Year End #10: JCOM, An odd little company

J2 Global or JCOM is an odd little company. I first was introduced to it when I got a fax account with eFax (which I still have, many years later). An eFax account allows you to do away with a fax machine. You just have a phone number, which you give to anyone who wants to send a fax to you – and the fax turns up in your email and you read it (and print it out if you want to). It’s very low-tech. A number of years ago JCOM acquired eFax and it has been a cash-cow ever since, not only bringing in a bundle of cash but growing that annual income (albeit slowly) ever since. More recently JCOM has been expanding into the cloud in a number of ways, by acquisitions mostly, and growing the acquisitions.

I’m not urging anyone to buy JCOM as it is a strange little company, but be aware that it IS successful. I’ve been in it a couple of times, generally getting impatient with its glacial growth and selling out when I needed cash. This time I took a small position two months ago at $56 or so. It’s been as high in these two months as $63.30 a couple of weeks ago. Now with this meltdown, it’s at $59.75. When I talk about glacial growth, in 2011 they made $2.72, 2012 they made $2.93, 2013 they made $3.05, and they’ll probably end up in 2014 making about $3.33 (very roughly). Their PE is about 18.

They also pay a small dividend of 28.5 cents per quarter (which isn’t that small, as at $1.14 per year is roughly a 2% dividend). They raise it EVERY quarter by three quarters of a cent (ie next quarter it will be 29.25 cents), which is an interesting little twist.

Here is a pretty nice write-up which came in part from a Seeking Alpha article.

May 2014 –
Legacy fax business obscures growth potential of a strategically acquired portfolio of businesses.


The legacy cash-cow fax business obscures growth potential of J2’s other cloud services and media business.

JCOM has excellent management with a history of value creation and with ownership in the company.

Media acquisitions add value on their own but also contribute to a greater strategy.

The operating leverage in the Digital Media segment will double operating margins.

J2 Global Inc. (JCOM) was founded in 1995. The company began as a cheaper alternative to owning a fax machine. Today, incredibly this is still a cash cow, J2 still processes more than 1 billion faxes a year for lawyers, doctors and others who rely on delivery confirmation and phone records. The company is led by CEO Nehemia Zucker, who has established an impressive track record of value creation.

Last year the market got really upset when the company missed on earnings, and scared because the CEO moved away from acquisitions in the cloud space to acquiring assets in the media space. The stock dropped from $55 to $45 after that earnings call. Since that time the stock held up reasonably well, but made a less pronounced dive after the most recent earnings call again, back to just $46 per share even though results were not at all bad:

Revenues were $134.1 million, a first quarter record, and up 18%.

Business Cloud Services revenues were $108.8 million, up $10.1 million or 11%.

Digital Media revenues were $33.3 million, up $10.5 million or 46%.
Both results exceeded our internal budgeted targets.

EBITDA increased 19% to a first quarter record of $57.3 million, up from $48.2 million.

Right now, the company has three distinctly different sources of revenue.

the Cloud businesses with the eFax and eVoice tools,
the Media Business
IP licensing revenues

Fax is not sexy, but it makes a ton of cash.

“Our non-fax business of total revenue back in 2011 was only 17%. So over 80% of our business in 2011 was fax. In 2014 fax is going to be a little bit less than 50% and non-fax is going to be bigger than 50%. It is very, very important to state that while our fax business is still growing, our other non-fax businesses are growing even faster.

What is especially interesting about this dynamic of having a legacy cash cow business complemented with a fast growing portfolio of businesses acquired at reasonable prices, is that the growth speed of the new business gets lost. This allows us, as investors, to acquire these fast growers at an attractive price.

IP licensing revenue is highly volatile and is very little compared to the company’s total revenue. For example, in Q4 it was $1.6 million. That’s why it is somewhat underestimated by investors. In reality this revenue falls almost completely to the bottom line. The volatility of this revenue stream, because it often involves litigation, can make the company’s valuation multiples look somewhat elevated at certain points in time.

Promising Media Business
Management says that the reason it has recently mostly been buying media companies is a matter of price. Although it is also interested in building out its cloud business, the asking price by sellers was too high. In the Dec conference call there were a few especially intriguing bits when thinking about future growth:

“In our Media business, we’ve created a leading digital public share in tech, in games and in men’s lifestyle. All this was done during the period of one year, really amazing. We added in 2013 the brands of IGN, the business of AskMen, NetShelter and TechBargains. We continue to expand our geography footprint on the Media business and we expect to launch up to a dozen new version of IGN, PCMagazine and AskMen globally”.

The company wants to launch local versions of its magazines across the globe. The recent stock pullback also has them more optimistic about acquiring companies in the U.S. instead of looking across the globe in search of more attractively priced assets. Getting incremental revenue will influence the ultimate EBITDA margin that is attainable in the Media segment. Management estimates they are somewhere in the low to mid-20s right now, but argues it’s realistic to attain margins in the 30s. The 4th quarter of 2013 was highly promising in this regard, because management indicates that this high revenue quarter saw almost all the additional revenue fall directly to EBITDA. Obviously high growth in revenue combined with margin expansion will exponentially inflate the bottom line.

