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Friday, August 7, 2009

Confirmation that eFax Lives - j2 Global Does Not Disappoint

On Wednesday afternoon, j2 Global Communications (JCOM, $24.54) reported 2Q09 results that confirmed our view that eFax is still alive. Unlike last quarter, when j2 reported an 11% Y/Y increase in net income and the stock went down -- which didn't make one iota of sense -- this time, j2 reported a 19% Y/Y increase in adjusted net income and the market noticed.

The company reported June quarter revenue of $62.5 million and non-GAAP earnings of $0.48, ahead of Wall Street expectations of $61.0 and $0.44, respectively. Non-GAAP net income is adjusted upward for $0.04 of stock based compensation and a one-time, non-recurring impairment charge of $0.19 related to impairment of auction rate and related securities. We normally look at GAAP earnings, but in this case, the impairment obfuscates comparable results and we believe j2's earnings quality is very high. Other quick highlights:
  • Subscriber revenue increased 3% Y/Y to $61 million and paid customers of 1.274 million increased slightly Y/Y but was flat Q/Q

  • j2 lost some individual and/or small/medium size business customers, but added voice services and corporate fax customers leading to Y/Y customer growth

  • Management noted that j2's voice business increased >26% Y/Y and its corporate fax business grew >16% Y/Y
  • ARPU increased across all brands and reported monthly ARPU increased slightly to $14.96, the first increase in six quarters -- ARPU has been declining because of lower ARPU services sold to corporate fax and voice customers, as well as j2's less expensive fax offerings

  • Customer churn declined to 3.3% from 3.5% in 1Q09, an improvement but still above targeted levels of 2.5% - 2.7%

  • Gross margin increased Y/Y to 81.4% from 80.7% and operating margin increased to 44.1% from 39.7%

  • Management maintained guidance for modest revenue and earnings growth this year including acquisitions (which will likely be a small contributor)
  • Quarterly free cash flow of $22.9 (defined as cash flow from operations less capital expenditures) brought cash and investments to $195 million (18% of current market capitalization) - the company has no debt
  • We estimate that j2's return on net operating assets (RNOA) remained extremely high at 72%
Despite the persistent short thesis that fax is a dinosaur (see earlier post re: Barron's article), we continue to believe that j2 Global can keep growing through an increasingly diversified product portfolio. As the company grows, the business should keep generating significant excess cash that shareholder friendly management can use for reinvestment, acquisitions, and share buybacks. We think j2's high quality business model could fairly trade at 15 times trailing free cash flow (7% yield), which would put shares at $30, up 22% from current levels.

Jeffrey Walkenhorst

Disclosure: long JCOM.

© 2009 Jeffrey Walkenhorst
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