The COVID-19 pandemic accelerated the pace of digital transformation worldwide as both individuals and businesses relied heavily on technology to remain functional. This trend created an enormous opportunity for most tech companies and drove an unprecedented growth in internet adoption in various, previously untapped parts of the world. Consequently, California-based internet service provider J2 Global, Inc. (JCOM) has experienced exceptional growth over the past year.
JCOM offers cloud services that include cloud fax services, endpoint and other cybersecurity, email marketing and delivery solutions, and on-demand voice communications services. The company offers these services through a portfolio of brands that include IGN, Mashable, Speedtest, Spiceworks, and Ekahau in its Digital Media business, and eFax, eVoice, iContact, Vipre, and KeepItSafe in its Cloud Services business. JCOM has more than 4.4 million subscribers and reaches more than 240 million people per month across its brands.
In line with the accelerating demand for networking, cloud and digital services, analysts anticipated JCOM would report strong earnings for the last quarter. The company surprised investors with even better earnings and delivered a record top-line of $398.2 million, up 19.8% year-over-year. Its adjusted EPS for the quarter came in at $2.18, rising 55.8% from its $1.40 year-ago value, and beating the consensus estimate by 31.3%.
Here is what we think could influence JCOM’s performance in the near term:
Impressive First-Quarter Results
JCOM’s cloud services segment generated $171.4 million during the quarter, increasing 1% year-over-year, while the company’s Digital Media segment contributed $226.8 million to its total revenues, surging 39.5% compared to the year-ago quarter. In fact, its adjusted gross margin expanded 330 bps on a year-over-year basis to 85.7%. Notably, its average monthly revenue per customer grew 3.2% year-over-year to $14.40, while its cancellation rate came in at 2.2%, marginally down from the 2.3% year-ago rate.
Spin-off to Enhance Financial Flexibility
On April 19, JCOM unveiled a separation plan and decided to break the company into two independent entities. The company wants to spin off its cloud fax service, which contributed nearly 22% to its overall top-line last year, under a new brand called Consensus. The separation is slated to be completed in the third quarter, and upon completion, there will be two independent publicly traded companies–J2 Global and Consensus.
In the words of CEO Vivek Shah: “I think they’re both underappreciated and I think part of the reason they’re underappreciated is that they’re inside of one company.” JCOM’s management believes that the split will give both entities their own dedicated leadership, focus and balance sheets, thereby leaving them with a clear set of peers with which to compete with.
Inorganic Growth Strategy
On April 7, JCOM issued an update stating that the company completed one acquisition and two divestitures in the first-quarter of 2021. JCOM bought certain assets of gaming platform HowLongtoBeat and acquired Digital Media (USA). Though the terms of the acquisitions were not disclosed, JCOM’s management believes that they will help the company grow its global customer base, provide access to new markets and expand its product lineup.
In addition, JCOM divested its equity stake in U.K.-based City Numbers, a worldwide provider of inbound local, national and international toll-free phone numbers in over 80 countries. The company also sold Callstream, a leading provider of voice and connectivity solutions in the U.K. Notably, both these companies were part of JCOM’s U.K. Cloud Services business.
Expected Growth in Financials
Buoyed by the outstanding first-quarter earnings report, JCOM’s management raised its outlook for full-year 2021. The company now expects its revenues for the current year to be between $1.68 billion – $1.70 billion, up from an original guided range of $1.63 billion – $1.68 billion. In addition, its adjusted EPS is now projected to lie between $9.27 – $9.51, up from an earlier estimate of $8.93 – $9.27.
Wall Street analysts expect JCOM’s current year revenue to increase 13.9% year-over-year to $1.70 billion. The company’s consensus EPS estimate for the year is $9.38, which indicates a 14.7% improvement over 2020. Furthermore, JCOM has an impressive history of reporting earnings surprises in it trailing four quarters.
POWR Ratings Show Odds are in Favor
JCOM has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system evaluates each stock based on a total of eight different categories. Among these categories, JCOM has a Growth Grade of B, which is consistent with robust expectations from both management and analysts.
JCOM also has a B Quality Grade. Among other favorable qualitative aspects, the company’s 10.31% forward ROE growth rate compares favorably with the 2.75% industry average. The stock is ranked #2 of 45 stocks in the Internet – Services industry.
Beyond what we stated above, we also have given JCOM grades for Value, Momentum, Stability, and Sentiment. Get all the JCOM ratings here.
Also, click here to access other stocks in the Internet – Services industry with an overall POWR Rating of A or B.
Shares of JCOM have returned 65.4% over the past year. Its cloud business looks unstoppable. The company anticipates a robust revival in ad spending this year, which could act as a tailwind to its advertising, gaming and streaming service business. Furthermore, JCOM’s growing cybersecurity portfolio is also expected to boost its prospects and meet the demands of today’s threat landscape.
In addition to its accretive inorganic strategy, its recent spin off should further unlock value in its booming cloud fax and digital media business. Notably, JCOM has a proven track record of posting revenue growth for 25 consecutive years. Of the 11 Wall Street analysts rating the stock, nine have given it either a Strong Buy or a Buy rating. Hence, JCOM looks like a long-term winner as it steadily improves its services.
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JCOM shares were trading at $126.19 per share on Wednesday afternoon, up $1.20 (+0.96%). Year-to-date, JCOM has gained 29.17%, versus a 12.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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