8x8, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016, the second quarter of fiscal 2017; year-to-date figures cover the six months ended September 30, 2016. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
8x8 provides cloud-based business communications and collaboration services, including voice, conferencing, messaging, video and contact-center solutions. Service revenue is the large majority of sales.
| Metric | Quarter ended September 30, 2016 | Six months ended September 30, 2016 |
|---|---|---|
| Total revenue | $63.2 million, up 24.0% year over year | $123.2 million, up 24.7% |
| Service revenue | $57.7 million, up 22.9% | $113.0 million, up 24.0% |
| Product revenue | $5.5 million, up 37.0% | $10.2 million, up 32.4% |
| Gross margin | Approximately 73.7%, versus 72.9% | Approximately 73.7%, versus 73.1% |
| Operating income (loss) | $(0.4) million, compared with $(1.7) million | $(1.3) million, compared with $(1.6) million |
| Net income (loss) | $0.03 million, compared with $(1.9) million; EPS $0.00 | $(0.5) million, compared with $(2.4) million; EPS $(0.01) |
Quarterly service margin was 81%; product margin remained negative at 6%, an improvement from negative 15% a year earlier. Sales and marketing expense rose 26% for the quarter to $33.7 million, and research and development expense was $6.5 million. Management attributed higher sales and marketing costs primarily to payroll, lead generation and facility costs.
Cash flow, liquidity and obligations
- Cash, cash equivalents and short-term investments totaled $169.7 million at September 30, 2016, including $32.1 million of cash and equivalents. Total current assets were $189.2 million and current liabilities were $37.3 million.
- For the six months, operating cash flow was $13.4 million, compared with $7.1 million a year earlier. Investing cash flow was $(16.1) million, including $5.2 million for property and equipment and $2.4 million for capitalized internal-use software. Financing cash flow was $1.2 million.
- Total liabilities were $40.7 million. The filing does not show a conventional debt balance; it reports capital lease payments and $2.4 million of assets under capital leases.
- Cash and cash equivalents declined by $1.5 million from March 31, 2016. Short-term investments increased to $137.7 million from $129.3 million.
Material changes, outlook and risks
- Management reported 36% year-over-year growth in service revenue from mid-market and enterprise customers, which represented 53% of service revenue. New monthly recurring revenue bookings from those customers and channel sales teams increased 30%. Average monthly service revenue per business customer rose 14% to a record $409, from $360.
- Management expected business-customer growth and revenue per customer to continue increasing in fiscal 2017. It also expected research and development and sales and marketing expenses to rise as it invests in DXI, Romania-based R&D, larger-business sales and international enterprise expansion. The filing gives no specific full-year revenue or earnings guidance.
- Management estimated that current GBP/USD exchange rates could reduce quarterly revenue by approximately $1.2 million compared with the exchange rate in fiscal Q1. Brexit-related currency movements had not materially affected results through September 30, but could do so in the future. The company said it did not hedge currency exposure.
- 8x8 launched Quality Management and Virtual Office for Sales, opened a customer-support center in the Philippines, and said its Amsterdam, Brazil and Singapore data centers were operating. A Romania support center was expected by year-end 2016.
- Commitments include a London office lease through June 2026, with an 18-month rent holiday and a conditional June 2022 break clause; a New York office lease through October 2021; and $2.2 million remaining under a third-party customer-support commitment upon termination.
- Disclosed legal matters include the Bear Creek patent litigation, which was administratively closed while patent appeals continue, and a customer lawsuit in Alabama in which 8x8 sought to compel arbitration. State and municipal tax inquiries and audits were also noted; the company said amounts remitted historically were within its accruals.
Important facts for investors to verify
- Whether rapid service-revenue and enterprise-customer growth can continue while sales and marketing spending rises and operating results remain near break-even.
- The effect of GBP weakness on reported revenue and European operations, and whether management’s estimated quarterly currency impact changes.
- Cash-flow sustainability, capital spending and internal-use software capitalization, alongside stock-based compensation of $9.6 million for the six-month period.
- Product economics: product revenue continued to carry a negative margin, despite improvement versus the prior year.
- Developments in the disclosed litigation, tax matters and lease and vendor commitments.