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An Idiot's Guide to Cloud Telephony

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When I read something like "VoIP telephony provider," I ask myself, "What the heck is that?"

If you already know the answer, this article may not be for you. But if, like me, you're left scratching your head, then you're in luck. Here's a quick idiot's guide to VoIP telephony, with the pick I'm watching in the sector and a special free report at the end.

What, exactly, is it?
VoIP stands for voice over Internet protocol. In laymen's terms, this means placing and receiving telephone calls that travel over the Internet -- instead of through the landlines and satellites that normal service providers have constructed.

If that sounds a lot like Microsoft's (Nasdaq: MSFT  ) Skype, it should. When you use Skype to make a call to someone's phone, that's an example on VoIP. When it comes to other forms, the two biggest consumer-facing options are Vonage (NYSE: VG  ) and majicJack (Nasdaq: CALL  ) . Because these companies are able to store your data -- like contacts and/or messages -- remotely, they're a type of cloud play on telephony.

Historically, Vonage has been the dominant force here, with revenue last year topping $870 million. To use the company's product -- as the picture below shows -- you simply plug a Vonage box into your Internet, and then plug your phone into the Vonage box.

Source: Vonage.

Typically, majicJack was running a distant second. In 2011, revenue came in at about one-eighth of Vonage's. This was mostly because to use its product, users plugged their phone directly into their computer. If the computer was off or on standby, calls couldn't be made or received.

But with the release of majicJack Plus, the company now allows users the same convenience of Vonage -- plus the ability to use the phone on the run, as it can hook up to Wi-Fi networks if it is plugged into a computer.

A valuable proposition?
In all, these products provide quite a value proposition over standard landlines. Vonage users can get unlimited calls to the U.S. and Canada for $25 per month, while majicJack comes in at just $30 per year after start-up costs -- or just $2.50 per month!

Without a doubt, there's a serious value proposition here. And yet, I simply don't believe that either one of these companies will be long-term winners.

Though landlines will certainly be around for a while, and it's nice to be able to use majicJack while on the move -- mobile phones are the wave of the future. No one will want to lug their computer with them everywhere to place phone calls in 20 years, and unless there are technological developments that will allow convenient use of VoIP on the move, the consumer use of this technology is headed the way of the dodo bird.

Here's where the money is
When it comes to VoIP, however, I do believe there is one company poised to profit: 8X8 (Nasdaq: EGHT  ) . The most basic way to think about the company is that it offers products and a valuable proposition similar to majicJack and Vonage, but with a laser focus on the business community.

While I can rationally imagine a future when household landlines are a thing of the past, I think integrated landline systems -- on some scale -- will exist in the business community for the foreseeable future. And it's not just standard telephone service 8X8 offers, it has a whole suite of products to offer customers, from voice mail to a virtual office suite.

The company was able to grow revenue by an impressive 10.6% last year, but the story gets even better when you zoom in on the last quarter, where it grew by 30.9% year on year. Over the past two years, churn has dropped from 2.7% to 2%, and service revenue per customer has gone up 19% in just the past six months.

Backing up my pick
I won't beat around the bush -- this isn't a "sure thing" pick. An innovator -- on a moment's notice -- can disrupt the field of telephony. But for the time being, I'm excited about 8X8's value proposition and focus on business customers. That's why I'll be making a bullish CAPScall on the company in my All-Star profile.

In the meantime, if you're focused on the even bigger future for telephony, I suggest you check out our special free report: "The Next Trillion Dollar Revolution." Inside, you'll find out about a company poised to profit from the legions of people quickly converting to mobile phones worldwide. To find out what the company is, get your copy of the report today, absolutely free!

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Vodafone Group, and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (13) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2012, at 1:07 PM, Demokrat wrote:

    Hmm. Interesting. And exactly how many customers does this company that has a focus on business customers have exactly? 20 000, right? Yes, I see how 10.6% increase in revenue growth last year can be impressive to the likes of you. But for the rest of us real investors, it is an obvious pumping of a lowly company. And with a price to book ratio of 15.85 is that not cause for concern? No? Really? You dare to buy the stock today and you wake up tomorrow with the pps at more reasonable levels of 2$- $2.20. No, thanks! Give me a company with just as high a price/book ratio but with an AUTHENTIC growth potential such as BAIDU, and then I might take you seriously.

