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JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
JCOM Strategic Valuation - Report
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JCOM Strategic Valuation - Report

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JCOM-Nasdaq strategic valuation.

JCOM-Nasdaq strategic valuation.

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  • 1. GLOBAL STRATEGIC VALUATION J2 Global Communications Valuation Analysis Team 5 Alessandro Masi Ajay Pal Singh Bo Liang Rajat Saxena Shuai Zhang Vivek Vemuru
  • 2. Table of Contents Executive Summary ...........................................................................................................1 Investment Thesis (EEA, Mispricing, catalyst) .........................................................2 EV/IC scatters graph analysis ........................................................................................4 Macro and Thematic Drivers .........................................................................................4 Summary Analysis of Cash Flow Prime™ Valuation ...............................................6 Review of sell-­side brokerage reports .......................................................................9 Management conference call analysis ........................................................................9 Additional company information ...............................................................................12 Credit analysis and coverage ratios ..........................................................................15 Shareholder ownership .................................................................................................15 Analysis of Form DEF14A and competitors ............................................................16 Devil’s Advocate ...............................................................................................................19
  • 3. Executive Summary J2 Global Communica/ons (NASDAQ:JCOM) founded in 1995 is a provider of cloud-­‐ based, business-­‐cri/cal communica/ons and storage messaging services. Core services include leading brands in six business sectors: eFax® (online fax),eVoice (virtual voice), FuseMail(hosted email), Campaigner (email marke/ng), KeepItSafe (online backup), and OneBox (unified communica/ons). The company provides its cloud-­‐based services through a global communica/ons network that spans more than 4,300 ci/es in 49 countries on six con/nents serving more than 11 million subscribers worldwide. In this paper, we discuss about the company performance over the last 10 years and do an evalua/on of company stock. Based on the ROI’ and EV/IC performance of the stock, we determine that the stock is undervalued. The reasons for undervalua/on is analyzed and the proper recommenda/on is given based on our analysis.
  • 4. 2 Global Strategic Valuation NASDAQ:JCOM Investment Thesis (EEA, Mispricing, catalyst) • Key reasons for the markets evalua3on of J2 global communica3ons -­‐ Embedded expecta3ons. Even though the ROI’ levels of the company has been consistently growing for the past 10 years, the valua/on of the company is not reflec/ng the growth. This could be the result of following • The market believes that the eFax business which generates around 70% of revenue for the company is dying and this component is taken in to considera/on while evalua/ng the company. • Market doesn’t believe in the ability of management and there are some deals which are quite suspicious that are made by the company. • During the last three years the company had accumulated so much of cash and the market doesn’t value high the management use of cash in their valua/on -­‐ In 2008, the company ini/ated a huge share buy back program which will go on for the next five years. The excess cash was used in this process. The market believe this strategy as a way to get the excess cash out of the balance sheet rather than a strategic investment. -­‐ In 2009, the company invested a huge amount of excess cash in improving their opera/ng performance and acquiring new companies. The market doesn’t see this as a strategic fit and doesn’t increase the valua/on -­‐ In 2010, the company made huge investments in acquiring two companies in europe which will make the exis/ng products beder. • The price is mis priced due to following reasons The company is providing cloud based communica/on services and the overall demand for cloud based compu/ng is dras/cally increasing since it saves a lot of cost for the clients The net income, return on investment and invested capital growth beat the analyst es/mates for the last three quarters in 2011. The stock price performance shoots up from $21 to $27 and stays at $27 for almost half year. The market believes that the stock is cheap at $27. J2 Global Communications Inc.
