8x8, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also reports the quarter ended March 31, 2015 (fiscal Q4). Financial statement amounts below are in U.S. dollars; dollar figures are in millions unless otherwise noted.
Business context
8x8 provides cloud-based communications and collaboration services, including business telephony, contact center, meetings and analytics. At year-end it served approximately 41,621 business customers and more than 650,000 subscriptions. It reported one operating segment; the Americas accounted for 92% of FY2015 revenue.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $162.4 | $128.6 | +26.3% |
| Service revenue | $148.2 | $116.6 | +27.1% |
| Product revenue | $14.2 | $12.0 | +18.5% |
| Operating income | $3.9 | $3.1 | +26.2% |
| Net income | $1.9 | $2.5 | -23.4% |
| Diluted EPS | $0.02 | $0.03 | Down |
| Cash from operations | $21.2 | $14.9 | +$6.3 |
- Margins: Overall gross margin was approximately 72% for FY2015, versus approximately 71% in FY2014; service margin was 80%. Product revenue remained loss-making, with product cost equal to 111.7% of product revenue. Operating margin was approximately 2.4% and net margin approximately 1.2%.
- Liquidity and debt: Cash and investments totaled $177.1 million at March 31, 2015, versus $178.4 million a year earlier. Current assets were $191.6 million and current liabilities $21.8 million. The company reported no borrowing arrangements; capital lease obligations were approximately $25,000.
- Cash deployment: FY2015 investing cash outflow was $12.3 million and financing cash outflow was $14.9 million, including $19.2 million of share repurchases. Capital expenditures for property and equipment were $5.8 million.
- Operating indicators: Mid-market customers generated 42% of service revenue, up from 37%. Average monthly service revenue per customer was $320 in Q4, versus $287 a year earlier. FY average monthly business service revenue churn improved to 0.7% from 1.3%.
Fiscal Q4 and changes versus comparable periods
For the quarter ended March 31, 2015, revenue was $43.5 million, up 21.6% from $35.8 million in the year-earlier quarter. Operating income was $52,000, compared with an operating loss of $373,000; net income was $183,000, compared with a net loss of $1.945 million. Q4 monthly service revenue churn was 0.5%, versus 1.2% a year earlier.
Annual revenue growth was driven by customer-base expansion and higher average revenue per customer. Profit remained modest as operating costs rose: sales and marketing increased 32.4% to $80.7 million, R&D increased 30.0% to $15.1 million, and general and administrative expense increased 18.3% to $18.2 million. Net income declined despite higher operating income, partly reflecting a higher tax provision and the absence of FY2014 discontinued-operation income and disposal gain.
Outlook, commentary and notable items
- Management expected business-customer growth and average monthly service revenue per customer to continue increasing in FY2016. It planned to maintain R&D and sales-and-marketing investment at rates comparable to FY2015 Q3 and Q4 for the foreseeable future. No specific revenue or earnings target was provided.
- Growth priorities included larger SMB and mid-market customers, cross-selling the service suite, international expansion and strategic acquisitions. New data centers opened in Hong Kong and Australia; the company was migrating non-U.S. services to overseas infrastructure.
- A $1.0 million patent-sale gain was recognized in FY2015. The company repurchased approximately 2.49 million shares for $19.2 million during the year.
- After year-end, the company acquired DXI, a contact-center workflow provider, for approximately $25.5 million: $18.7 million cash at closing, $3.8 million placed in escrow and approximately $3.0 million in stock.
- Legal matters include multiple patent lawsuits. 8x8 agreed in May 2015 to settle the CallWave matter under confidential terms; the filing says a related loss contingency was accrued at March 31, 2015, but does not disclose a clear settlement amount. Other patent cases remained pending, and management said potential liability in the Bear Creek matter could not be estimated.
- Key risks include intense competition and pricing pressure; customer churn and lengthy enterprise sales cycles; dependence on third-party network and data-center providers; service outages, cybersecurity and privacy events; evolving VoIP regulation and E-911 obligations; international execution; and intellectual-property claims.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial controls were effective at year-end.
Most important facts for investors to verify
- Whether customer growth, higher revenue per customer and lower churn continue, particularly in mid-market and enterprise accounts.
- Whether expense growth—especially sales and marketing and R&D—translates into durable operating-margin improvement.
- The composition, maturity and liquidity of the $124.0 million short-term investment portfolio, and cash remaining after the DXI acquisition.
- The financial terms and final resolution of CallWave and other patent litigation, including the accrued contingency whose amount is not clearly stated in the filing text.
- Whether management’s FY2016 growth expectations are achieved; the filing provides no quantified earnings or revenue guidance.