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Undervalued 8x8: The Time to Rediscover It Is Now

|Includes: 8X8 Inc (EGHT)
I posted this on my mjmaherGroup website June 22nd. I have decided to start posting to seeking alpha, so here goes. The stock has since risen 23.7% since my post but I think there is still upside, as you will read. 

8×8 (NASDAQ:EGHT) provides communication, hosting, and cloud-based services to businesses. Founded under the name Integrated Information Technology in 1987, it  developed multimedia semiconductors and software. In 1996 the company changed its name to 8×8 and in 1997 it went public. It wasn’t until 2002 that 8×8 began offering its voice-over IP (VoIP) phone service direct to customers. 8×8 has since expanded its products and services to include VoIP, mobile VoIP, internet faxing, video conferencing, virtual meetings, hosting, and other cloud related services.

8×8 has 25,000 business customers and the number is growing at a rate of 20% per year. The average number of services each customer is using is 8, which is a 7% increase from last year.  Twelve-month trailing revenue is $70.1 million up 10.6% from last year and now accelerating.

I believe that 8×8 is undervalued even at today’s 52 week high of $3.95. Due to it price and scalability, VoIP is becoming attractive to businesses, especially small to medium-sized businesses. According to FCC data, currently only 6% of businesses are utilizing VoIP. 8×8′s addressable market is expanding rapidly.

8×8 faces competition from startups as well as industry leaders. To compete, the company looks to grow organically and inorganically. With the acquisitions of Central Host, Inc in May 2010 and Zerigo,Inc just last week, 8×8 is broadening its offerings to businesses by including hosting as well as a wide range of cloud computing capabilities.  The demand for VoIP is outpacing supply, and with its ability to provide businesses a low cost IT infrastructure, 8×8 is well positioned to close this gap .

8×8′s fourth quarter revenue growth increased 14.6% to $18.1 mil and GAAP diluted EPS were $.03 vs. $.02, in the same period last year. Looking ahead to the next twelve months, strong revenue growth should yield $.07 in EPS.

Net cash provided by operations was $1.6 mil compared to $1 mil last Q4. 8×8 continues to increase the extent to which its net income generates cash. The cash flow from operations to net income ratio is 1.32 compared to .64 the same period last year. The company plans on reinvesting some of this cash flow over the next year. 8×8 will add to its 254 employees to both assist in revenue growth and staff the new channel sales organization.

Current net tangible assets are $9.1 million. Revenues are slated to come in at $77M for FY2012. Given the recurring nature of its business, a 3x multiple would be justified. This would peg enterprise value at $231 million giving it a market cap of $240 million or $3.90 per share.

So why am I recommending a buy at $3.95? That can be answered with its new growth potentials. Last quarter 8×8 brought in two new seasoned executives. Don Trimble a former Cisco exec and Kim Niederman also a former Cisco exec but more recently Mr. Niederman was Senior Vice President of NComputing, Inc. Together they were brought in to spearhead a new range of cloud-based services. With the acquisition of Central Host and Zerigo 8×8 introduced Cloud-based VoIP, Cloud Contact Centers, Virtual Managed Hosting, Cloud Server, and Cloud Video Conferencing Virtual Room. The additions will all be delivered as a SAAS model. This will allow the company to leverage its existing customers and infrastructure to sell a lot more services.

Currently the average monthly subscription paid is $209. By offering customers scalable cloud-based office solutions to replace their existing more expensive solutions, 8×8 will likely drive that average $209 subscription to over $300. This would peg enterprise value at $335.6 million giving it a market cap of $344 million or $5.50 per share.