Monday, November 30

J2 Global: Track Record Of Earnings Growth, Discounted Valuation To Peers

This note is a follow-up to the report I published on J2 in 2018. For those who do not have access to the original report, here is a quick summary of the original investment thesis published in 2018:

J2’s track record at productively putting capital to work, places it in the same category as Danaher, Constellation Software, Jack Henry, HEICO, and other high-performance conglomerates.

Despite this impressive track record of earning power growth, not only is the stock trading at a significant discount to other high-performance conglomerates, it is trading at discount to the sum of its parts, creating what I view as a very compelling investment opportunity.

Based on my assumption of continued strong fundamental performance and eventual trading multiple re-rating my target price in 2018 was $200/share over 2-5 year time horizon (the stock at the time was $73.47/share, vs ~$80/share today).

This update is organized in three sections:

  1. Fundamental performance highlights over the past two years. Despite facing unprecedented economic headwinds in 2020, the company posted double-digit annualized earning power growth over the past two years and showed remarkable resilience through the worst of the COVID induced recession.
  2. Updated views on the investment opportunity. Two years since the publication of my original report and despite a slightly higher price, I believe J2 Global represents an even more attractive investment opportunity today than it did two years ago.
  3. Hindenburg promotional short report review. I see The Hindenburg short report is largely a collection of glaring misrepresentations regarding J2’s management team and business fundamentals that detract from legitimate concerns regarding Chairman’s influence on the business.

Section 1: Fundamental Performance since the original report was published

In 2018, J2 Global reported Revenue and EBITDA of $1,207MM and $490MM respectively. As of Q3 2020 the company has generated trailing twelve months EDITDA of $580MM with mid-point guidance for full year 2020 of $600MM representing ~11% annualized growth.

Couple of comments on the figures above:

  1. The company has been able to achieve double digit annualised earnings growth in a period that includes one of the sharpest economic contractions ever seen. (I will discuss company’s performance in the second quarter of 2020 later). I certainly did not anticipate the magnitude of COVID related slowdown when formulating my expectations in 2018, making company’s fundamental performance even more remarkable.
  2. The company has reduced its share count by 5.5% over the past two years, with $150MM in stock buybacks in Q3 2020 alone. Should share price remain at current levels (around $80/share), we can expect the company to continue buying back stock and therefore expect per share figures to grow at faster clip than the headline EBITDA and free cash flow numbers.
  3. 2020 will include only two months of recently closed RetailMeNot acquisition, and if we look at 2021 EBITDA (that I believe can exceed $700MM) the annualized EBITDA growth per share over a three-year timeframe will approach mid-teens.

It is worth pointing out that J2 had deployed relatively little capital on acquisitions in the first three quarters of 2020. So, the strong fundamental performance achieved over the first nine months of 2020 has largely been driven by strong organic performance of the individual business units and shows that even in absence of significant acquisitions J2 can deliver outstanding results.

Of course, capital allocation is central to my J2 thesis, and with the RetailMeNot acquisition that closed in the end of October, the company has completed its second largest acquisition in history. More importantly, based on the guidance already provided by the company it appears that the management team paid an attractive price for this asset.

It should also be noted that in the third quarter of this year J2 had walked away from a larger (at least from a sticker price perspective) acquisition of CNET Media Group. We know that J2 was at the table but was unwilling to pay $500MM that was eventually paid by Red Ventures. When evaluating management’s capital allocation, I believe, potential acquisition targets that management chooses to forgo, tell us as much about management’s discipline and ability than those transactions that it successfully closes.

If we just add RetailMeNot and CMG we get a combined value approaching one billion dollars just for these two transactions. Clearly, there is no lack of material M&A targets, and as J2 gets used to consummating acquisitions in the COVID environment, investors should expect M&A to remain an important destination for company’s capital, but not the only destination.

As J2’s stock has languished this year, it became a very attractive investment option. Because the management team looks at buybacks through the same lens as it looks at acquisition targets, it is not surprising that it spent a record amount (almost ~$240MM) on buybacks so far this year.

