In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - "Risk Factors" of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (together, the "Risk Factors"), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures About Market Risk." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with theSEC . Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to: •Sustain growth or profitability, particularly in light of an uncertainU.S. or worldwide economy and the related impact on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines; •Maintain and increase our customer base and average revenue per user; •Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations; •Acquire businesses on acceptable terms and successfully integrate and realize anticipated synergies from such acquisitions; •Continue to expand our businesses and operations internationally in the wake of numerous risks, including adverse currency fluctuations, difficulty in staffing and managing international operations, higher operating costs as a percentage of revenues, or the implementation of adverse regulations; •Maintain our financial position, operating results and cash flows in the event that we incur new or unanticipated costs or tax liabilities, including those relating to federal and state income tax and indirect taxes, such as sales, value-added and telecommunication taxes; •Accurately estimate the assumptions underlying our effective worldwide tax rate; •Maintain favorable relationships with critical third-party vendors whose financial condition will not negatively impact the services they provide; •Create compelling digital media content causing increased traffic and advertising levels; additional advertisers or an increase in advertising spend; and effectively target digital media advertisements to desired audiences; •Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure or security breach; effectively maintaining and managing our billing systems; time and resources required to manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures; •Compete with other similar providers with regard to price, service, and functionality; •Cost-effectively procure, retain and deploy large quantities of telephone numbers in desired locations inthe 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; -48- -------------------------------------------------------------------------------- •Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return; •Successfully develop and protect our intellectual property, both domestically and internationally, including our brands, patents, trademarks and domain names, and avoid infringing upon the proprietary rights of others; •Recruit and retain key personnel; and •Realize the expected benefits of the cloud fax spin-off transaction or the sale of the B2B Backup business. In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics including the COVID-19 outbreak and other catastrophic events outside of our control, including as to COVID-19 the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us. Overview As ofSeptember 30, 2021 ,Ziff Davis, Inc. , together with its subsidiaries ("Ziff Davis", "our", "us" or "we"), was a leading provider of internet information and services. The Digital Media business specialized in the technology, shopping, gaming, and healthcare markets, offering content, tools and services to consumers and businesses. The Cloud Services business provided cloud-based subscription services to consumers and businesses including cloud fax, cybersecurity, privacy and marketing technology. InFebruary 2021 , we sold certain Voice assets in theUnited Kingdom and inSeptember 2021 , we sold our B2B Backup business. OnOctober 7, 2021 subsequent to the end of the third quarter of 2021, the spin-off of the cloud fax business into an independent public company (Consensus) was completed. We believe the spin-off will enable the independent companies to create value with distinct management teams, capital structures and strategic focus. Our Digital Media business generates revenues from advertising and sponsorships, subscription and usage fees, performance marketing and licensing fees. Our Cloud Services business generates revenues primarily from customer subscription and usage 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 Digital Media business is driven primarily by advertising revenues, has relatively higher sales and marketing expense and has seasonal strength in the fourth quarter. Our Cloud Services business is driven primarily by subscription revenues that are relatively higher margin, stable and predictable from quarter to quarter with some minor seasonal weakness 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.Ziff Davis, Inc. (formerlyJ2 Global, Inc. ) was incorporated in 2014 as aDelaware corporation through the creation of a holding company structure, and our Cloud Services business, operated by our wholly owned subsidiary,J2 Cloud Services, LLC (formerlyJ2 Cloud Services, Inc. ), and its subsidiaries, was founded in 1995.
