Voice Over Internet ProtocolFinance & Investment ClubTelecommunications Sector

Arlind Hoxha

Summer 2012

 

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Industry Definition

Companies in this industry provide Voice over Internet Protocol (VoIP) services and equipment to residential customers, enterprises of various sizes, and government organizations both domestically and abroad.

Voice over Internet Protocol is a form of technology that converts voice signals into data packets which are transferred using the internet.

8x8(NASDAQ: EGHT)

Vonage(NYSE: VG)

MagicJack(NASDAQ: CALL)

Shoretel(NASDAQ: SHOR)

Consolidated Communications

(NASDAQGS: CNSL)

Cincinnati Bell(NYSE: CBB)

 

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Industry Breakdown and Summary

Industry Breakdown by Market Cap ($BN) Market Share by FY2011 Revenue (%)

Technology

$ 126,392.1 (100%)

Telecommunications*

$ 7,530.7 (5.96%)

Communication Services and Equipment

$ 3709.9 (2.90%)

VoIP

$3.3 (.003%)

*Domestic and Foreign Telecom($907.2 BN), Diversified Communication Services($103.9 BN), Communication Equipment($3606 BN), Networking Devices($126.7 BN), Bus Software/Services($2786 BN)

3%

28%

4%

6%

12%

47%

EGHT VG CALL SHOR CNSL CBB

 

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FY2011 Revenue Segments

91%

9%

Telecom ServicesTelecom Equipment

Other

98%

2%

47%46%

7%

20%

80% 83%

8%9%

82%

14%

3%

 

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Revenue Generation

Sell PBX hardware so customers can

connect to public network

Sell access to wired infrastructure

Provide VoIP services and equipment to its

customers

Residential Customers

Sell licenses to use encoders and

decoders which compress data

Business Customers

Telecom Equipment Manufacturing

Software Publishers

Wired Telecom Carriers*

Voice over IP Providers

Government Organizations

Main Sellers Main Buyers

*Some companies in this industry are also wireline telecom providers ( CBB, CNSL)

 

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Historical Revenue Time Series Analysis

2005 2006 2007 2008 2009 2010 2011 20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

0%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

VoIP RevenuesChange in Business CustomersChange in Mobile Internet Connections

Rev

enue

($M

)

Perc

enta

ge C

hang

e Si

nce

2005

Strong correlation between industry revenues and business customers/mobile internet connections Revenues-business customers correlation: . 918 Revenues-mobile internet connections correlation: .84

Based on the increase in business customers and mobile internet connections, we can infer: Estimated Revenues ($M) = 2372.48 +6.38Business Customers -95.06Internet Connections 86% of the variation in revenues can be determined by the variation in business customers

and internet connections 68% confident that industry revenue estimates from the above equation are within +/- 1886M

 

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Trends Overview

Increasing adoption by

business customers

Expansion of 4G and mobile

internet

Growth in international

calling demand

 

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Increasing Adoption of VoIP by Business Customers There has been an increasing use of

VoIP over the past 8 years– Customers are less hesitant to use VoIP

due to better quality, fewer issues, and faster internet speeds

– CAGR of overall VoIP revenues from 2005 to 2012 is 40.6%

Most of the growth has been driven by demand from business customers– Business users now comprise of 33% of

industry revenue, up from 10% in 2010– Number of business seats in service

grew at a CAGR of 60% since 2005*– Most of this growth is due to the

adoption of VoIP by small and medium sized businesses

2005

2006

2007

2008

2009

2010

2011

2012

2013e

2014e

2015e

01000020000300004000050000

Total VoIP Revenue ($M)

*Business seats in service chart uses 90% of CAGR to yield expected amounts from 2013-2015

2005

2006

2007

2008

2009

2010

2011

2012

2013

e20

14e20

15e

0

4000

8000

12000

16000

Business Seats in Service (Thousands)

LargeMediumSmall

 

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Increasing Adoption of VoIP by Business Customers Business demand for VoIP has not been

slowed by decreased private investment spending– Investment spending has fallen 19%

since 2007– At the same time, the number of

business seats in service for VoIP has grown over 400%

Why do businesses spend on VoIP even during economic slowdowns?– Businesses save avg. of 4.5M annually

after 7 years of implementing VoIP

Benefits to VoIP companies– Avg. 5-6% higher margins for sub-sector – Business customers need more services

at little to no additional expenses for the sub-sector

2007 2008 2009 2010 2011-100%0%

100%200%300%400%500%

Cumulative Change Since 2007

Private Domestic Investment Business Seats in Service

Mid-size company

Large Company

Very Large Company

$- $5,000,000 $10,000,000 $15,000,000

Annual Cost Savings After 7 Years

 

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Trends Overview

Increasing adoption by

business customers

Expansion of 4G and mobile

internet

Growth in international

calling demand

 