In summary, the fundamental performance of the business has been in-line with my expectations, an impressive accomplishment given that as I mentioned earlier, no one expected COVID-19.

Stress test like no other, Q2 2020 Performance

The second quarter of this year proved to be a demanding test for all organizations with an unprecedented decline in economic activity over a compressed timeframe, J2 passed this test with flying colors.

With the company reporting a record second quarter revenue, EBITDA and free cash flow.

Consolidated revenue grew 2.7% Y/Y with a small decline in the Cloud Services (-1.2%) segment and strong performance in the Digital Media (+6.9%) segment.

The strength in the company’s Digital Media segment was a function of the company’s focus on healthcare (40% of display revenue), performance marketing (that came back faster than the overall advertising spending) and perhaps more importantly company’s limited exposure to local, travel, food and auto end-markets, that were hit particularly hard by the pandemic. For context, Alphabet’s “Google Search & Other” segment saw its revenue decline almost 10% in the same quarter, with this segment serving as a good benchmark for the overall digital advertising market.

As remarkable as Digital Media’s performance was in the quarter, it is also worth highlighting the resilience of the Cloud Services segment. Given segment’s exposure to small/office home/office (SOHO) and small and medium sized business (SMB) customers, I was curious to see how this segment would hold-up in Q2. In fact, the cancel rate in the Cloud segment declined both sequentially and on year over year basis in the second quarter of 2020. The Cloud business benefitted from the fact that it represents a small fraction of the overall spending even for smaller SOHO customers and thus remained largely unaffected by the pandemic. It also benefited from a limited exposure to most impacted industries like the restaurants.

The company’s corporate fax business was negatively impacted due to reduced page volumes from company’s healthcare customers as elective procedures were put on hold during Q2, but in my view this represents a deferral of revenue as the backlog of delayed procedures will have to be addressed at some point. This assumption is supported by the fact that this business grew 12% in the third quarter, with the growth rate accelerating through the quarter.

Not only was management able to keep the top-line stable in the quarter, but it also managed to convert revenue to profits at a higher rate in the second quarter of 2020 compared to the same period last year, with EBITDA margins expanding 250 bps Y/Y. These savings were achieved while keeping the employee base and marketing spend stable and management expects the benefits of these cost reductions to persist through the rest of the year and beyond.

Finally, the company generated record free cash flow in the quarter even after adjusting for the timing of a tax refund that benefited Y/Y comparisons.

All in all, one would be hard pressed to come up with better supporting evidence for the resilience of the company’s model than its Q2-2020 performance.

In the long-run, fundamental performance is the driving force of equity valuations, regardless of what I or any promotional short sellers writes. And J2’s fundamental performance since the original report was published has been very strong.

Speaking of promotional short-sellers…

Section 2.0: My forward expectations

The consensus estimates at the time of writing call for EBITDA of $653MM in 2021. This translates to an EBITDA multiple of ~7.8x (subtracting $420MM paid for RetailMeNot from cash and cash equivalent).

What this means, is that while the company has significantly grown its earning power since my original report was published, the gap between the company’s trading multiple and other high-performance conglomerates and the broader market has grown.

As the result, valuation today is even more attractive than it was at the time of the original report two years ago even if the stock price is slightly higher today.

How long will it take for this gap to close? Nobody knows, but this is what we do know:

