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.
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