Yesterday, after market close, j2 Global Communications Inc. (JCOM) reported mixed financial results for the third quarter of 2010. Net income was $19.8 million or 43 cents per share compared with $19.3 million or 43 cents per share in the year-ago quarter. Third quarter EPS of 43 cents was above the Zacks Consensus Estimate of 41 cents.
In the reported quarter, j2 Global organically added 76,000 DIDs (Dial In Demand), the largest quarterly growth since the fourth quarter of 2000. Importantly, the company maintained its reduced cancel rate to the pre-recession 2006 level of 2.6%.
Revenue
Total revenue was $62.8 million compared with $61.8 million in the year-ago quarter. The year-over-year increase was primarily due to an increase in the company’s subscriber base. However, the reported revenue was below the Zacks Consensus Estimate of $64 million. Subscriber Usage revenue was $62.1 million, compared with $61.0 million in the third quarter of 2009.
Quarterly gross margin was 82.9% compared with 81.8% in the year-ago quarter. However, operating expenses, in the reported quarter, were $24.8 million compared with $23.9 million in the prior-year quarter. Operating margin was 43.4%, compared with 43.1% in third quarter of 2009. The year over year improvement was primarily due to increased revenues and reduced bad debt partially offset by planned increases in sales and marketing initiatives.
j2 Global Communications generated $27.2 million cash from operation during the third quarter of 2010 compared with $26.5 million in the prior-year quarter. Free cash flow (cash flow from operation less capital expenditure) in the same quarter was $26.7 million compared with $26.1 million in the year-ago quarter.
Balance Sheet
At the end of the third quarter of 2010, j2 Global Communications had approximately $231.6 million of cash & marketable securities on its balance sheet compared with $228.8 million at the end of fiscal year 2009. The company had no outstanding debt.
Future Financial Outlook
j2 Global continues to target an average revenue growth of 5% with a range of 3%–7% year over year for full fiscal 2010. EPS (excluding stock-based compensation expenses) is expected to stay at the same level of fiscal 2009 since management intends to reinvest its incremental operating income in initiatives designed to accelerate growth in 2011 and beyond.
j2 Global acquires keepITsafe Data Solutions Ltd.
j2 Global acquired Ireland’s largest provider of cloud-based, online backup services, keepITsafe Data Solutions Ltd., on October 21, 2010. The acquisition expands j2 Global’s cloud-based business services portfolio to include online data backup in addition to its core Internet fax, voice and email services. j2 Global brands include eFax, eVoice, Onebox and Electric Mail, among others.
Our Recommendation
j2 Global is currently a short-term Zacks #2 Rank (Buy) stock. We believe the company’s strong financial position and diversified products/services pipeline, in synergy with the long-term growth prospects for outsourced value-added messaging services, may drive valuation levels higher in the near future.Moreover, we believe j2 Global’s risk/ reward is attractive as the stock offers more upside potential than downside risk.
Nevertheless, j2 Global is extremely sensitive to overall macroeconomic factors, particularly weakness in credit markets. Over the near term, macroeconomic environment may negatively impact organic subscriber growth, churn rate, and service usage.
Furthermore, foreign exchange fluctuations may affect revenue performance. We, therefore, maintain our long-term Neutral recommendation for j2 Global.
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