Management with history of value creation
J2 has historically been a serial acquirer. This is not the first time Zucker steered the company in a different direction. Fighting for its life, J2 acquired its main competitor, eFax, in late 2000 and raised prices. When Nasdaq threatened to delist J2, the company did a 4-for-1 reverse split of its shares in February 2001. Zucker also halved the $8 million+ ad budget, equivalent to 62% of revenue. This returned the company to profitability by 2002. Zucker has bought 40 or so companies since he took over at the helm. He has taken J2 into document management, e-mail hosting, marketing services, conference calls and now media. Through all these years he built up a track record of creating tremendous value for shareholders. Earnings per share have grown by an average of 24% per year over the past ten years. Returns on equity have been astounding.

A philosophy of careful capital allocation appears to be well ingrained in the entire management team: Well our whole thesis is really about the return on invested capital. Whether that capital was invested in activity that some people deem organic, or whether we invest it in M&A activity, that’s the key driver of how we think about our businesses, doesn’t matter whether the intellectual property business, the cloud subscription business or the media business.

The chairman of the board is Richard S. Ressler who owns approximately 5.26% of the company and is the founder of Orchard Capital. Zucker owns 0.4% of outstanding shares with a market value of over $8 million, in May he, along with other insiders, has acquired some more shares. A majority of key insiders are properly incentivized to further the goals of minority stockholders.
Greater Strategy Behind Digital Content

As much as I dislike companies driving growth by acquisition, Zucker has the track record to back him up. His latest foray into digital content has a greater strategy beyond just prudently investing capital into cash generating businesses.

It is vital to understand this in order to judge the company’s prospects correctly. Paramount to this strategy is the acquisition of NetShelter. The company is using its advanced digital ad targeting platform and Ziff Davis B2B, a leading provider of research to enterprise buyers and leads to IT vendors, to expand its ad platform and data providing services to businesses.

Going forward, I expect management will seek to acquire more content platforms in the technology space to expand on the reach of its new ad network. By building a highly targeted network with enough reach, the company will have an attractive offering for large advertisers.
Increasing the number of advertisers will drive interest among publishers to sign up to the ad network. When 3rd party adoption of the advertising network can be accelerated, the segment can quickly grow revenue. Ads on third party websites will leverage the digital ad targeting platform asset and drive revenue with almost no incremental expense. In turn driving the bottom line very hard.
Another strategic benefit of the NetShelter engine is to allow the company to extract incremental value from investments into media companies. When management acquires enough niche websites or signs up 3rd party publishers, the company is effectively establishing a moat around its business. When its ad network has both scale and is highly targeted, it will become very hard for other networks to match J2’s effectiveness per dollar spent on ads.

Both its historic track record and this ongoing strategic execution strengthen my confidence the company will achieve better returns on equity than the S&P 500 over the next few years.

Here’s a division by business segment for 2013

Business Cloud – Revenue was $390 million up 8%, Op Marg was 51%, Operating Income was up 6.2%.

Fax – Revenue was $260 million up 5.5%, Op Marg was 51%,

Digital Media – Revenue was $131 million up 1245%, Op margin was 5%, Op income was up 133%.

This will have a profound effect on the bottom line contribution coming from Digital Media. Currently Business Cloud Services operating income dwarfs Digital Media’s with $49 million vs $4.6 million. Last year Digital Media was still operating at a net loss.
The quarterly picture already shows a strong move in the right direction and Q1’s are known to be very weak quarters for Digital Media. Generally expected to represent a fifth of full year revenue without further acquisitions.

All segments have very capital light business models, and the CAPEX required to maintain Free Cash Flow is negligible. Most of the company’s CAPEX goes towards acquisitions.

The CEO has a great track record of capital allocation. The strategy behind the latest string of acquisitions shows the soundness of his current plans. This indicates Zucker has a good chance to keep batting his historic averages of creating tremendous value for shareholders.

The market is underestimating the company’s room to increase margins at the Media business and continue growing revenue at its historic pace. This creates an opportunity to buy J2 and wait for the market to recognize the company’s true worth when future earnings reports paint a clearer picture.

June 2014 – Acquisition
Ziff Davis, the Digital Media Division of j2 Global, announced the acquisition of emedia Communications, a provider of research to IT buyers and leads to IT vendors. emedia will become part of the Ziff Davis B2B unit which combined will feature an email database of over 20 million.

