

On January 7, 2019, J2 Cloud Services, LLC entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as sole lead arranger and as administrative agent for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided J2 Cloud Services with a credit facility of $100.0 million (the “Credit Facility”) with an option to request an increase of up to $50.0 million. On July 1, 2019, the Company increased its Credit Facility to $150.0 million (see Note 17 - Subsequent Events of Notes to Condensed Consolidated Financial Statements).The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of J2 Cloud and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement. As of June 30, 2019, the Company had drawn $100.0 million on the Credit Facility.

On February 6, 2019, the Company’s Board of Directors approved a quarterly cash dividend of $0.4450 per share of J2 Global common stock payable on March 12, 2019 to all stockholders of record as of the close of business on February 25, 2019. On May 2, 2019, the Company’s Board of Directors approved a quarterly cash dividend of $0.4550 per share of J2 Global common stock payable on June 4, 2019 to all stockholders of record as of the close of business on May 20, 2019. Future dividends are subject to Board approval. However, based on the significant number of current investment opportunities within the Company’s portfolio of businesses and the historic returns from prior investments, the Board of Directors suspended dividend payments for the foreseeable future after the June 4, 2019 payment.

On September 25, 2017, the Board of Directors of the Company authorized the Company’s entry into a commitment to invest $200 million in an investment fund (the “Fund”) over several years at a fairly ratable rate. The manager, OCV Management, LLC (“OCV”), and general partner of the Fund are entities with respect to which Richard S. Ressler, Chairman of the Board of Directors (the “Board”) of the Company, is indirectly the majority equity holder. As a limited partner in the Fund, the Company will pay an annual management fee to the manager equal to 2.0% (reduced by 10% each year beginning with the sixth year) 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 will 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.

During the first six months of 2019, the Company received capital call notices from the management of OCV Management, LLC. for $19.3 million, inclusive of certain management fees, of which $14.7 million has been paid for the six months ended June 30, 2019.

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 expenditure, stock repurchases and cash dividends for at least the next 12 months.

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Cash Flows

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $212.2 million and $206.3 million for the six months ended June 30, 2019 and 2018, 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 increase in our net cash provided by operating activities in 2019 compared to 2018 was primarily attributable to increased depreciation and amortization and an increase in accounts payable and accrued expenses; partially offset by lower uncertain tax position, increased tax payments and reduced deferred revenue. Our cash and cash equivalents were $155.5 million and $209.5 million at June 30, 2019 and December 31, 2018, respectively.

Net cash used in investing activities was $311.5 million and $154.1 million for the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, net cash used in investing activities was primarily attributable to business acquisitions, capital expenditures associated with the purchase of property and equipment and the purchase of investments. The increase in our net cash used in investing activities in 2019 compared to 2018 was primarily due to business acquisitions.

Net cash provided by (used in) financing activities was $44.8 million and $(43.2) million for the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, net cash provided by financing activities was primarily attributable to proceeds from the line of credit and exercise of stock options; partially offset by cash used for business acquisitions and dividends paid.  For the six months ended June 30, 2018, net cash used in financing activities was primarily attributable to dividends paid, repurchases of stock and business acquisitions. The change in net cash used in financing activities in 2019 compared to 2018 was primarily attributable to the proceeds from the line of credit; partially offset by business acquisitions and the payment of dividends.

Stock Repurchase Program

In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2020. During the six month period ended June 30, 2019, we repurchased zero shares under this program. Cumulatively at June 30, 2019, 2.7 million shares were repurchased at an aggregate cost of $101.1 million (including an immaterial amount of commission fees).

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of June 30, 2019:

		Payments Due in (in thousands)
Contractual Obligations		2019				2020				2021				2022				2023				Thereafter				Total
Long-term debt - principal (a)		$	—			$	—			$	402,500			$	—			$	—			$	650,000			$	1,052,500
Long-term debt - interest (b)		26,041				52,081				45,541				39,000				39,000				78,000				279,663
Line of credit - principal (c)		—				—				—				—				—				100,000				100,000
Operating leases (d)		9,997				19,715				17,943				16,031				14,126				26,279				104,091
Finance leases (e)		675				1,184				118				—				—				—				1,977
Telecom services and co-location facilities (f)		1,577				2,461				1,116				239				—				—				5,393
Short-term note payable (g)		5,500				—				—				—				—				—				5,500
Holdback payment (h)		2,394				3,231				—				—				—				—				5,625
Contingent consideration (i)		20,000				—				—				—				—				—				20,000
Transition Tax (j)		—				—				—				—				—				11,675				11,675
Self-Insurance (k)		6,168				284				—				—				—				—				6,452
Other (l)		3,490				662				614				598				—				—				5,364
Total		$	75,842			$	79,618			$	467,832			$	55,868			$	53,126			$	865,954			$	1,598,240

 

(a)	These amounts represent principal on long-term debt.

