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Wednesday, May 6, 2009

j2 Global Grows Operating Earnings 18% Y/Y, But Stock is Down?

j2 Global Communications (JCOM, $21.87) was founded in 1995 and provides fax, voicemail, email and call handling services to individuals and businesses worldwide. The company's stock is down 10% today following results yesterday - link here. While revenue was a tad light from Wall Street expectations and subscriber disconnects are trending higher as the recession negatively impacts some customers, the market seems to be overlooking key positives:
  • Revenue still grew 3% Y/Y to $60.4 million (including small acquisition)
  • j2 Global's gross margin improved to 81.1% from 80.2% in 1Q08 and its operating margin was 43.8% versus 38.4% in the year ago period as the company shows continued operating leverage and scale
  • Operating earnings of $26.5 million increased 18% Y/Y and net income was up 11% Y/Y (much lower interest income Y/Y)
  • GAAP EPS of $0.42, up 20% Y/Y from $0.35 (helped by lower share count)
  • Quarterly free cash flow of $30.4 (defined as cash flow from operations less capital expenditures, in this case) was a record for the company, bringing cash and investments to $179.3 million (19% of current market capitalization) - the company has no debt
  • Management maintained guidance for modest revenue and earnings growth this year including acquisitions (which will likely be a small contributor)
and, the real eye catcher:
  • j2 Global's return on net operating assets (RONA) remains extremely high at 82%
Each year, j2 Global generates after tax, cash operating income almost equal to the total amount of capital required to operate the entire business. There are very few companies capable of this feat, period. Moreover, numerous competitive advantages protect j2’s subscription-based, high margin/ROIC business model: brand, sticky customers, scale/scope, and intellectual property rights (59 issued patents). j2 Global should continue to generate significant excess cash that the company can use to further grow the business and return to shareholders through share buybacks.

Many companies are reporting tremendous Y/Y sales and earnings declines, yet their shares move higher.... j2 Global delivers revenue and impressive earnings growth, but shares are lower -- makes no sense to us here at CommonStock$ense, yet the market is often irrational.

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long JCOM.

© 2009 Jeffrey Walkenhorst
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