  • 5. 3 Global Strategic Valuation NASDAQ:JCOM The cancella/on rate of customers has been decreased by 2.6% from 3.7% in Q1 2011. They also increased their market presence in 4500 ci/es in Europe. We believe the following catalysts will drive the stock price of JCOM -­‐ The JCOM ROI’ performance over the last one year has exceeded the market expecta/ons and will con/nue to increase which will bust the market predic/on that eFax business will go out of the market. -­‐ The recent acquisi/ons made by the company fit very well with in the core strategy of the company and adds more value to their exis/ng product line. -­‐ Most importantly, the market will understand that the majority business crea/ng product eFax will not go out of market and con/nue to exist in new markets where it is s/ll considered a innova/ve product. -­‐ It ll also become a sweet target for poten/al take overs and might increase the valua/on of the company. -­‐ The investment capital growth in last year is 13% and with the recent acquisi/ons it wll con/nue to increase. All these reasons makes us believe that the market undervalued the company and it is a certain BUY op/on. J2 Global Communications Inc
  • 6. 4 Global Strategic Valuation NASDAQ:JCOM EV/IC sca*ers graph analysis Forward ROI’ Macro and Thema9c Drivers J2 Global Communica/ons operates in the Internet Soiware and Services sub-­‐ industry. Nevertheless, its main focus is on “cloud-­‐based, value-­‐added communica/on, messaging and data backup services to businesses of all sizes, from individuals to enterprises (…) under the brand names eFax, eVoice, Electric Mail, Campaigner, KeepItSafe and Onebox”. Although it has taken a while for this sector of the market to heat up, communica/ons-­‐as-­‐a-­‐service (CaaS) is genera/ng serious aden/on. Currently, it is a small market, with few vendors offering complete product offerings in the area of unified communica/ons (UC) and contact centers but this will most likely change. We believe that current budget restraints, limited IT exper/se and unwillingness to undertake large capital expenditures is a driving force for this shii in buying behaviors. The uptake in interest to use cloud services for communica/ons (according to Forrester Research, 23% of decision makers stated they would consider both UC and contact centers as a cloud based service in 2011) may be a response to the general market acceptance of cloud services for other cloud services such as soiware-­‐as-­‐a-­‐service (SaaS) and infrastructure-­‐as-­‐a service (IaaS) solu/ons that help companies beder manage their IT expenses. Today, most UC solu/ons available as J2 Global Communications Inc.
  • 7. Global Strategic Valuation NASDAQ:JCOM CaaS are single applica/ons and are not comprehensive product suites: therefore, we believe JCOM’s cross-­‐selling strategy of offering a complete suite of cloud-­‐based services will be winning. We think buying paderns for both UC and contact center solu/ons will shii during the next few years from premise to cloud services, as more service providers recognize the full poten/al of the CaaS opportunity and develop robust product solu/ons. This will allow customers to pay per-­‐user per-­‐month or per-­‐transac/on for full lifecycle support and enable them to gain advanced UC and contact center solu/ons quickly and affordably. In order for JCOM to grow its market share in the sector (against big compe/tors such as Microsoi, IBM, and Cisco, and smaller ones such as Level 3 Communica/ons), we believe it will have to focus its aden/on on: · increasing 5 brand awareness and recogni/on; · innova/on through R&D and patents licensing; · improving customer service, which in turns drives up reten/on (cancel rate down to 2.6% in Q1 2011); · implemen/ng reliable privacy and security systems in order to avoid fraudulent ac/vity, system failure or a security breach. Addi/onal risk factors are the inability to successfully integrate and realize an/cipated synergies from newly acquired businesses (as the company relies mainly on acquisi/ons rather than organic growth), and the inability to con/nue to expand the business and opera/ons interna/onally. To be men/oned that the services are currently considered by the management as “informa/on services” under the Telecommunica/ons Act of 1996 and related precedent and therefore not currently subject to U.S. telecommunica/ons services regula/on at both the federal and state levels. However, the services u/lize data transmissions over public telephone lines and other facili/es provided by carriers which are subject to foreign and domes/c laws and regula/on by the Federal Communica/ons Commission (the “FCC”), state public u/lity commissions and foreign governmental authori/es. These regula/ons affect the availability of DIDs, the prices paid for transmission services, the administra/ve costs associated with providing our services, the compe//on from telecommunica/ons service providers. J2 Global Communications Inc
  • 8. Global Strategic Valuation NASDAQ:JCOM As messaging and communica/ons services converge and as the services expand, JCOM may become subject to FCC or other regulatory agency regula/on, or subject to fines, penal/es or enforcement ac/ons as well as liabili/es for past regulatory fees and charges, retroac/ve contribu/ons to various telecommunica/ons-­‐related funds, telecommunica/ons-­‐related taxes, penal/es and interest. Changes in the regulatory environment could decrease revenues, increase costs and restrict the service offerings. In many interna/onal loca/ons, JCOM is subject to regula/on by the governmental authority. 6 Summary Analysis of Cash Flow Prime™ Valua9on J2 Global Communications 5 year forecast of ROI’ and IC’ 1.5000 1.1250 0.7500 0.3750 0 -­‐0.3750 -­‐0% -­‐2% 1% 0% 9% IC' Growth -­‐4% -­‐4% 6% 27% -­‐12% 23% 37% 101% 39% 0% The ROI performance over the past 10 years is good for JCOM as it has been consistently increasing rela/vely to IC growth. In the year 2004, the ROI prime J2 Global Communications Inc.
