8x8, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended December 31, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. 8x8 provides cloud-based VoIP and SaaS communications services, including cloud telephony, contact center and virtual meeting products.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Nine months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $53.2 | +$11.8; 28.5% | $152.0 | +$33.1; 27.9% |
| Service revenue | $48.9 | 29.5% | $140.1 | 29.5% |
| Product revenue | $4.2 | 18.2% | $11.9 | 11.7% |
| Operating income (loss) | $(2.5) | Prior-year income $0.8 | $(4.1) | Prior-year income $3.8 |
| Net income (loss) | $(1.7) | Prior-year income $0.4 | $(4.0) | Prior-year income $1.7 |
| Diluted earnings (loss) per share | $(0.02) | Prior-year $0.01 | $(0.05) | Prior-year $0.02 |
- Overall gross margin was 72% in the quarter, unchanged year over year. Service margin was 80%; product margin was negative 21%, versus negative 11% a year earlier. Management attributed the weaker product margin to increased discounting on customer equipment.
- Operating expenses rose to $55.7 million in the quarter from $40.5 million, led by higher sales and marketing, research and development, and general and administrative costs. Nine-month operating expenses were $156.1 million, versus $115.1 million; the prior-year period included a $1.0 million patent-sale gain.
- Stock-based compensation was $11.2 million for the nine months, up from $6.5 million. The filing reports $36.4 million of unrecognized compensation cost expected to be recognized over a weighted-average 2.53 years.
Cash, liquidity and capital
- At December 31, 2015, cash and cash equivalents were $23.9 million and short-term investments were $130.7 million, totaling $154.6 million. At March 31, 2015, the combined balance was $177.1 million.
- Operating cash flow was $15.4 million for the nine months, compared with $13.8 million a year earlier. Investing cash outflow was $35.6 million, including $23.4 million for acquisitions; financing cash outflow was $9.3 million, primarily reflecting share repurchases. Cash decreased by $29.2 million over the period.
- Total liabilities were $34.3 million and stockholders’ equity was $269.3 million. The filing does not report a conventional borrowing balance; it does disclose capital leases, with $1.7 million of leased assets at period-end, and related payments.
- The company repurchased $11.6 million of common stock during the nine months. The remaining authorized repurchase amount was approximately $19.6 million at December 31, 2015.
Business developments, outlook and risks
- Management reported strong growth in new monthly recurring revenue bookings from mid-market and enterprise customers and channel sales. Average monthly service revenue per business customer reached a record $369, up 21% from $305 a year earlier. Management said it expects business customers and average monthly service revenue per customer to continue growing in fiscal 2016.
- The company is prioritizing larger customers and expects to add fewer one- and two-line business customers. It also expects research and development and sales and marketing expenses to increase as it invests in DXI, expands its Romania development team, and pursues larger and international enterprise customers. No numerical earnings or revenue guidance is provided.
- The May 2015 DXI acquisition contributed approximately $7.4 million in revenue and a $2.0 million net loss from acquisition through December 31, 2015. The company also acquired QSC; its contributions were not material. Purchase accounting valuations remained preliminary.
- 8x8 recorded a $0.6 million impairment after deciding to end its Zerigo hosted virtual desktop service; Zerigo revenue and results were not material. The nine-month loss also compares against a prior-year period that included a $1.0 million patent-sale gain.
- Risks include competition and pricing, customer demand and retention, service reliability, integration and realization of acquisition benefits, regulatory and tax matters, product defects, and potential intellectual-property claims. Disclosed litigation included a new patent suit by 2-Way Computing, a customer dispute referred toward arbitration, and the Bear Creek matter, where patent claims had been rejected but the decision remained subject to appeal. The company said it could not estimate potential liability in the 2-Way case at this early stage.
- Other disclosed obligations include a $2.2 million minimum remaining commitment to a third-party customer-support vendor and $4.1 million in minimum third-party network-service payments through fiscal 2018. Management reported effective disclosure controls as of December 31, 2015.
Important facts for investors to verify
- Whether recurring-revenue and customer growth can translate into improved operating profitability as sales, marketing and R&D costs rise.
- The drivers and sustainability of the 21% increase in average monthly service revenue per business customer, alongside quarterly service-revenue churn of 1.2% (excluding DXI).
- Product discounting and the persistently negative product margin, and whether equipment sales support higher-value service relationships.
- DXI and QSC integration, acquisition-related losses and expenses, and final purchase-accounting values.
- Cash and investment levels after acquisitions and repurchases, as well as the effect of stock-based compensation and remaining repurchase authorization.
- Developments in the disclosed litigation, tax audits and other contingencies; the filing does not quantify potential exposure for all such matters.