  1. Consensus estimates for 2021 look conservative. Remembering that the company has provided guidance of $600M in EBITDA for 2020 and the fact that RetailMeNot is expected to contribute ~$54MM at the low end, the current 2021 estimate would indicated that street expects no organic growth in the business. This seems highly unlikely for a few reasons:
    1. The company in 2020 has demonstrated its ability to grow earning power by double digits in absence of any major M&A transactions and with an incredibly challenging economic backdrop.
    2. I think it is reasonable to expect that 2021 will have a more favorable macro conditions than what we experienced this year, thus having easier Y/Y comparables, at least in the first half of the year.
    3. Company’s gaming assets in 2021 should benefit from the new gaming console cycle and potentially from blockbuster games like Cyberpunk 2077.
    4. Current estimates for RetailMeNot contribution in 2021 strike me as light. Management has suggested that RetailMeNot should contribute ~$85MM to company’s EBITDA in the first 12-24 months. Given that J2 already has presence and experience in the area where RetailMeNot operates it is likely that J2 will be able to hit that $85MM EBITDA target sooner rather than later. However, even if the company does not reach $85MM in 2021 it seems likely that they will be able to make some improvement on $54MM in EBITDA that RetailMeNot currently generates.
  2. Should the company’s trading multiple just return to its historic average, this would translate to a 50% improvement in the company’s stock price.Source: Company’s presentation
  3. I estimate that the company can generate in excess of $700MM in EBITDA in 2021 that will translate to more than $450MM in free cash flow (~11.5% FCF yield on current stock price). This means that even in absence of any earning power growth the company, theoretically, will be able to shrink its share count by 1/3 at current share price over the next three years.
  4. More likely, free cash flow in addition to low-cost debt will be used to significantly grow company’s earning power through accretive M&A as there appears to be no shortage of potential targets.
  5. Given company’s access to very attractively priced debt (current notes are already trading in the 4% range) I would not be surprised to see J2 do a follow-on offering if the company was in position to do another substantial ($500MM+) deal. Even if such a raise was used to buyback stock it would be immediately accretive at current prices.
  6. I believe the market will be surprised by the rate of organic growth in the company’s Cloud segment in 2021. So far, the strength in the company’s healthcare IT business (Corporate Fax) and its security portfolio have been offset by declines in the backup business and modest growth in the SOHO fax business. However, as these businesses grow in scale and as backup stabilizes, I believe the company will eventually be able to deliver high-single digit organic growth in the overall Cloud segment, outpacing expectations.
  7. As I mentioned in my Q3 preview note, there is currently a record number of shares that are sold short. As J2 continues to deliver strong fundamental results, these short-sellers will be competing for stock with new long-only investors.

To reiterate, although J2 short-term performance is a function of stocks popularity (or lack thereof), in the long-term, the success of my investment thesis will be determined by company’s fundamental performance. And given the strength of the fundamental performance since the publication of my initial report, there is no change to my target price of $200/share within the next 1-3 years.

Sections 3: Reviewing the Hindenburg Short Report

A good promotional short report identifies a genuine weakness in a company, and then blows it out of proportion to create a narrative that makes those investors who have not done their homework sell their stock.

In the case of the June 30th short report by Hindenburg Research the identified weakness was corporate governance and specifically the possibility of self-dealing by company’s Chairman. This of course should not have surprised anyone who had done their homework, in fact, my own 2018 report included the following risk factor:

“Insider dealing: Richard Ressler exerts disproportionate influence on the board, despite a relatively modest economic interest in the business (he owns 2.5% of the business). There is a risk that Richard can use his influence for his personal benefit at the expense of other shareholders. For example, we were disappointed with the terms that j2 received for its $200M commitment to OCV Management. OCV Management is a venture capital firm co-founded by Richard Ressler in 2016. Although we believe that the return on this commitment is likely to be attractive, we would have expected that such a commitment included a fee break or an ownership interest in the GP.”

Despite making several distortions pertaining to J2’s commitment to the OCV Fund as well as to Chairman’s success as a businessman, I believe Hindenburg’s criticism related to the OCV transaction is well placed and I welcome the additional scrutiny that the report has brough to J2’s corporate governance and more specifically to company’s Chairman.

But this is where my praise of the Hindenburg report ends, as I believe the rest of the report (the vast majority of it) misrepresents a number of important facts pertaining to company’s business. In fact, the nature of some of these misrepresentations unfortunately detracts from these legitimate questions.

Misrepresentation #1: Vivek Shah company’s new CEO was paid $45MM despite his lack of experience to look the other way on the OCV investment.