  • 9. 7 Global Strategic Valuation NASDAQ:JCOM performance went down. It may be due to the heavy investment in 2003.The company has dras/cally reduced inves/ng in capital from 2006. Even though the ROI prime maintained consistency over the period of 2006 to 2009, the evalua/on of the company started going down. Possible Reason: The analysts might have perceived that the company growth is minimal and reduced the evalua/on. From 2009 to 2010, even though the growth is minimal, the ROI prime performance increased. This has been the best ROI prime performance for the company so far,Even though the company reduced the growth by 4 %. Hence the ideal scenario -­‐ Low growth, High ROI prime. The future projected ROI’s for the year 2011 is also increasing. It could be the fact that the growth and ROI prime performance are not included in the evalua/on. Even if you compare with other companies in the same industry, the ROI performance of JCOM is way ahead for the valua/on. From this ROI and EV/IC analysis, we can infer that the company JCOM is highly undervalued and its necessarily a BUY op/on. If you observe the below graph which displays the ROI performance rela/ve to EV/IC levels. Even though the company has increasing ROI levels aier 2007, the company valua/on went down. J2 Global Communications Inc
  • 10. 8 Global Strategic Valuation NASDAQ:JCOM 20.0 15.0 10.0 5.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LFY+1 20 15 10 5 10.5 9.8 10.0 8.1 11.7 Fwd P/E' 18.0 17.6 17.9 17.0 7.0 4.1 Similarly if you observe the ROI vs IC growth chart, it reflects the same informa/on. The growth in Invested capital is decreasing but the ROI is increasing. This is an ideal situa/on and we as a team believe that this valua/on is not part of the current stock price. There fore we believe that the stock price will go up and we should BUY the stock now. ROI growth VS EV/IC 10.5 12.3 7.3 6.7 8.6 15.4 10.1 10.3 9.1 7.4 2.5 EV/IC' 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 LFY+1 20 15 10 5 0 0 28 55 83 110 J2 Global Communications Inc.
  • 11. 9 Global Strategic Valuation NASDAQ:JCOM ROI vs IC Growth 150 113 75 38 0 -38 13 41 46 37 47 70 68 69 71 89 102 IC Growth ROI Review of sell-­‐side brokerage reports With the premise that the company receive marginal aden/on by sell-­‐side analysts (which might be an addi/onal reason for the stock to be underpriced), analysts rated JCOM with six “buy” or “strong buy” and four “hold” out of the total coverage (source: Yahoo! Finance). The mean target price is $34.00 (high target price is $41.00). Consensus target price is $33.88 (source: Bloomberg). Management conference call analysis Risk Factors • Inability to sustain growth or profitability, par/cularly in light of an uncertain U.S. or worldwide economy and the related impact on customer acquisi/on and reten/on rates, customer usage levels and credit and debit card payment declines • Inability to maintain and expand our customer base and maintain or increase the average revenue per subscriber • Inability to successfully integrate and realize an/cipated synergies from newly acquired businesses J2 Global Communications Inc
  • 12. 10 Global Strategic Valuation NASDAQ:JCOM • Inability to con/nue to expand our business and opera/ons interna/onally • New or unan/cipated costs or income, sales or other tax liabili/es or inability to accurately es/mate our effec/ve tax rate • Inability to maintain exis/ng or enter into new rela/onships on acceptable terms with cri/cal telecom and other vendors whose financial condi/on will not nega/vely impact the services they provide • Inability to manage certain risks inherent to our business, such as fraudulent ac/vity, system failure or a security breach • Compe//on from other similar providers with regard to price, service and func/onality • Inability to obtain telephone numbers in sufficient quan//es on acceptable terms and in desired loca/ons • Enactment of burdensome telecommunica/ons, Internet, or other regula/ons • Reduced use of fax services due to increased use of email, scanning or widespread adop/on of digital signatures • Inability to adapt to technological change and diversify our service offerings and related revenues at acceptable levels of return-­‐on-­‐investment • Inadequate intellectual property protec/on or viola/ons of third party intellectual property rights • Loss of services of execu/ve officers and other key employees • Other factors set forth in our Annual Report on Form 10-­‐K filed by us on February 28, 2011 with the Securi/es and Exchange Commission (“SEC”) and the other reports we file from /me-­‐to-­‐/me with the SEC Q1 2011 Updates Organic Net Adds of nearly 25K; a Strong Quarter Improved Reten/on; Cancel Rate Down to 2.6% J2 Global Communications Inc.
