1. Voice Over Internet Protocol Finance & Investment Club Telecommunications Sector Arlind Hoxha Summer 2012

2. 2 2 Industry Definition  Companies in this industry provide Voice over Internet Protocol (VoIP) services and equipment to residential customers, enterprises of various sizes, and government organizations both domestically and abroad.  Voice over Internet Protocol is a form of technology that converts voice signals into data packets which are transferred using the internet. 8x8 (NASDAQ: EGHT) Vonage (NYSE: VG) MagicJack (NASDAQ: CALL) Shoretel (NASDAQ: SHOR) Consolidated Communications (NASDAQGS: CNSL) Cincinnati Bell (NYSE: CBB)

3. 3 3 Industry Breakdown and Summary Industry Breakdown by Market Cap ($BN) Market Share by FY2011 Revenue (%) Technology $ 126,392.1 (100%) Telecommunications* $ 7,530.7 (5.96%) Communication Services and Equipment $ 3709.9 (2.90%) VoIP $3.3 (.003%) *Domestic and Foreign Telecom($907.2 BN), Diversified Communication Services($103.9 BN), Communication Equipment($3606 BN), Networking Devices($126.7 BN), Bus Software/Services($2786 BN)

4. 4 4 FY2011 Revenue Segments Telecom Services Telecom Equipment Other Telecom Services Telecom Equipment Other

5. 5 5 Revenue Generation Sell PBX hardware so customers can connect to public network Sell access to wired infrastructure Provide VoIP services and equipment to its customers Residential Customers Sell licenses to use encoders and decoders which compress data Business Customers Telecom Equipment Manufacturing Software Publishers Wired Telecom Carriers* Voice over IP Providers Government Organizations Main Sellers Main Buyers *Some companies in this industry are also wireline telecom providers ( CBB, CNSL)

6. 6 6 Historical Revenue Time Series Analysis  Strong correlation between industry revenues and business customers/mobile internet connections  Revenues-business customers correlation:. 918  Revenues-mobile internet connections correlation:.84  Based on the increase in business customers and mobile internet connections, we can infer: Estimated Revenues ($M) = 2372.48 +6.38Business Customers -95.06Internet Connections  86% of the variation in revenues can be determined by the variation in business customers and internet connections  68% confident that industry revenue estimates from the above equation are within +/- 1886M

7. 7 7 Trends Overview Increasing adoption by business customers Expansion of 4G and mobile internet Growth in international calling demand

8. 8 8 Increasing Adoption of VoIP by Business Customers  There has been an increasing use of VoIP over the past 8 years –Customers are less hesitant to use VoIP due to better quality, fewer issues, and faster internet speeds –CAGR of overall VoIP revenues from 2005 to 2012 is 40.6%  Most of the growth has been driven by demand from business customers –Business users now comprise of 33% of industry revenue, up from 10% in 2010 –Number of business seats in service grew at a CAGR of 60% since 2005* –Most of this growth is due to the adoption of VoIP by small and medium sized businesses *Business seats in service chart uses 90% of CAGR to yield expected amounts from 2013-2015

9. 9 9 Increasing Adoption of VoIP by Business Customers  Business demand for VoIP has not been slowed by decreased private investment spending –Investment spending has fallen 19% since 2007 –At the same time, the number of business seats in service for VoIP has grown over 400%  Why do businesses spend on VoIP even during economic slowdowns? –Businesses save avg. of 4.5M annually after 7 years of implementing VoIP  Benefits to VoIP companies –Avg. 5-6% higher margins for sub-sector –Business customers need more services at little to no additional expenses for the sub-sector

10. 10 Trends Overview Increasing adoption by business customers Expansion of 4G and mobile internet Growth in international calling demand