Digital Media Performance Metrics
We use certain metrics to generally assess the operational and financial performance of our Digital Media business. The number of visits is an important metric because it is an indicator of consumers' level of engagement with our mobile applications, websites and other services. We believe highly engaged consumers are more likely to participate in advertising programs and other activities that derive our multiple revenue streams. -49- -------------------------------------------------------------------------------- We define a visit as a group of interactions by users with our mobile and desktop applications and websites. A single visit can contain multiple page views and actions, and a single user can open multiple visits across domains, web browsers, desktop or mobile devices. We measure visits withSeptember 30, 2021 and 2020 (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 (1) 2021 (1) 2020 (1) Visits 2,047 2,197 6,454 6,701 Page views 7,006 7,167 22,038 21,887
Sources:
(1) To more accurately reflect customer activity at Ookla, we have shifted to using tests as the basis instead of
Cloud Services Performance Metrics
We use certain metrics to generally assess the operational and financial performance of our Cloud Services business; these metrics also serve as a baseline for (a) internal trends and (b) benchmarking against competitors. The average monthly revenue per customer can be used as an analytical tool in determining the marginal economics of customer acquisition, which is particularly useful as we continue to focus on growing our higher-margin businesses. We also use this metric, in conjunction with the cancel rate, to help provide a directional indicator of Cloud Services revenue and calculate the lifetime value of customers within each of our business units. -50- --------------------------------------------------------------------------------
The following table sets forth certain key operating metrics for our Cloud
Services business as of and for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Subscriber revenues: Fixed (1)$ 152,359 $ 144,525 $ 444,397 $ 426,766 Variable (1) 29,639 25,708 84,079 80,255 Total subscriber revenues$ 181,998 $ 170,233 $ 528,476 $ 507,021 Other license revenues 92 15 275 69 Total revenues$ 182,090 $ 170,248 $ 528,751 $ 507,090 Percentage of total subscriber revenues: Fixed 83.7 % 84.9 % 84.1 % 84.2 % Variable 16.3 % 15.1 % 15.9 % 15.8 % Total revenues: Number-based$ 98,652 $ 98,000 $ 293,167 $ 289,502 Non-number-based 83,438 72,248 235,584 217,588 Total revenues$ 182,090 $ 170,248 $ 528,751 $ 507,090 Average monthly revenue per Cloud Business Customer (ARPU) (2)(3)$ 15.53 $ 13.98 Cancel Rate (4) 2.1 % 2.1 %
(1)The first quarter 2020 disclosure of
(2)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.
(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.
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 2020 Annual Report on Form 10-K filed with theSEC onMarch 1, 2021 . During the three months endedSeptember 30, 2021 , there were no significant changes in our critical accounting policies and estimates. -51- --------------------------------------------------------------------------------
Results of Operations for the Three and Nine Months Ended
Digital Media
We expect the revenue for the remainder of fiscal year 2021 to be higher compared to the prior-year comparable period due to the acquisition of RetailMeNot and organic growth, subject to the continued risk of the COVID-19 pandemic. We expect the Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, but these initiatives will be offset by the impact of COVID-19 in the near term. 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, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space but with different business models may impact Digital Media's overall profit margins. Cloud Services Excluding the impact of the spin-off of our cloud fax business, the sale of our backup business and assuming a stable or improving economic environment, and, subject to our risk factors, we expect 2021 revenue to be higher compared to the prior year. The main strategic 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. OnOctober 7, 2021 , the Company completed the spin-off of its cloud fax business into an independent publicly traded company. This cloud fax business represented approximately 50% of our total Cloud revenues and approximately 31% of our total Cloud operating costs for the nine months endedSeptember 30, 2021 . As a result, we anticipate a reduction in our operating margins as the cloud fax business will not recur going forward. We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current macroeconomic conditions. In a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses within this space but with different business models may impact Cloud Services' overall profit margins. Consolidated Excluding the impact of the spin-off of our fax business and based on the trends discussed above with respect to our Cloud Services and Digital Media businesses, we anticipate our consolidated revenue for fiscal year 2021 to be higher compared to the prior-year comparable 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 has historically operated at a lower operating margin; and (ii) the completion of the spin-off of our cloud fax business which historically operated at a higher operating margin than our remaining businesses. -52- --------------------------------------------------------------------------------
Revenues
(in thousands, except percentages)
Three Months Ended Nine Months Ended September 30, Percentage Change September 30, Percentage Change 2021 2020 2021 2020 Revenues$444,252 $356,976 24%$1,271,480 $1,020,353 25% Our revenues consist of revenues from our Digital Media and Cloud Services businesses. 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. Cloud Services revenues primarily consist of revenues from "fixed" customer subscription revenues and "variable" revenues generated from actual usage of our services. Our revenues in 2021 have increased over the comparable three and nine month periods of 2020 primarily due to a combination of acquisitions and organic growth; partially offset by declines in certain areas of both the Digital Media and Cloud Services businesses.
