JCOM Final c21
JCOM Final c21
For years j2 Global (NASDAQ:JCOM) has been a darling of Wall Street and a
nemesis for short sellers. The company has spun a high-tech story of cloud
computing, digital media, and mergers and acquisitions. All the while, it is being
funded by its legacy eFax business.
That is the story they want you to hear.
The real story, exposed here for the first time, is a company spending a billion on
a roll-up strategy with negative organic growth. J2 has been buying money-losing
commoditized cloud computing companies, combining them with a nonperforming digital media strategy to inflate its top line, as EBIDTA runs in place.
Citron analyzes all three of j2s businesses, providing a basis for a fair
and optimistic sum of the parts analysis which supports our price
target: $27.
Citron Reports on J2 Global
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BUT!!! What the bears underestimated was j2s ability to generate cash flow by
dominating a business in decline.
To be fair, there is still enough business using fax-to-email to deem this business
"Not Yet Dead". While many have called eFax the worst part of their business, in
reality it has been and remains the best part of their business.
While j2 does not disclose its utter dependence on eFax services for its bottom
line profits, Citron has done the homework. A single line stands out in the justfiled 10-K (undisclosed in prior years):
We rely heavily on the revenue generated by our fax services.
Currently, a substantial portion of our revenue is fax-to-email related and
constitutes 42% of our consolidated revenues.
.
Citron Reports on J2 Global
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2013
"Cloud"
2014
2015
$199
$190
$210
Digital Media
Segment Operating Income
$7
$206
$30
$220
$30
$241
Corporate expenses
Total
($30)
$175
($34)
$186
($41)
$199
3.4%
13.6%
12.9%
Note to analysts:
"Don't even bother opening your mouth unless you can publish a reliable
estimate of how much of J2 Global's net revenue is directly attributable to its
fax-to-email services."
-- Andrew Left, Editor, Citron Research
What the company and the analysts never discuss is the sustainability of the
moat around this profit stream. So that's where we begin.
Dirty Secret#1
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Global (page 290). Note this is an excerpt from a much larger criticism of the
business ethics and practices of j2 from the perspective of patent trolling:
First, j2 Global has sued a striking number of its competitors, and many, although not all, of the lawsuits
were against relatively small competitors.124 j2 Global argues that most of the companies offering
Internet fax services have modest revenues, which limits the potential damages and makes it
economically sensible for the parties to settle for relatively small amounts. 125 Nevertheless, suing small
companies has the happy coincidence of ensuring that most will be unable to fight back, given that
patent litigation can cost 1-5 million dollars.126 For a small revenue company, it is difficult to justify that
type of expenditure -and even more difficult to find a patent litigator willing to take your case. 127 In
addition to its wide-ranging assertion campaign, j2 Global also has had a remarkably large appetite for
acquiring competitors and related companies, both here and abroad. A quick search of press reports as
well as j2 Global's releases shows j2 Global acquiring more than 20 companies, including acquisitions in
Canada, the UK, Ireland, Europe, Hong Kong, and Australia. 128 Some of the companies acquired were
ones that j2 Global had previously sued for patent infringement,129 raising the question of whether the
lawsuits and patent assertions could have played a role in reducing the price, distracting management,
or otherwise disadvantaging a target prior to purchase. In particular, j2 Global has been able to acquire
some of the companies that have created the greatest headaches for them, including two of the three
companies that purportedly objected to j2 Global's trademark filing as well as Venali. (Venali had filed
antitrust claims,130 which were dismissed on summary judgment, and was eventually successful in
proving that j2 Global's [AudioFax] patents related only to telephone fax systems and not to Venali's
Internet fax services.)'
http://repository.uchastings.edu/cgi/viewcontent.cgi?article=2044&context=faculty_scholarship p. 291
After spending a decade suing, then buying competitors who could have undercut
pricing in a race to the bottom (which is "free") j2 has hit a wall in the acquisition
game at the same moment their patent protection is expiring.
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Note: The other commonly referenced patent 6350066 in the above litigation
links, expired last year. It covered storing incoming messages in a database.
Obviously analysts did not pick up on that either.
In another case, filed in June 2013, J2 Global vs. EC Data Systems, which currently
operates Faxage.com . This suit clearly asserts violation of 6020980 which covers
"Facsimile Delivery to Electronic Mail". This patent expires Sept 30, 2016, just 6 +
months from today.
Examine j2's patent disclosure page carefully. The root '638 patent is listed first;
that's the one that expires April 1, 2017. Of the 27 patents listed, 9 are already
expired, and all but 4 will expire by 2019.
Dirty Secret #2
The only way j2 has been able to maintain the profitability of its fax-to-email
business is through highly controversial and aggressive (if not fraudulent) billing
practices. In proving this point we use as a source j2-owned PC Mag. While we can
find many sources that publish public complaints about j2s dubious billing policy,
nothing is better than the company's own "flagship" brand.
Despite eFax receiving an excellent
rating and numerous "Editors Choice"
awards from PC Mag, (here, here, and
here kind of like your mother telling
you you're good looking all 34 reviews by users express
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"the worst" etc, etc. If you are an investor, click the link and go read every
comment for yourself. http://www.pcmag.com/article2/0,2817,2415489,00.asp%23disqus_thread
Here are just two; the rest are all as bad or worse:
Rebecca Gaffney 2 months ago
EFAX IS THE WORST - I had almost a carbon copy experience of Andro's and everyone else's.