Quotes from the Hindenburg report:

“Insider Enrichment: J2’s Newly Appointed CEO Was Paid An Astounding $45 Million In His First Year As CEO; More Than the CEOs of J.P. Morgan and Microsoft”

“J2’s CEO, Vivek Shah, is relatively young and had limited executive experience when starting his role as CEO of J2. He had served only as CEO of J2 acquisition Ziff Davis for two years and, prior to that, in various management positions at Time Inc. “

“We think J2 has a looming problem with its historical acquisition portfolio, which makes us wonder whether Shah is being compensated for taking on hidden risks. We also wonder whether his generous compensation was related in any way to the generous commitment of hundreds of millions to the J2 Chairman’s/former CEO’s own investment vehicle, which took place within days of Shah’s assumption of the CEO role.”

First, Hindenburg’s suggestion that Mr. Shah is young and inexperienced executive is clearly disingenuous. As already stated in my original report Mr. Shah left Time Inc. where he was the group president of Time’s digital business to partner with Green Hill Partners to acquire Ziff Davis in 2010 and then proceeded to acquire additional assets to grow the portfolio.

Clearly, Green Hill Partners thought that Mr. Shah was a “backable CEO” to support him with over $50MM in capital. And as it turned out they were right as the business was eventually sold to J2 for ~$175MM, representing (3.2x multiple of capital).

Let’s look directly at what Chris Gaffney, the managing partner at Great Hill Partners, had to say:

Vivek Shah is an unusual combination of strategic vision and management talent. He designed the plan, built an amazing team, and executed flawlessly in building the company from a concept and a number of unconnected pieces into the attractive operating platform it is today. We are proud to have been a part of the company’s revitalization.

From 2012 until 2018, Mr. Shah served essentially as the CEO of J2’s digital medial business, before being appointed the CEO of the whole business.

Second, Hindenburg misrepresents Mr. Shah’s compensation in 2018 by neglecting to mention that the vast majority (96%) of his compensation in 2018 was in the form of equity awards. The stock options and time-based restricted shares had an eight-year vesting period (essentially 1/8 of the grant was to vest each year over the next eight years). The vesting of performance-based restricted shares is dependent on the company’s stock price over the next eight years, with the stock price needing to hit over $183/share for the performance-based restricted shares to fully vest.

Mr. Shah’s cash compensation in 2018 was under $2M and slightly over $2M in 2019.

I can only guess that Hindenburg failed to discuss these essential details of Mr. Shah’s compensation as the authors understood that these details would make Hindenburg’s claims about Mr. Shah’s incentives look patently absurd.

If in fact, Mr. Shah was compensated for taking “hidden risks”, as Hindenburg alleges, why would he agree to a compensation structure that is so disproportionately tied to long-term equity performance?

It should also be noted that despite his track record of success Mr. Shah is only 46 years old. If he knew or believed that J2 indeed was full of these “hidden risks”, it would have been in his best interest to leave the company soon after the closing of Ziff Davis transaction in 2012 because the risk of jeopardizing his reputation and future earning power as an executive would have outweigh his compensation at J2 when most of it is tied to the long-term performance of the business.

Not only did Mr. Shah chose to stay at J2, he also recruited a talented group of executives who currently run the different business units within J2. I encourage the readers to go the through the investor day (March 2020) transcript themselves, but here is a sample of the caliber of people Mr. Shah was able to attract:

Nate Simmons, President, Cloud Services:

So I started my career about 20 years ago, over 20 years ago as a consultant with McKinsey and after that I did a brief stint in the corporate strategy group at Time Warner what’s now known as Warner Media. And this was — this first phase in my career was very much focused on strategy. I quickly decided that I wanted to be an operator. I felt that was a much more exciting place to work in business and I wanted to get my hands dirty and shape the outcomes of business, but with that phase of my career gave to me, is a good foundation and strategy and I think most importantly a set of tools analytical tools and a discipline around being data driven, in terms of setting strategy and making decisions.

