Prior to 2012, j2 Global (NASDAQ:JCOM) was solely a cloud services company. Today, that part of the business provides fax, virtual phone, data backup, email, email marketing, and customer relationship management services to a range of business customers. As a cloud services company, j2 Global survived two market crashes. During the financial crisis specifically, it cruised through barely missing a step. While reporting constant revenue growth throughout the crisis, it suffered a mild decline of 8% in net income in 2009 and then rebounded big in 2010 with a 24% gain.

Then in 2012, j2 Global acquired Ziff Davis which married its cloud services business with Ziff Davis’ digital media business. The digital media segment “specializes in the technology, gaming, lifestyle and healthcare markets, reaching in-market buyers and influencers in both the consumer and business-to-business space.” Its websites include PCMag.com, IGN.com, Speedtest.net, and Everydayhealth.com.

A bride and groom cake topper facing away from each other.

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And after seven years, things seem to be working well…

In recent earnings calls, management has highlighted revenues, adjusted EBITDA, and free cash flows as three metrics about which investors should be excited. The first three quarters of 2019 saw revenues and adjusted EBITDA grow by about 12% compared to the same period in 2018. Free cash flows grew by about 9% year over year. Also, management points to j2 Global repurchasing about $20 million in company stock and making ten acquisitions of which the company appears to be particularly excited about two: BabyCenter and Spiceworks. And then there is the increase in full-year guidance for revenue, adjusted EBITDA, and non-GAAP EPS to reflect a year-over-year growth rate of about 10%.

But are they really?

Unfortunately, these highlights do not reflect the full picture. For revenues, both divisions are seeing revenue growth especially for digital media which now exceeds cloud services. The problem is that these revenues are not translating to profits for shareholders. While cloud services’ operating income has increased, digital media’s income and the operating margins for both have been declining. This in turn has resulted in net income being rather flat having grown only about 6% total since 2012. Interest expense growing to over $60 million following the accumulation of about $1.25 billion of long-term debt since 2012 hasn’t helped while a reduction in the company’s effective tax rate has provided support to net income in the last couple of years.

Looking at free cash flow, j2 Global uses a traditional measure of operating cash flow minus purchases of property and equipment. However, I don’t believe that this is fully representative of j2 Global’s actual free cash flow because it ignores the significant cash costs (i.e. outflows) related to its acquisitions of businesses. These should be included because they reflect purchases of capital assets used for operations and depreciated or amortized in operating cash flow just like the assets that are acquired via the purchases of property and equipment line item. Since 2012, the company has spent over $3 billion on acquisitions. For reference, net income has totaled just over $1 billion and operating cash flows has been about $2.1 billion during that time. When acquisitions are included, free cash flow is never above $50 million in a year and is actually often negative.

Then there is the suspension of the dividend in 2019. Management said that this was done to direct resources to more acquisitions, but where are the benefits from the previous ones?

Maybe it’s time to call it quits?

This union has rewarded investors with stagnant net income, poor free cash flow, and a suspension of their dividend while all available funds are directed to acquisitions that do not appear to be adding to the bottom line.

At least on the surface, an independent cloud services company could provide investors with a slow growing but reliable business with a substantial dividend whereas digital media seems to be getting worse despite the continuous investment provided by cloud services net income.

While a breakup of j2 Global is not the only solution, I think that it is a fair question to ask. Breaking up the company would allow investors to evaluate each business on its own merits. Maybe cloud services needs these acquisitions just as much as digital media in order to sustain its performance. Maybe digital media’s situation isn’t as bad as it looks. As it stands, investors simply don’t know since the current structure obfuscates the real situation. However, as separate companies, the true health of each would be seen for what it is, and the company’s owners could decide for themselves what to keep and what to cut.