(b)	These amounts represent interest on long-term debt.

(c)	These amounts represent principal on the line of credit.

(d)	These amounts represent undiscounted future minimum rental commitments under noncancellable operating leases.

(e)	These amounts represent undiscounted future minimum rental commitments under noncancellable finance leases.

(f)	These amounts represent service commitments to various telecommunication providers.

(g)	These amounts represent short-term note payable.

(h)	These amounts represent the holdback amounts in connection with certain business acquisitions.

(i)	These amounts represent the contingent earn-out liabilities in connection with certain business acquisitions.

(j)	These amounts represent commitments related to the transition tax on unrepatriated foreign earnings reduced by the 2017 overpayment of US Federal Income Tax.

(k)	These amounts represent health and dental insurance plans in connection to self-insurance.

(l)	These amounts represent certain consulting and Board of Directors fee arrangements, software license and implementation commitments and others.

As of June 30, 2019, our liability for uncertain tax positions was $49.1 million. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with such authorities.

We have not presented contingent consideration associated with acquisitions (other than the $20.0 million in contingent consideration associated with the acquisition of Humble Bundle) in the table above due to the uncertainty of the amounts and the timing of cash settlements.

Off-Balance Sheet Arrangements

We are not party to any material off-balance sheet arrangements.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

The following discussion of the market risks we face contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. J2 Global undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document and in the other documents incorporated by reference herein, including our Annual Report on Form 10-K for the year ended December 31, 2018 as well as in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed or to be filed by us in 2019.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and borrowings under our Credit Facility that bear variable market interest rates. The primary objectives of our investment activities are to preserve our principal while at the same time maximizing yields without significantly increasing risk. To achieve these objectives, we maintain our portfolio of cash equivalents and investments in a mix of instruments that meet high credit quality standards, as specified in our investment policy or otherwise approved by the Board of Directors. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30, 2019, the carrying value of our cash and cash equivalents approximated fair value. Our return on these investments is subject to interest rate fluctuations.

As of June 30, 2019, we had investments in debt securities with effective maturities greater than one year of approximately $22.1 million. As of June 30, 2019 and December 31, 2018, we had cash and cash equivalent investments primarily in money market funds with maturities of 90 days or less of $155.5 million and $209.5 million, respectively. 

On January 7, 2019, J2 Cloud Services, LLC entered into a Credit Agreement (the “Credit Agreement”) with certain lenders from time to time party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as sole lead arranger and as administrative agent for the Lenders (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided J2 Cloud Services with a credit facility of $100.0 million (the “Credit Facility”) with an option to request an increase of up to $50.0 million. On July 1, 2019, the Company increased its Credit Facility to $150.0 million (see Note 17 - Subsequent Events of Notes to Condensed Consolidated Financial Statements). As of June 30, 2019, the Company had drawn $100.0 million on the Credit Facility.

At J2 Cloud’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greatest of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 1/2 of 1% per annum, (y) the rate of interest per annum most recently announced by the Agent as its U.S. Dollar “Reference Rate” and (z) one month LIBOR plus 1.00% or (ii) a rate per annum equal to LIBOR divided by 1.00 minus the LIBOR Reserve Requirements (as defined in the Credit Agreement), in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50% to 1.50% and the applicable margin relating to any LIBOR loan will range from 1.50% to 2.50%, in each case, depending on the total leverage ratio of J2 Cloud. The final maturity of the Credit Facility will occur on January 7, 2024. J2 Cloud is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty.

If the LIBOR-based interest rates or Federal Funds Effective Rate would have increased by 100 basis points, annual interest expense would have increased by $1.0 million as it relates to our Credit Facility that bear variable market interest rates.

We cannot ensure that future interest rate movements will not have a material adverse effect on our future business, prospects, financial condition, operating results and cash flows. To date, we have not entered into interest rate hedging transactions to control or minimize certain of these risks.

Foreign Currency Risk

We conduct business in certain foreign markets, primarily in Canada, Australia and the European Union. Our principal exposure to foreign currency risk relates to investment and inter-company debt in foreign subsidiaries that transact business in functional currencies other than the U.S. Dollar, primarily the Australian Dollar, the Canadian Dollar, the Euro, the Hong Kong Dollar, the Japanese Yen, the New Zealand Dollar, the Norwegian Kroner and the British Pound Sterling. If we are unable to settle our short-term inter-company debts in a timely manner, we remain exposed to foreign currency fluctuations.