  • 13. 11 Global Strategic Valuation NASDAQ:JCOM Q1 Non-­‐GAAP Revenue is $83.7M; 39% Y/Y and 18% Q/Q growth Record FCF of $38.2M, Despite $1.9M of Transi/on Exit Costs, Net of Tax Corporate Con/nues to Grow at a Healthy Pace • Net adds of >10,000 DIDs in quarter; added 8 new large contracts in Q1 • Y/Y revenue growth of ~30%; DID growth of >25% Interna/onal Expansion Across Mul/ple Services • Added Onebox® Numbers in 15 Major Canadian Ci/es • Increased presence in Germany; 115 more ci/es for a total of 303 ci/es • Strong growth con/nues in Japan: Q/Q revenue up > 45%, DIDs up >68% • Several poten/al acquisi/ons Progress of Acquisi/ons Transi/on of Our Recent Acquisi/ons on Target: • Venali® -­‐ finish integra/on in Q2 • MyFax® -­‐ sales team already combined with eFax® under single management • Con/nue to support MyFax® brand; achieved double digit growth rate • MyFax®/My1voice™ -­‐ expect last stage to be completed during Q4 Expand Geographical Reach for KeepItSafe™ • Leading back-­‐up provider in Ireland; fully integrated into our Dublin office • Started expansion into UK, targe/ng SMB and Enterprise customers • Investment to increase data storage capacity • Y/Y revenue growth is >35% Campaigner: Acquired December 2010 • Development, Marke/ng, Sales, Customer Support kept in Odawa J2 Global Communications Inc
  • 14. 12 Global Strategic Valuation NASDAQ:JCOM · Simple and Easy to Use; Quick Set Up to Start Email Marke/ng · Posi/oned as Best In Class • Free 24/7 customer support • Free on-­‐boarding • Compe//ve pricing • Ideal value proposi/on for SMB/SOHO customers · Proven Reliability to Ensure Emails are Delivered on Time · Technology is Scalable to Support Growing Client Base · Annual Seat Growth is >74% · Greater than 10,000 Paying Customers Cross Sell Ini/a/ves Focus on j2 Premium Services: eFax®, eVoice®, Campaigner®, FuseMail®, KeepItSafe® and Onebox® • Ini/al focus on increasing awareness both internally and externally • Ac/vely pursuing cross sells with every direct sale/increase awareness • Launched new j2.com “one-­‐stop-­‐shopping” website in March • X-­‐Sell promo/ons on web pages for all brands and all communica/ons Generated New Sign Ups from Cross Selling Efforts Addi9onal company informa9on J2 Global Communica/ons’ strategy J2 Global Communica/on adopts a strategy named “CORE” which stands for Cloud Service for Business; Our Own Brands; Recurring Revenue; Efficient Opera/ons. J2 Global Communications Inc.
  • 15. 13 Global Strategic Valuation NASDAQ:JCOM  Cloud Services for Business J2 Global Communica/ons believes that businesses of all sizes are increasingly outsourcing their communica/on, messaging and data backup needs. Their goal is to reduce or eliminate costs while also enhancing produc/vity, mobility, business con/nuity and security. Under this circumstance, Cloud services will definitely be a perfect fit to cater these growing unmet needs. More specifically, these services represent more efficient and less expensive solu/ons than many exis/ng alterna/ves, and provide for increased security, privacy and message handling flexibility.  Our Own Brands J2 Global Communica/ons owns and uses a number of trademarks in connec/on with its products and services, including eFax and the eFax logo, MyFax and the MyFax logo, eFax Corporate and the eFax Corporate logo, eVoice and the eVoice logo, Electric Mail and the Electric Mail logo, KeepItSafe™ and the KeepItSafe™ logo and Onebox and the Onebox logo, among others. Many of these trademarks are registered in the U.S. and other countries, and numerous trademark applica/ons are pending in the U.S. and several non-­‐U.S. jurisdic/ons. J2 holds numerous Internet domain names, including “efax.com”, “efaxcorporate.com”, “myfax.com”, “fax.com”, “evoice.com”, “electricmail.com”, “campaigner.com”,“fusemail.com”, “keepitsafe.com” and “onebox.com”, among others. J2 also has in place an ac/ve program to con/nue securing “eFax” and other domain names in non-­‐U.S. jurisdic/ons. Besides, J2 has filed to protect our rights to the “eFax” and other names in certain alterna/ve top-­‐level domains such as “.org”, “.net“, “.biz”, “.info” and “.us”, among others. The above patents definitely are J2’s compe//ve advantages comparing to its major compe/tors.  Recurring Revenue J2’s most revenue are recurring revenue which means once a customer starts to using J2’s service, it will generate revenue con/nuously. To certain extent, this business model can easily incur reliable revenue in the following years which is rela/vely predictable and stable. More importantly, this kind of J2 Global Communications Inc
