Fax Firm Sends Internet Message

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Hollywood’s J2 Global Inc. has been on a roll lately, reporting record revenue and profit in the most recent quarter and hitting a five-year stock high in October.

But its recent success might leave some scratching their heads. After all, the vast majority of J2’s business is in an industry generally considered obsolete: fax.

While establishing itself as the market leader in the fax business, the company also has quietly become one of the most profitable companies in Los Angeles. Analysts said that’s because it’s only now seeing its greatest returns from years spent tirelessly cornering the Internet fax market through acquisitions and aggressive patent protection.

“At first glance, you see J2 is mostly a fax business and you write it off right away,” said Daniel Ives, an analyst at FBR Capital Markets & Co. in New York. “But they took a market when most doubted it, and now here it is years later and they’re a pretty impressive business.”

J2 has some 2 million fax subscribers, and its revenue more than doubles any of its closest competitors in that area. Though overall fax usage is on the decline, the company’s revenue has grown in part due to the increasing popularity of Internet fax, a $1.2 billion market that one consultant believes could double in the next five years.

Still, most analysts agree that the fax business has a limited lifespan. And J2 is already preparing for a postfax world by diversifying its business.

Last month, the company announced a nine-figure acquisition of a magazine publisher and an attempted takeover of a company specializing in online data storage. Nearly one-quarter of J2’s business now comes from nonfax services.

“The biggest thing going against the company is the fax market falling off at some point,” said Greg Burns, an analyst at Yonkers, N.Y., firm Sidoti & Co. LLC. “I would expect pretty much anything they do (in the future) that’s of a meaningful size to be outside of fax.”

Success story

Launched as JFax in 1995, the company was one of the first to offer a service forwarding fax messages to e-mail accounts.

It went public in 1999. Just a year later, it bought out one of its main competitors, eFax. After struggling through the dot-com bust, the company, which changed its name to J2, began to see growth among individual and small-business customers. It continued a pattern of buying out competitors, the largest of which was the $213 million acquisition in 2010 of the market’s No. 2 company, Protus IP Solutions.

Today, it is a behemoth in its space. Shares closed at $30.04 on Dec. 5, up 11 percent in the last year and resulting in a market capitalization of nearly $1.4 billion.

The company did not make executives available for this story.

Analysts cite several reasons for the continued growth of Internet fax, which has been a major driver of J2’s business. The pace of people switching to Internet fax remains faster than the pace at which overall fax usage is shrinking, and many industries, especially health care, financial services and marketing, still use fax regularly. Sending sensitive documents via fax is also considered more secure than sending them to a company email account.

J2’s big selling point is that a customer, such as a small business or professional service provider, can get a fax number and service without the expense or bother of a fax machine or separate phone line.

Through J2’s Internet fax service, customers get a dedicated fax number, and faxes sent to that number are hosted on a J2 email account that customers can access on their computers. They can also send scanned documents from their computers to both traditional fax lines and other Internet fax accounts.

The popularity of Internet fax helped the company post $32 million in net income last quarter on $93 million in sales, both records. It’s also on pace to break last year’s annual records of $115 million in net income on $330 million in sales.

The company’s 35 percent profit margin was the second highest of the 70 largest public companies by revenue in Los Angeles County last year, behind only Glendale’s Public Storage.

It’s able to hit those high margins because it spends little on research and development or marketing. It’s also managed to charge much higher fees than competitors while maintaining dominant market share.

For example, J2’s cheapest eFax service costs $14.13 a month for 150 pages. Though that’s less than the cost of a traditional fax line, many competitors offer similar services for below $10 a month. RingCentral Inc.’s cheapest plan is $7.99 a month for 500 pages; Nextiva Inc.’s is $4.95 for 500 pages.

It might seem like a no-brainer for companies to simply pick the cheapest option, but analysts said J2 is such a dominant player in its field that businesses tend to choose it by default.

“J2 is the one customers know about,” said Peter Davidson of Davidson Consulting Inc. in Sturgis, Mich. “They’re the one with the brand-name recognition. Anybody else is somebody you’ve never heard of.”

In addition to acquiring competitors, the company stifles others through aggressive patent enforcement. Those lawsuit filings have increased in the last year, and the company is currently involved in legal fights against competitors including RingCentral; OpenText Corp. in Ontario, Canada; and Chicago’s Integrated Global Concepts Inc. For instance, J2 is suing OpenText over OpenText’s alleged use of a patented system to transmit fax messages to email.

Over the next four years, the company expects to make some $60 million on patent licensing, Chief Executive Hemi Zucker said last month on an earnings call. That would dwarf the $22 million in licensing revenue the company has collected since 2003.

“They are scaring the heck out of all kinds of companies,” Davidson said. “A lot of foreign companies don’t want to come to the U.S. because J2 has the patents and is going to enforce them.”

Beyond fax

Though J2 has a lock on the market, many analysts still believe fax will tail off in coming years.

The company has made moves outside of fax, rolling out other online products including Internet voicemail services and online backup storage. Last quarter, nonfax revenue increased by 35 percent year over year to $19 million.

“Over the years, we were always suspected of being … this one-trick pony: fax, fax, fax,” Zucker said in the earnings call. This year, he added, “our fax revenue is now only 76 percent of the business.”

One of the boldest moves the company has made outside of fax came last month, when it paid $167 million for Ziff Davis Inc., the publisher of PC Magazine and ComputerShopper. Last month, J2 also announced a failed takeover bid for Boston online backup service Carbonite Inc., and disclosed a 9.9 percent stake in that company.

More acquisitions are likely. The company has more than $300 million in cash and investments, and during last month’s call, executives said that they were looking to buy companies that would result in between $50 million and $100 million in acquired revenue a year – outside of fax.

“The company is looking for new frontiers,” Ives said. “The fax market is mature and they’re trying to diversify out of it, but to show accelerated growth will be challenging.”

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