8×8 May See A Boost In The Stay-At-Home Economy

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Business communications player, 8×8 (EGHT) can emerge as a major beneficiary in the golden age of communication, thanks to the advent of the stay-at-home economy. In a matter of few months, 8×8 has managed to position itself as a prominent SaaS (Software-as-a-Service) provider of voice, video, chat, contact center, and enterprise-class API solutions based on a global cloud communications platform. The company‘s Jitsi and 8×8 video meetings are now seen as credible and secure alternatives to video-over-IP solutions of prominent player, Zoom (ZM).

8×8 was not spared in the overall market downturn of March 2020. While the stock has recovered some of its losses, it still remains down 17.32% on YTD (year-to-date) basis. However, I believe that there remains significant upside potential in this stock on a risk-adjusted basis.

UCaaS and CPaaS have emerged as huge opportunities in the stay-at-home economy.

According to MarketsandMarkets estimates, the global UCaaS (Unified Communications as a Service) market will grow from $15.8 billion in 2019 to $24.8 billion in 2024, a CAGR (compounded average growth rate) of 9.5%. According to industry analyst IDC, the worldwide CPaaS (communications platform-as-a-service) market is forecast to grow from $3.3 billion in 2018 to $17.2 billion in 2023. The UCaaS market has never been better positioned, considering that the pandemic has created a huge need for rapidly scaling remote contact centers and virtual offices. The workforce in this stay-at-home economy will increasingly depend on the ability to move seamlessly from chat to voice to video.

Customers are now increasingly opting for single-platform based communications solutions. 8×8 has been successfully leveraging this increased demand for single technology UCaaS and CCaaS solutions as a replacement for legacy on-premise systems and single-point solutions. In the fourth quarter, the company saw 71% of new bookings with ARR (annual recurring revenue) greater than 12k from customers for UCaaS and CPaaS solutions, up from 52% a year ago. I believe that this trend will continue in the next few quarters, with demand mainly coming from mid-market and enterprise customers.

The company is focused on expanding its customer base while reducing costs

8×8 saw explosive growth in monthly active users for open-source video meetings service Jitsi and 8×8 free video meeting solutions from a few hundred thousand customers to 20 million customers in just a few weeks. There has also been a steep rise in 8×8 X series platform scalability and usage, a number of app downloads, messages exchanged, bundled video conferencing usage, and a total number of app-based phone calls in this period. In the absence of the pandemic, the company expected a similar ramp-up in its active users to take place over a period of 18 months – 24 months.

8×8 plans to leverage this expanded customer base for cross-selling opportunities and for expanding its paid business customer base while controlling costs. The company aims to build on brand recognition for increased scale. The company expects this huge customer base to prove to be a marketing asset, and allow the company to add new customers at lower costs. This, in turn, is expected to improve CAC (customer acquisition cost) and LTV (Lifetime Value) metrics.

There are a few other strategies that are being used to control costs. 8×8 is actively migrating legacy customers to the X series platform. The company is targeting migration of 80% of the installed base by the end of the calendar year 2020, which can help reduce support costs, increase customer LTV, improve churn rate, and increase net dollar retention.

8×8 is also working to improve its customer mix from small businesses, traditionally known for high risk of churn as well as high CAC. To that extent, the company has made available attractive self-service support offerings for workgroup and micro businesses.

Although all these initiatives may take some time to reflect on the company’s bottomline, they are definitely a move in the right direction.

8×8 is working on increasing channel partners, product offerings, and targeted geographies

8×8 has joined the Oracle partner network and made its video meeting solutions available in the Oracle Cloud Marketplace. This can further help the company generate new customers from Oracle’s long list of existing customers. The company will also launch an 8×8 voice for Microsoft Team in June 2020, a cloud-based integration that provides enterprise-grade telephony and global PSTN (public switched telephone network) connectivity to customers that want to retain Microsoft teams as the collaboration interface.

8×8 is now exploring direct opportunities in the B2C market. In April 2020, the company launched 8×8 Video meetings Pro, first standalone paid meeting product at $9.99 per month. The product is now available through e-commerce.

8×8 has also been increasingly focusing on international markets such as Canada and the United Kingdom. The company has launched 8×8 X Series and 8×8 Contact Center in Canada and 8×8 Express in the United Kingdom. The company’s strategic partnership with Virgin Media Business is also aimed at increasing the adoption of its services in the United Kingdom.

8×8 will be launching its CpaaS offerings globally in the first quarter of fiscal 2021. The company has already closed initial deals in the United Kingdom and Europe and is exploring cross-selling opportunities within our UCaaS and CCaaS customer base in the U.S. and United Kingdom.

All these initiatives will increase the company’s customer base significantly in the coming quarters.

8×8’s end-to-end encryption is a major differentiator in the business communications space

8×8’s products involve three robust components. The first component is the infrastructure, which has to be scalable and secure. The company has selected Oracle Cloud as the core infrastructure for running Jitsi open source video conferencing technology and 8×8 Video Meetings. Oracle has been chosen for its security and price performance. The second component is the X Series platform. Finally, there are applications run on this secure platform.

Jitsi communication technology has been developed by 2,000 developer communities in a manner that ensures strong encryption, ease of use, and privacy. 8×8 expects to differentiate its video communication tools which are based on Jitsi on the merits of secure video meetings and strong encryption. These qualities are of exceeding importance in today’s environment when businesses are increasingly opting for work-from-home options.

