Musician Jaye Muller had a problem. The East German born and raised young man moved to Paris after the Berlin Wall fell and traveled widely after releasing his first album in 1993 (350,000 copies sold).
His problem? When traveling, faxes and voice messages were delayed getting to him, and to make matters worse, hotel staff would see his confidential fax messages. At the same time, he carried a laptop and could send and receive email messages instantly. It struck him, on a tour through English colleges, that he should be able to do the same with fax and voice messages, but no such service existed.
Since he had been forced to study electronics while a student in East Germany, he was somewhat familiar with the technology and set about creating a service himself. He subsequently paused his music career, and, along with his producer/manager Jack Rieley, set out to create a new business. In 1995, he and Rieley incorporated JFax.com Inc. As we’ll see, that company grew exponentially, became publicly traded, and along the way, changed its name to j2 Global, Inc (NASDAQ, symbol JCOM).
It gets our attention today because it comes up when we run the Undervalued Predictable screener at GuruFocus.com. According to the screener, it is undervalued and has a higher than average consistency in generating earnings. Whether that appearance in the screener warrants closer inspection by potential investors is what we’ll pursue in this article.
History
1995: Company founded as JFax .com Inc. by Jaye Muller and Jack Rieley, who raise $2-million for an idea hatched by Muller
1997: Company receives venture funding from Orchard Capital Corporation; Orchard manager Richard Ressler takes over day to day operations of JFAX
1998: Ressler raises $100-million through a private placement
1999: Company goes public (NASDAQ) at $9.50 per share, symbol JCOM
2000: Acquires SureTalk.Com, Inc., and its CEO becomes the CEO of JFAX; name change to j2 Global Communications, Inc.
2010: Acquires Protus IP Solutions, Inc. and FuseMail, LLC
2011: Another name change, to j2 Global
2012: Takes on approximately $250-million in long-term debt; acquires digital publisher Ziff Davis Inc., Zimo Communications (UK), Offsite Backup Solutions, and Venali Inc.
2013: Acquires IGN Entertainment
2013: Acquires MetroFax and Backup Connect BV (The Netherlands), and through Ziff Davis, acquires TechBargain.com
2014: Issues approximately $390 million in new long-term debt; acquires City Numbers (UK), LiveDrive (UK), OzeFax (Australia), Faxmate (Australia), and Business Critical Software (UK)
Takeaways: A tech company with 20 years of history and a significant number of acquisitions under its belt. Has recently turned to debt, after years of being debt-free. History based on articles in Reference for Business and Wikipedia.
Business Model
If I were to tell you about a growing business that had faxing at its core, you’d likely scoff and suggest it would soon disappear. I thought that way myself.
But it turns out faxing has not gone the way of the buggy whip and may not for some time yet. As an article in Fortune Magazine notes, faxes still have a very prominent place in the finance, law and health care sectors. If you deal with professionals such as lawyers, doctors and bankers, you’ll find that the faxing plays a prominent role in their work lives. Matters such as security, ease of use, actual signatures and so on keep faxing alive even if it no longer has a place in many small businesses. Interestingly, a current article is titled 10 reasons why fax is still important.
J2 Global has taken the fax out of its name, but fax still provides a major income stream for this technology company. Leaving the fax business aside, JCOM is not unlike another tech company I recently profiled, OpenText (OTEX, Financial); both operate a suite of products that revolve around online communication, particularly through clouds.
JCOM operates in two main segments, Business Cloud Services and Digital Media.
Business Cloud Services generates revenues from customer subscriptions and usage fees, as well as IP licensing fees. Its operations include:
- Fax
- Voice and unified communications
- Online backup
- Email and customer relationship management (CRM)
- IP licensing
- Global network and operations
- Customer support services
The major Business Cloud brands are eFax, eVoice, FuseMail, Campaigner, KeepItSafe, and Onebox.
Digital Media, a division that began with the acquisition of Ziff Davis in 2012, generates revenue from display advertising, sale of customer leads, and licensing of logos and copyrighted materials. Operations focus on the following areas:
- Technology (mainly Ziff Davis magazines)
- Gaming (made possible by the IGN acquisition)
- Men’s Lifestyle (through the AskMen website)
In 2013, the Digital Media Division received 2.2 billion visits and 7.3 billion page views. (information in this section based on JCOM’s 10-K for 2013)
Revenue
The following excerpt from Note 16 of the 10-K shows revenue by category:
About $370 million of the company’s $520 million (or 70%) came from the United States. Geographically, the other major contributors to revenue were Canada and Ireland.
