8x8, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2015 (fiscal 2016 Q2). The company provides cloud-based VoIP and SaaS communications, contact-center and meeting services, primarily to small and midsize businesses and larger enterprises. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $50.9 | $39.6 | $98.8 | $77.5 |
| Operating income (loss) | ($1.7) | $2.5 | ($1.6) | $3.0 |
| Net income (loss) | ($1.9) | $1.3 | ($2.4) | $1.3 |
| Diluted EPS | ($0.02) | $0.01 | ($0.03) | $0.01 |
| Operating cash flow | Not separately stated for the quarter | $7.1 | $8.6 |
- Q2 revenue rose 28.6% year over year; service revenue increased 30.0% to $47.0 million and product revenue rose 14.8% to $4.0 million. For the half-year, revenue increased 27.5%.
- Q2 service margin was 80% versus 79% a year earlier; overall gross margin was 73% versus 72%. Product margin remained negative at -15%, compared with -8%, reflecting increased equipment discounting.
- Operating expenses rose to $52.6 million in Q2, up from $37.1 million, as sales and marketing, R&D and administrative costs increased. The prior-year periods included a $1.0 million patent-sale gain, which reduced operating expenses.
- At September 30, cash and cash equivalents were $28.8 million and short-term investments were $120.4 million, totaling $149.1 million. Current assets were $168.7 million and current liabilities $26.7 million. Total liabilities were $30.9 million; no conventional borrowing balance is separately presented, while capital leases are disclosed.
- Cash declined $24.3 million during the half-year. Operating activities provided $7.1 million; investing activities used $23.1 million, including $23.4 million for acquisitions; financing activities used $8.4 million, including $10.1 million of share repurchases.
Material changes and business developments
- Average monthly service revenue per business customer reached $360, up 20% from $299 a year earlier. Monthly business service revenue churn was 0.8%, compared with 0.9% a year earlier.
- The DXI acquisition, completed in May 2015 for approximately $22.6 million, contributed about $4.5 million of revenue and a $1.0 million net loss through September 30. QSC was also acquired during the quarter; its contribution was not material. Acquisition-related costs were approximately $1.0 million combined.
- Goodwill increased to $48.7 million from $36.9 million at March 31; intangible assets increased to $25.1 million from $12.3 million, primarily reflecting acquisitions.
- The company repurchased $10.1 million of common stock in the first half. Approximately $5.1 million remained under the existing authorization at September 30. On October 20, the board approved a separate new repurchase program of up to $15 million.
- Geographic segment results showed Americas revenue of $44.1 million and net income of $0.015 million in Q2; Europe revenue was $6.9 million and net loss was $1.9 million.
Outlook, risks and unusual items
- Management reported strong demand in mid-market and enterprise customers and channel sales, and expected business customers and average monthly revenue per customer to continue growing in fiscal 2016. No specific revenue or earnings guidance was provided.
- Management expects R&D expenses to rise as it invests in DXI and its Romania R&D team, and sales and marketing expenses to rise as it targets larger businesses and global enterprise customers. It is adding fewer one- and two-line business customers and said customer counts are becoming less useful as a growth measure.
- Risks highlighted include customer demand and retention, competition and pricing, service reliability and support, regulatory and tax exposure, product defects, third-party network and supplier dependencies, acquisition integration and realization of expected benefits, and potential litigation or intellectual-property claims.
- Pending matters include the Slocumb Law Firm dispute, for which the company intended to seek arbitration, and a patent reexamination appeal in the Bear Creek matter. The company also reported state and municipal tax inquiries and audits; it said amounts remitted historically were within accrued amounts.
- Other items to note: stock-based compensation expense was $6.5 million for the first half, versus $3.9 million a year earlier. The company reported no active federal or state income-tax audits as of October 22, 2015. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue growth and the $360 average monthly service revenue per customer persist, and how churn and customer mix develop.
- Whether expense growth, especially sales and marketing and R&D, translates into durable revenue growth and improved profitability.
- DXI and QSC integration, acquired-business performance, and any changes to preliminary acquisition valuations or contingent consideration.
- Cash and investment deployment, future repurchases, capital-lease obligations, and the extent of any additional financing needs.
- Developments in the disclosed litigation and tax matters, and the impact of ongoing tax, regulatory and foreign-exchange risks.