magicJack VocalTec Ltd. Earnings: What to Expect

magicJack VocalTec (CALL) will release its quarterly report on Wednesday, and investors have recently boosted their expectations of just how successful the provider of Internet-based phone services could become. Even though the company faces steep competition from Vonage Holdings (VG) and 8x8 (EGHT -2.62%), magicJack has attracted the attention of some high-profile institutional investors who believe that the company could keep soaring.

Along with its peers, magicJack has helped changed the way people think about their phone service, as the company specializes in allowing people to make phone calls over the Internet, whether from desktop computers or from mobile devices. Boasting more than 10 million sales of its namesake magicJack product since launch, the company prides itself on offering low prices and strong customer service. But with so much competition, the big question is whether magicJack truly has a big enough moat to sustain its success. Let's take an early look at what's been happening with magicJack VocalTec over the past quarter and what we're likely to see in its report.

Source: magicJack VocalTec.

Stats on magicJack VocalTec

Source: Yahoo! Finance.

Will magicJack earnings explode higher?
Analysts have had mixed views in recent months about magicJack earnings, raising their fourth-quarter estimates by 10% but cutting their full-year 2014 projections by about 12%. The stock has rocketed higher, though, climbing 60% since early December.

Coming into the quarter, magicJack had strong momentum from its third-quarter results. The company grew its subscriber count by 21%, and although sales dropped 14% from the year-ago quarter, adjusted earnings were much stronger than investors had expected to see. In addition, magicJack announced a buyback of shares from founder and former CEO Daniel Borislow, boosting earnings per share and encouraging investors that magicJack is taking steps forward to tackle new challenges and boost growth.

But the biggest boost for magicJack came last month, when well-known institutional investor Whitney Tilson compared magicJack's business to the early stages of Netflix. Tilson has a history of taking positions on Netflix, initially having sold the stock short but having made a bold bullish call after shares of streaming-video company plunged in 2012. Investors took the vote of confidence as a positive sign that magicJack's success could last a lot longer than they initially believed.

Still, magicJack faces plenty of competition. Vonage has managed to reverse past subscriber losses with gains in its most recent quarter, as its BasicTalk product aims at the same customers that magicJack appeals to. At the same time, though, Vonage is looking to expand in emerging markets, with a launch in Brazil potentially boosting the company's prospects greatly. Meanwhile, 8x8 has gone aggressively after the business market by offering higher-margin voice-over-Internet services to small and intermediate-sized businesses. That strategy has led to strong revenue growth and profitability for 8x8.

In the magicJack earnings report, watch to see how the company's initiatives are faring. As long as the company can keep boosting its subscriber counts, then magicJack shares will have room to run given their still-low multiple to current earnings.

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