Competition
JCOM faces intense competition in both of its divisions, including both big, multi-service players and small, niche-focused players.
Yahoo! Finance lists its competitors as CYREN, a much smaller company, and OpenText, which is more than twice the size of j2 Global by market cap.
For its Business Cloud Division, the company says its competitive advantages include financial strength and stability; pricing; reputation for reliability and security of service; intellectual property ownership, and other factors. In Digital Media, where it describes competition as fierce and intensifying, it cites (in its 10-K for 2013) the competitive advantages of, "... Ziff Davis' reputation as a trusted source of objective information and our ability to attract Internet users and advertisers to our web properties."
Takeaways: j2 Global is anything but a declining fax service, with both a B-to-B advertising company and a provider of communication services through its cloud network. While fax still plays an important part, it has numerous other areas that generate revenue and income, most notably the new Digital Media Division which came onstream in 2012. Competition is intense, but the company does have heft and a history of coping with it.
Growth
The following chart shows JCOM’s past growth of revenue (green line) and EBITDA (blue line) from 1998 through the end of 2013:
Given its history, we would expect the company to look at acquisitions as a growth driver, and its says as much in the Management Discussion & Analysis section of its 10-K: "We expect acquisitions to remain an important component of our strategy and use of capital in this segment ...."
For internal growth, it will look to increasing sales of existing products/services as well as new products and services in the Business Cloud segment. For Digital Media, it expects demand for its advertising inventory to increase as overall economic conditions improve and advertising generally shifts from offline to online. At the same time, it sees the trend to mobile devices (from desktop) putting pressure on its margins.
Takeaways: While I have no concerns about the fax piece of its business, I do wonder how much the company can depend on general economic conditions. Further, online may be gaining at the expense of offline, but at the same time, online is an increasingly crowded space, with Facebook, Twitter, and other firms offering new targeting and results-based services. JCOM may need strategic acquisitions to maintain its growth in this marketplace.
Management
Chief Executive Officer: Hemi Zucker joined the company in 1996 and has served as chief marketing officer, chief financial officer and chief operating officer.
President and Chief Financial Officer: Scott Turicchi joined in 2000 as executive vice president of Corporate Development; he held the CFO title from 2003 to 2007 and took it on again in August 2014 after the resignation of Kathleen Griggs in July.
Chairman: Richard S. Ressler has been chairman of the board and a director since 1997; he also served as CEO from 1997 to 2000.
Board of Directors: The board has four directors plus chairman Ressler; no members of the management team serve on the board. Directors have experience or expertise in the law, merchant banking, investment management, enterprise management, financial management, and consulting.
ISS Governance QuickScore: j2 Global earns a good or very good (low governance risk) score of 2/10, on a scale where 1 is very good and 10 is very poor. It receives two red flags: Related Party Transactions and Use of Equity. It also receives one green flag, for Voting Issues.
Takeaways: The Investor Relations section of the company’s website has a page discussing governance issues it has proactively addressed; this appears to have paid off in terms of the ISS Governance score. On the management side, the team is led by well-seasoned officers.
Ownership
Gurus: Six gurus followed by GuruFocus own stakes in j2 Global; the three largest holdings are: Jim Simons (Trades, Portfolio) at 742,900 shares; Chuck Royce (Trades, Portfolio) with 309,800 shares; and Ken Fisher (Trades, Portfolio) at 148,275 shares.
Institutions: Yahoo! Finance puts institutional (including mutual fund holders) at 103% of the shares outstanding and 116% of the float. It puts the short interest at 7.14 million shares or 15% of the outstanding and 16% of the float. The largest holding among the 234 institutional investors belongs to Jackson Square Partners, LLC, which owns 4.3 million shares.
Short Interests: As noted above, using data from Yahoo! Finance we get short interests at 15% of the outstanding and 16% of the float. GuruFocus puts the shorts at 20.67% of the float. It was near that level in April 2014 when an analyst at Zacks took note, and a contrarian perspective, "However, it is worth noting that earnings estimates have actually been moving higher for the company, despite the pessimism. Thanks to these rising estimates, we actually have a Zacks Rank #1 (Strong Buy) on JCOM." Since then, Zacks has lowered its rating, to Hold.
The following GuruFocus chart shows short interests in historical context. Note that shorts began increasing their presence as JCOM came out of the economy-wide financial meltdown, and built until about the time it started to borrow big time. Since then, the attention of shorts has diminished significantly:
Insiders: Chairman and former CEO Richard Ressler owns 1,706,292 shares, while current CEO Hemia Zucker owns 160,850, according to Yahoo! Finance. GuruFocus reports 5% of shares are held by insiders.