Cost of Revenues
(in thousands, except percentages)
Three Months Ended Nine Months Ended September 30, Percentage Change September 30, Percentage Change 2021 2020 2021 2020 Cost of revenue$64,302 $55,822 15%$185,462 $171,755 8% As a percent of revenue 14% 16% 15% 17% Cost of revenues is primarily comprised of costs associated with content fees, editorial and production costs and hosting costs. The increase in cost of revenues for the three months endedSeptember 30, 2021 was primarily due to higher content fees, campaign fulfillment and other editorial and production costs and increased hosting and other computer related costs. The increase in cost of revenues for the nine months endedSeptember 30, 2021 was primarily due to higher content fees, editorial and production costs, hosting and computer related costs and increased depreciation. Operating Expenses Sales and Marketing.
(in thousands, except percentages)
Three Months Ended Nine Months Ended September 30, Percentage Change September 30, Percentage Change 2021 2020 2021 2020 Sales and Marketing$139,693 $95,074 47%$394,981 $287,317 37% As a percent of revenue 31% 27% 31% 28% 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 endedSeptember 30, 2021 was$72.8 million (primarily consists of$44.3 million of third-party advertising costs and$22.1 million of personnel costs) compared to the third quarter of 2020 of$35.4 million (primarily consists of$19.8 million of third-party advertising costs and$12.8 million of personnel costs. Advertising cost for the nine months endedSeptember 30, 2021 was$205.2 million (primarily consists of$119.7 million of third-party advertising costs and$67.5 million of personnel costs) compared to 2020 of$108.0 million (primarily consists of$57.8 million of third-party advertising costs and$39.4 million of personnel costs). The increase in sales and marketing -53- -------------------------------------------------------------------------------- expenses for the three and nine months endedSeptember 30, 2021 versus the prior comparable period was primarily due to increased creative services, sales, advertising operations, advertising and product development costs associated with the acquisition of businesses acquired in and subsequent to the third quarter 2020 within the Digital Media and Cloud Services businesses.
Research, Development and Engineering.
(in thousands, except percentages)
Three Months Ended Nine Months Ended September 30, Percentage Change September 30, Percentage Change 2021 2020 2021 2020 Research, Development and$21,639 $14,261 52%$62,634 $43,273 45% Engineering As a percent of revenue 5% 4% 5% 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 nine months endedSeptember 30, 2021 versus the prior comparable period was primarily due to an increase in costs associated with businesses acquired in and subsequent to the third quarter 2020.
General and Administrative.
(in thousands, except percentages)
Three Months Ended Nine Months Ended September 30, Percentage Change September 30, Percentage Change 2021 2020 2021 2020 General and Administrative$122,477 $114,381 7%$359,498 $312,283 15% As a percent of revenue 28% 32% 28% 31%
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 nine months ended
Goodwill impairment on business. Our goodwill impairment on business is generated from the impairment of the B2B Backup business in the second quarter of 2021.Goodwill impairment on business was$32.6 million for the nine months endedSeptember 30, 2021 . See Note 6 - Dispositions from the footnotes to our Condensed Consolidated Financial Statements for additional information.
