8x8, Inc. — Form 10-Q Summary
Business context and reporting period
Cloud communications SaaS provider offering voice, video, messaging, contact center and communications APIs. This filing covers the quarter and six months ended September 30, 2019 (fiscal Q2 and first half of fiscal 2020); financial statements are unaudited.
Key financial metrics
| Metric | Quarter ended Sep. 30, 2019 | Prior-year quarter | Six months ended Sep. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $109.5 million | $85.7 million | $206.2 million | $168.9 million |
| Service revenue | $104.5 million | $81.3 million | $196.9 million | $159.5 million |
| Operating loss | $(37.9) million | $(22.0) million | $(70.5) million | $(38.0) million |
| Net loss | $(40.9) million | $(21.5) million | $(75.2) million | $(36.8) million |
| Loss per share, basic and diluted | $(0.42) | $(0.23) | $(0.77) | $(0.39) |
Quarterly total revenue grew 27.8% year over year; service revenue grew 28.5%. Approximate gross margin, calculated from revenue less cost of service and product revenue, was 54.6%, versus 63.1% a year earlier. Sales and marketing expense was $57.9 million, up 38.9%; research and development was $19.4 million, up 38.2%.
- Cash flow: First-half operating cash use was $44.5 million, versus $4.6 million in the prior-year period. Investing cash use was $59.9 million, largely reflecting Wavecell and capital investment. Cash, cash equivalents and restricted cash totaled $181.2 million at September 30.
- Liquidity: Cash, cash equivalents and investments were $212.0 million, plus $19.0 million in restricted cash. Management said existing balances and anticipated operating cash flows should meet working-capital and expenditure needs for the next 12 months.
- Debt: $287.5 million principal of 0.50% convertible senior notes due 2024; balance-sheet carrying value was $222.4 million. Notes’ disclosed fair value was $302.7 million. The company intends to settle principal in cash upon conversion. Capped calls cover approximately 11.2 million shares, subject to a $39.50 cap price.
- Balance sheet: Total assets were $666.6 million and stockholders’ equity was $238.9 million. The accumulated deficit was $325.5 million.
Material changes versus prior comparable period
- Revenue growth reflected more subscribers, higher average monthly service revenue per customer, and some contribution from acquired CPaaS business.
- Operating loss widened as service costs and operating expenses rose faster than revenue. Management cited acquired CPaaS costs, increased personnel, sales and marketing investment, and higher amortization and stock compensation.
- Wavecell was acquired July 17, 2019 for approximately $117.1 million in cash and stock consideration. The company recorded $94.6 million of preliminary goodwill; acquired revenue and earnings were described as not material to consolidated results.
- Adoption of new lease accounting in April 2019 added operating lease right-of-use assets and liabilities. At quarter-end these were $78.1 million and $80.5 million, respectively.
Outlook, risks and unusual items
- Management prioritizes growth over short-term profitability and expects continued investment in technology, international expansion, sales and marketing, direct and channel sales, and customer acquisition. No numerical revenue or earnings guidance was provided.
- The company planned to accelerate migrations from legacy Virtual Office and Virtual Contact Center products to X Series during the rest of fiscal 2020 and into fiscal 2021; migrations could require unrecoverable professional-services costs.
- Management cautioned that investment may not produce sufficient additional revenue. Other cited risks include competition, customer churn, service reliability, reliance on third-party networks, cybersecurity, acquisition integration, regulatory compliance, and foreign-exchange exposure.
- The new Campbell headquarters lease increased right-of-use assets by $56.8 million and lease liabilities by $56.1 million; the 132-month lease includes 12 months of rent abatement and a tenant-improvement allowance of approximately $15.4 million.
- The company reported ongoing tax audits and other ordinary-course legal matters, but no provision for litigation losses; management did not believe a loss was probable. Disclosure controls were assessed as effective, and no material changes in internal control were reported.
Most important facts for investors to verify
- Whether service-revenue growth and customer economics continue to offset faster growth in service costs and operating expenses.
- Cash burn, investment requirements, and liquidity trends, including the effect of acquisition spending and lease commitments.
- Wavecell integration, CPaaS growth, and the ultimate purchase-price allocation, which remained preliminary.
- Potential dilution and cash obligations from convertible notes, employee awards, and acquisition-related equity.
- Progress and costs of legacy-customer migrations, and whether planned sales and marketing investments generate durable growth.