j2 Global (Nasdaq:JCOM) reported fourth-quarter results to demonstrate that growth may be returning to its services. It used its solid financial position to acquire a number of rivals during the downturn, and could continue to pursue bolt-on purchases to supplement internal growth trends. A larger rival could also swoop in to acquire j2, to offer its services to an even wider customer base.
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Fourth Quarter Recap
Total revenues jumped 16.6% to $71 million. Subscriber revenue accounted for all but $700,000 of the top line and grew 16.8%. j2 makes its money from selling subscriptions to use its fax, voice and email capabilities under the eFax, eVoice and Electric Mail brand names. During the quarter, the company added 500,000 additional paid subscribers to bring the total to nearly 2 million.

Gross profit increased 15.6% to $58.3 million, while higher costs meant operating income improved only 10.8% to $26.3 million. But higher interest income and lower income tax expense pushed net income ahead by 50.7% to $26.9 million, or 58 cents per diluted share.

Annual Review
Full-year trends reflected a more difficult operating environment at the beginning of the year. Total revenues increased 4% to $255.4 million, operating earnings fell a slight 0.5% to $103.9 million, while higher interest income and lower taxes again sent net income up significantly for growth of 24.2% to $83.1 million, or $1.81 per diluted share. Free cash flow came in at $94.5 million, or just over $2 per diluted share.

Outlook
For the coming year, management expects revenue between $320 million and $340 million and earnings from continuing operations in a range of $2.21 and $2.42 per diluted share. The profit outlook excludes costs to issue share compensation to employees and acquisition costs, the combined cost of which is between $14 million and $19 million, or 30 cents and 41 cents per diluted share, based on current shares outstanding. (For related reading, see The Basics Of Outstanding Shares And The Float.)

The Bottom Line
During the year, j2 made nearly $250 million in acquisitions with cash on hand. This included the purchase of Canadian-based Protus IP Solutions that offered a similar array of fax, email and voice services, and Venali, a competing provider of internet fax services. These bolt-on acquisitions will help boost overall growth as organic trends had slowed over the past couple of years.

Top-line growth for the coming year looks impressive, at more than 25% based on current guidance. The trailing free cash flow multiple is a bit rich at 14, which means it may be best to wait on the sidelines to see if j2 can sustainably boost its growth back toward 20% per year. With a market cap of only $1.3 billion, there is ample room for it to grow and acquire market share over the long haul. The company could also appeal to a larger peer interested in boosting its online capabilities. Xerox (NYSE:XRX), Lexmark (NYSE:LXK) and even AT&T (NYSE:T) and Verizon (NYSE:VZ) come to mind, as they could offer existing clients access to appealing fax, voice and email services.

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