j2 Global (NASDAQ:JCOM) turns 10 this year. The company, originally a dot-com darling, underwent a near-death experience when the Internet bubble burst. But over the past few years, j2 Global has become a highly profitable company.
In the second quarter, revenues increased 35% to $34.9 million. During this period, net earnings surged 57% to $11.7 million, or $0.46 per share. The company has $108.6 million in the bank.
j2 Global has its roots in Internet-based faxing services (the company was once called JFax.com). Over the years, the company has built a sophisticated, global Internet communications network. Besides faxing, j2 Global offers conference calling, email protection, voice mail management, virtual PBXs and more. In all, j2 Global's network covers more than 1,500 cities in 25 countries.
Since the network is a fixed cost, j2 Global has inherent leverage in its business model. What's more, the company can launch a new service with minimal marketing dollars by cross-marketing to its growing customer base. For example, the company spent virtually no money to market its eVoice service, but signed up 2,000 paying customers in the second quarter.
Foreseeing continued growth, j2 Global upped its 2005 earnings guidance. The company expects to generate earnings between $1.82 and $1.87 per share, which compares with previous guidance of $1.70 to $1.75 per share.
Faxing remains a big part of the company's business. According to j2 Global, fax usage grew significantly, especially in the eFax Pro service.
This might well be a niche, but the growth is likely to continue. j2 Global expects that an increasing number of companies will turn to it to ensure Sarbanes-Oxley compliance for fax messaging.
This company has managed to build a business model that scales beautifully and has the potential for excess returns once the initial network is established. But where's the competition? No one seems to know. j2 holds 23 patents on its data-transmission/messaging methods, and the company has been pursuing litigation to protect its intellectual property. It would seem that the company's experience relative to competitors, the strength of its network, and its plentiful patents have enabled j2 to create a reasonably comfortable moat around its business.
Ironically, while writing this article, I got a fax via email. And, yes, it used j2 Global's service.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
