8x8, Inc. — Form 10-Q Summary
Business context and reporting period. 8x8 provides cloud communications and collaboration services on a SaaS basis, including cloud phone, conferencing, contact center and messaging. This report covers the quarter and six months ended September 30, 2018—the second quarter of fiscal 2019, not calendar 2018 Q2. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial results
| Metric | Three months ended September 30, 2018 | Year-over-year change | Six months ended September 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $85.7 million | +18.2% | $168.9 million | +19.3% |
| Service revenue | $81.3 million | +19.4% | $159.5 million | +19.7% |
| Operating loss | $22.0 million | Prior-year loss: $4.5 million | $38.0 million | Prior-year loss: $9.9 million |
| Net loss | $21.5 million | Prior-year loss: $0.5 million | $36.8 million | Prior-year loss: $2.7 million |
| Basic and diluted loss per share | $0.23 | Prior-year loss per share: $0.01 | $0.39 | Prior-year loss per share: $0.03 |
| Cash used in operating activities | Not presented quarterly | — | $4.6 million | Prior-year cash provided: $11.2 million |
Service revenue drove growth; product revenue was nearly flat year over year for the quarter at $4.3 million. Mid-market and enterprise service revenue grew 30% and represented 61% of service revenue. Average monthly service revenue per customer increased from $442 to $490; mid-market and enterprise ARPU rose 6% to $4,988.
Operating expenses rose substantially: quarterly sales and marketing increased 35.9%, research and development 67.6%, and general and administrative 72.0%. The quarterly operating margin was approximately negative 25.7%, versus negative 6.2% a year earlier. Cost of product revenue exceeded product revenue, reflecting the company’s phone-discounting practice. Cost of service revenue was 19.5% of service revenue, compared with 18.7% a year earlier.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $24.7 million, short-term investments $104.2 million, and restricted cash $8.1 million—approximately $137.0 million combined. Cash, cash equivalents and restricted cash were $32.8 million, down $7.0 million since March 31.
- Total assets were $309.6 million and total liabilities $70.3 million. Current assets of $175.3 million exceeded current liabilities of $66.3 million. The filing reports no outstanding debt instruments other than equipment under capital leases.
- Six-month investing cash use was $0.3 million, including $11.4 million of capitalized software development, $2.9 million of property and equipment purchases, and $2.6 million invested in the MarianaIQ acquisition. Financing cash use was $2.0 million, including $8.2 million of share repurchases and tax-related withholding, partly offset by $6.7 million from employee stock plans.
- Future minimum lease payments were $90.6 million. Stock-based compensation was $19.0 million for the six months.
Material changes, outlook and notable items
- Accounting change: 8x8 adopted ASC 606 and ASC 340-40 on April 1, 2018 using the modified retrospective method; comparative periods were not restated. Adoption increased opening accumulated deficit by $39.9 million (made it less negative), primarily by capitalizing $38.2 million of sales commissions. The company defers eligible commission costs and amortizes them over five years. For the quarter, reported adoption adjustments improved operating and net results by $2.8 million versus the filing’s ASC 605 comparison; for the six months, the improvement was $4.6 million. Revenue impact was small. This affects comparability with prior periods.
- Management outlook: Management expected customer growth and average monthly service revenue per customer to continue for the remainder of fiscal 2019. It planned continued investment in talent, marketing, demand generation, product innovation and global expansion of the X Series, and expected operating expenses to grow materially. R&D, sales and marketing, and G&A were each expected to increase as a percentage of revenue; no numerical revenue or earnings guidance was provided.
- Products and acquisitions: The X Series became generally available in July 2018, and Team Messaging was integrated in September. 8x8 acquired certain MarianaIQ assets in April for total consideration of $3.5 million; the acquisition did not materially contribute to revenue or net loss. In October, after quarter-end, it agreed to acquire certain Atlassian assets relating to Jitsi video technology.
- Tax and other exposures: A preliminary review of state sales and use tax audits led to a $4.6 million incremental liability recorded as G&A expense in the quarter. The company separately disclosed an estimated $5.7 million contingent liability for state, municipal and similar taxes, fees and surcharges; assessments could exceed its accrual. Several jurisdictions were conducting audits.
- Risks: The filing highlights customer retention and churn, competition, execution and customer adoption of X Series, scaling and service reliability, dependence on third-party network and data-center providers, cybersecurity and privacy compliance (including GDPR), regulatory and tax uncertainty, and international and Brexit-related uncertainty. Management reported disclosure controls were effective at September 30, 2018 and no material litigation matter was pending as of that date.
Important facts for investors to verify
- Whether service-revenue growth and mid-market and enterprise ARPU gains continue, and how customer churn and acquisition costs develop.
- Whether expense growth—especially sales and marketing, R&D, stock-based compensation and headquarters costs—translates into growth sufficient to improve operating performance and cash generation.
- How ASC 606 commission capitalization affects reported expenses, assets and year-over-year comparisons; prior periods were not restated.
- Whether sales and use tax audits result in assessments above the recorded accrual, and whether the disclosed $5.7 million contingent tax estimate changes.
- Liquidity available after considering restricted cash, investment maturities, operating cash use, capitalized software spending and lease commitments.
- The financial and operational impact of the Jitsi asset purchase and integration, and whether X Series achieves the adoption and growth management expects.