On the evening of February 10th, j2 Global (NASDAQ:JCOM) will release its 2019 fourth quarter and year-end earnings results. The full year guidance for 2019 provided by the company was:
Revenues: $1.33 Billion-$1.37 Billion
Adjusted EBITDA: $540 Million-$556 Million
The next morning on February 11th, management will conduct its earnings call. Here are the three main questions that I hope are addressed on the call:
Since the digital media division was acquired in 2012, please breakout separately how much has been spent each year on cloud services' acquisitions and digital services' acquisitions?
Investment in capital expenditures ("capex") is important for a business because it enables the company to sustain its current production and income levels and/or provides a foundation for the business to grow. Capex comes in the form of purchases of property and equipment as well as acquisitions of businesses. If a capex investment is not going to produce an acceptable return for the business' owners, then that money should be utilized elsewhere or returned to the owners.
Over the years, j2 Global has spent and will continue to spend a lot of money on capex, specifically acquisitions. And while the company does breakout annual purchases of property and equipment in its annual 10-K filing, the company does not appear to provide the same breakout for the acquisitions. That is the reason for asking the question above.
Purchases of property and equipment are a small part of j2 Global's annual expenditures; acquisitions consistently account for most of what is spent. For this reason, a breakout of acquisition expenditures between the two divisions is important for the owners to know. The information will give them a clue as to whether the investments being made in each division are providing a sufficient return, and it can spur a conversation between the owners and management about the performance of the two divisions' investments.
When will investors see results in the form of increased operating income from the digital media division?
The digital media division's operating income is not substantially different from where it was in 2014 which was the division's second full year as part of j2 Global. Back then operating income was $30.5 million, and if this division's recent trend in operating income holds, then the income for 2019 may be around $37 million. If true, then this would reflect continued declines in operating income and margin for this division since its 2016 highs.
This performance decline comes during the same period that the company acquired 18 businesses in the digital services division. Management has said that some of these businesses were not profitable prior to the acquisition, so it is understandable that it could take some time to bring these investments to profitability. But how long will it take to see the overall division do better? Are the most recent additions dragging down the growth of the older acquisitions and the rest of the division? Or are all of the operating margins and income within the digital media division flat or declining? The owners need to know if management is using their money wisely or just throwing good money after bad.
Which services and solutions are driving subscriber and operating income growth within the cloud services division, and which are seeing subscriber and/or operating income declines or losses?
While the cloud services division is growing, the growth is modest considering that it too has had quite a few acquisitions since 2016. While question one will hopefully shine light on how much has been invested in the cloud services division, the point of this two-part question is to help j2 Global's owners ascertain the makeup of the cloud services division's growth. Higher relative growth in the previously held services provides some hope that the core business is still healthy and that the company is just waiting for the newer investments to begin producing. The follow-up question would be asking when that would be.
On the other hand, if the growth is just coming from each subsequent acquisition, and all of the existing services are stagnant or declining, then that should be concerning to the company's owners. And it should spark additional questions like whether the owners' money should continue going toward acquisitions or be returned to them in the form of dividends.
With the answers to these questions, the company's owners will hopefully be able to get a better idea of the company's future and whether or not it is a good place for them to keep their money.