8x8, Inc. Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2018. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context
8x8 provides cloud-based business communications, collaboration, conferencing, and contact-center services on a SaaS model. Its customers span more than 150 countries. The company rolled out its X Series offering across U.S. and U.K. business segments and shifted to one reporting segment during the quarter.
Financial performance
- Quarter revenue: $89.9 million, up 19.0% year over year. Service revenue was $85.9 million, up 19.5%; product revenue was $4.0 million, up 8.6%.
- Nine-month revenue: $258.8 million, up 19.2%. Service revenue was $245.4 million, up 19.6%; product revenue was $13.4 million, up 11.5%.
- Profit and loss: Third-quarter operating loss was $24.2 million versus $18.2 million a year earlier; net loss was $23.8 million, or $0.25 per share, versus $88.5 million, or $0.96 per share. Nine-month net loss was $60.6 million versus $91.2 million.
- Margins and costs: Service cost was 19.8% of service revenue versus 17.1% a year earlier. Product cost exceeded product revenue, reflecting phone discounting. Operating expenses were $114.2 million for the quarter, up from $93.8 million; R&D, sales and marketing, and G&A all increased.
- Cash flow: Operating activities used $6.7 million in the nine months, compared with $19.4 million provided a year earlier. Investing activities provided $4.7 million; financing activities used $1.0 million. Cash, cash equivalents, and restricted cash ended at $36.4 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled about $114.8 million; including restricted cash, reported liquidity was about $122.9 million. Current assets were $161.5 million and current liabilities $71.2 million. The company reported no outstanding debt instruments apart from equipment under capital leases.
- Balance sheet: Total assets were $304.0 million, total liabilities $76.3 million, and stockholders’ equity $227.7 million at December 31, 2018.
Material changes versus prior comparable periods
- Revenue growth was driven primarily by subscriber-base growth, net of churn, and higher average monthly service revenue per customer, which rose from $454 to $506.
- Operating losses widened year over year in the quarter as operating expenses grew faster than revenue. The prior-year net loss included a $70.8 million quarterly income-tax provision, largely from a valuation allowance on deferred tax assets; this makes the net-loss comparison less representative of underlying operations.
- Operating cash flow declined from positive $19.4 million to negative $6.7 million for the nine-month periods. Increased capitalized software development costs and deferred sales commissions contributed to cash use.
- Adoption of ASC 606 from April 1, 2018, using the modified retrospective method, increased opening equity by $39.9 million, largely due to capitalized commission costs. Prior-year periods were not restated. For the nine months, ASC 606 increased reported operating results by $7.5 million versus the company’s ASC 605 comparison.
- MarianaIQ and Jitsi technology assets were acquired to support AI, machine learning, and video collaboration capabilities; neither acquisition materially affected reported revenue or net loss through December 31.
Outlook, risks, and unusual items
- Management expected service revenue to continue growing through the remainder of fiscal 2019. It planned continued investment in X Series, talent, marketing, demand generation, product development, and international expansion.
- No specific numerical revenue or earnings guidance was provided. Management expected operating expenses to grow materially; R&D and sales and marketing were expected to rise as percentages of revenue, while service costs were expected to remain at a similar percentage of service revenue.
- The company recorded $6.5 million of incremental sales-tax expense during the first nine months following preliminary audit findings. It reported an accrued contingent liability of approximately $7.1 million for potential indirect taxes, fees, and surcharges; further assessments could exceed the accrual.
- A patent-infringement complaint filed in November 2018 concerning the Virtual Office application was at an early stage, and the company could not estimate any potential loss. Management stated it did not then believe the suit would have a material adverse impact.
- Future minimum operating lease payments totaled $88.9 million, including $54.6 million thereafter. The company also expected adoption of the new lease standard to materially affect its balance sheet.
- Key disclosed risks include customer churn and acquisition costs, competition and pricing pressure, execution and adoption of X Series, service reliability and reliance on third-party network providers, cybersecurity and privacy compliance, tax audits, regulatory changes, international operations and currency exposure, and acquisition integration.
- Disclosure controls were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether service-revenue growth and higher revenue per customer continue, and how churn and customer-acquisition costs develop.
- Whether expense growth moderates and the company can improve operating margins and cash generation while funding X Series and product investments.
- The cash-flow impact of capitalized software and deferred commissions, and the comparability effects of ASC 606 adoption.
- Potential outcomes of sales and use tax audits, including whether the approximately $7.1 million accrual is adequate.
- Progress integrating Jitsi and MarianaIQ, and whether the acquisitions contribute meaningfully to products, customer demand, or revenue.
- Developments in the patent litigation, lease obligations, and major service, cybersecurity, privacy, and regulatory risks.