And I carry that with me today and it’s certainly a discipline that I’m bringing to cloud services. But after that, given the fact that I wanted to be in an operating role, my next phase in my career, I worked at Time Inc, the publishing division of Time Warner, which at the time was the largest publisher in the world. I have many roles at Time Inc, but all of them we’re focused on subscriptions — subscription marketing and managing subscription businesses there. And that’s really what I took from that experience that I bring to the cloud. So obviously publishing and content and media, are very different businesses from software, which is what we do in the cloud, but the revenue model is the same, it’s subscription. And what I learned at Time Inc, was a very disciplined profit driven approach to acquiring customers and retaining them. Equally important to that was that Time Inc, that I first encountered Vivek, our CEO. So I was able to work with him there, I got to observe his leadership style and see his ability to grow businesses and that’s what brought me to J2, to be frank.

[…]

After Time Inc, I made a — what many people consider an interesting transition, I moved into the world of cyber security. So immediately prior to J2, I was at Symantec, which is the biggest cyber security company in the world. While I was there, I was the Chief Operating Officer of the NortonLifeLock consumer business unit within Symantec. So NortonLifeLock had about $2.4 billion in revenue, when I was there. And today it’s a stand-alone Company, with a market capital little over $11 billion. So that’s a very substantial security and privacy business.”

Is it likely that Mr. Simmons would have chosen to join J2 if he thought the company and specifically the business he was taking over were laden with “hidden risks”

In summary, I believe Hindenburg’s assertions regarding Mr. Shah’s incentives and experience are not only misleading, but the actual facts contradict the very allegation that Hindenburg is making.

Misrepresentation #2: J2 Global is using tricky accounting and new acquisitions to obfuscate declines in its core business.

This portion of Hindenburg’s report contains a couple of claims that I will discuss separately:

2.1 – Everyday Health saw its revenue decline 25% post acquisition and yet no impairment was recorded.

First in arriving at the 25% revenue decline, Hindenburg states the following:

“We arrive at a total revenue adjustment of $18 million as a result of the net divestitures. To arrive at this, see the press release announcing 3 divestitures, 2 of which are Everyday Health related. The company discloses a $23 million revenue decline for 2017 for all three. We add back ~$3 million for the unrelated acquisition (Web24) given its lack of reported revenue, suggesting its modest size [Pg.79]. We also add back $2.2 million for 1 month of eHealthCareers (which was acquired in December) per its run-rate prior to J2’s acquisition [Pg. 18]”

Here is what the J2 press release referenced by Hindenburg actually states:

“In light of the three divestitures described above, which reduce the Company’s revenue by approximately $23 million in the second half of the year (emphasis added), j2 announced that it is adjusting its revenue guidance for fiscal year 2017 as follows: for fiscal 2017, j2 estimates that it will achieve revenues between $1.107 billion and $1.147 billion. j2 reaffirms its Adjusted non-GAAP earnings per diluted share of between $5.60 and $6.00.”

Given that the revenue adjustment was only for a portion of the year, the annualized revenue lost would have to been substantially greater than the $23MM stated in the press-release or $18MM that Hindenburg uses. The estimate I had in my original report was for combined annualized revenue impact of approximately ~$50MM, which is consistent with what the press release actually states.

Notwithstanding Hindenburg’s “misreading” of the press-release, it important to realize that revenue decline alone does not necessarily equate to asset impairment. The most common asset valuation method is the discounted cash flow model. If a dollar of revenue produces no cash flow because of the associated expenses, then its loss will have no impact on asset valuation. Given that J2 often acquires businesses that are not run to generate profit by their sellers, elimination of unprofitable revenue is not unusual, in fact it is something that as Hindenburg admits, company’s executives talk openly about.

Let’s look at the actual math of the Everyday Health transaction, but imagine that instead of J2 buying these assets, they were purchased by a private equity firm we invested in.

In 2016, the private equity firms pays $494MM to acquire assets that generate $254MM in revenue and $31MM in EBITDA. A year later, it sells a part of the acquired assets for $120MM. These assets that were sold generated ~$50MM in revenue and essentially no EBITDA, plus the private equity firm eliminated ~$30MM in revenue with zero or negative EBITDA contribution margin.

