J2: From A Fax Machine To An M&A Machine

| About: j2 Global, (JCOM)

By Brenon Daly

In reporting third-quarter financial results after Wednesday’s closing bell, j2 Global Communications (NASDAQ:JCOM) not only posted record revenue and cash-flow levels but also highlighted the returns it has generated in its recent M&A spree. And the communication services provider, which has some $162m in cash and short-term investments in its treasury, hinted that more deals are coming. J2 has done three acquisitions so far in 2011, after eight in 2010.

The purchases come as part of a dramatic overhaul of the company, which has expanded through M&A from its core fax offering to now include a number of services for small businesses including email, Web-based collaboration and even marketing. Most recently, it has moved into online backup, buying three small startups – all of which are based in Ireland – just in the past year. The European acquisitions are also part of a larger effort at j2 to increase international revenue, which accounts for only about 15% of total sales.

Overall, j2 has spent almost $400m on M&A over the past half-decade. One of the reasons why the company has money to go shopping is that it generates a ton of cash each quarter. In Q3, j2 recorded $86m in sales and $37m in free cash flow (FCF), an enviable 43% FCF margin. And we should note that the cash is being generated as the company continues to grow at a healthy clip. It guided that sales for 2011 should come in at about $340m, which represents a 33% increase from 2010. Granted, much of that increase is coming from j2’s $213m all-cash purchase of Protus IP Solutions last December. (Protus had recorded $72m in the year leading up to its sale to j2.) But as the company has said in the past, it ‘isn’t picky’ when it comes to organic versus inorganic growth.