Churn, Baby, Churn!


8x8 (NAS: EGHT) is on a roll. Shares jumped 8% overnight thanks to another estimate-crushing report. The maker of Internet-based telephony products has now gained 21% in the last three months and 60% year to date.

Since nearly 13% of the company's shares are sold short, it's fair to say that 8x8 has its critics. But even the most ardent skeptics must admit that the financial performance fits the stock chart.

In the first quarter, sales jumped 36% year over year to $25.3 million, led by 46% higher orders from business-class customers. Not only is 8x8's subscriber base growing, but the average customer buys more lines and services these days. New customers these days like to order some 40% more services than the existing early adopters, which gives 8x8 plenty of incentive to go looking for more fresh blood.

Those new customers tend to stay around. Churn, which is a measure of cancellations during the quarter, continued its long, slow dive toward the ideal of zero dropped lines. Of existing subscribers, 1.7% signed off during each month of the quarter, down from 2% six months ago and mostly due to macroeconomic pressures or the customer closing up shop entirely.

Some of the lower churn comes from a revamped customer service department. Happy customers tend to stick around, you know. But there's still plenty of room for improvement. For example, 8x8 could chase higher-quality customers in order to keep those unfortunate going-out-of-business cancellations on the low side. And nobody said that the new help desk is perfect. Expect the churn improvement to continue.

To get a sense for how much happier 8x8's subscribers could become, consider that Verizon (NYS: VZ) just posted total retail churn of just 1.1%. Closer to home, head-to-head rival Cbeyond (NAS: CBEY) sports churn rates of just 1.5%, though consumer-oriented competitor Vonage (NAS: VG) lags far behind with monthly cancellations of 2.7%.

Keep a close eye on that important metric. Our Foolish watchlist feature can help with that -- just click here to add 8x8 to your personal stock concierge right now.

I believe in Internet-based communications, and I've got a bullish CAPScall on 8x8 to prove it. The massive dividends of traditional telecoms may be perfect for safety-seeking income investors, but 8x8 and friends are bringing a truckload of disruption into this industry right now.

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