Takeaways: I always become concerned (not to mention confused) when I see holdings that exceed 100% of the outstanding or float –Â explained (at least in part) to relatively high levels of short interest. Insiders have a reasonable stake in the company, which is a modest offset to the shorts concern.
By the Numbers
Looking specifically at the dividend, the company has increased it for 12 consecutive quarters, making it 12.1% higher than it was in the third quarter of 2013 (Q2, 2014 press release).
Takeaways: j2 Global posts modest numbers for dividends and ROE, negative for share repurchases. The company obviously has taken a more aggressive stance on dividends in the past three years, which would encourage investors.
Financial Strength
Financial Strength comes in at 5/10, while Profitability & Growth rate an 8/10 in the GuruFocus system:
Looking more closely at the chart, we see a strong red icon for Cash to Debt vs History. To understand that, we need to take a look at the GuruFocus 10 Year Financials. After having little or no debt over the past decade, the company took on approximately $250-million of new debt in 2012 and $390-million in 2014.
The 10 Year Financials also tell us that j2 Global is sitting on $592 million in cash and cash equivalents. Add in marketable securities and the total climbs to more than $653 million (just over $700 million reported in the Q2, 2014 earnings press release). And free cash flow for the trailing twelve months sits at $142 million.
Takeaways: On the face of it, we might have some initial concerns about the new level of long-term debt, but the level of cash available reduces those concerns.
Valuations
As noted, JCOM appears in the Undervalued Predictable screener, having a 4-Star predictability rating and a price that’s below the DCF value.
A 4-Star rating is a very good one (5 is the top, 1 is the bottom on this scale), and the company has steadily grown its earnings. All else being equal, we would expect the company to continue growing those earnings over the next few years. If price follows earnings, then we would expect price to increase as well (although never in a straight line). Here’s a GuruFocus chart that shows the relationship between JCOM’s price (green line) and EBITDA (blue line) over time:
Over the past 10 years, the company’s P/E has ranged from 9.85 to 31 so the current level of 22 puts it roughly in the middle of the range.
The Discount Cash Flow valuation comes in at $77, which is a 33% discount to Monday’s (October 27) closing price of $51.50.
Takeaways: The trajectory for this stock would be the earnings or the EBITDA. It’s driven the price of the stock in the past, and steadily rising earnings make us optimistic about future prices.
Opportunities & Risks
With a war chest of more than $700 million after the second quarter of fiscal 2014, we have to think management sees some acquisition opportunities ahead. In some areas, that will allow it to expand its range and depth of existing services and in other areas will allow it to enter new areas (as with Ziff Davis and IGN).
Given the broad range of existing services, there should be opportunities to reduce costs by streamlining or process improvements. We would also expect opportunities to prune or grow sub-segments as markets change.
And internal growth should also help significantly. For example, j2 Global reports EBITDA for the second quarter of 2014 increased more than 18% (compared to the same quarter last year) while free cash flow was up by 38% over the same quarter of 2013.
Risks include general economic conditions. The current and past uncertainty has had an effect, according to the company’s 10-K for 2013.
Its current debt level could affect its financial flexibility and opportunities.
As a company that aims to expand internationally it exposes itself to currency risks, taxation risks, and operating risks in other cultures.
In the Risks section of its 10-K, JCOM notes that it still depends heavily on fax revenues, and if digital signatures become more accepted and prevalent, it could lose a mainstay of its business.
As a tech company, it faces all the usual risks, including the potential of being outflanked by new and better technology, intellectual property issues, and data breaches.
Outlook
With a seasoned management team and a strong history, j2 Global should be able to weather the risks and make the most of opportunities.
More than $700 million in cash also means it should have funds for acquisitions, presumably accretive ones, and a cushion to protect itself against any short-term difficulties.
Conclusions
There’s much to like about j2 Global, Inc., which has built a strong business on a legacy technology. In particular, it has a diverse range of income sources and a sizable amount of capital available.
At the same time, of course, it borrowed a great deal of money to establish that pool. I also have lingering concerns about the relatively high level of short interests, and wonder, of course, if they know something that’s not apparent to the rest of us.
With 12 consecutive quarters of dividend increases, this may become an income and capital appreciation combination, but that’s still in the future.
And, as the company looks to increase its dependence on advertising revenue, there is also concern because that business can be very fickle.
Overall, an interesting prospect but too many uncertainties for me right now.
