JCOM

[BadBoyBenny]

I recently bought this around $20, I'm OK with holding it for several years if I don't think it becomes fully valued.

This company has had skyrocketing revenues for as far back as I can tell, and although they are slowing somewhat margins are improving. An impressive 50% net margin last year.

Earnings will take a hit this year as it is the first year that they have had to pay taxes, so earnings will drop slightly, but the business is still growing. Those 50% margins will be hit by a 40% tax rate and may only be 30% unless the company widens its gross margins. That's still an impressive number to me though.

Last year it had 35,600,000 in net income and 39,700,000 in cash flow and the company only has a market cap of 441,000,000.

That gives a trailing PE of less than 13 for a company that had 50% earning growth last year.

That said earnings will be down this year due to the taxes, so forward PE is more like 18 on average estimates.


Also, over 50 million in cash and marketable securities in the last balance sheet I could find, and no long term debt.

Does anyone else have thoughts?
Anyone else long on this one?
Anyone short?
Does anyone know something I should be worried about?

[MaxPower]

This looks interesting to me and is worth some more research. Do you know the reason behind their margin increases?

[BadBoyBenny]

This is from their 2002 10K

Reduced price from buying in bulk

Cost of revenues were $11.2 million, or 23% of revenue, $13.4 million, or 40% of revenue, and $7.3 million, or 52% of revenue for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in cost of revenues from 2001 to 2002 was due primarily to consolidation of various components of our infrastructure, increased network efficiency and our ability to negotiate reduced costs with several of our vendors. The increase in cost of revenues from 2000 to 2001 reflects the cost of building and expanding our server and networking infrastructure and customer support services to accommodate the growth of our subscriber base. Cost of revenues as a percentage of revenue decreased from year-to-year as a result of our ability to negotiate reduced costs with several of our vendors, the consolidation of various components of our infrastructure and overall increases in revenue over the same periods, relative to the fixed costs to support that revenue.

Pretty flat adminsitration and management compensation while revenues were growing at more than 50% annually


General and Administrative. Our general and administrative costs consist primarily of personnel related expenses, professional services and occupancy costs. General and administrative costs were $13.5 million, or 28% of revenue, $13.9 million, or 42% of revenue, and $15.4 million, or 110% of revenue for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in general and administrative costs from 2000 to 2001 was primarily due to higher 2000 expenses relating to an equity investment in an unconsolidated subsidiary, realized loss on sale of an investment and stock based compensation expense. General and administrative costs as a percentage of revenue decreased from year-over-year as a result of increases in revenue over the same periods versus a stable level of general and administrative expenses.

That said, I'll list few things that worry me about the company.

Their business seems to have pretty low barriers to entry as they are buying lines from telecom companies and don't need to invest capital in a whole lot of infrastructure.

There is already competeing software to do the fax or voicemail to email inbox thing, and any of those companies could be acquired by a alrger more aggresive company.

A lot of their growth has come from acquisitions. I would rather see organic growth. However, most of their acquisitions seem to blend with their existing products and do better than they would on their own (like efax). Also zero debt and plenty of cash means that acquisitions are not loading the company with debt and may be the best use of their excess cash flow.

[squiffy]

One thing that worries me is "artificial" growth by acquisition, which was a big problem with CISCO systems during its heydey. It's one thing if a Krispy Kreme or Home Depot or Best Buy is building its own stores and increasing its own customer base. It's merely an accounting trick if a company keeps acquiring other companies, then boasts about rapidly increasing revenue and profits.

JCOM recently acquired another company. I didn't dig too deeply, but if this is one reason for historical growth, then you have much less reason to be impressed.

Another problem with buying other companies is that it is not clear until too late whether the acquirer has overpaid and whether the acquirer really knows how to operate the target efficiently.

Many mergers do not succeed as planned and at least in the short term can cause huge problems or losses.

But then again, I didn't like INVN either. Though it turns out I was right about CFC dropping from 97. I just didn't buy a put with a long enough time frame!!!!

The problem with options is you have to be right about strike price, about timing, and about direction!!!

[BadBoyBenny]

Thanks for the feedback.

You make good points about the acquisitions. In their defence I will say that they are in a very young and fragmented industry, and they bought the company with cash from operations. Two factors that can make acquisitions a justifiable business move.

Back in 2000 they went on an acuisition spree also (at that time they used stock because they were still cash flow negative). Most of the companies that they purchased seem to have integrated well and are helping the bottom line, especially efax.

Another thing I don't like is about 4 to 5% dilution annually from stock options. This is too high but it also hard to avoid if you are buying young growth companies.

I can't find much specific info about the electronic mail company, or anything to give me a perception of what they were worth. So, I'm taking that acquisition on a blind leap of faith.

Not a very smart idea, but there is so much other stuff I like about their financials...

[AceHigh]

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One thing that worries me is "artificial" growth by acquisition, which was a big problem with CISCO

[/ QUOTE ]

Good point and a much bigger problem with Enron, WorldCom and Tyco.

[ QUOTE ]
is building its own stores

[/ QUOTE ]

Even this is scary, because the rules for accounting with opening new stores is similar to acquisitions. Where the true price of opening the new stores in not shown in the books and it looks like the company is growing earnings, when it's mostly just growing revenues or expenses are outpacing revenues. See Abercrombie and Fitch for an example of this.