8x8 thrives in SMB space despite economy

Though the economy is dealing a blow to small and medium-sized businesses (SMBs), 8x8, which sells IP telecom services to businesses and consumers alike, saw its SMB business rise to new heights last quarter.

In the company’s fiscal third quarter, which ended in December, revenue from business customers was up 41% from a year earlier, exceeding $10 million for the first time in 8x8’s history and contributing two thirds of its total quarterly revenue. Business customer churn dropped below 3% for the first time in at least a year. And while average service revenue per business user dropped from $220 to $208 in the quarter and average number of services per business user dipped slightly to 6.6, 8x8’s average customer acquisition cost dropped below $1000 after hovering between $1100 and $1200 for the previous year.

“We had a phenomenal December in terms of sales and cost of acquisition,” said Bryan Martin, 8x8’s chief executive officer. “We had a lot of leads -- more leads than we had sales people.”

Thus, the company is working hard to grow its sales staff to keep up with customer demand. Though 8x8 added 32 salespeople in the back half of last year, ending December with 56 quota-bearing sales people (plus another 19 without quotas), the company is building a staff of 85 to 100 quota-bearers. And it reiterated that it is benefitting from a favorable hiring market in Silicon Valley.

8x8 attributes part of its success to ongoing reviews of its sales and lead-generation channels to evaluate which ones offer the greatest returns. The company recently terminated one sales relationship as a result of those reviews and redistributed its activities to a more successful channel. It also reduced spending on advertising connected with Google and Yahoo keyword searches in the last quarter but began spending more again there in January. “There’s kind of a limit on what you can spend on keyword searching because there’s only so many people bidding on words,” Martin said.

The economic crisis is taking its toll, however. The fraction of 8x8’s business-customer cancellations due to financial hardship rose to 40% in the quarter from 34% and 33% in the previous two quarters. And January’s cancellation levels are similar to December’s, Martin said. “It didn’t correct itself.”

Meanwhile, the company’s residential business is getting hit harder. Revenue from residential and video services dropped 32% from a year earlier and 12% sequentially.

Overall, 8x8’s revenue was up 2.5% in the fiscal third quarter, and its net income dropped from $1.4 million a year earlier to $180,000.

8x8’s results came the same day that Juniper Networks reported strong results from its more high-end enterprise business, which saw an 11% sequential increase in sales in what was for many firms a turbulent fourth quarter.