Will 8x8 Sink or Swim in 2012?

This year has been very kind to 8x8 (Nasdaq: EGHT  ) . Share prices have climbed more than 50% as earnings solidified and sales growth jumped to double-digit levels.

In fact, this stock crushed all-comers in its industry. Voice-over-IP compadres Vonage (NYSE: VG  ) and magicJack VocalTec (Nasdaq: CALL  ) couldn't hold a candle to 8x8's returns. Neither could traditional telephony giants AT&T (NYSE: T  ) or Verizon (NYSE: VZ  ) , whom 8x8 considers its main competition.

Can 8x8 repeat this stellar performance in 2012 -- or are the challenges ahead too great for the little phone-tech rebel? Let's find out.

The strategy
CEO Bryan Martin sees 8x8 working in the "ever-changing business cloud solutions market." With about $20 million in quarterly revenue spread across nearly 27,000 business customers, the average revenue per account comes out to roughly $740 per quarter or $246 a month. We're obviously talking about small to medium-sized businesses here -- 8x8 is leaving retail consumers to magicJack and Vonage.

The company is reaching for larger accounts. Management likes to highlight success stories with 25 lines or more per account -- still far from enterprise-class but larger than the eight lines in the average account.

To get this done, 8x8 is working on developing an indirect sales model as opposed to managing sales calls in-house. The company recently recruited two sales executives from unified communications expert Polycom (Nasdaq: PLCM  ) to establish a partner network in 2012. So far, more than 40 partners have joined the external sales force; we'll get to know more about them, maybe even including some names, in the next earnings call.

Challenges and roadblocks
The largest obstacle in 8x8's path will always be the wireline phone company. These services aim to replace traditional phone, fax, and other communications lines with an Internet-based and largely software-focused suite. That's easier said than done, especially since the same incumbents 8x8 wants to push out tend to control the network connections on which this newfangled stuff depends.

On the technology side, 8x8 solutions may be compatible with good old copper-wire solutions as well as competing video and voice networks by Polycom and Cisco Systems, but no IT manager ever got fired for choosing Cisco. Two decades of operating history don't count for much when weighed against the imposing market presence of much larger rivals.

How's that 2012 looking, then?
None of the major challenges facing 8x8 today are particularly new. On the other hand, businesses of every size are getting more comfortable with cloud-based infrastructure services every day. The year to come could very well be the one where VoIP telephony hits the tipping point and starts a period of exponential growth.

I'd put that likelihood at about 30%. Extend your time frame to five years, and I'm certain that this will happen before 2016. Investing a little too early in the next business revolution doesn't cost much, especially when compared with the lost opportunity if you miss that hockey-stick moment. I'd use the Foolish watchlist feature to get a closer look at 8x8 if I were you.

Believe it or not, but Foolish analysts see some even better risk-reward equations in today's market. Check out the Fool's top stock idea for 2012 right here -- the report is free, but it won't be around forever.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Polycom. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On December 26, 2011, at 11:48 AM, Demokrat wrote:

    You guys must be kidding when you write;

    "...this stock crushed all-comers in its industry. Voice-over-IP compadres Vonage (NYSE: VG ) and magicJack VocalTec (Nasdaq: CALL ) couldn't hold a candle to 8x8's returns.''

    What exactly are those returns you write about? You must mean the earnings that EGHT has failed to meet the analysts' expectations for the last two quarters. Their paltry and disappointing earnings results must only have only have left a positive impression on you fools at MotleyFool. The rest of us rely on the actual facts, not the Hitlerian type propagandistic facts. Vonage has reported profits 3 quarters in a row, a verifiable fact. EGHT has missed expectations, terribly last quarter. Another verifiable fact. Vonage has 2.4 million subscribers and are very much dedicated for years now to their long distance plans, and mobile extensions. EGHT has 27000 subscribers and they somehow get MotleyFool to revere them because of their potential to double in size "over the next decade". How impressive! That is some growth! I think I would much prefer Vonage's fundamentals in these trying times given their fantastic ability to generate the free cash flow that enabled them to reduce their debt from $220M last Dec, 2010 to $120M today. And with close to $80M available cash they are capable of reducing it substantially lower or choose to buy back shares or invest it elsewhere. Next year's analyst projections are for earnings in the .50-.58 cents range. Vonage is winning over the analysts rightfully so. EGHT needs at minimum 5 years to get there. Too long a wait for a company whose pps is far and beyond what it should be with its 1 to 2 penny earnings per quarter. I would not want to own EGHT when the hype dissipates and it comes down to more reasonable levels. If Vonage is priced "right" at $2.48 then all indications are for EGHT to be priced in the $1.00 range. No more. Otherwise, EGHT at $3.69 dictates a Vonage pps closer to $7.50. Make of this what you will, but the facts about Vonage's turnaround do not lie. Their fundamentals are as solid as one would hope in these difficult economic times. EGHT is too tiny a company for them to already be relevent today. Hype is not a fundamental aspect of any company except from MotleyFool's perspective.

  • Report this Comment On December 28, 2011, at 3:06 PM, pete163 wrote:

    is 8x8 the size of the box that it's going to be berried in, what a joke.

  • Report this Comment On December 29, 2011, at 7:35 AM, voip108 wrote:

    Demokrat, it's good to see that Vonage is finally coming out of massive losses to growing profitability, and may soon be in a position to be debt-free. All this argues for Vonage being worth more than it's current share price, and perhaps even leading VOIP to the tipping-point of general acceptability on a mass scale.

    In Germany and France, VOIP has already become a commodity, with DSL and Cable Internet providers across the board offering low cost or free calls with VOIP hardware built in to their modem/router boxes.

    Number portability makes it easy for consumers in particular to freely switch across providers for the best deals and promos. Vonage's current loss-leader of Vonage World with no contract, no commitment, free hardware and a low payment for the first 3 months is certainly hard to beat - for the first 3 months.

    What EGHT has going for it, in addition to being debt-free with cash in the bank and modest profitability for many quarters, is a unique set of virtual PBX services for business customers. The real value of these services are still to be really appreciated on a wide scale - e.g. the ability to integrate a geographically distributed workforce into a single virtual company located behind a single phone number; and making physical provisioning as simple as plugging a phone into any ethernet jack at any desk anywhere in the world. With some key patents behind their PBX offerings and growing revenue to actively protect these patents, these services are very sticky, as evidenced by low churn and a steady growth in business customers. "Steady" is of course the word, and "exponential" is where things have the potential to go (for all players in the VOIP field) as more and more companies see the potential benefits and cost savings of VOIP.

    Rather than beating EGHT down to match the current price VG is trading at, perhaps you'd like to speculate where VG could itself be going based on your analysis?

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