The company managed to surpass the consensus revenue estimate in the fourth quarter

In the fourth quarter, 8×8 posted revenue and service revenue numbers that surpassed the company’s previous guidance. Revenues also surpassed the consensus by $2.15 million.

The company has been especially successful with mid-market and enterprise customers and channel partners. The company’s non-GAAP EPS of -$0.49 fell short of the consensus by $0.12.

8×8 also managed to surpass fiscal 2020 revenue and pre-tax loss guidance. Annual service revenue from mid-market and enterprise customers represented 43% of total annual service revenue and grew 51% over the prior year. The company saw solid contributions from both new and existing customers from UCaaS and CCaaS subscription models and from usage-based CPaaS offerings.

In the fourth quarter, 8×8 added 42 new enterprise clients with deal sizes above $100,000, which represented 34% of new bookings for the quarter. The company also added 5,500 new paying customers, almost 100% up YoY and 35% more sequentially. A notable point is that five of 8×8’s 10 largest wins were replacements of existing Avaya solutions with the X series platform. The company has also managed to increase penetration of the X series platform from 37% at the end of fiscal 2019 to 43% at the end of fiscal 2020.

Contact Center bookings rose YoY by 76% and accounted for 30% new bookings in the fourth quarter. Channel bookings rose 63% YoY and made up for 54% of new bookings. The company has prominent channel partners such as Virgin Media, ScanSource, and Comstar Technologies. The company has 1,035 active channel partners and 24 master agents. Channel partners accounted for eight of the ten largest deals in the fourth quarter.

The company’s cost structure and margins remained a challenge even in the fourth quarter. The company saw a huge jump in the free user base, which will also pose some challenges for its near-term margins.

The company has guided for fiscal 2021 service revenues to be up YoY by 17% to 18%. Despite the ongoing challenges, the company also expects to exit this fiscal year at breakeven non-GAAP profitability. This will be definitely an impressive feat for a cost-pressured company like 8×8, especially in today’s recessionary environment.

Investors should consider these risks

The impending global recession is a major risk for the company. The company’s customer churn in the small and medium business segment and especially in legacy small business VoIP customers is already high and can go even higher in the coming months. The company’s total net dollar retention, which compares monthly service revenue from the same set of clients across comparable periods, was just under 100% in the fourth quarter.

At the end of the fourth quarter, small business customers with revenues less than $50 million accounted for 54% of 8×8’s ARR. In the fourth quarter, good gains and expansion of mid-market and enterprise customers were offset by churn in small businesses. The company’s net dollar retention rate for mid-market and enterprise NDR was marginally higher at just under 110% in the fourth quarter. Although the company expects this problem to resolve as it expands its mid-market and enterprise base and migrates customers to the X series platform, this risk will definitely weigh down on the stock for the next few quarters.

8×8 is in a hypercompetitive space and faces pressures from other cloud communication providers of voice, chat, collaboration, contact center and communication APIs such as RingCentral (RNG), Vonage Holdings (VG), Zoom Video Communications, Fuze, Five9 (FIVN), NICE inContact, Slack (WORK), Twilio (TWLO)., and LogMeIn (LOGM). The company also competes with large communications and cloud vendors such as Cisco Systems (CSCO), Google (GOOGL), Amazon Web Services (AMZN), and Microsoft Corporation (MSFT). Finally, 8×8 is also in competition with wireline business voice service players such as AT&T (T), CenturyLink (CTL), Comcast Corporation (CMCSA), and Verizon Communications (VZ) who are now launching their own cloud communication services.

Then again, 8×8 has not been profitable since fiscal 2016. This reflects badly on 8×8’s management, especially when the company has been on public markets since 1997. The company’s higher operating expenses and debt-to-equity ratio as compared to peers in the technology sector also remain major risks for the company.

What price is right here?

According to finviz, the 12-month consensus target price of 8×8 is $22.60, implying an upside potential of 42.68% from its last close. The company is trading at PS (price-to-sales) multiple of 3.39x, which is definitely not cheap. However, considering the exploding demand for UCaaS services during these pandemic times, I believe that the consensus target price is a fair estimate of the growth potential of the stock in the next 12 months. Paul Singer’s Elliot Management has also added new positions in 8×8 in the first quarter.

As of March 31, 2020, 8×8 had $170.9 million of cash and cash equivalents and $291.5 million of long-term debt. While concerning, the debt does not seem to be so high as to impede the functioning of the company as a going concern atleast in the near or medium-term future. Further, explosive demand for its services will soon reflect in the company’s profits and cash flows, thereby improving its risk profile.

Analysts have mixed opinions about the stock. On May 13, Northland analyst Michael Latimore lowered the target price to $23 from $29 but kept an Outperform rating on the shares. On May 13, B. Riley FBR analyst Josh Nichols lowered the target price to $12 from $13 and reiterated a Sell rating. On May 13, Baird analyst Josh Nichols lowered the target price to $23 from $29 but reiterated Outperform rating. On May 13, BTIG analyst Matthew VanVliet raised target price to $23 from $20 and reiterated Buy rating.

Although near-term remains challenging, I believe that the company’s long-term prospects are pretty promising. In this backdrop, I believe that retail investors with above-average risk appetite and investment horizon of atleast one-two years should consider this investment in May 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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