    20 000 customers only? Really? And how long will it take before they become the force you pretend they will be recognized for, that is, when they hit let's say 5 million customers? 100 years? You know I am laughing at you for simply not disclosing that this company is all about hype, right?

    On another note, where exactly did you explain cloud telephony? I think I am not mistaken to suggest that you, sir, need a book for bigger idiots (dummies) in order to better explain cloud telephony to others (dummies/the actual word you were looking for, dummy!).

    Do I now hear you asking: "CLOUD TELEPHONY provider," I ask myself, "What the heck is that?"

    No doubt.

  • Report this Comment On March 27, 2012, at 2:43 PM, TMFCheesehead wrote:

    An explanation of the use of "cloud telephony" from the 4th paragraph:

    <<Because these companies are able to store your data -- like contacts and/or messages -- remotely, they're a type of cloud play on telephony.>>

    Brian Stoffel

  • Report this Comment On March 27, 2012, at 2:46 PM, TerrorByteFX wrote:

    I think your mistaken with your facts also Demokrat, 8x8's current P/B ratio is 5.23 and it has 25,000 customers. You should get your facts straight before you start calling people "dummy," dummy!

  • Report this Comment On March 27, 2012, at 2:58 PM, TMFCheesehead wrote:


    I'm not sure where your numbers are from, but on Yahoo! Finance I see EGHT trading at 5.2 times book value (not 15.85)

    And when it comes to customers, the company currently has 27,677 businesses using their technology, a 19% year on year increase in customers.

    While you look at that number and think "that's too low", I look at it and think "look at all the room for growth!"

    Either one of us may end up being right about this company, but I encourage you to make a bearish call on your CAPS profile for it, as I've entered a bullish one, and we can come back and revisit this in three years.

    Brian Stoffel

  • Report this Comment On March 27, 2012, at 4:26 PM, piranha60565 wrote:

    I own a small amount of EGHT. My only problem with them is Bryan Martin, their CEO. He doesn't seem too confident in his own company and seems to know how to milk his share holders when he wants to. Look at SEC form 4.

    Good company though.

  • Report this Comment On March 27, 2012, at 10:49 PM, seanbowes wrote:

    Bryan Martin is a horrible CEO. Look at it this way, the company has good technology and a horrible CEO that no one on Wall Street wants to do any business with. Is it any surprise their analyst coverage is from three lousy firms and not a single real analyst from a real firm will cover this company?

    When was the last time Bryan Martin actually opened his cheapskate pockets and bought some shares instead of milking shareholders with free options and using share buybacks to buy his own expiring options?

    Get a new CEO and this company will be $10 in 9 months.

  • Report this Comment On March 28, 2012, at 1:13 AM, Demokrat wrote:

    For starters, when you start your article with the heading, An idiot's Guide to Cloud Telephony, and all you have to offer for it is that line Mr. Brian Stoffel, you are either branding your readers as too stupid to understand any more than you want to offer or you truly have not grasped much more than that.

    As far as the 25k clients, you are kidding, right Terrobytefx? 20k or 25k is still light years from the 5 million figure I put forth for a real company that begin to be reckoned with. Certainly you own a stake in EGHT otherwise you wouldn't defend a lowly company such as that. Nothing wrong with profiting from the hype but a scam is but a scam regardless. 25k customers? You are kidding, right? What were their majestic revenues stemming from those 25k customers? And what does 10.6% revenue growth equate to exactly on those majestic revenues?

    Tell me this. How in the world does a company with numbers reflective of Over The Counter status get this kind of attention and a price per share above 4$? Don't bother. I already know the answer. You have been fooled into defending a mediocre, albeit hard working, company that realistically is never going to break 100k customers before this decade is over. Can you imagine 400% growth in under 10 years for a company only starting at 25k? Facebook had 100k subscribers after only 48 hours online. But all that doesn't matter. No, siree!! As long as Motley Fool pumps it from here to oblivion this company can well be the next Apple if their corrupt minds convert enough feeble ones. Remind me again, do they have a stake in EGHT?