  • 16. 14 Global Strategic Valuation NASDAQ:JCOM revenue source needs less expenditure to maintain rela/onship with exis/ng clients. Increasing number of new clients and general expansion of exis/ng clients will yield more business opportuni/es to J2 which will turn into company’s revenue at the end.  Efficient Opera/ons J2 is aiming to help both individual and companies to improve their opera/on efficiency. By using advanced servers and professional technique supports, J2 can bring its clients fast processing, convenient accessing, more func/ons and safety at low cost. Save clients money and /me as well as improving their accuracy at a reasonable is the key to J2’s business. J2 Global Communica/ons’ Plan in 2011 1. Con/nue to conduct acquisi/on and integra/on. • Finish integra/on of Venali® before Q2 • Combine sales team of MyFax® and eFax® under single management by the end of 2011 • Con/nue to support MyFax® brand to achieve double digit growth rate. • Finish integra/on of MyFax®/My1voice™ -­‐ by the end of Q4, 2011. 2. Expanding Geographical Reach for KeepItSafe™. • KeepItSafe™ will be fully integrated into our Dublin office, aiming to lead back-­‐ up provider in Ireland. • Start expansion into UK, targe/ng SMB and Enterprise customers • Investment to increase data storage capacity • Y/Y revenue growth is >35% 3. Enhancing Cross sell, especially focusing on premium services (eg. eFax®, eVoice®, Campaigner®, FuseMail®, KeepItSafe® and Onebox®) within the group. • Ini/a/ng focus on increasing awareness both internally and externally • Ac/vely pursuing cross sells with every direct sale/increase awareness J2 Global Communications Inc.
  • 17. 15 Global Strategic Valuation NASDAQ:JCOM • Launching new j2.com “one-­‐stop-­‐shopping” website • X-­‐Sell promo/ons on web pages for all brands and all communica/ons Credit analysis and coverage ra9os Assets are completely financed by equity (no debt) and WACC (in this case cost of equity) is 10.42%. No preferred equity. 1-­‐Yr Default Likelihood: 0.001%, Credit ra/ng: AAA, 5-­‐Yr CDS Spread: 33bp (source: Bloomberg). Management is composed of 4 execu/ves ($0.62MM average reported compensa/on, 9.2 years average tenure), whereas 5 is the average for peer companies ($1.42MM average reported compensa/on, 7.6 years average tenure). Board of directors is composed of 6 members; all of them are independent and own shares, whereas 83.3% of peer companies’ board members own shares. The average tenure is 8.6 years, whereas is 6.6 years for peer companies. The ten major shareholders are: Fidelity Management & Research (12.75%), Macquarie Group Ltd (8.26%), Delaware Management Company (7.75%), Vanguard (5.13%), William Blair & C. (5.00%), Blackrock Fund Advisors (4.55%), Perkins Investment Mgmt Llc (4.31%), Century Capital Management Llc (3.81%), Reinassance Technologies Corp (3.45%), TimesSquare Capital Management (2.94%). Shareholder ownership Major Direct Holders: Holder Shares Reported RESSLER RICHARD S 1,024,703 May 12, 2011 TURICCHI R SCOTT 348,564 Jun 7, 2011 BECH DOUGLAS Y 175,021 May 12, 2011 ZUCKER NEHEMIA 141,375 May 10, 2011 CRESCI ROBERT J 52,553 Jul 6, 2011 Top Institute Holders: J2 Global Communications Inc
  • 18. 16 Global Strategic Valuation NASDAQ:JCOM Top Mutual Fund Holders: Analysis of Form DEF14A and compe9tors The members of the Compensa/on Commidee are Messrs. Bech, Cresci and Schulhof, who is the Chairman of the Commidee. The Compensa/on Commidee is responsible for, among other things, administering the Company’s compensa/on programs, including its stock and benefit plans, for making recommenda/ons to the Board, for approval by a majority of independent directors, with respect to compensa/on of the Company’s execu/ves and for recommending to the Board changes in the policies that govern the Company’s compensa/on programs. Here are the basic components of the company compensation program : • Compensa/on for j2 Global’s execu/ves generally consists of salary, par/cipa/on in an execu/ve bonus program and stock op/on grants and restricted stock awards. • The Commidee helps the Board of Directors assess past performance and an/cipated future contribu/on of each execu/ve officer in recommending to the J2 Global Communications Inc.
