8x8, Inc. — Form 10-Q Summary
Business context and reporting period: 8x8 provides cloud-based communications software and services, including unified communications, contact center, video, messaging and communications APIs. This unaudited report covers the fiscal third quarter ended December 31, 2019, and the nine months then ended; comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $118.6 million | $89.9 million | $324.8 million | $258.8 million |
| Service revenue | $113.6 million | $85.9 million | $310.5 million | $245.4 million |
| Operating loss | $(43.2) million | $(24.2) million | $(113.7) million | $(62.2) million |
| Net loss | $(47.1) million | $(23.8) million | $(122.3) million | $(60.6) million |
| Diluted net loss per share | $(0.47) | $(0.25) | $(1.23) | $(0.64) |
- Quarterly service revenue grew 32.2% year over year; total revenue grew 31.9%. Nine-month total revenue grew 25.5%.
- Quarterly gross profit was approximately $62.3 million, or 52.6% of revenue, versus $57.0 million, or 63.3%, a year earlier. Service cost rose faster than revenue; service cost was 43.4% of service revenue versus 32.2%.
- Quarterly operating expenses were $161.7 million, up from $114.2 million. Sales and marketing was $63.1 million, or 53.2% of revenue. The filing reports no separate adjusted or non-GAAP profit measure in the provided text.
- For the nine months, operating cash use was $62.8 million, versus $6.7 million a year earlier. Investing cash use was $84.8 million, compared with $4.7 million of investing cash provided; financing provided $65.8 million, including $65.3 million net proceeds from the additional convertible notes.
Financial position and material changes
- At December 31, 2019, cash and cash equivalents were $184.8 million, investments were $50.4 million, and restricted cash was $19.0 million. Cash, cash equivalents and investments totaled $235.2 million, down from $346.5 million at March 31, 2019. Cash, cash equivalents and restricted cash totaled $203.8 million.
- Total assets were $732.5 million and stockholders’ equity was $219.5 million. Current assets were $302.4 million versus current liabilities of $121.6 million.
- Convertible senior notes had $362.5 million aggregate principal due in 2024 at 0.50% interest; their net carrying amount was $287.5 million. The notes are unsecured. The company’s stated initial conversion price was approximately $25.68 per share, and capped calls are intended to partially offset potential dilution up to a cap price of $39.50.
- Operating lease liabilities were $90.5 million. The company adopted new lease accounting in fiscal 2020, recognizing right-of-use assets and liabilities. A new Campbell, California headquarters lease began January 1, 2020; it is a 132-month lease with stated base rent of about $0.7 million monthly during its first year, subject to a 12-month rent abatement and a tenant improvement allowance.
- Wavecell was acquired in July 2019 for approximately $117.1 million in cash and stock consideration. The preliminary allocation included $91.1 million of goodwill and $21.0 million of acquired intangibles. The acquired business’s contribution to revenue and earnings was described as not material.
Outlook, commentary and risks
- Management said it is continuing to prioritize growth investments in sales, marketing, e-commerce, research and development, and indirect sales channels, while also seeking operating efficiencies and progress toward profitability. It gave no specific numeric revenue, earnings or cash-flow guidance in the provided filing text.
- Management attributed revenue growth primarily to customer-base expansion net of churn, higher average service revenue per customer, and, to a lesser extent, acquired products. It said it intends to accelerate migrations from legacy Virtual Office and Virtual Contact Center services to the X Series during the rest of fiscal 2020 and fiscal 2021; migrations may entail unrecovered professional-services costs.
- Remaining performance obligations were approximately $245.0 million at December 31, 2019, excluding contracts with an original term of one year or less; management expected most to be recognized over the next 36 months.
- The company stated that existing cash, investments and anticipated operating cash flows should be sufficient for working-capital and expenditure needs over the next 12 months. This is management’s assessment, alongside significant reported operating cash use.
- Risks cited include customer demand and churn, competition, service reliability and third-party network dependence, scaling and customer acquisition costs, cybersecurity, regulatory and privacy compliance, acquisitions and integration, and the possibility that upfront growth spending or efficiency initiatives do not deliver expected results. The company reported ongoing tax audits in several jurisdictions and no material provisions for legal proceedings; it said future litigation could still adversely affect results.
Investor verification priorities
- Track whether service-revenue growth can be sustained while service costs and total spending are controlled, and whether margins and losses improve.
- Verify cash burn, investment and capitalized commission spending, and liquidity relative to the company’s growth plans and its stated 12-month funding assessment.
- Assess Wavecell integration, acquired revenue contribution and the valuation and recoverability of acquisition-related goodwill and intangibles.
- Review the convertible notes’ cash repayment or conversion implications, potential dilution and capped-call coverage and limits.
- Monitor customer churn, migration costs, remaining performance obligations, and the scale and timing of headquarters and other lease commitments.