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September 28, 2010

VoIP is Just Getting Started This Decade!

By Doug Mohney, Contributing Editor

Voice over IP's best days are ahead of it, should you look at the results and plans 8x8 and Metaswitch Networks have in store over the next 12 months. I recently talked with both companies and I can't help but think Wall Street and the business media are asleep at the wheel in focusing on flashy-but-chronically nonprofitable companies.

A presentation given at 8x8's (News - Alert) annual shareholder's meeting on Aug. 31, outlined both the company's growth and the potential for growth of the industry, with one slide in particular sticking in my head. It was a pie chart for US business voice services, with business VoIP holding a little blue sliver of $1.6 billion of the market, with circuit-switched business voice taking up the rest of the pie at $40 billion.

Do you think US businesses will be spending anywhere close to $40 billion on circuit-switched voice even five years from now?

No, me either. Despite all the type and declarations that "VoIP is dead," it's circuit-switched business voice that is doomed to extinction over the next decade as people roll forward to IP communication for lower-cost voice, better quality voice through wideband (i.e. HD) voice, and slowly but surely, to embrace UC.

Part of the proof is in 8x8's performance numbers over the past two years. In June 2008 -- as the recession was putting the bite on businesses around the globe -- 8x8 reported nearly 12,000 net business customers. At the end of June 2010, the company was in the ballpark of nearly doubling that number with more than 21,000 customers. Quarterly revenue ending June 30, 2010 was $16.8 million, the highest quarterly revenue figure in the company's history, and the company had generated net income in 10 of the last 11 quarters. The company is increasing its share repurchase plan from $2 million to $3 million, and company insiders are buying more stock -- both signs that 8x8 management believes in the company's future and intends to make some money in the process.

Similarly, Metaswitch believes in the future of VoIP and IP communications -- and has solid financials to back its beliefs. The company's expansion model for the next 24 months is quite concise: "Going global, going mobile," said Metaswitch CEO Kevin DeNuicco.

The majority of carriers around the world have tons of legacy TDM-based infrastructure that needs to be replaced as they continue to migrate to an all-IP world. At the same time, mobile carriers deploying 4G services are building them on an all-IP infrastructure -- "a true game changer," stated DeNuccio.  

Metaswitch plans to carefully build out its Class 5 softswitch to encompass the myriad of legacy TDM standards around the globe on a country-by-country basis and continue its moves into mobile services.  In addition to the MetaSphere application server and the AppTrigger service broker, the company has two more "big" software-based products in the pipeline.

Announced last week, Metaswitch's financials are equally impressive (yes, some would argue more). Over its last fiscal (2009/2010, closed Aug. 31), overall revenues grew 18 percent in US dollars from $113.7 million last year to $134.5 million this year with pro-forma EBITDA margins "sustained" at 20 percent. Key customers added include RCN, Knology (News - Alert) -- both large cable MSOs -- TDS Telecom, SureWest Communications, Cincinnati Bell in the US, and Telecom Argentina and Cooperativa Mariano Moreno in Latin America.

It's one thing to hear a lot of rah-rah about the future of VoIP from companies bleeding cash. It's another to hear it from companies making good profits and maintaining steady growth quarter after quarter and year after year. Who would you believe?

Edited by Tammy Wolf

Technology Marketing Corporation

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