8X8: Midmarket Firing on All Cylinders

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Revenue came in slightly above consensus and our estimate (by $400,000). On an organic basis (excluding Voicenet, which we estimate at $2.2 million-$2.3 million), the company grew the top line by 22% year-overyear, up from the prior 21%—excluded from this number is accrued backlog, which grew 20% sequentially, to $3.6 million, and has time to revenue of two to six months on average. Overall revenue accelerated to 30% year-over-year from 29% last quarter. Adjusted EPS of $0.03 were in line with consensus and our expectations, as better-than-expected margins (190 basis points of upside) offset higher operating expenses (driven by a surge in sales and marketing).

Midmarket and channel sales grew 94% year-over-year, accounting for 41% of service revenue and 44% of new MRR, which increased from 39% last quarter and 30% a year ago. ARPU grew by $6 from last quarter, which management says is a sustainable trend, while revenue churn posted a record 0.4% (down from 1.2% last quarter). Management slightly raised the outlook for growth to at least 25% (from about 25%), which, while trivial given the run-rate of business, signals continued confidence in the business. In our view, 8×8 is well-armed for the battle in midmarket, charging head-on against onpremise PBX vendors.

Its early success is visible in a 1,200-seat Virtual Office deal with a healthcare provider that 8×8 seized from the on-premise competitor, saving the customer in excess of 70%, or $5 million, over five years. A blended contact center/UC suite, global reach with failover data center capability, security compliance (HIPAA and FISMA), and integration with back-office systems such as salesforce (CRM $53.60; Outperform), NetSuite (N $82.50; Outperform), and Zendesk (ZEN $17.40), are part of 8×8’s arsenal, widening the gap between it and other cloud PBX vendors.

This strategy, as evidenced this quarter, is already paying dividends through the increased midmarket sales and customer lead flow. Furthermore, international traction (largely Voicenet) is exceeding management expectations—2 of the top 10 deals involving multinational enterprises chose 8×8 because of its U.K. data center presence. The company remains highly profitable (reporting $5 million from operations this quarter) and has a $182 million war chest for strategic acquisitions or buybacks. Given positive revenue revisions, increased management confidence in the business—underpinned by the full-year growth outlook of at least 25%—and notable traction in the midmarket segment, and highly vibrant and largely underpenetrated cloud PBX market opportunity, we reiterate our Outperform rating and believe that 8×8’s business should continue to warrant a premium multiple.

The stock trades at an enterprise value of 2.8 times our calendar 2015 revenue estimate, below its recent peak multiple of 5.0 times and below its peer, RingCentral (RNG $13.94; Outperform), which is trading at an enterprise value of 4.5 times projected 2015 RC Office sales (3.2 times on a straight EV/sales basis) and remains starkly unprofitable.

Jarrod Wesson covers media, telecom and momentum stocks for StreetWise. Prior to joining the company, Jarrod was a financial analyst for Pacific Crest.