8x8 Finds a Path to Profitability in VOIP Land

8x8 Inc. offers a variety of telecommunications services for IP, telephony and video applications. This includes web based conferencing, unified communications services and thanks to a recent acquisition, managed hosting and cloud based computing.

The company has been shifting to an enterprise focus from a residential one where it has found a more solid growth possibility. Recently, losses from the residential side have masked the very substantial gains on the business and enterprise side, now the residential earnings have bottomed, and overall growth is starting to become more apparent.

8x8 owns several patents, has original software and generates the majority of their revenue from subscription services, about $16 million last quarter. They as well sell IP telephones accounting for a small percentage of their total earnings, $1.3 million last quarter, taking a loss that helps them secure and facilitate their subscriptions.

The product

Since the product and service cannot exist without each other, it's probably a good idea to look at their operating margins in its entirety, since some of the service cost of revenue may be hiding in the product cost of revenue. The overall gross margin is 68% with the IP telephones dragging down the service margin by 10%. Overall gross margin has remained at 68% for the last four quarters, up from an average of 65% while the previous four quarters.

Vonage, though a much bigger company in the VoIP (Voice over Internet Protocol) space, currently has a 65% gross operating margin focusing on residential clients. It seems that the three percent margin improvement from business clients has brought 8x8 into profitability, something that Vonage has but to achieve.

The company currently gets a little over $200 per business subscriber per month, and it is costing them about $825 to acquire one subscriber. This is a four month payback as opposed to a ten month payback for residential acquisitions over at Vonage. 8X8 has a total of 22,167 business clients, up from 21,362 the previous quarter, and up from 18,199 the previous year.

Giant force to be reckoned with just

Although not a giant force to be reckoned with just but, 8x8 has found the path to profitability in VOIP that Vonage and others have not.