Neutral on j2 Global Communications

We downgrade our recommendation on j2 Global Communications Inc. (JCOM - Analyst Report) to Neutral based on its current valuation. The stock price soared more than 36% last year. We continue to believet he company’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. At the same time, we also believe that these positives are already reflected in the current valuation leaving little room for above market gain anytime soon.

j2 Global Communications continues to grow its most powerful eFax brand with creative content and designs. Furthermore, secondary digital faxing brands, including Fax.com, Rapid FAX, and Send2Fax also registered growth albeit at a higher rate than eFax, its signature offering. With the acquisition of Phone People Holding Corporation in the U.S. and MediaburstLimited in Europe, j2 Global Communications has become a worldwide leader in the virtual PBX market.

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. Backed by strong free cash flow, management decided to repurchase up to 10 million common shares, which would be approximately 22% of the company’s total shares outstanding, by the end of 2012.

Meanwhile, On March 2011, j2 Global Communications 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 Communications 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.