As the result of these changes and operational improvements, by the end of 2017, the private equity firm was left with an asset that was generating $171MM in revenue and ~$60MM in EBITDA, translating to an acquisition multiple of only 6.2x EBITDA (after sale proceeds) vs. 15x that it paid just a little over 12 months ago.

Today, after deploying additional ~$285MM to acquire more assets, Everyday Health division generates ~$100MM in EBITDA while growing double digits organically.

No limited partner in their right mind would suggest that based on the math above the private equity firm should take an impairment charge on its original Everyday Health investment. In fact, in a private equity context, Everyday Health transactions would be rightfully celebrated as a huge win, that by itself would be valued conservatively at well over $1B today. One big difference between public shareholders and private equity investors is that J2 shareholders did not have to pay anything approaching the 20% carry on value created that would have been paid by private equity investors.

2.2 – “The market has been enamored with J2’s acquisition spree, yet it has been a grand waste of time and energy – 83% of last quarter’s operating income was still its legacy fax and email marketing business and (64% on an LTM basis).”

The focus on operating income under U.S. GAAP has been a common misrepresentation of the company’s earning power by short sellers.

Specifically, this math deliberately ignores the allocation of acquisition related amortization expense between the different segments. Because the e-fax business has seen relatively limited new capital allocated to it since 2012, it bears a disproportionately small percentage of the amortization expense. Here is an illustration of this fact using Q1-2020 numbers:

Note: EBITDA, does not reconcile with Adjusted EBITDA as reported by the company because it excluded corporate expenses, as well as, stock-based compensation and other line-items that do not impact the outcome of the math.

The table above illustrates that when adjusting for acquisition related integration expenses and amortization expenses, Digital Media segment goes from accounting for just 8% of the reported GAAP operating income to 40% of the earning power in the first quarter. The company does not provide the split of intangible amortization between the two sub-segments of Cloud Services, but it is fair to assume that most of the allocation would fall on Voice, Backup, Security and CPP, thus GAAP Operating income overstating the contribution of Fax and Martech to company’s earning power.

As I mentioned in my original report amortization of acquired intangibles does not have a true economic cost and is largely an accounting construct. When looking at cash flows, we see that post RetailMeNot transaction, the Fax business will account for less than 1/3 of company’s earning power. Understandably, promotional short sellers want to portray the fax segment as a melting ice cube and therefore want to exaggerate its contribution. In reality, the overall fax business has been steady as double-digit growth in Healthcare IT (1/3 of the business) has been concealed by low-single digit growth in SOHO/SMB fax business (2/3 of the fax business).

Misrepresentation #3 “j2’s Legacy business in Decline”

As outlined below, Hindenburg presents data without the necessary context to support its claims.

For example, Hindenburg uses the following graph as evidence that company’s cloud business is eroding:

A key item left out of this analysis is any mention of the VPN acquisitions in 2019, that depressed ARPU, distorting Y/Y comparisons. This specific point was addressed on prior conference calls and it is hard to imagine that Hindenburg simply missed it.

Similarly, when it comes to page views data disclosed by the company, Hindenburg fails to mention that the decline in page views from 2018 to 2019 was primarily due to reduction of traffic on company’s Snapchat pages that carried little monetization. Again, this is something that has been discussed on prior company’s calls and should not surprise Hindenburg or anyone who hade done the bear minimum research on the company.

When analyzing company’s digital assets, it is important to bear in mind, that the value of these assets is not tied to the number of visit’s to company’s URL from a desktop, but instead to the consumption of company’s media content across all platforms and devices.

Here is an illustrative example:

Below is an Alexa Rank for the official Joe Rogan podcast URL: Joe Rogan (Podcast Site)

According to these figures the site ranks as #47,222 globally and #13,368 in the United States. For reference IGN.com (a J2 Global property) ranks as #638 and #292 respectively. For those readers who are not familiar with the Joe Rogan Experience podcast, it is the number one podcast globally, with Spotify willing to pay a reported $100MM for a limited time use of its content.

