Three months ago, 8x8 (NYSE:EGHT) was on a roll. Share prices had doubled in just nine months as the company geared up for another earnings report ... which sent shares down by 19% in a couple of days, as investors vented their disappointment with results that merely matched analyst targets.
Fast-forward to this Thursday, and it's like the last three months never happened. The cloud computing and digital telephony expert reported another quarter roughly in line with Wall Street expectations, with earnings just below, and revenue just above, analyst targets. And the stock responded by rising 7.1% on Thursday, erasing the last bit of gap back to the previous pre-crash 52-week highs.
Mr. Market does know how to forgive and forget, after all.
But the story doesn't seem to have changed much from the previous quarter's bitter disappointment -- at least not on the surface. So how did 8x8 earn the respect of investors this time?
For one, 8x8's sales growth accelerated after a surprisingly slow third quarter. The company used to report year-over-year revenue growth north of 30% every quarter, but stayed at 17% in the previous period, and climbed back to 18% this time. It's not a triumphant return to glory, but a step in the right direction.
More importantly, 8x8 also expanded gross margins from 68.3%, to 70.6% -- a strong quarter-over-quarter increase that shows pricing power.
Now, 8x8 is not the only digital voice service specialist to play in this rarefied gross margin air. Vonage (NYSE:VG) scores a generous 69% gross margin, Cbeyond (UNKNOWN:CBEY.DL) lands at 68, and magicJack VocalTec (NASDAQ:CALL) comes in at a still-sizable 64%. There's plenty of room for highly profitably providers in the digital voice space.
Even so, 8x8 is a leader. The company sports the widest gross margins in the industry, and beats fellow business-class specialist Cbeyond in bottom-line profitability. In fact, Cbeyond reported a small loss over the last four quarters. That's despite Cbeyond holding the advantage in economies of scale -- the company collects nearly five times 8x8's annual revenues.
Things get more confusing in the consumer-oriented market. Vonage sees twice Cbeyond's sales dwindle to a barely profitable earnings line. MagicJack is barely larger than 8x8, and has the thinnest gross margin to boot -- but enjoys a fantastic 36.3% net income margin. So there's room for lowballing the competition on price and still collecting an outsized net profit.
Of course, these innovators aren't really battling each other. They're all facing the entrenched monopolies of hard-wired phone lines, and the newer cell-phone solutions. I wouldn't be surprised if these small-caps end up consolidating over the next couple of years. They're all cash-rich and nearly debt-free, they provide a flexible and reasonably priced alternative to a ubiquitous service, and they could all use some more marketing muscle. So why not band together, pool your resources, and fight the power more effectively?
This report washed the previous quarter's bitter taste out of investors' mouths. Me, I have a thumbs-up CAPScalls on three of these four digital voice stocks. I'm only waiting for another unreasonable plunge before adding Cbeyond to the bullish herd. I'm a believer.
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