Flat is a good thing if you're talking about your home's foundation, or your stomach. It's not so good when it reflects growth at a corporation. Leading Internet fax and communications company j2 Global (Nasdaq: JCOM) disappointed investors with moderate revenue growth and lower margins in its third-quarter earnings report.
For its third quarter, j2 Global reported a 41% increase in earnings, to $18.1 million, on revenue that grew 22% to $55.7 million. Obviously, it's hard to take issue with the year-over-year growth, but analysts expected more than what shook out to be only 3% sequential revenue growth. In response, the market has cut the stock by more than 17% as of this writing.
The usual suspect -- competition from alternative communications platforms from the likes of AT&T (NYSE: T), Verizon (NYSE: VZ), or Qwest (NYSE: Q) -- was not the main issue this quarter. Instead, macro conditions in credit markets were blamed for a dip in usage and revenue.
Management explained how j2 Global is affected as certain companies cut back on spending and headcount. The company has seen a significant slowdown in business from financial and banking firms, brokers, and real estate companies, affecting j2 Global's revenue by $1 million to $1.25 million this quarter.
Regular salary increases and headcount expenses also had a larger effect on margins for the quarter. Operating margins dipped to 41.5% from 44.2% in the second quarter, while gross margins remained relatively stable from recent quarters. Consequently, free cash flow came in at $15.7 million, ahead of the $12.4 million level a year ago, but below each of the past two quarters.
Looking ahead, management sees more tepid revenue growth in the fourth quarter to a range of $56.1 million to $57.6 million. For 2008, it expects revenue growth to grow 17% from the current year, with expectations of earnings per share growing at least that fast.
Given that j2 Global is showing a subdued growth trend, it's not surprising to see the stock cut down, especially amid concerns about the unknown extent of the credit fallout. But knocking more than $200 million off j2 Global's market cap seems overdone. Stockholders are surely smarting from today's thrashing, but the long-term prospects of j2 Global look little different today than yesterday.
For more Foolishness:
What do the unfolding financial crisis and ongoing market volatility mean for your money? The Fool's here with answers. Get the best of our daily commentary and analysis in your inbox simply by entering your email address in the box below.
Terms & Conditions
RSS Headlines
Fool UK