This Digital Phone Service Disrupts the Disruptors

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Internet-based calling specialist magicJack VocalTec (NAS: CALL) rang up overnight gains as high as 9.3% on Monday. The catalyst? A second-quarter report strong enough to drag along sector rivals Vonage (NYS: VG) and 8x8 (NAS: EGHT) on 5% single-day joyrides. Vonage reports results later this week, so it's not surprising to see that stock moving on a competitor's market updates -- but 8x8 already put this quarter's numbers in the rearview mirror. Maybe investors are just waking up to the growth potential of this lean, mean industry.

Be that as it may, magicJack's quarter certainly deserved some applause. Total revenue jumped 34% year-over-year to $38.6 million, led by 68% higher sales of actual call-handling hardware. A tight lid on operating costs helped the company boost GAAP earnings from $0.08 to $0.51 per share.

The only analyst sending in magicJack estimates would have settled for earnings of $0.48 per share on $38 million in sales. Not sure if there is such a thing as a one-analyst consensus, but there you have it. I'd expect more firms to pick up coverage on this stock over the next few quarters.


magicJack president, Andrew McInnes, said that cost reductions remain a top priority for his company. He's looking for cost-effective advertising strategies such as ultra-short TV spots, which the networks sell cheaply and use for plugging minuscule gaps in their ad space schedules. These seem to work well for magicJack, judging by rising sales numbers amid the current short-form ad blitz.

Earnings were also helped by a very active share buyback program. The company has reduced its share count by 8.3% over the last six months and still plans to buy more. Shares may look expensive, trading at 110 times trailing earnings, but management sees value here anyhow. Buybacks are often a waste of capital, but buybacks of this magnitude might still tell you something about magicJack's prospects.

I'm sure that voice over IP is the future of telephony, which is why I have bullish CAPScalls running on all three of the providers we've discussed today. I'm particularly certain that magicJack should succeed in the long term thanks to the management team's strong fiscal discipline.

This type of low-cost voice calls isn't just a threat to landline phones, but is also making inroads on smartphones and tablets today. Disrupt the disruptors!

The article This Digital Phone Service Disrupts the Disruptors originally appeared on Fool.com.

Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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