J2 backers retaining optimism despite exposure on phone tax.

Of all the e-mails that get sent by J2 Global Communications, its managers are hoping this one got through.

Shares of the Hollywood-based provider of faxing and e-mail services tanked late last month after the Congressional Budget Office proposed that a $1 monthly fee be placed on every phone line in the country. J2 Global owns nearly 12 million phone numbers, which it parcels out to its customers under a variety of paid and unpaid plans.

On March 29, J2 Global shares fell 16.6 percent on the news, with volume of 11.5 million shares outstripping the usual volume by a factor of 10.

J2 Global President Scott Jarus and Chief Financial Officer R. Scott Turicchi scrambled to reassure players in the financial markets.

In an emergency e-mail sent to analysts and to the Securities and Exchange Commission, Jarus and Taricchi pointed out that the idea of a $1 tax has been bandied about Congress for the past three years as a way to subsidize rural phone service.

The topic has been disclosed in the CBO's past three annual reports and publicly addressed in investor forums. They insisted that the CBO report would not have a "material financial impact" on future prospects.

Some analysts said it was the timing of the news that sent J2 Global stock into a freefall.

"People didn't understand the initial announcement, and it was the end of the quarter," said Bill Benton, an analyst with William Blair & Co. That's when portfolio managers worry about performance and don't want winners to suddenly become losers. "It was confusing, people were on vacation, and they were just selling without knowing what was going on," he said.

Benton maintains an "outperform" rating on the stock, siding with company executives in his belief that the tax will probably not happen, and even if it does, it wouldn't be expected until 2007.

Jarus and Taricchi declined to comment, observing a quiet period prior to the scheduled release of first quarter earnings on April 18.

J2 Global Communications was founded in 1995 as JFax by a German rap star who was frustrated trying to get faxes and phone messages while on tour. The original company delivered phone messages and faxes via e-mail. After going public in 1999 and changing its name to J2 Global Communications, the company began adding services. It shifted to a "unified messaging" ideal--fax to e-mail, voice to e-mail, blast faxes, voicemail, conferencing and a premium service that reads e-mail over the phone.

"I really look at them as a bridge technology between fax and e-mail," Benton said. He said the decline of faxing over the past 10 years is more perception than reality, especially in the legal, medical and real estate industries, which are all dependent on signatures and contracts.

J2 Global offers a free service, where customers are given a phone number that directs faxes to a chosen e-mail account. It allows up to 20 pages of faxes per month, and the customer agrees to open a number of advertisements sent by e-mail. Two of the ads are from J2 Global, enticing the customer to migrate to its paid service, and others are from outside advertisers, who pay J2 Global a penny apiece when customers click through.

Paid services starting at $12.95 per month allow the customer to choose its fax number, accommodating area code preferences. The feature is particularly useful for businesses wishing to create a presence in different cities. With the subscription, faxes cost 10 cents per page in the U.S., and 20 cents per page to receive a fax from a toll-free number.

J2 Global boasts 8.7 million subscribers, up from 5 million a year ago. Close to 500,000 of its customers are paid subscribers, up from 380,000 a year ago.

But if the fee were ever instituted, all those free subscribers would tuna into a potential $8.7 million monthly millstone around J2 Global's neck. That would more than eliminate the $31 million in net income that J2 Global reported for 2004.

In their e-mail, Jarus and Turicchi claim J2 Global could weather the fee by discontinuing their free service and passing the $1 charge through to paying customers, drawn from its pool of free customers. That marketing channel would be disrupted, one analyst said.

With almost $100 million in cash, Benton said an acquisition could be a likely next step for J2 Global. The company also has an expanding international operation, and a growing palette of services.

"Even though the vast majority of their revenue comes from faxing, I don't think they view themselves as just that," Benton said.

J2 Global Communications Inc.

Stock Prices

April 7, 2004   $22.50
April 7, 2005   $36.85

Note: Table made from line graph.

YEAR (Dec. 31)                 2004    2003

Revenue (millions)           $106.3   $71.6
Total Expenses (millions)      60.3    44.3
Operating Income (millions)    46.0   27.25
Net Income (millions)          31.6    35.8
Earnings Per Share            $1.27   $1.42

Quarterly Net Income (millions)

[GRAPHIC OMITTED]

SUMMARY

Business: Messaging, fax-to-e-mail services

Headquarters: Hollywood

CEO: Richard Ressler

Market Cap: $861 million

Total Liabilities: $12.1 million

Long-Term Debt: $0.9 million

Dividend Yield: None

P/E Ratio: 28.6