Record High 3Q for j2 Global

Yesterday, after the closing bell, j2 Global Inc. ( JCOM - Analyst Report ) reported excellent third-quarter 2012 financial results, with record high quarterly revenue, earnings per share, EBITDA, and churn rate. Management seems more confident about the rest of 2012 as it raises the company’s full year 2012 non-GAAP earnings per share guidance.

Additionally, the Board of Directors of j2 Global has hiked its quarterly dividend by 2.3% from 22 cents per share to 22.5 cents per share, maintaining its streak of dividend increases for five consecutive quarters. The new dividend rate implies a 12.5% increase compared to the first dividend paid by j2 Global in September 2011.

Quarterly GAAP net income came in at $31.7 million or 69 cents per share compared with $25.5 million or 54 cents per share in the year-ago quarter. Third-quarter adjusted earnings per share of 65 cents were well above the Zacks Consensus Estimate of 57 cents. Total revenue was approximately $93.2 million, up 8.4% year over year, easily beating the Zacks Consensus Estimate of $89 million. Subscriber Usage revenue stood at $89.5 million, up 4.5% year over year.

j2 Global posted quarterly gross margin of 82.5% compared with 82.6% in the year-ago quarter. Operating expenses in the reported quarter were $34.7 million compared with $34.6 million in the prior-year quarter. Quarterly operating margin was 45.3% compared with 42.4% in the comparable quarter last year. Churn rate, in the third quarter of 2012, was a record low of less than 2.3%.

In the third quarter of 2012, j2 Global generated $38.2 million of cash from operations compared with $28.7 million in the year-ago quarter. Free cash flow, in the reported quarter was $37.2 million, remaining same year over year. At the end of the third quarter of 2012, j2 Global had around $469.8 million in cash & marketable securities on its balance sheet compared with $221 million at the end of 2011. At the end of the previous quarter, the company had $245.1 million of debt and the debt-to-capitalization ratio was 0.30.

Financial Outlook

j2 Global has raised its fiscal 2012 financial outlook. Management expects total revenue in the range of $345 million - $365 million, while non-GAAP EPS is expected to exceed the year-ago figure. Non-GAAP effective tax rate is estimated in the range of 24% - 26%.

Our Recommendation

Despite stiff competition from EasyLink Services International Corp. and Open Text Corp. ( OTEX - Snapshot Report ) , we believethe company’s strong financial position and diversified product pipeline, as well as its long-term growth prospects of outsourced value-added messaging services and continuous subscriber growth will drive earnings higher in the near future. We, thus, maintain our long-term Neutral recommendation on j2 Global. Currently, the company holds a short-term Zacks #3 Rank (Hold) on the stock.