A couple of years ago, the device that turned a broadband internet connection into a full-fledged phone service was an interesting curiosity occasionally featured in a late-night infomercial. When pitted against the likes of Skype or a very legitimate Vonage though, the so-called 'MagicJack' wasn't expected to be much more than a soon-to-be-forgotten fad. As it turns out, however, that little device is finally starting to get some serious sales, and the publicly-traded company behind it - appropriately called magicJack VocalTec Ltd (NASDAQ:CALL) - has turned into a surprisingly compelling investment opportunity.
magicJack VocalTec Technology
The equipment does exactly what it's billed to do. It can turn any broadband connection into a phone line, but it doesn't require an actual 'landline' service to work; it's a true VOIP (voice over internet protocol) connection. However, magicJack VocalTec's device has one edge that many other VOIP carriers haven't resolved yet - the newest version of the magicJack doesn't require a computer to use it. It IS the computer. Simply plug one end of the device into the broadband connection, plug a regular phone into the other end of the device, and dial.
This last twist appears to be the one that got magicJack VocalTec Ltd over the hump. Though the device sold reasonably well before it became fully self-contained, sales of the magicJack Plus just exploded once consumers began to understand they didn't need a computer at all to make it work...they just needed a broadband connection (which could be shared with a home network).
That being said, the self-contained version of the device isn't the only game-changer for CALL shareholders. The proliferation of smartphones - particularly those with wi-fi capability - has opened up another fast-growing venue for the company.
Yes, a mobile phone inherently has function as phone, but using the actual provider's service may incur unreasonable per-minute... and that's assuming a decent connection can be made. By using the magicJack app to tap a wi-fi connection, a smartphone becomes a mobile VOIP device with better call quality, and no per-minute charges.
CALL Revenue Growth
To that end, current or potential investors of CALL should understand that magicJack VocalTec Ltd drives revenue in two ways.
The first and biggest immediate sales driver is the magicJack device itself. It retails for $69.95 (versus the older version's price of $39.99, though the older version required a connection to a PC).
There's a recurring revenue aspect to the technology too. Maintaining the telephone service (which includes retaining a user's phone number, and also offers free international calling) costs a flat $19.95 per year. Phone bills can be reduced by hundreds - if not thousands - of dollars per year.
It's a price mix that appears to be right on target, at least according to recent sales results. In one month's time late last year, the company sold more than 365,000 magicJacks. At $69.99 each, that translates into sales of $25.5 million. All told, the company expects to post total unit revenue of somewhere between $55 million and $60 million for the quarter. That's well above the normal $29 million it's been generating in quarterly revenue for the past couple of years.
There's another dimension to the increasing sales rate though... though unit sales are growing, so too will that number of users paying that annual $19.95 fee. At that price, those 365,000 new magicJack owners will also create $7.3 million in revenue each and every year for as long as they own the device. And, while one can expect some attrition, retention is quite high for the service; the cost/quality ratio is quite strong, and more than competitive enough with the likes of Skype or Vonage. 
Now multiply that degree of recurring revenue times the pace of sales the company is seeing for the magicJack device. Even at half of the pace set a month ago - let's call it 180,000 units - that's 2.16 million new users per year each paying $19.95 per year. The math works out to be $43.0 million in fee revenue alone; it doesn't factor in revenue generated by sales of the magicJack itself. But, at $69.99 each multiplied by an (and this is a low end guess) annualized sales rate of 2.16 million users, you can add another $151 million in sales to the tally. [For reference, there are about 100 million households in the U.S. However, the device's use is not limited to the U.S. Any broadband connection can become a phone line, yet still use the owner's 'home phone' number from any locale.]
Outlook and Analysis
Though the number-crunching in the previous section was for illustrative purposes only, they're not likely to be off target. If anything, they're a little low. Low or not, however, that hypothetical $194 million in first-year (of the new magicJack) annual revenue easily justifies the current market cap of $326 million for CALL. Anything above and beyond those levels - which is very likely in light of the recent sales explosion - just makes the stock worth that much more in terms of price versus revenue
It's not just a price/sales ratio that implies magicJack VocalTec Ltd is undervalued and underestimated though. Margins are ridiculously high for most technology devices, and even more ridiculously high telecom services. The pros expect the company to clear (net) $1.01 per share in 2012, translating into a P/E of 14.9. Already priced reasonably, the likely earnings growth above and beyond the current pace is poised to make CALL shares dirt cheap.
The analytical community as well as the company itself are starting to become convinced too.
As an example, magicJack VocalTec Ltd intended to raise money by selling 1.5 million shares in late November, but ended up canceling the deal in early December. Why? Because sales were so strong, it no longer needed the cash.
More recently, CALL has been deemed a 'buy' from Zacks' research team, and some commentators feel magicJack VocalTec is a strong buyout candidate... particularly by cable company with a wide reach of customers but without the rights or infrastructure of traditional landline phone services.
From a technical perspective, momentum has clearly developed. While CALL may be a little frothy in the very near term, in the bigger picture the chart's just now starting to reflect the company's budding underlying value. Any pullback to the 20-day moving average line (blue) may be an ideal entry opportunity.
As far as an upside value is concerned though, the long-term chart as well as our projected growth rates imply potential appreciation of 78% to 101% over a twelve-month period. Penetration of international markets would only raise that bar.
