Berk Sure Has A Way

Since my initial JCOM analysis, the stock has performed quite well – up over 30%. People are asking me if they should sell their shares. Since my last post, I have purchased and sold calls as well as sold about 10% of my holdings. I sold mainly to diversify. JCOM is still my largest holding (over 30% of my portfolio!) and I still believe their business and stock have a ton of potential, but I do have some short term concerns. I will start with my concerns and then move to long term potential.

Short Term Concerns:

Revenue growth is slowing – that is well known. It is hard to keep 50%+ revenue growth up (unless you are Google). What would be a true concern if growth stops (or god forbid declines) in the US market – this could indicate market saturation or a slowdown driven by a housing market downturn. Overall, I expect that any slowdown could be addressed with product and marketing shifts (different product tiers to convert more free subs, more aggressively licensing and partnerships). However, a slow growth quarter could severely hurt the stock in the near term.

Q3’s performance was within guidance. JCOM hit the top end of their guidance range (48-49 cents), but did not exceed it as it usually does. For many high-growth companies, this is fine, but JCOM has historically given conservative guidance.  For JCOM to only "hit" the top end of the range, it may indicate that growth was not as robust as they had hoped. To be fair, JCOM was coming off of strong growth in Q2. Nonetheless, it is worth watching earnings growth rates.

Q4’s guidance is wide and the low end implies low growth. Q3’s earnings (excluding a one time gain) was $0.49 and guidance for Q4 is $0.50 to $0.54. I could say, “Hey, $0.54 would be great!” But… the contrarian in me says: “Why the wide range? They generally are able to predict their quarters pretty accurately.” and “ Only $0.50? That’s only one penny more than Q3.” Part of their explanation was potential licensing deals. More likely is that acquisitions are beginning to play a bigger role in top and bottom line growth.

Long term potential:

Patent Licensing. Over the years I’ve wondered how efax has kept competition at bay. Clearly efax is a good brand and that helps, but I’ve come to the conclusion that the larger players that would like to add the faxing functionality have decided it is not worth the litigation risk to launch the product without licensing JCOM’s patents. From last quarter’s call it sounds like JCOM is starting to hold more active discussions on this front. If done right, patent licensing could become JCOM’s biggest profit center as telecom, cable and internet firms battle it out for customer ownership. JCOM’s features could provide a differentiator to attract and retain bundled customers.

Buyout Candidate? If JCOM’s patents hold up and they can convince anyone to license them, they may be an excellent candidate for a telco or web titan with global ambitions.  Online access to unified messaging is clearly part of our telecom future and many of JCOM’s features could immediately plug directly into Skype (owned by Ebay), Google Talk, Yahoo Messenger, or MSN Messenger. Alternatively, a telco or cable company looking to improve their position in their country, gain leverage over competitors and get some international exposure may pick them up. Likeliest candidates in my mind are the more innovative large firms – AT&T, Verizon, BT or Comcast.