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j2 Global Revert to Neutral

by Zacks Equity Research

December 23, 2011 | Comments : 0 Recommended this article: (0)

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We downgrade our recommendation on j2 Global Inc. (JCOM">JCOM) to Neutral based on its third quarter of 2011 financial results, which missed the Zacks Consensus Estimates. Nevertheless, the Subscriber Usage revenue continues to beat market expectations. This is an important parameter as credit-sensitive customers constitute a majority of j2 Global’s sales. We believe the company’s strong financial position and diversified product pipeline, coupled with the long-term growth prospects of value-added outsourced messaging services, will drive j2 Global’s earnings higher in the near future.

Exploration of new opportunities for both digital facsimile and voice services, through new acquisitions, facilitated j2 Global to solidify its market position. However, prolonged global macro-economic concerns have raised serious concerns regarding the future tech spending businesses, which may put pressure on j2 Global. The company’s business is extremely sensitive to overall macroeconomic factors, particularly weakness in credit markets. The company has a vast majority of credit-sensitive customers from lending and mortgage industries and other financial institutions.

Currently, j2 Global commands approximately 30% of the world digital faxing system. The company competes with EasyLink Services International Corp. (ESIC">ESIC), Open Text Corp. (OTEX">OTEX), and Fuze Box Inc. From an operational standpoint, the company continues to focus on subscriber usage revenue. In the third quarter of 2011, j2 Global Communications added more than 32,858 net DID (Dial In Demand) with a quarterly churn rate of 2.5%.

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. j2 Global is more confident about its growth prospect buoyed by increasing demand for cloud-based, value-added communication, messaging and data backup services. Consequently, management raised its fiscal 2011 financial outlook.

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