After blowing out consensus earnings estimates for three years running, quarter in and quarter out, in-computer fax-meister J2 Global (NASDAQ:JCOM) has settled down its disruptive ways in recent months, just matching estimates in each of the last two quarters. When it reports Q3 2006 earnings on Friday, will we see it continuing this sedentary pattern, or does the company still have surprises up its sleeve?

What analysts say:

  • Buy, sell, or waffle? Ten analysts follow J2, with five of them rating it a buy, four a hold, and one a sell.
  • Revenues. On average, they're looking for 24% sales growth tomorrow, to $46.8 million.
  • Earnings. Profits are projected to rise 20% to $0.30 per share.

What management says:
J2's involvement in the marketwide stock-option backdating scandal, and the resulting need to review its past financial statements, prevented the company from filing its 10-Q form last quarter and put it in Nasdaq's doghouse. At last report, J2 planned to get its numbers crunched and its 10-Qs filed by Friday, and expected that any restatements would increase its historical compensation expense by just $2.2 million over its seven-year history as a public company.

Numbers-wise, management's predictions match what the analysts are saying for tomorrow. You should note, however, that the $0.30-per-share estimate excludes an expected $0.02 per share in stock options expensing. So the "real" estimate looks more like $0.28 per share, GAAP.

What management does:
J2's rolling gross margins have been trending downward for all of the past year. Operating margins are holding more or less steady (consistent with CFO Scott Turicchi's assertion that the firm maintains "strong operating margins"). While the net margins appear to be weakening, that's deceptive -- J2 recorded $9.8 million in one-time gains from the sale of investments in the September and December quarters. As we move farther away from those inflated-net-margin quarters, the net should begin to stabilize.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

80.4

84.0

83.2

79.3

79.1

78.9

Op.

42.7

43.1

43.2

42.7

42.8

42.7

Net

30.6

31.8

36.9

35.6

34.7

33.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fax appears destined to go the way of the dodo, but J2's numbers are only now beginning to show the faintest signs of pressure. Over the last six months, sales are up 28%, cost of services up 35%, and selling, general, and administrative (SG&A) costs up 29%.

That appears to be the start of a trend toward margin compression, but comments made by management (and reviewed at length by TMFplatoish here) suggest the company may be planning to nip this trend in the bud as it experiments with raising prices on its services. If successful, it should shore up the firm's gross margin erosion right quick, and ease pressure to reduce operating costs. That, in turn, would permit the firm to advertise more in hopes of replacing any revenues lost to customers fleeing the price hikes.

Competitors:

  • Captaris (NASDAQ:CAPA)
  • CallWave (NASDAQ:CALL)
  • EasyLink (NASDAQ:EASY)
  • InPhonic (NASDAQ:INPC)
  • Omtool (NASDAQ:OMTL)
  • Premiere Global Services (NYSE:PGI)

If you've got some time to kill, read TMFplatoish's full review of Q2 right here. It's chock-full of detail, and shorter than War and Peace.

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Fool contributorRich Smithdoes not own shares of any company named above. The Fool's disclosure policy goes beep beep boop boop beep.