The reason that Alexa ranking bears no relationship to the value of the Joe Rogan podcast is the fact that most viewers (listeners) consume it through YouTube and Spotify. In fact, the rankings are likely to plunge further as the content will be exclusively moved to Spotify as of 2021. Similarly, as more and more consumers engage with IGN content through YouTube and on mobile devices visits to a its URL from desktop browsers are likely to decline while the value of the property continues to grow.

Misrepresentation #4: j2 Global has constrained liquidity that forced it to cut the dividend: “J2’s leverage has continued to climb and has constrained J2’s balance sheet. The company’s dividend was suspended in mid-2019, making room for large capital calls into its Chairman’s illiquid investment vehicle.”

Hindenburg absurd suggestion that J2’s balance sheet is constrained and resulted in a dividend cut is refuted by any one of the following facts:

  1. Just during the third quarter of 2020 the company spent $150MM on stock buybacks (for a total of almost $240MM repurchased so far this year) and just after the end of the quarter closed a $420MM acquisition.
  2. In early October, the company priced a 10-year, $750MM high-yield note at 4.625%! A company able to raise $750M with 4% handle by definition has no liquidity problems. In fact, it is by looking at the discrepancy between company’s cost of debt and cost of equity, that one can fully appreciate how discounted company’s current stock price is.
  3. The company reported record free cash flow of $93.7MM in Q3 for a total of $304.8MM just in the first three quarters of the year.

As I stated in the past, promotional short-sellers play a valuable role in the marketplace and in fact their activity can benefit long-only investors who do their own independent work. Hindenburg did raise a legitimate question on potential self-dealing by the company’s Chairman. These questions are certainly not new, but still legitimate.

Here is the full Risk section included with my original report, that I believe are still relevant:

  • Mis-execution on acquisitions: capital allocation represents a core component of the investment thesis. Should any changes occur to management, or to capital allocation approaches, resulting in lower prospective returns, the expected returns will be impacted. Yet as mentioned previously, the investor is not paying anything for management’s capital allocation skill.
  • Fax protocol is replaced by a new standard. This is a longer tail risk than we would have assumed prior to researching the business, given that close to half of revenue is from automated technology involved in mission-critical systems, such as invoicing. It seems that a meaningful technological change would be required for any wholesale change to communication protocols, i.e. to replace fax protocol.
  • AdBlocking software: diminishes the value of display advertising, specifically display advertising.
  • Insider dealing: Richard Ressler exerts disproportionate influence on the board, despite a relatively modest economic interest in the business (he owns 2.5% of the business). There is a risk that Richard can use his influence for his personal benefit at the expense of other shareholders. For example, we were disappointed with the terms that j2 received for its $200M commitment to OCV Management. OCV Management is a venture capital firm co-founded by Richard Ressler in 2016.

Disclaimer: The information contained herein reflects the views of the author as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. The author has an economic interest in the price movement of the securities discussed and this economic interest is subject to change without notice. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. While the information is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. There can be no guarantee that any projection, forecast or opinion will be realized. Nothing in these materials shall constitute legal or other professional advice or an opinion of any kind. Users of these materials are advised to seek specific legal advice regarding any specific legal issues.


[1] Term coined by Constellation Software’s Mark Leonard, read here to learn more

[2] J2 Global: Troubling Related Party Transactions, Looming Impairments And A Suspicious History Of Insider Enrichment Spanning Decades

[3] Bloomberg Transcript

[4] joerogan.net Competitive Analysis, Marketing Mix and Traffic – accessed on 21-10-2020

Additional disclosure: Disclaimer: The information contained herein reflects the views of the author as of the date of publication. These views are subject to change without notice at any time subsequent to the date of issue. The author has an economic interest in the price movement of the securities discussed and this economic interest is subject to change without notice. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. While the information is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. There can be no guarantee that any projection, forecast or opinion will be realized. Nothing in these materials shall constitute legal or other professional advice or an opinion of any kind. Users of these materials are advised to seek specific legal advice regarding any specific legal issues.

Credit: SeekingAlpha

Leave a Reply

Your email address will not be published. Required fields are marked *