Share-Based Compensation
The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): -54- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Cost of revenues$ 108 $ 136 $ 357 $ 413 Operating expenses: Sales and marketing 427 321 1,160 1,135 Research, development and engineering 613 425 1,690 1,340 General and administrative 5,607 4,918 15,912 15,755 Total$ 6,755 $ 5,800 $ 19,119 $ 18,643
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$19.9 million and$22.7 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$62.8 million and$65.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Interest expense, net was lower due to the redemption of our 3.25% Convertible Notes onAugust 2, 2021 . Loss (gain) on sale of businesses. Loss on sale of businesses was$24.6 million during the three months endedSeptember 30, 2021 and a gain of$17.1 million for the three months endedSeptember 30, 2020 . Loss on sale of businesses was$21.8 million during the nine months endedSeptember 30, 2021 and a gain of$17.1 million for the nine months endedSeptember 30, 2020 . Our loss on the sale of business during the third quarter of 2021 was related to the sale of our B2B Back-up business. The loss on the sale of businesses during the nine months endedSeptember 30, 2021 was due to the loss on the sale of the B2B Back-up business, partially offset by a gain on the sale of certain Voice assets in theUnited Kingdom in the first quarter of 2021 with a subsequent adjustment in the second quarter of 2021. See Note 6 - Dispositions from the footnotes to our Condensed Consolidated Financial Statements for additional information. Loss on investments, net. Our loss on investments, net is generated from gains or losses from investments in equity and debt securities. Our loss on investments, net was zero and$0.2 million for the three months endedSeptember 30, 2021 and 2020 and$16.7 million and$21.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our loss on investments, net for the three months endedSeptember 30, 2021 versus the prior comparable period was consistent. Our loss on investments, net decreased for the nine months endedSeptember 30, 2021 versus the prior comparable period due to lower net losses realized on certain investments as a result of an impairment recognized in the current period and changes in the investee's capital structure and overall market volatility recognized in the prior comparable period. Other income (expense), net. Our other income (expense), net is generated primarily from miscellaneous items and gain or losses on currency exchange. Other income (expense), net was$1.7 million and$14.2 million for the three months endedSeptember 30, 2021 and 2020, respectively and$1.4 million and$16.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Other income (expense), net changed for the three and nine months endedSeptember 30, 2021 versus the prior comparable periods primarily due to changes in gain or 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$8.8 million and$24.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$16.7 million and$49.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Our effective tax rate was 16.6% and 28.3% for the three months endedSeptember 30, 2021 and 2020, respectively, and 12.3% and 32.2% for the nine months endedSeptember 30, 2021 and 2020, respectively.
The decrease in our effective income tax rate for the three months ended
-55- --------------------------------------------------------------------------------
1.a decrease in tax expense during 2021 due to recognizing a current tax benefit related to the sale of the business-to-business backup business units; and
2.a decrease in tax expense due to increased tax benefits related to tax deductions for the vesting of restricted stock units and exercises of stock options; partially offset by
3.an increase in our effective income tax rate during 2021 forU.S. state and local taxes due to a greater portion of our income being subject to tax in theU.S.
The decrease in our effective income tax rate for the nine months ended
1.a decrease in tax expense during 2021 due to recognizing a tax benefit related to the disposition of certain business units; and
2.a decrease in tax expense due to discrete tax benefits related to a reduction in our net reserve for uncertain tax positions with no similar events for the nine months endedSeptember 30, 2020 ; partially offset by 3.an increase in our effective income tax rate during 2021 forU.S. state and local taxes due to a greater portion of our income being subject to tax in theU.S. 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.
Income (loss) from equity method investment, net. Income (loss) from equity method investment, net is generated from our investment in theOCV Fund for which we receive annual audited financial statements. The investment in theOCV 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 income (loss) from equity method investment, net was$(1.9) million and$(0.7) million net of tax benefit (expense) for the three months endedSeptember 30, 2021 and 2020, respectively, and$16.6 million and$(10.8) million , for the nine months endedSeptember 30, 2021 and 2020, respectively. The nine months endedSeptember 30, 2021 gain was primarily a result of a gain on the underlying investments. During the three months endedSeptember 30, 2021 and 2020, the Company recognized management fees of$0.8 million and$0.8 million , net of tax benefit, respectively, and for the nine months endedSeptember 30, 2021 and 2020, the Company recognized management fees of$2.3 million and$2.3 million , net of tax benefit, respectively.
