8x8 Finds a Path to Profitability in VOIP Land
    January 4, 2011  PSW Staff
    8x8 Inc. (EGHT) offers a variety of telecommunications services for IP, telephony and video
    applications.  This includes web based conferencing, unified communications services and
    thanks to a recent acquisition, managed hosting and cloud based computing.

The company has been shifting to an enterprise focus from a residential one where it has
found a more solid growth opportunity.  Recently, losses from the residential side have
masked the very substantial gains on the business and enterprise side, but the residential
revenues have bottomed, and overall growth is starting to become more apparent.

8x8 owns several patents, has original software and generates the majority of their revenue
from subscription services, about $16 million last quarter.  They also sell IP telephones
    accounting for a small percentage
    of their total revenues, $1.3 million
    last quarter, taking a loss that helps
    them secure and facilitate their
    subscriptions.

    Since the product and service
    cannot exist without each other, it's
    probably a good idea to look at their
    operating margins as a whole,
    since some of the service cost of
    revenue may be hiding in the
    product cost of revenue.  The overall
    gross margin is 68% with the IP
    telephones dragging down the
    service margin by 10%.  Overall
    gross margin has remained at 68%
    for the last four quarters, up from an
    average of 65% during the previous
    four quarters.

Vonage (VG), although a much bigger company in the VOIP space, currently has a 65% gross
operating margin focusing on residential customers.  It seems that the three percent margin
improvement from business customers has brought 8x8 into profitability, something that
Vonage has yet to achieve.

The company currently gets a little over $200 per business subscriber per month, and it is
costing them about $825 to acquire one subscriber.  This is a four month payback as
opposed to a ten month payback for residential acquisitions over at Vonage.  8X8 has a total
of 22,167 business customers, up from 21,362 the previous quarter, and up from 18,199 the
previous year.

EGHT bettered VG's churn rate last quarter as well, posting 2.2% compared to 2.7% a year
ago, and 3.1 % two years ago.  Churn rate is a measure of how many subscribers they lose
per month based on the average number of total subscribers during the three month period.

Better margins and a better churn rate have started to bring in earnings over the last year or
two.  The company earned close to $4 million or $0.06 per shares during the year ending
March 31, 2010, and has already earned $0.05 per share during the first two quarters of this
fiscal year.

The two analysts covering this company, who were beat by a penny in each of the last two
quarters, predict 3 cents this quarter, 4 the next and 17 cents for the fiscal year ending March
31, 2012.  A trailing P/E of 29, a forward P/E of 14 and a price to book ratio of 10 do not make
this look like the cheapest stock around, but a couple of factors may help its valuation in the
near future.

Beating estimates again would help, as well as a share buyback program that has been
ongoing for quite a while now.  Shares outstanding more than doubled to 61.1 million from
2001 to 2006.  Since then, total shares out have only climbed a couple of million to where
they are now at 63.2 million.  The company has had about $18 million in cash for the last
three quarters.

The buyback program was announced in July of 2009, with authorization to repurchase up to
$2 million worth of common stock.  In July of 2010, they extended the plan, and upped it to
three million.  As of September 30, 2010, the company had actually repurchased all $3
million that was authorized, and in October, they decided to authorize another $10 million.

Although not a giant force to be reckoned with just yet, 8x8 has found the path to profitability in
VOIP that Vonage and others have not.
Free, unbiased analysis & opinion on small & micro cap stocks
You need Java to see this applet.
Login:Password:  
    Enter Symbol, Company Name or Keywords:
    Free Premium Subscription Offer

    Full article access includes Buy, Sell & Stop-Loss conditions along with a no nonsense
    trading strategy.  Don't jump in blind, subscribers also get a detailed risk analysis,
    suggested position weight and time horizon ideas.  Also access our Small & Micro Cap
    portfolio.

    Get started for free right now with our weekly newsletter.
    Latest Unbiased Articles
    Analysis of listed, fully reporting penny stocks