8x8, Inc. — Form 10-Q Summary
Business context and reporting period
8x8 provides cloud communications, collaboration, contact-center and analytics services. This unaudited filing covers the three months ended June 30, 2018 (the first quarter of fiscal 2019); comparisons are with the three months ended June 30, 2017. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $83.2 million | $69.1 million |
| Operating loss | $16.0 million | $5.5 million |
| Net loss | $15.4 million | $2.2 million |
| Net loss per diluted share | $0.16 | $0.02 |
| Cash provided by operating activities | $0.8 million | $6.2 million |
- Service revenue was $78.1 million, up 20.0%; product revenue was $5.1 million, up 27.4%.
- Gross profit, calculated as revenue less service and product costs, was $61.9 million, or 74.3% of revenue, versus $52.6 million, or 76.1%, a year earlier. Product costs exceeded product revenue in both periods.
- Operating expenses rose to $99.2 million from $74.6 million. Sales and marketing was $53.3 million; R&D $13.1 million; and general and administrative $11.4 million.
- At June 30, cash and cash equivalents were $34.6 million, restricted cash $8.1 million, and short-term investments $109.9 million. Together these totaled approximately $152.6 million. Current assets were $186.0 million and current liabilities $60.7 million.
- Total liabilities were $63.7 million. The company reported no debt instruments other than equipment under capital leases. Future minimum lease payments were $91.8 million.
- Investing activities provided $1.8 million net, including investment maturities and sales, while the company spent $5.1 million capitalizing software, $2.6 million on an acquisition at closing, and $1.2 million on property and equipment.
Material changes versus the prior comparable period
- Total revenue increased 20.4%. Management attributed service growth to a larger subscriber base, net of churn, and higher average monthly service revenue per customer, which rose from $432 to $480.
- Mid-market and enterprise service revenue grew 28% year over year and represented 61% of service revenue. Monthly service revenue per mid-market and enterprise business customer rose 8% to $4,953.
- Operating loss widened by $10.5 million. Higher spending included sales and marketing, R&D, and G&A; stock-based compensation increased to $8.9 million from $6.4 million.
- Operating cash flow declined to $0.8 million from $6.2 million, despite the larger non-cash expense add-backs. Net loss increased significantly.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method. The opening accumulated deficit decreased by $39.9 million, primarily reflecting capitalized sales commissions. The standard increased reported quarterly net income by $1.8 million versus the ASC 605 presentation; the filing’s ASC 606 comparison shows a $28,000 reduction in revenue and a $1.8 million reduction in sales and marketing expense.
Outlook, management commentary and risks
- Management expects customer growth and average monthly service revenue per customer to continue for the remainder of fiscal 2019. It expects operating expenses to grow materially in all categories as it invests in growth; R&D and G&A are expected to increase moderately as a percentage of revenue.
- Management announced general availability of 8x8 X Series in July 2018 in the U.S. and U.K. and described continued investment in product innovation, talent, marketing, demand generation and global expansion.
- Approximately $130 million of contracted revenue remained unrecognized at June 30, excluding contracts with an original expected term of one year or less; the vast majority was expected to be recognized over the following 24 months.
- In April, 8x8 acquired certain MarianaIQ assets for $3.5 million, including $2.6 million paid at closing and $0.9 million held in escrow. MarianaIQ contributed no revenue or net loss through June 30.
- Key stated risks include competition and demand, customer churn and acquisition costs, service or infrastructure failures, cybersecurity, third-party network reliance, regulatory compliance, foreign-exchange movements, acquisition integration, and potential litigation. The company reported no material litigation matter as of August 2, 2018 and no material changes to the risk factors in its fiscal 2018 Form 10-K.
- Rent expense rose to $2.6 million from $1.4 million as the company began building out its new headquarters. Management said a hypothetical 100-basis-point interest-rate change would not significantly affect interest income; a 10% decline in foreign currencies against the U.S. dollar was not expected to create a material loss on foreign-denominated balances.
Important facts for investors to verify
- How sustained revenue growth and the X Series launch translate into customer retention, acquisition costs, and operating performance.
- Whether spending growth, particularly in sales and marketing and R&D, produces improved margins and cash generation.
- The effect of ASC 606, especially deferred commission capitalization and the resulting differences from prior-period accounting.
- The timing and collectability of the approximately $130 million in remaining performance obligations, and the operational impact of the MarianaIQ acquisition.
- Future cash needs, including capitalized software spending, lease commitments, and stock-based compensation; assess these alongside the company’s investment portfolio and limited reported debt.