8x8, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017. The filing also presents the quarter ended March 31, 2017 (FY2017 Q4); this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context and financial results
8x8 sells cloud-based unified communications, collaboration, contact-center and analytics services through a SaaS platform. It serves customers in more than 100 countries and is increasingly focused on mid-market and enterprise customers.
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $253.4m | $209.3m | +21.0% |
| Service revenue | $235.8m | $192.2m | +22.7% |
| Product revenue | $17.6m | $17.1m | +2.8% |
| Operating income (loss) | $(6.7)m | $(7.1)m | Loss narrowed |
| Net income (loss) | $(4.8)m | $(5.1)m | Loss narrowed |
| Net loss per diluted share | $(0.05) | $(0.06) | |
| Operating cash flow | $28.5m | $23.6m |
FY2017 overall gross margin was 77%, compared with 72% in FY2016. Service margin was 83% versus 81%; product margin remained negative at 9%, improving from negative 18%. The annual operating and net loss margins were approximately 2.6% and 1.9%, respectively.
For FY2017 Q4, revenue was $66.5m, up from $57.3m a year earlier. Operating loss was $3.7m versus $3.0m, and net loss was $2.9m versus $1.1m. Q4 margin figures are not clearly provided in the filing text.
Liquidity, debt and cash flow
At March 31, 2017, cash, cash equivalents and investments totaled $175.0m, up from $162.9m a year earlier. Current assets were $197.4m and current liabilities $43.3m. Management said existing liquidity and anticipated operating cash flows should fund working capital and expenditures for the next 12 months.
FY2017 investing activities used $22.2m, including $8.9m for property and equipment, $5.5m for capitalized software and $2.9m for the LeChat acquisition. Financing activities provided $1.6m. The company reported no outstanding debt instruments other than equipment under capital leases; capital-lease obligations were $1.7m on the balance sheet. Total disclosed capital-lease, office-lease and purchase obligations were $30.1m.
Material changes and management outlook
- Mid-market and distributed enterprise customers contributed approximately 54% of service revenue, compared with 48% in FY2016. Business customers increased to about 49,200 from 45,700.
- FY2017 average monthly service revenue per customer was $412 versus $367. Q4 ARPU was $426, up 11% from $385 a year earlier. Management attributed the increases to winning larger customers.
- Sales and marketing expense rose 27.3% to $139.3m, and R&D rose 14.2% to $27.5m; the company cited investment in sales capacity, customer support and product/platform development.
- Management expected customer numbers and ARPU to continue growing in FY2018, but provided no specific revenue or earnings guidance in the filing.
- The company launched its Communications Cloud platform and expanded channel-partner and global customer-support capabilities. It acquired LeChat for approximately $3.1m; acquired Sameroom technology supports interoperability among team-messaging tools.
Risks, contingencies and unusual items
- Profitability remains uncertain: the company reported a $6.7m operating loss and an accumulated deficit of $114.6m. Sales and marketing spending was 55% of revenue, and stock-based compensation was $21.5m.
- Key business risks include intense competition and pricing pressure, customer churn, lengthy enterprise sales and implementation cycles, reliance on third-party networks and data centers, service outages, cybersecurity and privacy incidents, and evolving telecommunications regulation.
- San Francisco levied a utility-tax assessment; management accrued a probable loss of about $0.5m and estimated a possible additional loss of $0–$0.5m. The filing also describes state and municipal tax inquiries and audits.
- Two patent suits were settled for amounts described as immaterial, with limited patent licenses granted. The Bear Creek patent claims were affirmed invalid on appeal. Management said other known legal matters were not expected to materially affect financial position, results or cash flows.
- In April 2017, DXI escrow arrangements resulted in a $1.4m release to 8x8, recorded as a gain in FY2018 Q1, not FY2017.
- The company announced a new $25m share-repurchase authorization in May 2017; it had made no open-market repurchases under a program during FY2017 Q4. The board also amended the management bonus plan after year-end.
Important facts for investors to verify
- Whether revenue growth and rising ARPU persist, and whether enterprise customer growth translates into improved operating profitability.
- Future churn, customer-acquisition costs, and the returns on the substantial sales, support and product-development investments.
- Cash conversion and the liquidity impact of lease commitments, capital spending, acquisitions and the new repurchase authorization.
- Resolution and potential exposure from tax assessments, regulatory changes, data-security obligations and litigation.
- The implementation impact of the forthcoming revenue-recognition standard, which management said could most affect allocation between product and service obligations.