    Lastly, you like Yahoo Finance, don't you TerrorbyteFx? That is admirable! But do you even know enough about calculating it yourself so you have the actual numbers? And you call me a dummy? Figure it out, Terrorbytefx, if you can. It can be complicated but the numbers will be more concrete. Do you think CitiGroup, Morgan Stanley, etc. go to Yahoo Finance for their numbers. I think not. Now who's the dummy?

  • Report this Comment On March 28, 2012, at 1:31 AM, Demokrat wrote:

    I'm sorry I almost missed your second post, Brian Stoffel. You are to be commended for appreciating the growth potential of a seemingly hard working company such as 8x8 but the fact remains that you are entertaining the idea that a company with numbers such as theirs is more than just an OTC worthy company. It is unjustifiable. 20, 25 or 27k plus just doesn't cut it. Apple was worth $360 back in november, 2011. Look at it now. Gluu Mobile was worth $1.85 around the same time and is now a respectable $4+ and rightfully so and have the revenues, subscribers, and growth to sustain that pps. These companies are worthy of our attention. And there are hundreds more like them that encountered some form of a debacle in the second half of 2011, were expected to bounce back, and did. EGHT was not one of them except as it pertains to MotleyFool and all of their holders of shares. Even the Russians, having had to endure the burden of digging deep into their pockets for their hard earned money to buy their Ladas, swore in the name of all that is mighty that their car was the greatest car in the world. Common sense and maybe a slap in the head snapped them back to reality.

  • Report this Comment On March 28, 2012, at 1:45 AM, TerrorByteFX wrote:

    You still hold the title as dummy. I pulled the information straight from the their website.

  • Report this Comment On March 28, 2012, at 1:52 AM, TMFCheesehead wrote:


    First things first, the name calling can stop. I'd like to think we can all be above that.

    Second, sales for the last twelve months for EGHT are $79.8M (18.2, 18.5, 19.8, and 23.3--all in millions, for the four quarters of 2011, in sequential order). All of this information is from the company's SEC filings, which took a while since their fiscal year ends on March 31.

    You're right that Yahoo isn't the most reliable source, but by pointing out that fact, we find that the P/S is even lower than thought. With $79.8M in sales and a market cap of $275 M, we have:

    A P/S of just 3.4. Or, roughly 80% lower than your claim. Secondly, each of these customers are businesses, not individuals.

    The Census Bureau estimated that in 2007, there were roughly 6 million businesses that had payrolls. Your 5 million customer threshold is either wildly optimistic (EGHT with a 84% penetration), or simply not in line with reality.

    Brian Stoffel

  • Report this Comment On March 28, 2012, at 10:47 AM, Demokrat wrote:

    I'll have you know Brina Stoffel that the name calling has been instigated by your heading in your article above (An Idiot's Guide to Cloud Telephony

    By Brian Stoffel | More Articles ). It seems you have not grasped that point as I carried on where you left off. In using the word dummy I was correcting your "idiot". Although there are certainly books titled "...for idiots", it is common to reference the more popular long standing books with the "...for dummies".

    That being said, my play on dummy is symbolic to your title and not a name calling gesture. I'm sorry you did not pick up on this on your own.

  • Report this Comment On March 28, 2012, at 11:06 AM, Demokrat wrote:

    On a final note, any which way you cut it, EGHT is only an OTC worthy company with those loose change numbers and their $4 price per share is unjustifiable based on those numbers. There are some greater growth stories out there for real investors to concern themselves with. 20k, 25k, 27k!! Only!! Such a big deal over nothing! How do you do it? And you hope for the pps to rise by how much more before you back off EGHT and ruin many people's lives? I'm eager for unbiased analysts to come in and say: "hang on a second! What the hell is this company with only 27k customers (business) commanding such a pps?Let's downgrade it!"

    Actually, didn't B. Riley & Co. downgrade EGHT on march 12 of this year? They sure did. Respectable, unbiased analysts.

    For the record, I own no EGHT shares, that much you have gathered, and I do not intend to short it either.

    I am simply bringing to light certain transgressions by certain individuals working for certain enterprises who are persistently aligned with the concept of HYPE, and it is not more evident than with EGHT.

  • Report this Comment On March 28, 2012, at 5:40 PM, piranha60565 wrote:


    I wish there would be more articles highlighting companies that do just that.

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