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In the business of disrupting the business of telephony, there are a few known quantities. Skype and Vonage (NYSE: VG  ) , of course. And Google (Nasdaq: GOOG  ) gets regular acclaim for its Voice service. Not so for 8x8 (Nasdaq: EGHT  ) , but that may be changing.

8x8 specializes in outfitting small businesses with professional Voice over Internet Protocol (VoIP) infrastructures. From caller ID to voice mail to auto attendant and call forwarding services, 8x8 provides everything its larger peers might but without the need for expensive equipment investments. All its services are delivered via the Internet.

It's good business. Last night, 8x8 reported deceptively good fourth-quarter results. Revenue rose 11.5% year-over-year to $17.78 million, while per-share earnings remained flat at $0.02 per share. Both results failed to meet Street expectations, though earnings would have been a penny higher if not for a $625,000 charge for settling a class action lawsuit.

8x8's shares are trading lower today as a result. I suspect that's because the certificate-flippers didn't look at the company's cash flow statement. Like Verizon (NYSE: VZ  ) , which also reported results recently, 8x8 generated more free cash flow than net income in Q4.

And cash is flowing faster than it ever has. 8x8's fourth-quarter FCF more than doubled, from $800,000 to $1.9 million. The company now carries $20.5 million in cash and investments on its books and no debt. This, and a still-developing growth opportunity born of the cloud-computing movement, is why some rebel Fools like the stock.

Wrote Foolish investor jkubinak1339 in November:

8x8 has found a niche for itself in that they can service [small and medium sized businesses] that [AT&T (NYSE: T  ) ] and Verizon cannot. 8x8 service is agnostic -- they easily provision companies that have displaced workers in different states or countries. One of 8x8's customers, for example, has 150 extensions in 26 different countries. All they had to do was plug their phones into an Internet connection and they were all on their enterprise class phone network.

Sound compelling? It does to me, especially now that 8x8's subscription services are driving outrageous cash flow growth. I'll be rating the stock to outperform in my CAPS portfolio after this morning's initial sell-off.

Now it's your turn to weigh in. What do you think of 8x8? Would you buy the stock at current levels? Use the comments section below to let us know what you think. You can also rate 8x8 in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add 8x8, Google, AT&T, Verizon, or Vonage to your watchlist.

Both our Motley Fool Inside Value and Motley Fool Rule Breakers services have recommended subscribers buy shares of Google.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. Brrrriiinnnggg! The Fool's disclosure policy is calling. Are you there?

Read/Post Comments (1) | Recommend This Article (7)

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 January 27, 2011, at 11:58 PM, dgroves0 wrote:

    You mentioned VG

    Let's compare VG to EGHT - their closest competitor.

    EGHT focus is on Business customers, it still services 40k homes. VG focus is on both, with a bigger home - 2.4M. VG has added Cell phone APPS and Social Networking, So has EGHT .

    The businesses are simular, when comparing, they are a natural.

    Analysts expect VG 2011 earnings of $.25 (without the writedowns caused by their old loan, they would have been close to these earnings in 2010)

    Analysts expect EGHT 2011 earnings of $.11

    ALL of the recent comparison Values are at Yahoo Key Statistics.

    VG ~$2.60 PPS

    Ent Val/Rev (ttm) 0.62

    Ent Val/EBITDA (ttm) 3.81

    Price/Sales (ttm): 0.55

    Rev Per Share (ttm): 4.32

    EBITDA (ttm): 144.59M...(Per Shr _ .65) (221m shr used)

    Operating Cash Flow (ttm): 197.09M...(Per Shr _ .89) "

    Levered Free Cash Flow (ttm): 113.20M...(Per Shr_ .51)

    EGHT ~$2.80 PPS

    Ent Val/Rev (ttm) 2.24

    Ent Val/EBITDA (ttm) 24.59

    Price/Sales (ttm): 2.51

    Rev Per Share (ttm): 1.04

    EBITDA (ttm): 6.01M...(Per Shr _ .10)

    Operating Cash Flow (ttm): 6.42M...(Per Shr_ .10)

    Levered Free Cash Flow (ttm): 3.18M...(Per Shr _ .05)


    If VG was to be Valuated as EGHT, VG PPS would have to go up the stated Value in each case:

    Ent Val/Rev (ttm).......3.6X

    Ent Val/EBITDA (ttm)..... 6.45X

    Price/Sales (ttm):..........4.56X

    Rev Per Share (ttm): .....4.15X

    EBITDA per Shr ............6.5X

    The average is 5.05X

    Is EGHT over Valued? NO - fits in nicely with Telcos.

    If VG were to be Valued the same as EGHT, with these comparisons, VG PPS would be $13.00!

    Out of range? Check out the Google stockscanner; stocks with a $500+ market cap, and $.25 in earnings. (watch that 1st Q earnings report on May 4th, in 4 months to validate $.06 for the 1st qtr)

    $13.00 is in the mid range! The lowest PPS is $5.50!

    BUYING OPP before recognition of the above, May 4th

    VG will not be held down forever

    JMO Dave

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