j2 Global Upgraded to Outperform

We upgrade our recommendation on j2 Global Communications Inc. (JCOM - Analyst Report) to Outperform. We believe j2 Global’s strong financial position and diversified product pipeline, coupled with the future growth prospects of outsourced value-added messaging services, will drive its valuation levels higher in the near future. The Subscriber Usage revenue continues to beat market expectations. This is an important parameter as credit-sensitive customers constitute a majority of the company’s sales.

Exploration of new opportunities for both digital facsimile and voice services, through continuous acquisitions, facilitated the company to solidify its market position. J2 Global has achieved huge reduction in cancel rate in the last two quarters. Acquisition of Protus IP Solutions significantly boosted j2 Global’s paid Dial in Demand numbers. Full- year 2011 financial outlook provided by management is also very strong.

In the fourth quarter of 2010,j2 Global added more than 500,000 paying DIDs (Dial In Demand). This is the largest quarterly growth since the fourth quarter of 2000. Total paying DID on December 31, 2010 was over 1.9 million. Although the company did not provide DID data for the first quarter of 2011, the Subscribers’ revenue in the previous quarter was a record-high $73 million. This indicates positive DID growth momentum. Supported by strong free cash flow, management decided to repurchase up to 10 million common shares by end 2012. That would be about 22% of the company’s total shares outstanding.

On March 2011, j2 Global received a legal notice for infringement of patent from EasyLink Services International Corp. (ESIC), which complained that j2 Global infringes two of its patent related to Facsimile Form Generation System and Autonomous Multi-Function Peripheral Device-based document communications systems and methods. j2 Global has long-standing legal battles with EasyLink and Captaris Inc., a subsidiary of Open Text Corp. (OTEX - Snapshot Report). These were related to reliable transmission of facsimile and voice messages in email form over the Internet.