2023-06-28 12:36:44 ET
Summary
- 8x8's integrated cloud communications platform provides voice, video meetings, chat, contact center, and API solutions, facilitating efficient collaboration for remote workforces.
- The growing interest in AI is expected to further drive the migration of contact centers to the cloud, presenting a significant opportunity for CCaaS providers like 8x8.
- My end-of-fiscal-year price target of $5 is based on a 1.5x forward EV/Sales multiple.
Investment Thesis
I see the extensibility of the 8x8, Inc. ( EGHT ) platform as a competitive advantage, particularly as enterprises focus on integrating disparate data through digital transformation. What sets 8x8 apart is that it owns the technology platform for each of these solutions. The majority of 8x8's products cater to the SMB market, serving companies with employee sizes ranging from 20 to 1,000. 8x8 offers its contact center solution as a standalone product and as part of its X Series, which combines the contact center solution with its UCaaS offering. I remain positive on the company's prospects within the industry and assign a buy rating to the stock with an end-of-fiscal-year price target of $5 on the stock.
Strong Results & Increased AI Conviction
8x8 recently released its fourth-quarter results, reporting a slight revenue shortfall but exceeding expectations in terms of adjusted operating margins. Additionally, the company provided guidance indicating better-operating margins for FY24, albeit with softer-than-expected revenues. The improved profitability focus, along with anticipated revenue growth in the second half of FY24, is encouraging.
In line with their commitment to investing 15% of revenue in research and development (R&D), 8x8's management is dedicated to enhancing the company's contact center capabilities, including artificial intelligence and machine learning (AI/ML). The company has already initiated partnerships for generative AI in its contact center through application programming interfaces (APIs). Management believes that their unique position in the industry, enabling the consolidation of voice transcripts for AI training across both unified communications as a service (UCaaS) and contact center as a service (CCaaS), could differentiate their offerings.
Core Products & Target Markets
8x8 is a SaaS company serving the Unified Communications as a Service and Contact Center as a Service market with a single, global cloud communications platform delivering voice, video meetings, chat, contact center and API solutions, enabling remote and distributed workforces to connect and collaborate more efficiently. As the only Gartner UCaaS Magic Quadrant Leader in the CCaaS Magic Quadrant, EGHT differentiates itself through its ability to provide customers with a tightly integrated UCaaS and CCaaS solution from one vendor. Also, EGHT offers a Communications Platform as a Service, with APIs enabling developers to embed SMS, Chat Apps, Video, Voice and performance monitoring into their own applications and customize workflows. I believe that EGHT is differentiated in that it is one of the first UCaaS providers to leverage 100% of its own technology stack, spanning UCaaS, CCaaS, and video collaboration.
Contact Center Drives Improved Customer Experience
The customer experience is a term used to describe how companies engage with their customers throughout all stages of the buying process (from before the purchase to post-purchase customer support). When well executed, a strong customer experience can build brand loyalty, increase the lifetime value of a customer and drive customer retention and in turn, increase in revenue.
While many companies have recognized the importance of investing in the early stages of the customer's journey (i.e. spending on sales & marketing to acquire customers), there has traditionally not been as much investment in the customer service aspect of the customer experience. Customer service, which is usually handled by an organization's contact center, is often viewed as a cost center. However, in recent years, there has been a shift in perception of the contact center. More often than not, the contact center is one of the key touch-points a customer has with a company post-sale, and improving the customer experience has become a crucial part of improving retention and driving revenue for a business. In a survey in 8x8's Customer Experience: 2030 Vision Report, 46% of the 500 CX and IT leaders that were polled indicated customer experience would be the key differentiator for brands.
Vast and Growing TAM and Generative AI's Impact
I view the large addressable market as a driver of revenue growth for participants in the UCaaS industry as these solutions continue to gain market share. The Cloud Communications total addressable market, spanning UCaaS, CCaaS and CPaaS, is estimated to be grow to $51 billion by 2030. The COVID-19 pandemic has fundamentally changed the future of work and pulled forward several years of UCaaS /CCaaS awareness, and executives increasingly view cloud communications as a critical component of business continuity and differentiation. With global UCaaS penetration still low, I believe work from anywhere and the need for communications flexibility are here to stay and likely to drive sustained global UCaaS market growth in the 15-20% growth rate.
As digital self-service gains prominence in the future of contact centers, generative AI is poised to revolutionize the customer experience. Organizations are increasingly realizing the significance of investing in CX, recognizing the contact center as a crucial touchpoint for customers after a sale. While the COVID pandemic served as a turning point for the migration of contact centers to the cloud in 2020, I anticipate that the growing interest in AI will further drive this trend in the coming years. AI-based solutions have the potential to deliver substantial cost savings, primarily by reducing the need for live agents and seats, resulting in an estimated 85% reduction in costs, predominantly associated with labor. This presents a significant opportunity for CCaaS providers to not only gain market share from traditional contact center vendors but also capitalize on AI technology by introducing new modules and adopting volume-based pricing models, expanding their TAM.
Valuation
The shares currently trade at a multiple of approx. 1x EV/NTM revenues at a discount to peers. My end-of-fiscal-year price target of $5 is based on a 1.5x forward EV/Sales multiple, given the company's single-digit growth profile. While I like the progress the company has made over the last several years, including a revamped go-to-market effort and migration to its X Series platform, I believe a significant multiple re-rating is not probable in the near term until more progress is made on the company's newly described initiatives and due to its elevated exposure to small businesses versus its peers.
Risks to Target
The cloud communications industry is highly competitive, and I expect the competition to become even more intense in the future. Additionally, 8x8 has been operating at a loss on a GAAP basis, partly because it has made substantial investments, particularly in its sales and go-to-market strategies, over the past 18 months. Like other companies dealing with the transmission of large amounts of data, there is a risk of potential system breaches or infiltration. Additionally, the integration of Fuze has not been successful in migrating customers to EGHT XCaaS, leading to high churn and increased support costs.
Conclusion
8x8's integrated cloud communications platform provides voice, video meetings, chat, contact center, and API solutions, facilitating efficient collaboration for remote workforces. With their tightly integrated UCaaS and CCaaS offerings, 8x8 stands out as a Gartner Magic Quadrant Leader. The ability of the EGHT platform to be easily extended and integrated is a key advantage, especially as enterprises strive to unify their data through digital transformation. I remain positive on the company's prospects within the industry and assign a buy rating to the stock with an end-of-fiscal-year price target of $5 on the stock.
For further details see:
8x8: Strong Positioning In The Industry In Digital Transformation Era