Stock Pitch: 8x8, Inc. Finance & Investment ClubTelecommunications Sector

Kevin Ng – Investment AssociateArlind Hoxha – Investment Asscoiate

Fall 2012

 

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Company Overview

8x8, Inc. markets and provides telecommunications services for Internet Protocol telephones and video applications mainly for business customers. The company is also expanding its line of services to include – contact center services– web-based conferencing– unified communications services– cloud based computing services

The company uses Voice over Internet Protocol technology which allows customers to place calls through the internet rather than through traditional switching methods that are more costly and harder to implement

8x8(NASDAQ: EGHT)

 

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Focusing on Services Has Fueled Revenue Growth

Company is focused on increasing its number of services and retaining customers– The number of services subscribed to per business customer grew to 10.1 in the first quarter of

FY13 in comparison to 8.4 in the same period last year– The churn rate fell to a record low of 1.7% in 1Q13, down from 2% at the end of FY12

More services and greater retention have fueled revenue growth– Average revenue per business user grew to a record high of $250 in 1Q13, up from $200 a

year earlier

2010 2011 2012 2013e $-

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000

$100,000

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Revenue (Thousands) Business Customers

3 year Revenue CAGR = 16.34%

 

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VoIP Market Growth in the U.S.

Small & Medium Businesses (SMB)

Large Enterprises Government Sector

SMBs allocated 10% of spending to cloud bundles in 2011, expected to increase to 15% by 2015

• Expected to grow from 12% market share of sector in 2010, to 32% by 2015• VoIP subscribers are expected to grow from 21 million in 2010 to almost 70 million by

2015 (CAGR of 27%)• By 2013, an estimated 79% of U.S. businesses will be using VoIP technologies

Strongest penetration rate with over 48% having VoIP in at least one location

40% of surveyed organizations use videoconferencing services or applications

Saves money by reducing operating costs over time while boosting the customer experience

Simplifies infrastructure and management complexity while being easy to use

41% of SMBs have already switched to VoIP with an additional 20% switching next year

 

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8x8: Positioned for Market Penetration

Small & Medium Businesses (SMB)

Large Enterprises

8x8

• Dominates the SMB market by providing comprehensive VoIP services • Larger competitors cannot focus on

advertising VoIP without drawing business away from other segments

• Offers a full-fledged contact center typically unaffordable for SMBs

• Cloud communication services can be installed without an IT person and potentially save hundreds of thousands

• Partnered with Level3 (LVLT) for Networx and WITS 3 Contracts

With more than 80 competitors, top market share of Hosted IP lines installed in 2011 (7.9%)

Government Sector

• Competitive advantage in pricing• Acquisition of Contactual in 2012 brought in

dozens of large enterprises for potential cross-selling services

 

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Patents and Patent Value

Current owns 79 patents valued up to $50 million with more pending

Most valuable patents were issued recently can be licensed to companies

abroadIf liquidated, patents could add $15 to $50 million as a hard asset on balance

sheet (12% to 39% increase)

Makes it an appealing potential takeover target

 

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Risks

High Probability

• Litigation (medium severity)• Competition (low severity)• Decreasing telecommunication rates (low severity)

Medium

Probability

• Emergency calls may be delayed or disrupted (medium severity)• Regulation changes by the FCC (medium severity)

Low Probability

• Another economic downturn (high severity)

 

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Conclusion8x8 could potentially be a good investment because of1)Revenue growth created by its focus on customers and services2) The company’s position to take advantage of a growing market3) Strong patent portfolio which makes the company a takeover target

However, the company could be overvalued at a price of 6.36 (as of 10/16) EV/EBITDA of 41.26x is above the comparable mean and median of

7.85 and 3.76, respectively

Company reports earnings on 10/24- do we get in before or after?

 

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Back Up Slides

 

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Industry Breakdown and Summary

Industry Breakdown by Market Cap ($BN) Market Share by TTM Revenue

Technology

$ 119,763.3 (100%)

Telecommunications*

$ 42057.2 (35%)

Communication Services and Equipment

$ 3931.8 (3.3%)

Business VoIP

$1.9(1.6%)

*Domestic and Foreign Telecom($908.1 BN), Diversified Communication Services($102.7 BN), Communication Equipment($3931.8 BN), Wireless Communications ($37114.6 BN)

5%

47%

7%

14%

27% 8x8VonageMagicjackShoretelCbeyond

 

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Comparable Company Analysis

Company % 52 week high

LTM EV ($MM) Debt/Equity

LTM EBITDA Margin

ROA ROE EV / EBITDA

Churn Rate

EGHT 90.60% $413.87 - 10.16% 89.35% 103.76% 41.26x 1.70%

VG 62.50% $499.47 23.20 15.45% 98.97% 312.48% 3.76x 2.50%

CALL 72.04% $355.38 N/A 7.90% 0.65% N/A 33.87x N/A

SHOR 70.05% $266.21 13.24 -2.51% -3.94% -14.22% -42.96x 3.10%

CBEY 90.58% $271.89 2.00 16.58% -1.92% -2.74% 3.32x 1.50%

                 

                 

High 90.60% $ 499.47 23.20 16.58% 98.97% 312.48% 41.26x 3.10%

Median 72.04% $ 355.38 7.62 10.16% 0.65% 50.51% 3.76x 2.10%

Mean 77.15% $ 361.36 9.61 9.51% 36.62% 99.82% 7.85x 2.20%

Low 62.50% $ 266.21 - -2.51% -3.94% -14.22% -42.96x 1.50%