Any smidgen of magic left in magicJack VocalTec (CALL) is vanishing quicker than street magician David Blaine can make a new quarter disappear.
Now the former star of annoying, late-night TV commercials only wishes it could make its melting core business model reappear.
MagicJack offers a device that is plugged into the computer to allow consumers to make local or international phone calls for about $40 per year. Its secondary offering is VoIP or voice over Internet protocol designed for small or medium enterprises, an area dominated by the AT&Ts and Verizons of the world.
Though magicJack enjoyed an early out advantage in 2007, the benefits have fallen apart like a busted magic trick.
After an early, reasonably-upbeat article, PC Magazine revisited magicJack in 2011 and rated it “fair,” adding: “(W)hen magicJack debuted, nothing else like it existed. That isn't the case anymore. In the face of competition, magicJack's poor interface, pushy attempts to up-sell you, on-screen advertisements for its own product, and general lack of support make it hard to recommend now.”
MagicJack faces numerous issues that make the stock impossible to recommend now, including:
*Perilous declines in users, activations and app users
*Deteriorating consumer market is further disrupted by free alternatives, carriers' unlimited talk phone plans.
*Disconnect between consensus, compared against declining Google Trend searches and revenue trend.
*Latest “enterprise initiative” features inexperienced businessman, limited overall potential
*Horrid consumer reviews
Investors may read other viewpoints here. Meanwhile, TheStreetSweeper breaks through the smoke and mirrors to reveal magicJack’s risky reality.
*Horrid Consumer Reviews
Consumers are not generally enamored with magicJack, as indicated by the reviews below:
*Perilous Declines: Users, Activations
Indeed, magicJack’s fraying business model is generating a determined, unrelenting downturn in active device users and activations. Our charts below uncloak the trend:
Active device users have plummeted 23% in two years, as shown above.
(Sources: SEC filings, earnings calls)
Meanwhile, as shown above, device activations bent in half and then some over two years.
Let’s look at why magicJack’s core product is declining so drastically…
*Crowded Consumer Market Gets Disrupted By Free Alternatives, Unlimited Talk Phone Plans
There's an elephant in the room – and it’s one big beast: The consumer space is dead. There is virtually no money to be made there.
Consumers don’t want to plunk down a big wad of cash for phone service. They’ve got free alternatives, such as:
So why pay for VoIP when you can get free phone service?
As if that’s not enough, monster companies such as AT&T and Verizon have changed their phone plans. Rather than consumers buying so many minutes, they now get unlimited talk and text. There’s no need to pay magicJack or Ooma.
*Small Businesses, Big Targets, Tiny R&D
So now, all the companies like magicJack are talking up their enterprise initiatives.
But it’s hard for magicJack to woo small and medium sized businesses because it just doesn't have much of a research and development budget. Look how small it is, compared to three rivals.
(Sources: SEC filings)
*HoteliJack: Limited Prospects
Indeed, in the recent earnings call, company leaders talk up their enterprise initiative called “HoteliJack.”
MagicJack partnered with a hotel-related group in an attempt to encourage low cost hotels to switch phone systems to magicJack-type systems.
“Let me turn to the enterprise initiative we discussed on our last call,” said CEO Gerald Vento during the last earnings call. “In September, we signed a 10-year exclusive agreement with Hoteligent and the Patel family.”
But the online presence of HoteliJack is modest:
And the site seems to focus on promoting the young entrepreneur who may be just cutting his teeth and hoping for a halo effect from magicJack, according to an audio interview:
Host: “I want to know a defining moment of your career …”
Kunal Patel: “It’s been a relatively new career… Thus far it’s got to be this partnership with magicJack. They have 2.7 million consumers on their side and they are a publicly traded company. Just to get a deal done with magicJack that both is solvent for us, the hotels and magicJack is an extraordinary time for us.”
*More Declines: Key App Users Fall
Surprisingly, along with core deterioration, harsh reviews, declining active device users and apparently limited prospects of HoteliJack (who wants to use a hotel room phone, anyway?), the company is also experiencing problems with what should be a promising category: Unique mobile app users.
And nobody wants to talk about it.
Referring to the unique app users number noted by an analyst during the second quarter conference call, CFO Jose Gordo said, “I think going forward we’ll probably continue to disclose it, but we see it as less relevant.”
But magicJack apparently then decided to take the head-in-the-sand approach. In the third quarter conference call, the CFO had this to say when an analyst asked about the app user numbers:
“We made the point a while ago that the growth initiatives as far as the app goes, or even enterprise or international, were not going to be material in 2015. We think it’s too early to disclose metrics.”
Investors may take a look at the user numbers, shown below.
(Sources: SEC filings, earnings calls)
So the chart reveals why company leaders don’t want to discuss unique app users.
*Declining Revenue Mirrors "Google Trend" Search Decline
Finally, the chart below shows the disconnect between Google Trend lines, yoy quarterly revenue declines and analysts' unrealistic consensus (shown by the bars) for magicJack revenue. For comparison, Ooma is shown in brown.
It would take the combined magic of David Blaine, Criss Angel and Harry Houdini to breathe life back into this dead-end business. Absent that kind of magic, we think a generous valuation for magicJack stock would be $5 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in CALL and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].