8x8, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2015, three months ended December 31, 2014; year-to-date results cover the nine months ended December 31, 2014. Comparisons are with the corresponding 2013 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
8x8 provides cloud-based communications and collaboration services, including hosted telephony, unified communications, contact center, video conferencing and virtual desktop offerings, alongside related products and cloud computing services. It reported approximately 41,100 business customers and one reportable segment.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Total revenue | $41.4 | $32.7 | $118.9 | $92.8 |
| Service revenue | $37.8 | $29.7 | $108.2 | $84.1 |
| Product revenue | $3.6 | $3.0 | $10.7 | $8.7 |
| Operating income (loss) | $0.8 | $(1.8) | $3.8 | $3.4 |
| Net income | $0.4 | $0.1 | $1.7 | $4.5 |
| Diluted EPS | $0.01 | $0.00 | $0.02 | $0.06 |
- Q3 revenue grew 26.3% year over year; service revenue rose 27.1%. Nine-month revenue increased 28.1%.
- Q3 overall gross margin was 72%, versus 71% a year earlier. Service margin was 80% (81% prior year); product margin improved to negative 11% from negative 34%. Product costs exceeded product revenue in both periods.
- Operating expenses increased to $40.5 million in Q3 from $34.5 million, led by sales and marketing. For nine months, sales and marketing expense rose 38%, reflecting investment in customer support, deployment and sales capacity, particularly for midmarket and larger enterprise customers.
- Operating cash flow was $13.8 million for nine months, compared with $11.6 million. Investing activities used $21.8 million, including net investment purchases and $4.5 million of property and equipment spending. Cash and cash equivalents declined $6.6 million to $52.6 million.
- At December 31, 2014, cash, cash equivalents and short-term investments totaled approximately $187.9 million; total assets were $308.0 million and total liabilities $22.2 million. The filing reports no material borrowing balance; capital lease payments were $0.1 million during the nine-month period.
Changes, outlook and management commentary
- Business customers increased to 41,051 from 36,753 a year earlier. Average monthly service revenue per business customer rose to $305 from $274; quarterly business-service churn fell to 1.0% from 1.5%.
- Management reported 42% year-over-year growth in new monthly recurring revenue from midmarket and channel sales teams; midmarket customers contributed 42% of service revenue. It attributed growth to subscriber-base expansion and higher revenue per customer, including larger deals displacing premises-based systems.
- Net customer additions were below historical averages, partly because of the wind-down of very small acquired iTelConnect customers and a sales focus on larger deals. Management expected this trend to continue and said customer-addition counts were becoming less representative of revenue growth.
- No numerical revenue or earnings guidance is provided. Management described demand in its target market as strong and emphasized building a more profitable midmarket customer base.
- Nine-month operating income included a $1.0 million gain from a patent sale-related payment. Prior-year nine-month net income included discontinued-operation income and a disposal gain from the dedicated server hosting business; the business was sold in September 2013. The prior-year quarter also benefited from a one-time tax-credit adjustment, affecting period comparisons.
- The board authorized up to $15 million of share repurchases through July 22, 2015. The company repurchased 216,965 shares for approximately $1.6 million in Q3; approximately $13.4 million remained authorized at quarter-end.
Risks, contingencies and unusual items
- Pending patent litigation included Bear Creek Technologies, CallWave Communications and a newly filed Adaptive Data matter. The company said it could not estimate potential liability in these cases; it believed the matters would not currently have a material adverse effect, while noting the uncertainty.
- Commitments included $2.2 million remaining under a third-party customer-support contract and $7.1 million of minimum network-service payments through fiscal 2018, in addition to facility leases.
- Management cited risks including customer demand and retention, service reliability, competitive pricing, customer acquisition costs, regulatory compliance, product defects and warranties, intellectual-property claims, execution of growth and acquisition strategies, and working-capital needs.
- Foreign-currency translation reduced comprehensive income by $1.5 million for the nine-month period. The company reported no currency hedging and said investment interest-rate exposure was not expected to be significant.
- Disclosure controls were assessed as effective at December 31, 2014; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Whether service-revenue growth, midmarket expansion and improved churn persist, and how customer additions and revenue per customer trend.
- Whether increased sales, marketing and service-delivery spending produces sustained operating profitability and cash generation.
- The effects of product sales priced below associated equipment costs, and whether product margins continue to improve.
- Future tax expense and the comparability of earnings given prior-period tax adjustments and discontinued-operation gains.
- Developments in the disclosed patent lawsuits, outstanding contractual commitments and the remaining patent-sale contingent payment opportunity.
- Changes in cash and investment balances, share repurchases, and potential dilution from equity awards.