  • 19. 17 Global Strategic Valuation NASDAQ:JCOM Board of Directors, for approval by a majority of independent directors, the total amount and mix of each element of compensa/on. Base salaries are evaluated annually for all execu/ve officers. In determining appropriate salary levels for such officers to recommend to the Board of Directors for its approval, the Compensa/on Commidee considers, among other factors, the officer’s scope of responsibility, prior experience and past performance and data on prevailing compensa/on levels in relevant markets for execu/ve talent. j2 Global has established an execu/ve bonus program for awarding bonuses to execu/ves and eligible managers and an employee bonus program for all other employees. As part of the execu/ve bonus program, the bonus guidelines established each year for j2 Global’s execu/ves and eligible managers are designed to encourage and reward senior management for (a) adaining Company-­‐wide financial goals, (b) improving the financial and opera/onal health of j2 Global, and (c) mee/ng or exceeding individually defined goals and objec/ves for each execu/ve and eligible manager. j2 Global’s Compensa/on Commidee establishes these guidelines subject to final approval by a majority of independent directors. The guidelines are non-­‐ binding and do not create any contract right between the Company and its employees. Power Sleuthing 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 at a higher rate than eFax, its signature offering. With the acquisition of Phone People Holding Corporation in the U.S. and Media burst Limited in Europe, j2 Global Communications has become a worldwide leader in the virtual PBX market. J2 Global Communications Inc
  • 20. Global Strategic Valuation NASDAQ:JCOM The below charts will illustrate tools that analysts may use in order to gain valuable information that may affect the companies stock performance. 18 JCOM Research and visit other efax and messaging service providers and compare the price with JCOM to get an idea of customer willingness Ques/on other service providers and to determine what is most important differen/ator a customer look for in eFax and messaging Survey the target market customer to find out whether they use JCOM products and what are other brands in the marjet they Use the survey results of targeted market customers to gauge which brand is most used and favoured by market JCOM Make monthly call to JCOM customers to determine what service they prefer to upgrade and which service they like most Survey customers on the course to determine which service they use most and what changes they want to see in those services Conduct survey and employe agents to determine which service is most reliable and which service has seen the highest growth Monitor similar kind of services exists in the market and determine which service is most offered and disliked by the customers J2 Global Communications Inc.
  • 21. 19 Global Strategic Valuation NASDAQ:JCOM Devil’s Advocate Though we maintain the view of ‘buy’ on J2COM stock, we need to re-­‐consider our assumptions and double check whether our analysis observes all the risks present in the investment. In our research, we have taken a holistic view of risks present in this investment and have complied a ‘what if’ list to determine the risky scenarios our investment can face. What if: 1. Company face legal issues regarding patenting a. On March 2011, j2 Global Communications received a legal notice for infringement of patent from EasyLink Services International Corp.(NASDAQ: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. (NASDAQ:OTEX). These were related to reliable transmission of facsimile and voice messages in email form over the Internet 2. Competition intensi^ies a. J2COM has to go head-­‐on against giants in cloud such as Microsoft, IBM, Cisco etc b. J2COM also competes with EasyLink Services International Corp., Open Text Corp. that offers similar services 3. Legal risk a. Company’s services to be subject to U.S. telecommunications services regulation at both the federal and state levels J2 Global Communications Inc
  • 22. 20 Global Strategic Valuation NASDAQ:JCOM 4. Insider trading can lead to decline in stock price a. CEO of j2 Global Communications Inc. Nehemia Zucker sells 20,056 shares of JCOM on 05/09/2011 at an average price of $29.79 a share. 5. Changes in industry a. Short sellers are betting heavily against electronic fax goliath j2 Global, assuming j2 will be unable to offset the seemingly inevitable decline of fax use globally. 6. Company fails to deliver the customer service essential in this industry a. There have been cases of unprofessional customer services and b. Not delivering the services promised at the promised price 7. Heavy reliance on the eFax business which is however mitigated by the international expansion, and most importantly through the diversi^ication of product portfolio, acquisitions, R&D, Patent licensing. J2 Global Communications Inc.

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