Digital Media and Cloud Services Results
Our businesses are based on the organization structure used by management for making operating and investment decisions and for assessing performance and have been aggregated into two businesses: (i) Digital Media; and (ii) Cloud Services. We evaluate the performance of our businesses based on revenues, including both external and interbusiness net sales, and operating income. We account for interbusiness sales and transfers based primarily on standard costs with reasonable mark-ups established between the businesses. Identifiable assets by business are those assets used in the respective business' operations. Corporate assets consist of cash and cash equivalents, deferred income taxes and certain other assets. All significant interbusiness amounts are eliminated to arrive at our consolidated financial results. -56- --------------------------------------------------------------------------------
Digital Media
The following results are presented for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 External net sales$ 262,162 $ 186,728 $ 742,729 $ 513,262 Inter-business net sales 267 56 551 200 Net sales 262,429 186,784 743,280 513,462 Cost of revenues 23,779 17,390 69,871 55,499 Gross profit 238,650 169,394 673,409 457,963 Operating expenses 188,950 143,312 548,960 410,109 Operating income$ 49,700 $ 26,082 $ 124,449 $ 47,854 Digital Media's net sales of$262.4 million for the three months endedSeptember 30, 2021 increased$75.6 million , or 40.5%, from the prior comparable period primarily due to business acquisitions. Digital Media's net sales of$743.3 million for the nine months endedSeptember 30, 2021 increased$229.8 million , or 44.8%, from the prior comparable period primarily due to business acquisitions. Digital Media's gross profit of$238.7 million for the three months endedSeptember 30, 2021 increased$69.3 million , or 40.9%, from the prior comparable period primarily due to business acquisitions. Digital Media's gross profit of$673.4 million for the nine months endedSeptember 30, 2021 increased$215.4 million , or 47.0%, from the prior comparable period primarily due to business acquisitions. Digital Media's operating expenses of$189.0 million for the three months endedSeptember 30, 2021 increased$45.6 million from the prior comparable period. Digital Media's operating expenses of$549.0 million for the nine months endedSeptember 30, 2021 increased$138.9 million from the prior comparable period. The increase in the three and nine months endedSeptember 30, 2021 is primarily due to additional expense associated with businesses acquired in and subsequent to the prior comparable period including (a) additional salary and related costs including severance; (b) creative and selling costs; and (c) increased amortization of intangible assets. As a result of these factors, Digital Media's operating income of$49.7 million for the three months endedSeptember 30, 2021 increased$23.6 million , or 90.6%, from the prior comparable period. Digital Media's operating income of$124.4 million for the nine months endedSeptember 30, 2021 increased$76.6 million , or 160.1%, from the prior comparable period.
Cloud Services
The following results are presented for the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 External net sales$ 182,090 $ 170,248 $ 528,751 $ 507,090 Inter-business net sales 89 - 215 - Net sales 182,179 170,248 528,966 507,090 Cost of revenues 40,791 38,421 116,069 116,208 Gross profit 141,388 131,827 412,897 390,882 Operating expenses 79,581 66,070 257,211 207,412 Operating income$ 61,807 $ 65,757 $ 155,686 $ 183,470 Cloud Services' net sales of$182.2 million for the three months endedSeptember 30, 2021 increased$11.9 million , or 7.0%, from the prior comparable period primarily due to business acquisitions acquired, partially offset by businesses sold subsequent to the third quarter 2020. Cloud Services' net sales of$529.0 million for the nine months endedSeptember 30, 2021 -57- --------------------------------------------------------------------------------
increased
Cloud Services' gross profit of$141.4 million for the three months endedSeptember 30, 2021 increased$9.6 million , or 7.3%, from the prior comparable period primarily due to business acquisitions; partially offset by businesses sold subsequent to the third quarter 2020. Cloud Services' gross profit of$412.9 million for the nine months endedSeptember 30, 2021 increased$22.0 million , or 5.6%, from the prior comparable period primarily due to business acquisitions; partially offset by businesses sold subsequent to the third quarter 2020. Cloud Services' operating expenses of$79.6 million for the three months endedSeptember 30, 2021 increased$13.5 million from the prior comparable period primarily due to expense associated with businesses acquired in and subsequent to the third quarter 2020 and increased marketing and advertising costs; partially offset by businesses sold subsequent to the prior comparable period. Cloud Services' operating expenses of$257.2 million for the nine months endedSeptember 30, 2021 increased$49.8 million from the prior comparable period primarily due to expense associated with businesses acquired in and subsequent to the third quarter 2020, increased marketing and advertising costs and the recognition of a goodwill impairment on business; partially offset by businesses sold subsequent to the prior comparable period. As a result of these factors, Cloud Services' operating income of$61.8 million for the three months endedSeptember 30, 2021 decreased$(4.0) million , or (6.0)%, from the prior comparable period. Cloud Services' operating income of$155.7 million for the nine months endedSeptember 30, 2021 decreased$(27.8) million , or (15.1)%, from the prior comparable period.
