8x8, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2014. The filing also reports the quarter ended March 31, 2014 (fiscal Q4). Amounts are in U.S. dollars.
Business context
8x8 provides cloud unified communications and collaboration services, including business telephony, virtual contact center and virtual meetings, primarily to small and medium businesses and distributed enterprises. At year-end it reported about 38,000 business customers and more than 500,000 subscriptions. It has one reportable segment and generated 97% of revenue in the Americas, principally the United States.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $128.6 million | $103.8 million |
| Service revenue | $116.6 million | $94.4 million |
| Product revenue | $12.0 million | $9.4 million |
| Operating income | $3.1 million | $22.7 million |
| Net income | $2.5 million | $13.9 million |
| Diluted earnings per share | $0.03 | $0.19 |
| Cash provided by operating activities | $14.9 million | $31.8 million |
- Revenue increased 23.9% year over year, driven primarily by growth in business subscribers and higher average service revenue per customer. Service revenue was 90.7% of total revenue.
- Overall gross margin was reported at 70% for FY2014, versus 71% in FY2013. Service margin was 79% at March 31, 2014; product margin was negative 23%, reflecting subsidized phone equipment.
- Operating income fell substantially as sales and marketing, general and administrative, and research and development costs rose; FY2013 also included a $13.0 million patent-sale gain that did not recur.
- FY2014 net income included $0.9 million from discontinued operations and a $0.6 million after-tax gain on disposal. The dedicated server hosting business was sold in September 2013.
- At March 31, 2014, cash and cash equivalents were $59.2 million and investments were $119.2 million, totaling $178.4 million. The company reported no borrowing arrangements; outstanding debt was limited to capital leases.
- Total assets were $299.2 million, total liabilities $21.0 million, and stockholders’ equity $278.2 million. The accumulated deficit was $106.7 million.
Material changes and quarterly results
- FY2014 business customer service revenue growth accompanied an increase in average monthly service revenue per business customer to $287 in Q4, from $256 in the year-earlier quarter. Management said 34% of new monthly recurring revenue for the year came from mid-market and channel sales teams, versus 25% in FY2013.
- New services sold during FY2014 increased 26% year over year. Average monthly business service revenue churn was 1.3% for the year, compared with 1.7% in FY2013; the quarterly operating-statistics table shows 1.2% at March 31, 2014.
- Q4 revenue was $35.8 million, up from $27.8 million in Q4 FY2013. Q4 operating loss was $0.4 million and net loss was $1.9 million, compared with operating income of $3.4 million and net income of $1.7 million in the year-earlier quarter. The filing attributes quarterly tax comparability in part to increases in valuation allowances.
- The company acquired UK-based Voicenet in November 2013 for $19.3 million, including $3.0 million placed in escrow. Voicenet contributed approximately $3.3 million of revenue and a $0.8 million net loss after acquisition through year-end.
- In November 2013, 8x8 issued 14.375 million shares in a registered offering, raising approximately $125.8 million net of issuance costs. Shares outstanding increased to 88.5 million at year-end from 72.1 million a year earlier.
Outlook, risks and unusual items
- Management planned to continue investing in research and development and sales and marketing at rates comparable to Q3 and Q4 FY2014 for the foreseeable future. It emphasized cross-selling, mid-market and enterprise adoption, international expansion, product development and strategic acquisitions. No specific revenue or earnings guidance was provided.
- Operating cash flow declined despite revenue growth. Investing cash use was $136.5 million, largely reflecting purchases of investments and the Voicenet acquisition; financing cash flow of $130.5 million was mainly the equity offering. Management stated available liquidity was sufficient for foreseeable needs.
- Key risks include competition and pricing pressure; customer churn and subscription renewals; scaling service, support and infrastructure; dependence on third-party network and data-center providers; outages, software defects and cybersecurity or privacy incidents; evolving VoIP, emergency-calling and other regulatory requirements; and international expansion and acquisition integration.
- Patent litigation remained unresolved, including Bear Creek, Klausner and CallWave matters; the company said it could not estimate potential liability in these cases. A TQP Development suit filed in April 2014 was dismissed before service. Several state tax audits were underway, and the company had received tax inquiries and assessments. Potential exposure values are not clearly provided.
- FY2014 included a $7.6 million stock-based compensation expense, including approximately $1.1 million related to the former president’s resignation and award modification. A $1.3 million increase in the tax valuation allowance affected FY2014 tax expense. The FY2012 net income comparison is unusually high because of a $62.1 million tax benefit from releasing most of a deferred-tax valuation allowance.
Important facts for investors to verify
- Whether subscription and customer growth, recurring revenue per customer, and churn trends continued after March 31, 2014.
- Whether rising operating expenses—especially sales and marketing, general and administrative, and stock compensation—can be supported by revenue growth and improved operating margins.
- Current cash and investment balances, investment maturities and credit quality, and the impact of the equity issuance and increased share count on per-share results.
- Voicenet integration progress and economics, including the remaining escrow and the acquired business’s contribution to revenue and profitability.
- Developments and any quantified financial exposure from patent litigation, tax audits, VoIP regulation, emergency-calling requirements, and service or cybersecurity incidents.