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8×8, Inc. (EGHT): The Last Three Months Never Happened

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Three months ago, 8×8, Inc. (NASDAQ:EGHT) was on a roll. Share prices had doubled in just nine months as the company geared up for another earnings report … which sent shares down by 19% in a couple of days, as investors vented their disappointment with results that merely matched analyst targets.

Fast-forward to this Thursday, and it’s like the last three months never happened. The cloud computing and digital telephony expert reported another quarter roughly in line with Wall Street expectations, with earnings just below, and revenue just above, analyst targets. And the stock responded by rising 7.1% on Thursday, erasing the last bit of gap back to the previous pre-crash 52-week highs.

Mr. Market does know how to forgive and forget, after all.

But the story doesn’t seem to have changed much from the previous quarter’s bitter disappointment — at least not on the surface. So how did 8×8 earn the respect of investors this time?

For one, 8×8, Inc. (NASDAQ:EGHT)’s sales growth accelerated after a surprisingly slow third quarter. The company used to report year-over-year revenue growth north of 30% every quarter, but stayed at 17% in the previous period, and climbed back to 18% this time. It’s not a triumphant return to glory, but a step in the right direction.

More importantly, 8×8 also expanded gross margins from 68.3%, to 70.6% — a strong quarter-over-quarter increase that shows pricing power.

Now, 8×8, Inc. (NASDAQ:EGHT) is not the only digital voice service specialist to play in this rarefied gross margin air. Vonage Holdings Corp. (NYSE:VG) scores a generous 69% gross margin, Cbeyond, Inc. (NASDAQ:CBEY) lands at 68, and magicJack VocalTec Ltd (NASDAQ:CALL) comes in at a still-sizable 64%. There’s plenty of room for highly profitably providers in the digital voice space.

Even so,8×8, Inc. (NASDAQ:EGHT) is a leader. The company sports the widest gross margins in the industry, and beats fellow business-class specialist Cbeyond in bottom-line profitability. In fact, Cbeyond, Inc. (NASDAQ:CBEY) reported a small loss over the last four quarters. That’s despite Cbeyond holding the advantage in economies of scale — the company collects nearly five times 8×8’s annual revenues.

Things get more confusing in the consumer-oriented market. Vonage Holdings Corp. (NYSE:VG) sees twice Cbeyond’s sales dwindle to a barely profitable earnings line. magicJack VocalTec Ltd (NASDAQ:CALL) is barely larger than 8×8, Inc. (NASDAQ:EGHT), and has the thinnest gross margin to boot — but enjoys a fantastic 36.3% net income margin. So there’s room for lowballing the competition on price and still collecting an outsized net profit.

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