8x8, Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended June 30, 2020; comparison is the three months ended June 30, 2019. 8x8 provides cloud-based communications software and services, including voice, video, chat, contact center and communications APIs. Fiscal 2021 ends March 31, 2021.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $121.8 million | $96.7 million | +26.0% |
| Service revenue | $114.2 million | $89.8 million | +27.1% |
| Other revenue | $7.6 million | $6.8 million | +11.5% |
| Operating loss | $(37.8) million | $(32.6) million | Loss increased |
| Net loss | $(41.9) million | $(34.3) million | Loss increased |
| Basic and diluted loss per share | $(0.40) | $(0.36) | |
| Net cash used in operations | $(9.3) million | $(20.5) million | Cash use decreased |
- Gross margin was approximately 57.2%, versus 61.0% a year earlier; operating loss margin was approximately 31.0%, versus 33.7%. Net loss margin was approximately 34.4%, versus 35.4%.
- At June 30, 2020, cash, cash equivalents and investments totaled $167.2 million; restricted cash was another $19.0 million. Current assets were $267.8 million and current liabilities $121.5 million.
- Convertible notes had $362.5 million principal outstanding and a $295.7 million net carrying value. Notes bear 0.50% interest and mature in 2024. Operating lease liabilities totaled $97.9 million.
- Stock-based compensation was $22.8 million. Purchases of property and equipment and capitalized software were $2.5 million and $8.9 million, respectively.
Changes and management commentary
- Revenue growth reflected subscriber gains, expansion of services to existing customers, usage growth and sales of UCaaS and CCaaS offerings, particularly to mid-market and enterprise customers. International revenue rose to $28.6 million from $13.4 million; U.S. revenue increased to $93.2 million from $83.2 million.
- Service revenue from mid-market and enterprise customers grew 48% and represented 45% of service revenue. Average annualized service revenue per customer increased to $7,883 from $7,069. Of new bookings above $12,000 in annualized recurring revenue, 55% were bundled UCaaS and CCaaS deals, versus 51% a year earlier.
- Cost of service revenue rose 62%, faster than service revenue, principally due to a $13.0 million increase in communications infrastructure costs and higher software amortization and stock compensation. Sales and marketing, R&D, and general and administrative expenses also increased. Lower hardware costs reduced cost of other revenue.
- Management plans to continue investing in customer acquisition, global expansion, sales and marketing, product development and partner channels, while pursuing operating efficiency and a path to profitability and improved operating cash flow. No specific numerical revenue or earnings guidance is provided in the filing.
Outlook, risks and unusual items
- COVID-19 effects remained uncertain. Management said the pandemic had not affected the business as negatively as initially anticipated, but small and mid-size customers were more affected than enterprise customers. CPaaS usage in APAC was below expectations during the quarter, with positive trends toward quarter-end. Remote work and curtailed travel changed sales and operations and reduced travel expense.
- The company expects existing cash, investments and anticipated operating cash flows to be sufficient for working capital and expenditures over the next 12 months. Deferred employer payroll taxes are expected to reduce fiscal 2021 cash use by over $4 million, and employee salary-for-stock elections are expected to reduce cash payroll use by over $4 million during fiscal 2021; deferred taxes become payable in fiscal 2022 and 2023.
- Management intends to accelerate migration of legacy customers to the X Series in fiscal 2021; migrations may require unrecovered professional-services and engineering costs. Planned upfront investments may not generate corresponding revenue or savings.
- The company adopted the expected-credit-loss standard and internal-use-software guidance in fiscal Q1. The credit-loss adoption produced a $2.8 million adjustment to opening accumulated deficit; management characterized the adoption impact as not material. The company also recorded a higher allowance for credit losses, partly reflecting pandemic uncertainty.
- Tax authorities are conducting audits; accrued contingent indirect tax liabilities were $4.5 million. The company reported no material legal provisions and did not consider loss probable for pending matters. New or heightened risks include privacy and data-protection compliance, including uncertainty following invalidation of the EU-U.S. Privacy Shield framework.
Key facts for investors to verify
- Whether service-revenue growth and customer expansion continue, particularly in mid-market and enterprise accounts and international markets.
- Whether infrastructure and operating costs moderate enough to improve gross margin and narrow operating losses.
- How COVID-19 affects customer churn, collections, small-business demand and CPaaS usage, and whether the stated liquidity outlook remains supported by cash generation.
- The cash, dilution and repayment implications of the $362.5 million convertible notes, including the company’s stated intent to settle principal in cash upon conversion.
- Progress and costs of legacy-product migrations, the Wavecell integration and customer-acquisition investments; also monitor tax exposures and privacy/data-transfer compliance risks.