j2 Global (NASDAQ: JCOM) is an American technology company founded in 1995 and headquartered in Los Angeles, California. The tech company divides its revenue generating operations into two divisions. The first is called Business Cloud Services. Its business lines include eFax, which allow users to send and receive faxes on phones, tablets, or laptops, and FuseMail, which encrypts email and filters spam on laptops. Their second division is called Digital Media. j2 Global reaches over 53 million online users with brands such as gaming website IGN, tech review authority PC Mag, and lifestyle website AskMen.
Q2 Earnings Report
In j2 Global's 2014 Q2 earnings report, the company's Q2 year-over-year growth was 12.0% in Cloud Services and 17.2% in Digital Media. These are the biggest increases in year-over-year growth the company has experienced according to their Q2 10-Q. Dividends also increased for the 12th consecutive quarter to $0.2775 per share. This represents a 12.1% increase from the dividend they paid out in 2013 Q2. EBITDA went up 18.4% and FCF increased 38% compared to 2013 Q2. Most of the revenue from Business Cloud Services comes from fixed fees on their subscription services. For the Digital Media division, the number of visits for the 6 months ended on June 30 went up 29% between 2013 and 2014.
For the company, cloud services are higher margin and a more predictable business compared to their Digital Media division. On the other hand, their Digital Media division derives most of its revenue from advertising but has a higher marketing expense.
Acquisitions allow the company to expand their customer bases, expand their product offerings, and gain professional expertise. When examining the recent history of j2 Global's acquisitions, most of them were for its Business Cloud Services. On September 22, j2 Global acquired Web24 Group, a domain name and web hosting service for small and mid-sized businesses. Boasting clients such as OfficeMax, Kmart, and Hallmark, this adds more to j2 Global's business cloud services and gives the company the infrastructure needed to expand into other countries.
Just several days ago, the company also acquired the cloud-based email security provider Excel Micro Inc. Excel Micro was the 2013 McAfee value added distributor of the year, offering partners live tech support, billing integration, and video tutorials. It's also one of the industry's best Software-as-a-Service distributors and partners with providers of cloud solutions. For j2 Global, it seems like that this acquisition will complement their current services and give them more depth and expertise in cloud security, a service that they are already providing with their KeepItSafe brand.
There is no question that these acquisitions will grow their customer base for cloud services. However, what type of growth can we expect from Digital Media? They acquired several of their brands, such as IGN in February 2013 and Ziff Davis in November 2012. Their website portfolio is quite strong and there doesn't appear to be any discussions about future acquisitions for the company in Digital Media.
Compared to peers such as Equinix (NASDAQ: EQIX) and Constant Contact (NASDAQ: CTCT), stock returns over the past year have lagged. Both EQIX and CTCT have had about 25% returns. However, its important to note that JCOM issues a dividend and that will reduce the stock price on the ex-dividend date.
The company has made a number of acquisitions recently, but it has to make sure it's investing in the right companies. Although the specifics about each of its transactions aren't specified in the news releases, it's fairly safe to assume that there are significant amounts of cash, debt, and equity used to finance these deals. Poor acquisitions would not only hurt the company's balance sheet, but it could also mean lost opportunities to use their limited capital more efficiently.
If j2 Global can seamlessly integrate each of its acquisitions into the company's core businesses to create synergies, I believe that there is potential for stock price growth.
Cloud Services are a higher margin business and are more predictable since a lot of them rely on subscriptions. Early on, they made some acquisitions for Digital Media but they now seem to be focusing their attention solely on Business Cloud Services. The brands that they currently have in Digital Media are quite strong and they should continue developing them.
I am apprehensive to pull the trigger and give the company a buy rating because of the intense competition in websites and in cloud computing. They are using the growth by acquisition approach and it's far too soon to see how they will do the Business Cloud Services. The company did a fantastic job acquiring Internet companies such as IGN and AskMen from News Corporation and have proven their expertise in developing their Digital Media brands. The companies that they acquired for Business Cloud Services do have quite some clout in their markets. But, it's difficult to say if these acquisitions will collectively turn the company into market leaders. They are grabbing up the right companies to fill their strategic plan, but do you have confidence in management's ability to grow what they have? Ultimately, I believe how you answer that question will determine whether the company is a buy, sell, or hold.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.