    

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As we expand our international presence, we become further exposed to foreign currency risk by entering new markets with additional foreign currencies. The economic impact of currency exchange rate movements is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.

As currency exchange rates change, translation of the income statements of the international businesses into U.S. Dollars affects year-over-year comparability of operating results, the impact of which is immaterial to the comparisons set forth in this Quarterly Report on Form 10-Q.

Historically, we have not hedged translation risks because cash flows from international operations were generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash flows and financial position.

Foreign exchange (gains) losses for the three months ended June 30, 2019 and 2018 were $(0.3) million and $0.2 million, respectively, and for the six months ended June 30, 2019 and 2018 were $1.9 million and $2.0 million, respectively. The decrease in losses to our earnings in the current period were attributable to decreased inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S. Dollar. Foreign exchange losses for the six months ended June 30, 2019 remained consistent with the prior comparable period.

Cumulative translation adjustments, net of tax, included in other comprehensive income for the three months ended June 30, 2019 and 2018 were $(1.2) million and $(14.6) million, respectively, and for the six months ended June 30, 2019 and 2018 were $(0.7) million and $(8.3) million, respectively.

We currently do not have derivative financial instruments for hedging, speculative or trading purposes and therefore are not subject to such hedging risk. However, we may in the future engage in hedging transactions to manage our exposure to fluctuations in foreign currency exchange rates.

Item 4.Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.    

As of the end of the period covered by this report, J2 Global’s management, with the participation of Vivek Shah, our principal executive officer, and R. Scott Turicchi, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, Mr. Shah and Mr. Turicchi concluded that these disclosure controls and procedures were effective as of the end of the period covered in this Quarterly Report on Form 10-Q.

(b)	Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) which occurred during the second quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.   OTHER INFORMATION

Item 1.Legal Proceedings

See Note 10 – Commitments and Contingencies of the Notes to Financial Statements (Part I, Item 1) for information regarding certain legal proceedings in which we are involved.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, before deciding to invest in J2 Global or to maintain or increase your investment, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “10-K Risk Factors”) as well as in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed or to be filed by us in 2019. If any of these risks occur, our business, prospects, financial condition, operating results and cash flows could be materially adversely affected. The 10-K Risk Factors are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. There have been no material changes from the 10-K Risk Factors.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)	Unregistered Sales of Equity Securities

 None.

 

(b)	Issuer Purchases of Equity Securities

 

Effective February 15, 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 20, 2020. Cumulatively at June 30, 2019, 2.7 million shares were repurchased under the 2012 Program at an aggregate cost of $101.1 million (including an immaterial amount of commission fees).

In December 2018, the Company acquired 600,000 shares of J2 Global common stock in connection with the 2012 Program and subsequently retired the shares in March 2019 (see Note 12 - Stockholders’ Equity of the Notes to the Condensed Consolidated Financial Statements).

As a result of the acquisition of J2 Global common stock through the Company’s share repurchase program, the number of shares available for purchase under the 2012 Program is 1,338,689 shares of J2 Global common stock. During the six month period ended June 30, 2019, we repurchased zero shares under this program.

The following table details the repurchases that were made under and outside the 2012 Program during the three months ended June 30, 2019:

Period	Total Number of Shares Purchased (1)			Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Program			Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program
April 1, 2019 - April 30, 2019	463			$	87.55			—			1,338,689
May 1, 2019 - May 31, 2019	28,370			$	87.80			—			1,338,689
June 1, 2019 - June 30, 2019	647			$	86.79			—			1,338,689
Total	29,480							—			1,338,689

(1)	All shares purchased were surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with employee stock options and/or the vesting of restricted stock issued to employees.

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Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not Applicable.

Item 5.Other Information

None.

Item 6.Exhibits

31.1	Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Rule 13a-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from J2 Global, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, (v) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		J2 Global, Inc.
Date:	August 9, 2019	By:	/s/ VIVEK SHAH
			Vivek Shah
			Chief Executive Officer and a Director
			(Principal Executive Officer)

 

Date:	August 9, 2019	By:	/s/ R. SCOTT TURICCHI
			R. Scott Turicchi
			President and Chief Financial Officer
			(Principal Financial Officer)

Date:	August 9, 2019	By:	/s/ STEVE P. DUNN
			Steve P. Dunn
			Chief Accounting Officer

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INDEX TO EXHIBITS

Exhibit Number	Description
31.1	Rule 13a-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Rule 13a-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Section 1350 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Section 1350 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from J2 Global, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, (v) Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.

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