Fax-Based Strategy

Fax-Based Strategy
Stalking Deals: J2 Global CEO Hemi Zucker at the Internet services and media firm’s Hollywood headquarters.

The year 1999 was supposed to be a time to shine for Hollywood’s J2 Global Inc.

Instead, the then 3-year-old Internet startup met the same fate as most other online businesses during the dot-com bubble: rapid decline. But unlike many of the others, the company survived. And as of late it has managed to find success using a strategy atypical of many of today’s consumer tech companies that focus on growing customers without much thought to present-day revenue.

When J2 went public in ’99, it raised $81 million by promising investors an opportunity to capture an anticipated $3.1 billion market in cloud-based email, voice mail and fax communications. But its stock quickly started sliding. The company’s share price opened at $9.50 in July of that year and fell to a dizzyingly low 22 cents by 2001.

But things got markedly better. As of last week, the company’s shares were trading at more than $74.

“All of us have 22 cents burned into our memory,” said J2 Chief Executive Hemi Zucker, who joined the firm as chief financial officer in 1996 not long after its founding.

Zucker said the company had to scramble to avoid getting delisted from Nasdaq in the wake of its stock tumble.

“We had to do a reverse split of the stock,” he said, reducing the number of outstanding shares to boost the price.

The following years were formative for J2.

“It’s all about the (company’s) childhood,” he said. “We came in with an IPO that was busted, a product that was e-fax and shareholders that left us in the dark. We had more shorts than shareholders.”

Though many on Wall Street thought fax was headed for a slow death, J2 decided to double down on the business. The company sidelined its email and voice mail businesses, reined in costs and focused on showing financial results. (The company’s pitch: Instead of having a bulky fax machine in your office, subscribe to our service so you can send a fax on those occasions you need to.)

Using its remaining IPO cash, J2 started consolidating the Internet fax industry, buying its largest competitor, eFax, in April 2000 for $10 million. J2 became cash-flow positive in 2001 after retaining 87 percent of eFax’s customers, despite increasing prices to customers from $3 and $4 a month to $9.50 a month and getting costs under control, said Zucker.

Today, monthly eFax subscriptions start at $17 and allow customers to send and receive faxes on any Internet-connected device. Zucker declined to disclose how many subscribers the company has.

The company has kept a close eye on expenses and margins ever since. A relentless focus on maximizing margins has become J2’s calling card on Wall Street. The company’s $3.6 billion market capitalization is the second highest of any publicly traded tech company in Los Angeles, only behind video-game developer Activision Blizzard Inc. of Santa Monica.

The company has achieved that distinction without much media attention.

“When you measure yourself in cash you don’t have to chase media,” said Zucker. “The success and longevity of J2 Global is not based on ego. It’s based on financial return to shareholders.”

In a technology industry obsessed with chasing eye-popping future returns, J2’s turnaround and focus on present financials stands out.

“Because of our background of being a fax loser, we are a cash winner,” said Zucker, explaining that fax’s anticipated death forced the company to show results to investors.

Last year, the company earned $333 million before interest, taxes, and amortization on $721 million in revenue.

“Operationally, they run a very tight ship,” said Gregory Burns, an analyst with Sidoti & Co. of New York. “They are hyperfocused on margins, profitability and cash flow.”

Shopping spree

While many companies spend millions each quarter on marketing costs, J2 has taken a different tack.

Zucker explained that rolling up competitors has become an especially cost-efficient way to acquire new customers, adding that J2 has acquired 127 different companies since 1996. Last year alone, it acquired 24, paying an average of between $12 million to $14 million. J2 has funded its acquisition streak by issuing $599 million in bonds and convertible debt since 2012.

“J2 Global is a little bit different. They are indifferent of how they acquire customers whether it’s through organic means or M&A,” said Shyam Patil, analyst for Susquehanna International Group of Bala Cynwyd, Penn. “They are very savvy in their calculation of customer acquisition costs.”

But folding so many companies – and employees – under one umbrella is a daunting challenge.

The process varies from company to company, but generally J2 retains support staff and carves out regional leadership roles for executives. The parent company runs all executives through a training program, which includes lots of face time with a mentor or Zucker. Most executives wind up staying with J2 over the long term and end up with senior roles, said Zucker.

Though J2 has used acquisitions to diversify its business to include cloud-backup storage, Web hosting, email marketing, e-commerce and online media, Zucker said its strategy for acquiring companies never changes.

“We never ever bought a company that was outside our discipline,” he said. “We buy you for your present, not your future: multiples of their current revenues, not their future revenues.”

Sidoti’s Burns said J2 takes a very disciplined approach to mergers and acquisitions.

“They don’t stretch,” he said. “They have their return hurdles. They stick to their playbook.”

Branching out

J2 has strived to be less one-dimensional in recent years.

In 2012, the company paid $167 million for online media business Ziff Davis, which publishes PC Magazine, IGN and AskMen.com. The margins on Ziff Davis’ business were exceptional for the media industry and J2 saw an opportunity, said Zucker.

The deal was eye-opening for many on Wall Street at the time.

“I think almost everybody was surprised by the move,” said Susquehanna’s Patil. “I think quite a few people were skeptical because it was clearly outside J2 Global’s cloud-business markets. In hindsight, executing on that acquisition was the turning point in changing investors’ views on this team’s ability to create value.”

J2’s ability to branch out of cloud services, while maintaining healthy margins, points to an ability to diversify further, said Burns.

“I think they’ll continue to invest in what they have and drive profitability for existing businesses,” he said. “But you can’t rule out them finding another attractive vertical that they want to add to the portfolio.”

Slowly and deliberately expanding into new markets will only come, however, if J2 thinks it can quickly show financial results, said Zucker.

“We never think about what’s sexy and what’s trendy: It’s all about the shareholders,” he said.

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