Their service was wonky and crappy between my iPhone and computer, and I cancelled it after 2
days. They charged me a month later anyway, and I sent them an email online asking them to
cancel the account again. They did not, and I ending up calling them to make sure they cancelled
the account and refunded my money. They were very rude about it - Megan and her supervisor
Nick - and refused to refund my money, though they claim it's cancelled. They are the worst and
need to be put out of business. I agree about PC magazine - get it together, guys!
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Dirty Secret #3
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Similarly j2 was rejected 3 times in attempts to buy Carbonite, which lost $22
million last year.
Dirty Secret #4
All of the websites operated by j2 are either flat to down over the past 3 years.
What is nice about quantifying digital properties is that traffic doesnt lie. From
Comscore data, as presented in the Susquehanna analysts reports, here is the
traffic of their flagship properties.
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What we see from the above charts is that organic traffic across j2 Global's
flagship properties is flat to down over the past 3 years. (The only exception is the
one-time bump in tech when j2 Global acquired Speedtest.net.) One of the most
glaring deficiencies of j2s digital media business is the absence of any actual
mobile strategy. These are traditional content sites and click bait.
Much like every other acquisition fed into the machine, when they acquired
Speedtest they used their standard line that is used to comment on every
acquisition:
Terms of the acquisition were not disclosed and the financial impact to
j2 Global is not expected to be material.
http://investor.j2global.com/releasedetail.cfm?releaseid=885561
While we give j2's management credit for diversifying revenues amongst their
online properties, and squeezing as much juice as they can out of these
businesses, you have to admit that these are all business on the decline. Organic
traffic is flat or declining across all their properties over the past 3 years.
Meanwhile, content has evolved, and sites like PCMag.com and Askmen.com are
just not what they used to be.
Citron Reports on J2 Global
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IAC/Interactive Corp
Ask.com (71)
Vimeo (131)
Investopedia (488)
CollegeHumor (1,465)
Daily Beast (223)
Revenue
EV /
Rev
$4,675
$3,936
84.6%
($3,330)
$3,231
$1,020
84.6%
($863)
1.4x
3.9x
$1,345
$2,368
0.6x
3.9x
So we see that the IAC properties trade at 0.6 x revenue. But let's be more
generous than that. Let's find a flagship online property with a top 30 traffic with
a compelling brand, just so we can be optimistic. We'll use the flagship of all
digital media content the New York Times (the 23rd most visited site in the US)
that trades at 1x revenue. But Citron is feeling generous so we will give them 1.5
x 2016 revenue.
Note: Citron is still highly doubtful that j2's digital media revenues can possibly
grow from $216 mil in 2015 to $270 mil in 2016 without more acquisitions.
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We continue to believe the major catalysts for the stock will be M&A
(especially mid-to-large size deals) and realization of synergies.
-- Wedbush, Feb 12, 2015
Accretive M&A is a key part of j2s value creation strategy where the
company acquires under-optimized assets (either under-monetized or with
subscale margins or both) at attractive valuations (usually around 2x
revenue) and synergizes them accordingly.
-- Susquehanna, Nov 4, 2015
We believe that j2 management will continue to use its ample cash
position on strategic M&A opportunities targeting profitable growth,
entering new geographies, and developing its cloud businesses to
complement its fax services.
-- JMP Securities, Feb 11, 2016
Guess what, Wall Street. The machine doesnt create gold after all
its really only fool's gold.
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+ 14%
+ 87%
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Revenues
2015
Connect
(Fax/Voice)
Backup
Email Marketing
Other
Cloud (subtotal)
Digital Media
IP Licensing
Total
$354
$74
$21
$50
$499
$216
$6
$721
2016
2015
$365
$110
$23
$51
$549
$270
$6
$825
49%
10%
3%
7%
69%
30%
1%
100%
Implied EV
Less: Net Debt
Implied Mkt Cap
FD Shares
Implied Share Price
Current Share Price
Potential Downside
2016
44%
13%
3%
6%
67%
33%
1%
100%
Valuation
Implied
Multiple
Valuation
2.0x
2.0x
3.0x
2.0x
1.5x
2.0x
$730
$220
$69
$101
$1,120
$405
$12
$1,537
$1,537
$171
$1,366
49.2
$27.75
$74.21
(63%)
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Risk Level
Nuclear
Toxic
Present-time
toxic risk to
growth,
margins and
stock
valuation.
Red Light
Caution
Not a
Problem
Serious risk to
operational
results -evident in
disclosures
and analysis
Legitimate
future risk
going
unaccounted
for
Snoozer
boilerplate.
Applies to
everyone in
business or
similar business.
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Risk
Level
Citron Comments
Generic comment about the risks of the
U.S. and worldwide economy. Duh.
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Enactment of burdensome
telecommunications, Internet,
advertising or other regulations, or
being subject to existing regulations
Sounds a lot like the description of the faxto-email service eFax provides. The
company's main investment in
competition has been patent trolling, and
the state of their patent portfolio clearly
shows declining utility of that investment
in forward years.
Zzzzzz
Conclusion
It is Citrons opinion that j2 Global has spent the past four years using the money
generated by its legacy eFax business to prop the financials of a collection of
unremarkable and/or useless assets that have all been acquired with terms
undisclosed.
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commonly used in busted roll ups, along with further focus on the accounting
shenanigans used by j2 to obfuscate their real financials, including the real vs.
misleading definitions of churn and customer counts.
Cautious Investing To All
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