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Mobile Internet Subscribers and Expansion of 4G Despite saturation in wireline services,

mobile internet users have grown– Mobile cell phone subscriptions grew by

CAGR of 15.4% since 2007– Subscriptions to mobile broadband grew

at a CAGR of 45% since 2007 due to the growth in smartphone sales

VoIP companies take advantage of the growth in mobile through applications– Number of mobile VoIP users in 2011

grew to 29M, increasing industry revenue by $377M

Expansion of 4G will continue to drive growth in mobile VoIP users– Although slow adoption at first,

subscribers to 4G networks grew at CAGR of 47% since 2008

2007 2008 2009 2010 2011 2012e 2013e0

2000400060008000

10000

Mobile Subscriptions (Millions)

Mobile cellular subscriptions Mobile Broadband subscriptions

2008

2009

2010

2011

2012e

2013e

05

10152025

4G Subscriptions (Millions)

47% CAGR

*Average revenue per mobile user is approximately $13

 

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Trends Overview

Increasing adoption by

business customers

Expansion of 4G and mobile

internet

Growth in international

calling demand

 

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Demand for Cheap International Calling Over the last 5 years, there has been

strong growth in international calling traffic using VoIP– Driven by cost savings between 30-

40% for businesses and households– International VoIP call volumes grew

at a CAGR of 12.2% since 2007

At the same time, traditional wire line international calling has slowed– Since 2007, TDM international call

volumes grew by a CAGR of 3.7%

Where is the demand coming from? – Calls from US to Mexico, China, and

India comprise more than 80% of the VoIP international call volume

– This trend will continue as the number of immigrants obtaining residency status in the US grows 3.5% a year

2007

2008

2009

2010

2011

2012e

2013e

0100200300400500600

International Call Volumes (Bln of minutes)

VoIPTraditional

2000 2001 2002 2003 2004 2005 2006 2007 2008 -

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Number of People Obtaining Residency Status in US

 

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Risks

Some of the potential risks which the industry faces are:

Risk of Wireless Substitution If more residential customers forego landlines and use only wireless phones, there could

be significant downward pressure on total subscribers to VoIP services

Risk of Competition from the Mobile Phone Industry If wireless providers succeed in attempting to block the use of mobile VoIP on their

services, the sub-sector will lose a large part of its current and future revenue growth

Risk of Future Regulation If the FCC increases the intercarrier compensation amounts or imposes a tax on VoIP

services, VoIP companies will not be able to penetrate the market with lower prices

Risk of Increased Cost of Licenses Software publishers or wire-line equipment providers could increase the prices of their

licenses in the future and decrease margins in the VoIP industry

 

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Comparable Company Analysis

Company % 52 week high

Enterprise Value ($MM)

Net Debt / EBITDA

LTM EBITDA Margin ROA ROE 5 YR Revenue

CAGR EV / EBITDA Churn Rate

EGHT 95.3% $ 376.00 -2.79x 10.8% 53.0% 58.4% 8.6% 37.57x 2.0%

VG 57.2% $ 479.07 0.25x 17.6% 72.2% 136.5% 1.2% 3.61x 2.6%

CALL 85.9% $ 431.13 NA 3.1% -1.6% NA 109.3% 42.74x NA

SHOR 54.7% $ 194.26 NA -3.8% -7.0% -12.2% 17.6% NA 3.1%

CNSL 81.7% $ 1,748.48 5.15x 29.6% 1.5% 36.4% 3.3% 11.65x 1.8%

CBB 98.0% $ 3,565.75 4.71x 20.2% 0.3% -1.1% 2.0% 6.87x 2.2%

High 98.0% $ 3,565.75 5.15x 29.6% 72.2% 136.5% 109.3% 42.74x 3.1%

Median 83.8% $ 455.10 2.48x 14.2% 0.9% 36.4% 5.9% 11.65x 2.2%

Mean 78.8% $ 1,132.45 1.83x 12.9% 19.7% 43.6% 23.7% 20.49x 2.3%

Low 54.7% $ 194.26 -2.79x -3.8% -7.0% -12.2% 1.2% 3.61x 1.8%

 

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VoIP Industry Recommendation: Overweight Sub-sector is overweight due to the following trends:1) Increases in gross margins due to the growing number of business subscribers2) Strong revenue growth driven by increasing international calling traffic and mobile applications

8x8 Inc is set to outperform the sub-sector and will be further researched because of the following reasons:1) No debt and strong financials compared to the sub-sector

- Net Debt/EBITDA= -2.79x (Median/Mean =2.48x / 1.83x)-ROA= 53% (Median/Mean= .9% / 20%) and ROE= 58% (Median/Mean= 36% / 44%)-Churn rate= 2% (Median/Mean= 2.2% / 2.3%)

2) Company is aggressively trying to attract more business customers and therefore pursue a higher margin customer base3)Company is expanding its use of mobile applications for enterprise which will further grow revenues

8x8(NASDAQ: EGHT)