8x8, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2011. Fiscal year ends March 31. Financial statements are unaudited. 8x8 provides IP telephony, video, conferencing, unified communications, managed hosting and cloud services; it reported more than 27,600 business customers at quarter-end.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Year-over-year change | Nine months ended Dec. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $23.278 million | +31.0% | $61.604 million | +18.5% |
| Service revenue | $21.200 million | +27.2% | $56.234 million | +16.9% |
| Product revenue | $2.078 million | +86.5% | $5.370 million | +38.4% |
| Operating income | $2.552 million | +$1.134 million | $5.023 million | +$0.812 million |
| Net income | $2.586 million | +$1.090 million | $5.365 million | +$0.882 million |
| Diluted EPS | $0.04 | vs. $0.02 | $0.08 | vs. $0.07 |
Quarterly operating and net margins were approximately 11.0% each; nine-month operating and net margins were approximately 8.2% and 8.7%, respectively. The filing reports overall gross margin of 68% for the quarter, unchanged year over year. Service margin was 77%; product margin was negative 24%, reflecting equipment costs exceeding product revenue. Product cost was 124.4% of product revenue in the quarter.
Nine-month operating cash flow was $6.408 million, compared with $6.974 million a year earlier. Investing activities used $2.456 million and financing activities used $0.422 million; cash and cash equivalents increased $3.530 million to $20.004 million. Cash, cash equivalents and short-term investments totaled approximately $21.9 million at December 31, 2011.
Total assets were $66.607 million, versus $26.584 million at March 31, 2011, largely reflecting acquisitions. Current assets were $25.348 million and current liabilities $12.350 million. Total liabilities were $12.750 million; the balance sheet reports no conventional borrowings. Capital lease obligations totaled $65,000, including $43,000 current and $22,000 long-term.
Changes and significant items
- Revenue growth reflected business-customer expansion and the September 2011 Contactual acquisition. Business customers rose to 27,677 from 23,251 a year earlier; reported churn was 2.0%, versus 2.2% a year earlier.
- Contactual was acquired for a preliminary estimated $31.774 million, primarily 6.485 million 8x8 shares. The acquisition added $22.683 million of goodwill and $11.150 million of identifiable intangible assets. Purchase accounting remained provisional; a measurement-period change increased consideration and goodwill by $2.5 million during the quarter.
- Zerigo was acquired in June 2011 for a stated total purchase price of $1.941 million, including cash, stock and contingent consideration. The earn-out milestones were met and the $500,000 payment was made by December 31.
- Operating expenses rose 26.7% in the quarter, faster than revenue, with higher payroll, acquisition-related staffing, network costs, R&D and amortization. SG&A increased 18.0%, though as a share of revenue it declined to 48.5% from 53.8%.
- Nine-month stock-based compensation increased to $1.013 million from $0.228 million. Weighted-average diluted shares rose to 73.214 million in the quarter from 66.873 million, reflecting dilution and acquisition-related shares.
Outlook, risks and contingencies
The company expects service revenue to continue comprising nearly all revenue for the foreseeable future. The filing provides no quantified revenue, earnings or cash-flow guidance. Management notes that interim results are not necessarily indicative of full-year or future results.
Key risks include potential FCC-driven increases in carrier interconnection costs, related pricing or margin pressure, and compliance with call-signaling requirements. The filing also discusses evolving FCC rules on E-911 location, billing, accessibility and VoIP regulation; broadband-provider restrictions or fees; competition, customer retention, service reliability, product defects, supply availability and working-capital needs. The company had not entered currency hedges and said foreign-exchange exposure had not been significant to date.
Two patent lawsuits were disclosed: Bear Creek Technologies’ Delaware action, for which a motion to dismiss was pending, and Klausner Technologies’ action, in which no specific monetary demand had been made. The company said it could not estimate potential liability in either case and believed it had defenses. It also disclosed $2.2 million of remaining obligations under a third-party customer-support contract and future minimum operating lease payments of $633,000. Management stated it was unaware of legal matters expected to have a material adverse effect. Disclosure controls were assessed as effective at December 31, 2011.
Most important facts to verify
- Contactual integration, purchase-price allocation and the eventual finalized goodwill and intangible-asset valuations.
- Whether revenue growth and customer metrics persist, particularly after separating acquired growth from organic growth.
- Whether negative product margins and rising operating expenses affect overall profitability and cash generation.
- Potential FCC rule changes, carrier-cost impacts and outcomes of the disclosed patent litigation.
- Share dilution and the effect of acquisition-related amortization and stock-based compensation on future earnings.