11. 11 Mobile Internet Subscribers and Expansion of 4G  Despite saturation in wireline services, mobile internet users have grown –Mobile cell phone subscriptions grew by CAGR of 15.4% since 2007 –Subscriptions to mobile broadband grew at a CAGR of 45% since 2007 due to the growth in smartphone sales  VoIP companies take advantage of the growth in mobile through applications –Number of mobile VoIP users in 2011 grew to 29M, increasing industry revenue by $377M  Expansion of 4G will continue to drive growth in mobile VoIP users –Although slow adoption at first, subscribers to 4G networks grew at CAGR of 47% since 2008 47% CAGR *Average revenue per mobile user is approximately $13

12. 12 Trends Overview Increasing adoption by business customers Expansion of 4G and mobile internet Growth in international calling demand

13. 13 Demand for Cheap International Calling  Over the last 5 years, there has been strong growth in international calling traffic using VoIP –Driven by cost savings between 30- 40% for businesses and households –International VoIP call volumes grew at a CAGR of 12.2% since 2007  At the same time, traditional wire line international calling has slowed –Since 2007, TDM international call volumes grew by a CAGR of 3.7%  Where is the demand coming from? –Calls from US to Mexico, China, and India comprise more than 80% of the VoIP international call volume –This trend will continue as the number of immigrants obtaining residency status in the US grows 3.5% a year

14. 14 Risks Some of the potential risks which the industry faces are: Risk of Wireless Substitution  If more residential customers forego landlines and use only wireless phones, there could be significant downward pressure on total subscribers to VoIP services Risk of Competition from the Mobile Phone Industry  If wireless providers succeed in attempting to block the use of mobile VoIP on their services, the sub-sector will lose a large part of its current and future revenue growth Risk of Future Regulation  If the FCC increases the intercarrier compensation amounts or imposes a tax on VoIP services, VoIP companies will not be able to penetrate the market with lower prices Risk of Increased Cost of Licenses  Software publishers or wire-line equipment providers could increase the prices of their licenses in the future and decrease margins in the VoIP industry

15. 15 Comparable Company Analysis Company % 52 week high Enterprise Value ($MM) Net Debt / EBITDA LTM EBITDA Margin ROAROE 5 YR Revenue CAGR EV / EBITDAChurn Rate EGHT 95.3% $ 376.00-2.79x10.8%53.0%58.4%8.6%37.57x2.0% VG 57.2% $ 479.070.25x17.6%72.2%136.5%1.2%3.61x2.6% CALL 85.9% $ 431.13NA3.1%-1.6%NA109.3%42.74xNA SHOR 54.7% $ 194.26NA-3.8%-7.0%-12.2%17.6%NA3.1% CNSL 81.7% $ 1,748.485.15x29.6%1.5%36.4%3.3%11.65x1.8% CBB 98.0% $ 3,565.754.71x20.2%0.3%-1.1%2.0%6.87x2.2% High 98.0% $ 3,565.755.15x29.6%72.2%136.5%109.3%42.74x3.1% Median 83.8% $ 455.102.48x14.2%0.9%36.4%5.9%11.65x2.2% Mean 78.8% $ 1,132.451.83x12.9%19.7%43.6%23.7%20.49x2.3% Low 54.7% $ 194.26-2.79x-3.8%-7.0%-12.2%1.2%3.61x1.8%

16. 16 VoIP Industry Recommendation: Overweight Sub-sector is overweight due to the following trends: 1) Increases in gross margins due to the growing number of business subscribers 2) Strong revenue growth driven by increasing international calling traffic and mobile applications 8x8 Inc is set to outperform the sub-sector and will be further researched because of the following reasons: 1) No debt and strong financials compared to the sub-sector - Net Debt/EBITDA= -2.79x (Median/Mean =2.48x / 1.83x) -ROA= 53% (Median/Mean=.9% / 20%) and ROE= 58% (Median/Mean= 36% / 44%) -Churn rate= 2% (Median/Mean= 2.2% / 2.3%) 2) Company is aggressively trying to attract more business customers and therefore pursue a higher margin customer base 3)Company is expanding its use of mobile applications for enterprise which will further grow revenues 8x8 (NASDAQ: EGHT)