Liquidity and Capital Resources
Cash and Cash Equivalents and Investments
AtSeptember 30, 2021 , we had cash, cash equivalents and investments of$657.2 million compared to$340.8 million atDecember 31, 2020 . The increase in cash and investments resulted primarily from cash provided from operations and proceeds from the Bridge Loan Facility (defined below); partially offset by the repayment of debt and cash used in business acquisitions, purchases of property and equipment (including capitalized labor), repurchase of common stock and investments. AtSeptember 30, 2021 , cash and investments consisted of cash and cash equivalents of$546.5 million , short-term investments of zero and long-term investments of$110.7 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 ofSeptember 30, 2021 , cash and investments held within domestic and foreign jurisdictions were$491.0 million and$166.2 million , respectively. OnApril 7, 2021 , the Company entered into a Credit Agreement (the "Credit Agreement") with certain lenders from time to time party thereto (collectively, the "Lenders") andMUFG Union Bank, N.A. , as administrative agent, collateral agent and sole lead arranger for the Lenders (the "Agent"). Pursuant to the Credit Agreement, the Lenders have provided the Company with a revolving credit facility of$100 million (the "Credit Facility"). Subject to customary conditions, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to$250 million , for a total aggregate commitment of up to$350 million . The proceeds of the Credit Facility are intended to be used for working capital and general corporate purposes of the Company and its subsidiaries, including to finance certain permitted acquisitions and capital expenditures in accordance with the terms of the Credit Agreement. The final maturity of the Credit Facility will occur onApril 7, 2026 . OnJune 2, 2021 ,June 21, 2021 ,August 20, 2021 andSeptember 16, 2021 , we entered into First, Second, Third and Fourth Amendments (together the "Amendments") to Credit Agreement. The Amendments (i) provided for the issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of$485.0 million (the "Bridge Loan Facility"), (ii) permitted the spin-off of our cloud fax business into a new publicly traded company, and (iii) provided for certain other changes to the Credit Agreement. -58- -------------------------------------------------------------------------------- OnOctober 7, 2021 , in exchange for the equity interest in Consensus, Consensus paid Ziff Davis approximately$269.6 million of cash and issued$500.0 million of senior notes due 2028 to Ziff Davis and Ziff Davis exchanged such notes with the lenders under the Credit Agreement and Credit Agreement Amendments by and among the subsidiaries of Ziff Davis party thereto as guarantors,Citicorp North America Inc. andMUFG Union Bank, N.A. andMUFG Union Bank, N.A. , as administrative agent for the lenders, in exchange for extinguishment of a similar amount indebtedness under the Bridge Loan Facility. Such lenders or their affiliates agreed to resell the 2028 notes to qualified institutional buyers inthe United States pursuant to Rule 144A. OnSeptember 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 whichRichard 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. In the first nine months of 2021, the Company received capital call notices from the management ofOCV Management, LLC for$21.2 million , inclusive of certain management fees. Of the outstanding balance,$21.2 million has been paid for the nine months endedSeptember 30, 2021 . We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months.
