Short Sellers Take Their Licks As J2 Global Shares Hit a High
By RiSHAWN BIDDLE, Staff Reporter
Rising profits and a price increase has helped fax services firm J2 Global Communications Inc. beat back short-sellers. But it still faces the challenge of converting its free customers into paying subscribers.
After years of losing money, J2 has rattled off a streak of six consecutive profitable quarters. The company reported net income of $5.9 million for the second quarter ended June 30, compared with $3.3 million in the like period a year earlier. Sales rose 51 percent, to $17 million.
Much of the turnaround is due to J2s array of services, which allow faxes and voice mails to be received through e-mail, being peddled to corporate customers that would have to spend more on their own for fax machines and dedicated phone lines. Over the past year, J2 nearly doubled the number of corporate customers from 29,000 to 56,000.
To help spur that growth, the company will rely on Microsoft Corp., which plans to offer its services in its Office suite of desktop applications. J2 has also boosted its sales force to 16 from 10 over the last six months; it expects to add four more by the end of the year, including one in Washington, D.C. in the hopes of grabbing government contracts.
Analysts are excited over J2’s decision in June to boost monthly rates for new subscribers. The company raised its monthly fee for its eFax Plus package to $12.95 from $9.95 while boosting the fee for its JConnect Premier service to $15 a month from $12.50. Despite the increase, J2 is expected to add another 37,000 paid customers during the third quarter that will end Sept. 30 according to Pacific Growth Equities analyst Joe Noel, who issued a report on the stock on Aug. 11.
That report, along with the rate increase, helped boost shares in J2 to an all time high of $62.76 two weeks ago. The stock’s closing price of $58.75 on Aug. 27 represents a 209 percent gain year to date.
The rise has knocked off short-sellers who were betting that the shares could not sustain their advances, especially after a report in the financial weekly Barron’s questioned J2’s fundamentals, as well as the flurry of insider sales.
Short interest the number of shares borrowed and sold by traders in the hope that they can be bought back later at a lower price rose to 4.7 million in April from 2.2 million last September. Short-covering, when short sellers capitulate and close out their losing bets, has lowered the short interest to 3.8 million as of mid-August.
“I’ve challenged every short seller I’ve talked with to write a letter explaining why J2 isn’t worth its price. I haven’t received one yet,” said Noel, who has a rating of “overweight” or buy on the stock.
This is just the latest challenge J2 has overcome since being founded as JFax six years ago by a German rapper named Jaye Muller and his business partner, a former manager of the Beach Boys.
The company burned through two different chief executives before bringing in President Scott Jarus, a former president of communications firm Onsite Access Inc., two years ago. He instituted a turnaround of its business as well as boosting the company’s profile on Wall Street.
Now the company faces a bigger challenge: Converting more of its users into paying customers.
While J2 has given out 5 million phone numbers for its services, just 293,000 of them generated 71 percent of its revenues. The remaining 4.8 million are supported by advertising, which generates just 4 percent of revenues. Second quarter ad revenues were $609,000, a 13 percent decrease from the year-earlier period.
Converting this group into paying customers has become a key goal for J2. “Our free base, which, as you will recall from previous discussions, is one of the sources we used to derive our paid subscriber base,” said Jarus in a July conference call.
One way to lure them into paying for products is by expanding its geographic coverage. The number of locations customers can reach was recently expanded to include Mexico City and the United Kingdom, where they are also expanding their free offerings.
But there is still a difficulty in converting customers. Some may not generate enough faxes to justify signing up for the paid service. “If J2 continues to offer new products, they’ll convert more people. But probably not all of them,” said fax industry consultant Maury Kauffman. “If you’re used to getting something for free, it’s hard to fork over money for it.”