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J2 Global Inc (JCOM): Why the 80/20 Principle Will Do This Company a World of Good

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In December last year, I wrote an article detailing J2 Global Inc (NASDAQ:JCOM)‘s transformation into a fresher and more diverse company. Last year, J2 Global Inc (NASDAQ:JCOM) bought into Carbonite and acquired Ziff Davis. This allowed the provider of internet business solutions to diversify its operations into both cloud computing and media publication. The company’s stock has risen 33% since I last wrote about it, but does it have room to go higher? I believe so, if it can make adjustments to cope with underlying fundamental problems.

J2 Global Inc (NASDAQ:JCOM) has more potential to profit, but is spending too much effort in certain business segments. Using the 80/20 principle, we can see where the company should expand and consolidate operations to be more effective.

Q1 was bad, but not awful

J2 Global Inc (NASDAQ:JCOM) reported an EPS that was $0.05 lower than analyst estimates for Q1, along with lower revenue and margins than expected.

Even so, there were good qualities to the company’s Q1. J2 Global Inc (NASDAQ:JCOM)’s revenue and earnings were still record setting, due to recent acquisitions that helped bring new life into the company. The problems with low revenue were partly expected: j2’s Digital Media segment was expected to bring in seasonally low Q1 earnings. On the flip side, the segment revenue could double in Q4 due to expected seasonal changes.

j2’s core business in cloud services also grew 5% year-over-year. The company revised expected revenue for 2013, increasing the estimate by $10 million. j2 Global has a lot of promising traits despite the numbers, but still has problems it needs to fix in order to benefit from both segments of its business

Consolidate media

j2 Global’s acquisition of Ziff Davis, a popular publisher for online and magazine content, added revenue and expanded the company’s reach. j2 also recently acquired NetShelter, a similar media company with publications on consumer electronics, computers, and the like.

But the recently purchased media segment brought in a first quarter loss of $4 million. Due to the new segment, cost of revenue increased and profits took a dip. The company’s media operations have two problems that continue to harm overall profit margins — operating expenses and lack of ad exposure.

j2 Global Communications

Source: Google Finance

Even though Ziff Davis is bringing in 117 million unique visitors per month, the company’s broad selection of products and publications are responsible for huge operating costs. Ziff Davis needs to condense its multiple homogeneous publications into larger and more effective advertisement hubs. For example, the company’s media segment and its subsidiaries are responsible for the following not-so-different publications:

Computer Shopper, PC Mag, geek.com, ExtremeTech, Appscout, Good Clean Tech, IGN, etc. The list goes on.

Niche publications aren’t a bad thing by any means, but having all these different products running seems to be daunting and inefficient.

Expand ad exposure

Another problem that the media segment faces is lack of monetization from ads and mobile sites. From what I can tell, the publications from j2’s media segment currently have no ad integration to monetize their mobile sites — a big problem that they need to fix to stay competitive. We can look at j2’s competitor, Facebook Inc (NASDAQ:FB), to see why mobile ads are so important for profitability of web-based content.

Facebook

Source: Google Finance

Facebook Inc (NASDAQ:FB) is now profiting from ads, due partly to the effectiveness of mobile advertising. Facebook’s transition to mobile now account’s for 30% of the company’s ad revenue. And while the mobile ads aren’t nearly as profitable as desktop advertisements, they’re still helping Facebook rake in more income.

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