Cash Flows
Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was$430.3 million and$356.0 million for the nine months endedSeptember 30, 2021 and 2020, 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 2021 compared to 2020 was attributable to additional income after considering noncash items, less cash outflow associated with accounts payable and accrued expenses and increased cash inflow associated with deferred revenue; partially offset by higher income tax payments, cash outflow associated with long-term liabilities and higher accounts receivable and prepaid expenses. Our cash and cash equivalents were$546.5 million and$242.7 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. Net cash used in investing activities was$159.6 million and$107.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, net cash used in investing activities was primarily due to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized labor) and the purchase of investments; partially offset by proceeds from the sale of businesses and distributions from an equity method investment. The increase in our net cash used in investing activities in 2021 compared to 2020 was primarily due to additional cash used for business acquisitions. Net cash provided by (used in) financing activities was$39.8 million and$(256.9) million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , net cash provided by financing activities was primarily due to the proceeds from the Bridge Loan Facility, issuance of common stock under the employee stock purchase plan and the exercise of options, partially offset by the repayment of debt, repurchase of common stock and business acquisitions. The change in net cash provided by financing activities in 2021 compared to 2020 was primarily attributable to proceeds from a bridge loan in 2021. -59- --------------------------------------------------------------------------------
Stock Repurchase Program
In
InNovember 2018 andMay 2019 , the Company entered into Rule 10b5-1 trading plans 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 inMarch 2019 . During the year endedDecember 31, 2019 , the Company repurchased 197,870 shares at an aggregate cost of$16.0 million which were subsequently retired in the same year.
During the year ended
OnAugust 6, 2020 , the Company's Board of Directors approved a program authorizing the repurchase of up to 10 million shares of our common stock throughAugust 6, 2025 (the "2020 Program") in addition to the five million shares repurchased under the 2012 Program. During the three month period endedSeptember 30, 2021 , we repurchased no shares under this program. Cumulatively atSeptember 30, 2021 , 2,490,599 shares were repurchased at an aggregate cost of$177.8 million (including an immaterial amount of commission fees) under the 2020 Program, which were subsequently retired.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
Payments Due in (in thousands) Contractual Obligations 2021 2022 2023 2024 2025 Thereafter Total Long-term debt - principal (a) $ - $ - $ - $ - $ -$ 1,300,000 $ 1,300,000 Long-term debt - interest (b) 24,559 44,313 44,313 44,313 44,313 183,061 384,872 Bridge loan (c) 485,000 - - - - - 485,000 Operating leases (d) 8,507 31,926 26,494 18,839 10,497 35,250 131,513 Telecom services and co-location facilities (f) 2,539 1,712 456 42 - - 4,749 Holdback payments (g) 3,693 16,944 950 - - - 21,587 Transition tax (h) - - - 3,189 8,486 - 11,675 Self-Insurance (i) 8,861 13,532 3,001 - - - 25,394 Other (j) 381 598 - - - - 979 Total$ 533,540 $ 109,025 $ 75,214 $ 66,383 $ 63,296 $ 1,518,311 $ 2,365,769 (a)These amounts represent principal on long-term debt. (b)These amounts represent interest on long-term debt. (c)These amounts represent principal on short-term debt. (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 the holdback amounts in connection with certain business acquisitions. (h)These amounts represent commitments related to the transition tax on unrepatriated foreign earnings reduced by the 2017 overpayment of US Federal Income Tax. (i)These amounts represent health and dental insurance plans in connection to self-insurance. (j)These amounts represent certain consulting and Board of Directors fee arrangements, software license and implementation commitments and others. -60- -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , our liability for uncertain tax positions was$54.2 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 contingent consideration which we have deemed as certain in terms of amount and timing) in the table above due to the uncertainty of the amounts and the timing of cash settlements. We have also not presented our remaining commitment toOCV Management, LLC of approximately$72.5 million due to the uncertainty of timing of funding requests.
Off-Balance Sheet Arrangements
We are not party to any material off-balance sheet arrangements.
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