CEO Bryan Martin doesn't want you to think of 8x8 (Nasdaq: EGHT ) as just a Skype alternative. He wants you to think of his company as a full-scale communications infrastructure provider. What Cisco (Nasdaq: CSCO ) and Avaya are to wired, on-premises communications, 8x8 wants to be for cloud-centric communications.
Serving a buffet for those hungry for Web infrastructure
It's a compelling vision that includes everything from small-business VoIP services that compete with Skype and Vonage (NYSE: VG ) to managed hosting services that compete with Amazon.com's (Nasdaq: AMZN ) Web Services, or AWS, and Rackspace Hosting's (NYSE: RAX ) core business. A roster of 24,000 customers to date -- growing at a rate of 1,000 per quarter -- suggests Martin is on the right track.
Strong financials also speak well for the strategy. Gross margins are up more than 5 percentage points since 2008 and continue to rise. Normalized net profit is up 69% over the trailing 12 months. Free cash flow normalized at a 35% tax rate, which had been running negative in years past, improving from $0.2 million in fiscal 2010 to more than $3.4 million over the past year as its subscription-based services have taken hold.
Dialing up partnerships
Future growth is dependent on 8x8 being recommended into accounts by systems integrators and others who provide technology services to small and midsized businesses. "No one's heard about 8x8 in the corporate technology space," Martin said in an interview.
He aims to change that via strategic acquisitions and a comprehensive channel strategy led by Don Trimble, a former Polycom and Cisco executive hired in February. A new video conferencing service set to debut this summer and sold through partners should help establish relationships while a budding arrangement with Level 3 Communications (Nasdaq: LVLT ) in serving government accounts also holds promise, Martin said.
On the acquisitions front, 8X8 recently completed a deal to acquire Colorado-based Zerigo to better compete with the likes of Amazon and Rackspace. Zerigo provides both monthly and hourly hosting services using a custom virtualization technology developed internally. In our interview, Martin said he believes Zerigo's technology will be an important differentiator against larger peers.
Foolish takeaway: still bullish
After hearing Martin's pitch, my take continues to be as it has been. Small businesses -- especially venture-funded small businesses -- are increasingly starting up with zero infrastructure. Having a comprehensive service provider to partner with makes sense, and 8x8 is among the best-positioned to occupy this niche.
There also appears to be more demand than supply. Amazon's Web Services suffered a major outage in April, taking down many high-profile online businesses with it. Box Office Mojo, Foursquare, Quora, and Reddit were among the bigger names affected.
The implication? No single service provider is going to serve the entirety of the infrastructure needs of cloud-computing start-ups. AWS, Rackspace, Skype, and others may have better-known brands, but there's plenty of business here for 8x8 to serve.
On its own, AWS was on track to generate $650 million in 2010 sales. Rackspace produced roughly $101 million in cloud hosting revenue last year, a near double over 2009's $56.4 million. Both figures beat 8x8's $70 million in revenue, and that's mostly from delivering voice over IP services. Branching out should dramatically increase the company's financial opportunity.
That's why I own shares of 8x8, and why I've rated the stock to outperform in my CAPS portfolio. Do you agree? Disagree? Please weigh in using the comments box below. And if you're interested in learning more about how the Internet is transforming business models, take a minute to watch this free video right now. You'll walk away with a stock idea from our Motley Fool Rule Breakers scorecard and a richer understanding of the cloud-computing revolution.