Why Small Businesses Are Becoming More Cloud Conscious


Gene Marcial, Contributor

May 7, 2015

The atmosphere in the wide world of small business is getting “cloudy,” but that’s just fine because this Cloud is actually a silver lining that delivers bright and good tidings.

Cloud is a series of application servers in remote locations accessible on the internet that enables dissemination of communications, computations and data storage. It’s not only a cost cutter but a productivity booster for small and big companies alike. But its impact on small businesses is more meaningful. Cloud actually reduces, if not eliminates, the need for a company to own expensive hardware. And with most enterprises now using Cloud, they are gaining access to more applications, such as the weather, radio, and e-mail, according to analysts.

Matt Rosen, CEO of Fusion Telecommunications (FSNN), which provides cloud services to about 12,000 small businesses through its 12 networks, says that small-to medium-size enterprises are attracted to cloud service providers because of significant cost savings. “Median operating cost savings for our clients are in excess of 30%,” he says.

And with the “workforce becoming more distributed and mobile, the legacy of on-premises desktop PCs is dying,” asserts Vlad Shmunis, chairman and CEO of RingCentral, a major provider of cloud services with more than 300,000 small-business customers.“The communication end-points are changing,” he says, “with the bulky desktop PCs being eliminated in favor of smaller and cheaper notebooks and tablets.” At the same time, the desk phones are being supplemented with mobile smartphones, he adds.

“Cloud communication solutions can deliver capabilities to meet the rapidly changing communications needs of enterprises,” argues Shmunis. That has helped RingCentral become one of the fastest growing Cloud communications providers for small businesses, he says. “We are disrupting a massive global market opportunity that analysts estimate has a potential value of about $75 billion,” says Shmunis. Apple’s (AAPL)  iPad, which has attracted millions of users in just a few years, costs much less than PCs but they (iPads) perform essentially the same functions based on Cloud. The traditional personal computers (PCs) have their computing and storage capabilities built in their hardware.

Traditionally, businesses of all sizes have on-site hardware, licensed software and IT staff for data processing, data storage and other services. Today Microsoft (MSN), Amazon (AMZN) and others provide huge computing capacity on the Cloud that vastly reduces the need for companies to own computer hardware. Oracle  is making its software available on the Cloud. A new breed of companies offer Software as a Service (SaaS) to businesses that are hosted in Cloud, notes Shmunis. The cost benefit to small businesses of using SaaS is significant, he adds.

Shmunis says that one area that small businesses are embracing at a rapid rate is “unified communications” (UC), which provides a host of services, including audio, web and video conferencing, landline, mobile and Internet convergence, as well as data sharing, integrated voice, text, email, and fax messaging. According to industry sources, a multi-location business with 55 employees would require $60,000 in capital expenditure to install traditional on-site hardware for communications. Analysts figure that Cloud-based UC would require less than $10,000. Using UC would not require office space to install hardware, and carrier fees such as local and long distance charges, would be much less.

Fusion CEO Rosen figures the median operating cost savings for businesses are in excess of 30%. And he notes that UC providers operate at healthy operating margins of 45-70% rate. So for Cloud service providers, it’s not just about cost savings and increased productivity. UC companies provide technological upgrades, and work flexibility for employees, says Rosen.

Among the companies that offer UC services to small businesses are RingCentral, 8X8 (EGHT), and Fusion Telecommunications. These companies serve a largely untapped market with the primary corporate objective of rapidly expanding their customer base. These companies have exhibited remarkable growth.

RNG revenues for 2014 were $220 million, up 279% from $78.8 million in 2011, at an average annual growth rate of 41%. In the same period EGHT (fiscal March 31, 2015) projected revenues are $162 million, up 194% from four years ago, at an annual average growth rate of 24.8%. FSNN revenues in 2014 were $92.7 million, up 219% from 2011, and growing annually at 29.9%. RingCentral, trading at $16.70 a share, has a market cap of $1.15 billion, 5.2 times its 2014 revenue. The company’s earnings before interest, taxes, depreciation and amortization was negative $20.0 million. But it’s expected to turn positive in 2015.

Brian Schwartz, analyst at Oppenheimer, says RingCentral a “visible path to profitability.” His price target for the stock is $20 a share. 8X8 is projected to earn 15 cents a share in fiscal 2015 ended Mar. 31. The company has authorized plans to repurchase $20 million worth of its own stock. The company has more than 40,000 small-business clients and is aggressively moving towards finding larger corporations.

Mike Crawford, analyst at brokerage and investment firm B.Riley, believes that continuing R&D will enable 8X8 to unify “virtual office and contact center functions that will differentiate it from RingCentral, in addition to its move towards larger customers. Selling at about $8 a share, 8X8 has a market cap of 4.9 times its fiscal 2015 estimated revenue of $162 million. Mark Crawford has a price target of $10 for the stock.

Fusion Telecommunications, which is relatively unknown on Wall Street,  morphed into an SaaS provider in 2012. It is the only UC company that provides “Infrastructure as a Service (IaaS), offering middle and larger businesses the much sought after virtual computers and other capabilities, including the ability to create their own Cloud. And while RingCentral and 8X8 have market capitalizations of about five times their revenues, Fusion’s market cap is only a third of its 2014 revenues of $92 million and just 3 times 2014 EBITDA of $11.2 million. Ross Silver of investment firm Vista Partners says that in comparison with 8X8 and RingCentral, Fusion is more focused on the middle market. And most Cloud services provide one or two products, but Fusion delivers Cloud solutions encompassing practically all of its aspects. He has a price target for the stock, currently trading at $3.99 a share, of $10 a share.

This article was written by Gene Marcial from Forbes and was legally licensed through the NewsCred publisher network.

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