j2 Global: The Short Side Is Too Pessimistic

| About: j2 Global, (JCOM)

Short sellers are betting heavily against electronic fax goliath j2 Global, assuming j2 will be unable to offset the seemingly inevitable decline of fax use globally. But short sellers are too complacent and too crowded in this trade, and that means good news for long investors.

j2 Global has long been a player in the shifting needs of small business. Clearly, faxes are no longer the preferred communication tool in a highly connected world. But the death of the fax hasn't been nearly as complete as shorts have hoped. While desktop fax machines have gone the way of the horse and buggy, small businesses haven't been willing to discard the technology completely. Instead, they've relegated the clumsy hardware to the closet and opted for desktop software fax solutions, and that's been good news for j2 Global, a pioneer in bringing faxes to computers.

j2 Global has clients in 4,300 cities in 49 countries and is expanding its efforts in Japan, Canada and Australia. Despite short sellers fears, Q4 subscription revenue rose 17% to a record $70.3 million while EPS grew 49%. Full year 2010 revenue rose 4% to a record $255.4 million while EPS rose 22% and full year free cash flow rose 7%. The company expects additional success this year, forecasting revenue of $320-$340 million, up 25-33% year over year, and earnings per share of $2.21-$2.42. Gross and operating margins remain strong at 82.1% and 37.1%, respectively, despite a modest decline in ARPU since 2008. The company has done a nice job of leveraging client growth against fixed costs to maintain earnings expansion despite competitive pricing.
The economic improvement is already evident in j2 Global’s improving cancelation rate, which peaked at 3.7% in Q1 2009 and fell to 2.7% exiting Q4. Paying DIDs, a measure of numbers issued for services accounting for 90% of revenue, increased to 1.9mn from 1.23mn ending 2008. As a result, Q4 fixed subscriber revenue rose to $56.8mn from $49.6mn while variable revenue rose to $13.45 million from $10.57mn. Gross profit has risen to 83% from 81% since 2008 with net earnings going to 33% from 30%.
And j2 Global has managed its cash flow nicely. The company doesn’t have any debt and still has $1.75 per share in cash after spending $249 million last year on acquisitions. The lion’s share of that money, some $230 million, went to acquire Protus, owner of j2’s competitor myFax. Protus adds $72 million of additional annual revenue and brings along Campaigner, a new software-as-a-service offering for email marketing.
Small business demand growth is set to accelerate this year as the economic recovery matures and small business budget cuts ease. And that’s good news for j2’s voice, email and fax products. The company has also entered the off-site data backup business with KeepItSafe. A focus on developing a well-rounded product offering for small business owners allows j2 to better penetrate its clients, boosting retention rates and maximizing revenue.
j2 Global has beat analyst expectations in three of the past four quarters and 2012 estimates have increased to $2.48 from $2.10 90 days ago. A reflection of the deep seeded pessimism, the stock trades at only 11.8x 2012 estimates.
Overall, j2 Global has continued to produce revenue and earnings growth, has a solid balance sheet and is expanding globally. The company has a solid track record of beating forecasts and an improving economy boosts demand for its products. All of which mean the short sellers, who own 17 days to cover, provide upside support on any pullbacks or positive news.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JCOM over the next 72 hours.