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
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
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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Fool contributor Dave Mock's world is flat, as far as he can tell, but he'll defer to the experts on the subject. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is not too cool for school.