July 2014 – Acquisition
Jcom’s Business Cloud Services Division has acquired the business and assets of Contactology, a North Carolina based provider of email marketing services. This is our first acquisition in the email marketing space since we entered the market with the 2010 purchase of Campaigner® and expands our email marketing base in the U.S. We intend to migrate Contactology customers and resellers to the Campaigner platform and services. With this acquisition, we have effected tuck in acquisitions on each of the cloud service platforms we currently operate. Terms of the acquisition were not disclosed and the financial impact is not expected to be material.

Here’s the latest quarter results.

Nov 2014 – Announced Sept quarter results

Dividend up for 13th consecutive quarter to $0.285

Cloud Services revenues up 16.4% to a record $109 million from $93 million

Digital Media revenues up 29.3% to a record $43.2 million from $33.4

Adjusted total revenues increased 19.7% to $153 million from $128 million.

Adjusted earnings increased 12.2% to 83 cents from 74 cents.

EBITDA up 22.5% to $64.7 million from $52.8 million.

Free cash flow up 75% to $39.1 million from $22.3 million.

Cash - We ended the quarter with $684 million in cash and investments after deploying $52.9 million for acquisitions during the quarter and j2s regular quarterly dividend payment.

This was another strong quarter with record performance in both our cloud and media divisions. Revenues were strong and are trending to the higher end of our guidance for the year. We continued to broaden our array of cloud-based businesses by adding hosted web services through our acquisition of Web24 and we significantly expanded our email security business with our acquisition of Excel Micro.

Dec 2014 – Acquisition
Ziff Davis, the Digital Media Division of j2 Global which is in the technology, gaming and men’s lifestyle categories, announced the acquisition of Ookla, a leading provider of broadband and mobile speed testing. Terms of the acquisition were not disclosed and the financial impact to j2 Global is not expected to be material.

Jan 2015 – 8 Acquisitions
j2 Global, Inc. (JCOM), the global provider of Internet services, today announced that it closed eight acquisitions in December, one for its Media Division (previously announced) and seven for its Cloud Services Division.
These additions grow the company’s global customer base, provide access to new markets, and expand j2’s product lineup. The acquisitions include:
Scene, LLC d/b/a Ookla (Media, USA)
Newrise Corp. (Fax, USA)
Arion IT Limited (Backup, Ireland)
Technology Partners LLC (Backup, USA)
Quantum RBS Inc. (Backup, Canada)
Comendo Security A/S and other affiliates (Email Security, Denmark)
Stay Secure (NCSG Holding AB) (Email Security, Sweden)
TestudoData LLC (Email Security, USA)

j2 also adds European offices in Copenhagen, Denmark and Stockholm, Sweden. The company’s footprint now includes 12 offices worldwide.

“We successfully executed on our fourth quarter M&A plan. j2’s global acquisition team hit its mark again, with media, backup, email security, and fax deals across North America and Europe. Our ability to opportunistically and consistently deliver on our M&A roadmap, while we organically grow our businesses, is a strategic differentiator for us. Our pipeline is strong heading into 2015. We enter the year with great momentum, targeting a wide range of global opportunities in both the Cloud Services and Digital Media spaces.”

When I finish writing this I wonder “Why am I in this odd little slow-growing company?”. A few reasons:

  1. It’s a good place to park cash when the market seems high and my high flyers don’t seem ripe for adding money to. Then, when the market is down a little I can sell from JCOM, which won’t have fallen hardly at all, to get cash back. Meanwhile it will have moved up a bit.
  2. I like that it increases its dividend each quarter.
  3. It seems to be well run.
  4. It’s media business is hidden among its cash cows but is growing rapidly.

After saying all that, I’m still not sure, so don’t buy it because I have it unless you really like it yourself.

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By coincidence, an article on Seeking Alpha about JCOM

Comparing America’s 3 Largest Internet Software And Services Companies


The Internet Software & Services industry is expected to outperform the S&P broader market substantially this quarter, underperform notably next quarter, then outperform significantly next year and beyond.

Mean and high targets for the 3 largest U.S. Internet Software & Services companies – Equinix, Ultimate Software Group, j2 Global - range from 4% to 27% above current prices.

Find out which among Equinix, Ultimate and j2 offers the best stock performance and investment value.

* All data are as of the close of Wednesday, January 7, 2015. Emphasis is on company fundamentals and financial data rather than commentary.

Investors looking to climb aboard the internet technology train have a long list of very viable choices in the Internet Software & Services industry.

Most of these companies cater to other businesses whose technology budgets can be quite large, allowing providers in this space to generate some hefty revenues of some 20% of their market caps annually, margins in the double-digits as high as over 30% in some cases, and returns in double-digits as high as over 20%.

*But even more impressive is their stock performance. Since the economic recovery began in March of 2009, the three largest U.S. companies in the space - Equinix, Inc. (NASDAQ: EQIX), The Ultimate Software Group, Inc. (NASDAQ: ULTI), and j2 Global, Inc. (NASDAQ: JCOM) - have doubled, even quadrupled the performance of the broader market S&P 500 index and their technology sector benchmark…*and more.…

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