8x8, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016. The filing is an annual report, not a standalone 2015 Q4 filing; it also reports the quarter ended March 31, 2016. Amounts are in U.S. dollars.
Business context
8x8 provides cloud-based business communications and collaboration services, including voice, contact center, messaging, video, meetings and analytics. It sells principally through subscriptions and is expanding its focus on mid-market and distributed enterprise customers. The company reports Americas and Europe segments.
Financial and operating performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $209.3 million | $162.4 million |
| Service revenue | $192.2 million, up 29.7% | $148.2 million |
| Product revenue | $17.1 million, up 20.3% | $14.2 million |
| Operating income (loss) | $(7.1) million | $3.9 million |
| Net income (loss) | $(5.1) million | $1.9 million |
| Diluted earnings (loss) per share | $(0.06) | $0.02 |
| Cash from operating activities | $23.6 million | $21.2 million |
- Revenue growth reflected subscriber growth, higher average service revenue per customer and about $10 million of service revenue from acquired DXI.
- Operating expenses rose to $216.4 million from $158.5 million. Sales and marketing increased 35.6% to $109.4 million; R&D increased 59.0% to $24.0 million.
- Service revenue was 91.8% of total revenue. Service costs were 19.3% of service revenue; product costs exceeded product revenue (118.0% of product revenue). The filing reports Q4 FY2016 gross margin of 72%, service margin of 81% and product margin of negative 18%.
- Q4 FY2016 revenue was $57.3 million, versus $43.5 million in Q4 FY2015. Q4 operating loss was $3.0 million, versus operating income of $0.1 million; net loss was $1.1 million, versus net income of $0.2 million.
- At March 31, 2016, cash and cash equivalents were $33.6 million and short-term investments were $129.3 million, totaling $162.9 million. Current assets were $185.9 million and current liabilities $34.7 million.
- The company reported no borrowing arrangements and no material debt instruments other than equipment under capital leases. Capital lease obligations totaled about $1.4 million, excluding interest.
Changes, outlook and management commentary
- Revenue increased 28.9%, but results shifted from operating and net income to losses as spending on sales, marketing, R&D and administration grew faster than revenue. Stock-based compensation rose to $16.3 million from $9.3 million.
- Mid-market and distributed enterprise customers generated more than 48% of service revenue, up from 42%. Q4 average monthly service revenue per business customer rose 20% year over year to $385. Business subscribers increased to about 45,700 from 41,600.
- Management expected business customer count and average monthly service revenue per customer to continue growing in fiscal 2017. It planned R&D and sales and marketing investment at rates comparable to FY2016 Q3 and Q4; no specific revenue or earnings guidance was provided.
- FY2016 operating cash flow improved modestly. Investing cash outflow was $36.3 million, including $23.2 million for acquisitions; financing cash outflow was $7.2 million, including $11.7 million for share repurchases, partly offset by employee stock-plan proceeds.
- The company acquired DXI for approximately $22.6 million and QSC for approximately $2.9 million. DXI contributed about $10.0 million of revenue and a $3.2 million net loss from acquisition through year-end. The company also recorded a $0.6 million impairment for its discontinued Zerigo hosted desktop service.
Risks and contingencies
- Key risks include competition and price pressure, customer churn, longer and costlier enterprise sales cycles, and the need to scale support and infrastructure while investing heavily in growth. Monthly business service revenue churn was 0.8% for FY2016 versus 0.7% in FY2015.
- Service delivery depends on third-party network, data-center and hardware providers. Outages, cyber incidents, software defects, privacy breaches or failure to meet service-level commitments could harm revenue and customer retention.
- Regulatory uncertainty for VoIP, emergency and E-911 calling, network neutrality, taxes and international data transfers could increase costs or constrain service. The filing notes the invalidation of the EU-U.S. Safe Harbor framework and uncertainty over replacement transfer mechanisms.
- Pending matters included Bear Creek patent litigation, 2-Way Computing patent litigation and a customer dispute brought by Slocumb Law Firm. The company said it could not estimate potential liability for the 2-Way and Bear Creek matters at the stated stage; it intended to defend the Slocumb claims. Management reported no known legal matter expected to have a material adverse effect, but outcomes remain uncertain.
- Management cited a cumulative deficit of $109.9 million and warned that future profitability was not assured. The filing also disclosed an ERP transition and the exclusion of DXI from management’s FY2016 internal-control assessment; the auditor opined that company internal control was effective, with DXI excluded.
Important facts for investors to verify
- Whether FY2017 customer and service-revenue-per-customer growth can continue while operating expenses and stock-based compensation are elevated.
- Retention and churn trends, particularly as the company pursues larger enterprise accounts and integrates acquisitions.
- Acquisition integration, DXI profitability, QSC milestones and the carrying value of goodwill and acquired intangible assets.
- Cash generation and liquidity after acquisitions, repurchases and continued investment; note that $129.3 million of reported liquidity was in short-term investments.
- Developments in the patent and customer litigation, VoIP regulation, E-911 obligations and cross-border data-transfer compliance.