Fax Firm J2 Global Gets Mixed Messages
When J2 Global Communications Inc. held its quarterly earnings conference call with investors and analysts last week, the company figured it had some good news: Second-quarter profit of 47 cents a share beat analysts’ average estimate by 3 cents.
Yet on the stock’s Yahoo message board after the report came out, someone was outraged -- or pretended to be. “I can’t believe they missed by 8 cents!!!,” the poster wrote in what may have been a deliberate attempt to hurt the shares.
For Hollywood-based J2 Global, facing skeptics -- and worse -- has become routine as the firm has reported soaring profit over the last two years and its stock has surged.
The company, a dot-com era survivor whose main business is converting faxes to e-mail for companies and individuals, finds itself a prime target of so-called short sellers -- traders who borrow stock and then turn around and unload it, betting that the market price will plunge. If the shares do fall, they can be repurchased at the lower price, with the short seller pocketing the difference.
Short sellers began to swarm around J2 Global last fall, when the stock was about $20. They have pulled back in recent months, but the number of shorted shares still stood at 4.1 million in mid-July. It has 11.3 million shares outstanding.
The firm has drawn disbelief from some financial media as well. In September, a columnist for TheStreet.com wrote, “It strains credibility” that one telecom company could be successful “and all others flop.” In November, an incredulous Barron’s article concluded by suggesting that investors sell the stock.
But J2 Global has been winning the battle with its detractors: Its shares closed at $53.21, down 51 cents, Tuesday on Nasdaq. The price reached a record $54.83 on Friday.
Scott Turicchi, J2 Global’s chief financial officer, said the company doesn’t get worked up about short sellers.
“A short is an amorphous, anonymous voice,” he said. “There’s no way to combat them. All we can do is continue to perform.”
Two Rivals Merge to Create Company
J2 Global, which occupies two floors of a Hollywood building overlooking the Kodak Theatre, began in 1995 as JFax.com Inc., the brainchild of German rock musician Jaye Muller, who needed a way to keep up with tour-related faxes as he traveled.
Amid the Internet stock mania of 1999, JFax.com found a waiting audience of hungry investors: The company went public in July of that year, raising $80 million in its initial offering.
But by late 2000, the party was over for Internet stocks, JFax.com included. The company, burning through cash at a fast clip and finding its shares nearly worthless, merged with rival messaging company EFax.com Inc. in November 2000 and changed its name.
President Scott Jarus, 47, and Turicchi, 39, say the firm began turning things around two years ago as the combined entity achieved a “critical mass” of customers and was able to streamline its network, integrate its features and generate enough subscriber and advertising revenue to operate efficiently.
Today, J2 Global says it has 349,000 paid subscribers, including multiple accounts.
Individual subscribers, who pay $13 to $15 a month, get a local phone number from J2 Global, which they use to receive faxes and voicemail messages. Their messages are converted to a digital file that is routed to the user’s e-mail address.
Corporate subscribers, who pay an average of $1,000 a month, typically use the service to communicate with their lower-tech customers.
For example, a drug maker may use J2 Global’s system to take orders from a small pharmacy. Other corporate services include simultaneous “blast” faxing, in which an oil company, say, would use J2 Global to send delivery schedules to gas stations on its distribution list.
The company also has 4.8 million customers who use its free service. They get limited service in exchange for viewing e-mail ads directed at them. J2 Global then tries to convert them to the paid side, which brings in the bulk of its revenue.
All told, the business brought in $17 million in revenue in the second quarter, up from $11.3 million a year earlier. The $5.95 million in net income that the company reported in the latest quarter translated into 47 cents a share. That was up from $3.31 million, or 28 cents a share, a year earlier.
Analysts, on average, expect the company to earn $1.98 a share this year.
Yet persuading Wall Street to pay attention was an uphill battle even as the firm initially turned profitable early in 2002, Jarus said.
J2 Global had to execute a 1-for-4 reverse stock split in 2001 to lift its shares back above $1 and avoid delisting from Nasdaq. The firm had no analyst coverage from brokerages and few “institutional” shareholders such as hedge funds and mutual funds.
Jarus remembers “hearing crickets” on his first earnings conference call in July 2001, two weeks after coming aboard.
“There were three people on the line. Two were our employees and one was the moderator,” he said. “I hung up the phone, looked at Scott and said, ‘We’ve got to go do something about this.’ ”
They traveled the country and talked up the company with any analysts and portfolio managers who would listen. One chat took place in Mystic, Conn., in the “dingy” home of an obscure hedge fund manager, Jarus recalled -- “in the back room, with a lightbulb hanging down.”
After J2 Global became profitable in the first quarter of 2002 and crossed $100 million in stock market value, momentum took hold. Fidelity Investments stunned Jarus and Turicchi in September when the mutual fund giant revealed in a regulatory filing that it had accumulated more than 1 million shares.
Smaller brokerages began following the stock, which now is covered by six analysts.
Critics Say It Looks Too Good to Be True
This year, analysts say the stock has benefited from two events aside from better earnings: the May announcement that J2 services would be included in Microsoft Corp.’s Office 2003 package, and the firm’s decision to raise subscription prices 30% for new customers starting in mid-June.
J2 Global’s sales pitch is that the service lets users discard fax machines and their embedded cost, store messages digitally and forward them easily and safeguard private information.
The pitch to investors, Jarus said, is that it’s an easily expandable business with a high profit margin. Revenue has more than doubled in the last two years as the company has grown to 170 employees from 130.
Critics of the stock say the firm’s success and its lofty prospects seem too good to be true, especially considering the maturity of fax technology and the ubiquity of standard e-mail. If digital signatures become legal, the business that J2 Global does with such customers as banks, mortgage brokers and law firms could suffer.
And if it’s such a great business, with 80% gross profit margins, why aren’t other companies trying it, some wonder.
Skeptics also say the firm has benefited temporarily from net operating losses carried forward, shielding this year’s earnings from federal tax. Profit would be 35% to 40% lower without the sheltering losses from past years.
J2 Global calls the critics misguided. There still are 75 million fax machines worldwide, and in business markets abroad their use is growing, Jarus said. In other words, the fax isn’t going away overnight.
“With technology transitions, they always take longer than people expect,” concurred analyst Stephen DeLucia at Sidoti & Co. in New York.
DeLucia said he thinks the company is doing well, but he nonetheless downgraded the stock from “buy” to “neutral” in late June when it reached $45, because the valuation had gotten “full” relative to the company’s growth prospects.
Meanwhile, naysayers remain active on J2 Global’s boisterous Yahoo chat board, where the “long” and “short” sides debate the stock’s merits when they’re not hurling insults at one another.
A typical recent comment: “The party’s over for this pig.”
The day after their latest earnings conference call, Jarus and Turicchi reflected on the firm’s odyssey. J2 Global celebrated four years as a public company June 22 -- just three days after surpassing its split-adjusted IPO price of $38 for the first time.
“The difference is, this time it’s a sound business,” Turicchi said. “The IPO came on a wing and a prayer.”
