Multiproduct Adoption And Asia Expansion Will Shape Future Markets

Key Takeaways

• Cross-selling and product adoption strategies significantly boost recurring revenue and retention, driving future growth and improving net margins.
  
• Strategic international expansion and investment in AI-based innovations enhance revenue potential and profitability through higher-margin solutions and reduced financial risk.
  
• Economic trends, competition, and incomplete platform transition pose risks to revenue stability and margins, while foreign exchange fluctuations and strategic investments could limit growth and profitability.

Catalysts

Provides voice, video, chat, contact center, and enterprise-class application programmable interface (API) Software-as-a-Service solutions for small business, mid-market, enterprise customers, government agencies, and other organizations worldwide.

• 8x8 is focusing on cross-selling and multiproduct adoption, with customers using 3 or more products having much higher retention and contributing significantly more to monthly recurring revenue than those with fewer products, which could drive future revenue growth and improve net margins.
  
• The company is expanding its international presence, particularly in the Asia-Pacific region, and has already secured significant deals like with a major auto manufacturer, indicating potential for increased revenue from new markets.
  
• Investment in innovation, particularly in AI-based products, has shown strong growth, with new product monthly recurring revenue up by more than 60% year-over-year. This focus could lead to enhanced earnings and margins as higher-margin AI solutions become a larger part of the revenue mix.
  
• 8x8 continues to reduce its debt, using excess cash flow for debt repayment, which strengthens its balance sheet and reduces financial risk, potentially leading to more favorable net margins and earnings due to lower interest expenses.
  
• The CX transformation, including the integration of Fuze and enhancements to the platform, positions 8x8 well to offer differentiated, high-value solutions to customers, likely increasing customer satisfaction and retention, which can positively impact future revenue and overall profitability.

8x8 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming 8x8's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts are not forecasting that 8x8 will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate 8x8's profit margin will increase from -3.8% to the average US Software industry of 13.2% in 3 years.
• If 8x8's profit margin were to converge on the industry average, you could expect earnings to reach $97.4 million (and earnings per share of $0.63) by about July 2028, up from $-27.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, up from -10.1x today. This future PE is lower than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to grow by 4.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

8x8 Future Earnings Per Share Growth

Risks

• The transition from the Fuze platform to the 8x8 platform is not complete, with 5% of revenue still dependent on Fuze customers. The risk of these customers not migrating could impact future revenue stability.
  
• Economic headwinds, including record bankruptcies in the U.S., pose a risk to the financial health of customers, particularly larger ones. This could affect 8x8's future revenues if customers reduce spending or default.
  
• Competitive market dynamics, such as aggressive pricing in the UC space and the presence of startups post-COVID, could pressure 8x8 to lower prices, potentially impacting net margins.
  
• Foreign exchange rate fluctuations have already caused revenue headwinds of several million dollars, which could continue to limit growth in international markets and affect overall earnings.
  
• The ongoing need to invest in growth opportunities and strategic initiatives, including sales and marketing, may result in lower operating margins in the near term, impacting earnings and profitability.

Valuation

• The analysts have a consensus price target of $2.325 for 8x8 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $735.8 million, earnings will come to $97.4 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 11.6%.
• Given the current share price of $2.04, the analyst price target of $2.32 is 12.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.