Tuesday, August 12, 2014

magicJack's Bag of Tricks

magicJack is a business in decline; and it's priced like it too! The shares fell to an ex-cash price-to-free-cash-flow ratio in the mid-single digits after-hours yesterday, as the company released quarterly results showing continued declines in sales of the company's hardware devices. However, I believe there is a protected downside along with some upside possibilities that are very compelling at the current price.

First, while the decline of the company's hardware devices continues unabated, the service/usage fees associated with those devices continue to rise. The company has been trying new techniques to reduce attrition rates and it is working. This more steady/predictable source of revenue now represents more than half of magicJack's total revenue. Management also indicated on yesterday's conference call that this is only the beginning of its process to reduce its churn/attrition rates.

Second, the company hasn't given up on the device market yet, either. It launched a new product in July (the magicJack GO). I suspect it's not doing as well as expected, as management cut its full-year guidance for the company yesterday. But it's this pessimism and uncertainty that can lead to the kind of price that makes for asymmetric reward potential. If management can market the product well, it will lead to years of the highly profitable service revenue mentioned above.

Finally, the company has a few new revenue opportunities it appears on the verge of exploiting. For one thing, magicJack is ready to go beyond US/Canada. A pilot program in partnership with Telefonica in Latin America went well, and magicJack devices are now going to be shipped into stores in Mexico in the coming months. magicJack also has a free long-distance calling app that it is almost ready to start monetizing. The magicJack app has 3.4 million active users, but unlike a lot of app companies that are focused on downloads and total users, magicJack management appears more interested in getting paid from its users. This is an attitude I appreciate as a new shareholder!

magicJack is priced like a company in run-off. As such, I don't think investors can get hurt too badly even if device sales continue to decline and nothing else works. On the other hand, if one or some of the company's initiatives pay off, the company's multiple is likely to jump back into the double-digits.

Good luck!

Disclosure: Author has a long position in CALL


Anonymous said...

Thanks for a timely article.

Anonymous said...


Whitney Tilson is big on this name.

Anonymous said...

Tilson's idea that MagicJack provides a valuable service is not true in the world of shared data plans with unlimited talk and text. Which is basically 100% phone plans being sold right now in the US.

Even if I give them credit for having a flat H2, thats 29m of EBITDA on a $150m Enterprise Value?

Doesn't seem that impressive, especially when adjusted EBITDA dropped 37% in H1 and 44% in H1.

Also in Q2 they spent $28 per gross add in marketing, and I calculate a customer lifetime value of $18 based on their Q2 profit margins. Doesn't seem like marketing spend will be generating huge ecomoimic value.

Anonymous said...

Now ev/ebitda is 2-3x...