The Two Problems With magicJack's Quarter

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

You have to hand it to Whitney Tilson -- he published a report on Feb. 7, saying that magicJack VocalTec  (NASDAQ: CALL  )  could be the next Netflix. Looking at the stock price and recent earnings upside, Tilson may be right. At $20.85 in the post-market, the stock is up 54% in just over a month. There's more to the story, though, and you need to look behind the headlines before purchasing the stock. There were a couple of ugly things about the quarter.

Financial results blew away expectations
After the close on March 12, magicJack reported revenue and earnings that blew the Street away. Revenue of $38.2 million and EPS of $0.69 smoked estimates of $35.9 million and $0.41 cents. That's a $0.28 beat on earnings. Unfortunately, the earnings beat came mostly from an income tax benefit of $35.4 million, which was four times the amount of net income the company generated. Ignoring the details, which is what the market will do, the earnings beat is huge.

Two obvious problems with the quarter
One other thing that worries me about the results is the fact that active magicJack subscribers were actually down from the prior quarter at 3.2 million. The prior quarter was down from 3.3 million, as subscribers seemed to roll off the paid service and onto the free service. This is a big concern, but even with these two significant problems, the positives outweigh the negatives.

MagicJack is a very cheap subscription at only $30 per year, so making international calls into the U.S. pays for the service with one call per month. It seems as if the company just needs to ramp up marketing to increase the size of the subscriber base. And that's just what management is doing.

Increasing distribution is just what the company needed
The company brought on several new channel partners that will double its physical presence, adding 10,000 new locations that will sell the device. These are urban sites that focus on prepaid relationships and should substantially increase the opportunity for distribution in the U.S.

High-margin subscription revenue is more of the mix
The revenue mix is favorable as well. Service renewals have increase to 40% of revenue, up from 28% in 2012, which is higher margin and more stable since the likelihood of renewing multiple times is greater in the out years.

Why use magicJack?
Telecom services are much cheaper than they have been in prior years, and Skype is free, so what does magicJack do for consumers? The value proposition seems to focus on two groups of people. The first group is people trying to call into the U.S. from international locations. MagicJack can save them substantial amounts of money, and the product will quickly pay for itself, if not on the very first call. The second group of people is those in the U.S. who need a home phone, but are looking to save money with unlimited calling and/or who want their home phone to ring on a mobile device. 

MagicJack is launching a refurbished product and branding campaign in about 100 days, near the end of the second quarter. If this campaign begins to show traction, with accelerating product sales, the stock can move quickly.

Stocks that you will never want to sell
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2877211, ~/Articles/ArticleHandler.aspx, 8/29/2015 8:50:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
CALL $8.66 Down -0.01 -0.12%
VocalTec Communica… CAPS Rating: **