8x8, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. Although the request references 2017 Q4, this filing is the FY2018 annual report; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars.
Business context
8x8 provides subscription-based cloud communications and customer-engagement services, including unified communications, collaboration, conferencing, contact center, and analytics. Management emphasized expansion among mid-market and enterprise customers, channel sales, international growth, and the planned X Series integrated product line.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $296.5 million | $253.4 million |
| Service revenue | $280.4 million, up 18.9% | $235.8 million |
| Product revenue | $16.1 million, down 8.5% | $17.6 million |
| Operating loss | $41.9 million | $6.7 million |
| Net loss | $104.5 million; $1.14 per share | $4.8 million; $0.05 per share |
| Net cash from operating activities | $22.0 million | $28.5 million |
Service gross margin was approximately 81.9%; product gross margin was negative 27.5%, and overall gross margin was approximately 76.0%. Sales and marketing expense rose 32.1% to $184.0 million; R&D rose 26.8% to $34.8 million. Management attributed higher spending to investment in sales, customer support, and product development.
At March 31, 2018, cash, cash equivalents, and short-term investments totaled $152.3 million, down from $175.0 million a year earlier; an additional $8.1 million was restricted for a lease letter of credit. Current assets were $178.6 million and current liabilities $56.3 million. The company reported no outstanding debt instruments other than equipment under capital leases; capital lease payments totaled $1.6 million. Management said available liquidity and anticipated operating cash flows should cover requirements for the next 12 months.
Fourth quarter: Revenue was $79.3 million, versus $66.5 million in Q4 FY2017. Net loss was $13.3 million, versus $2.9 million. The filing’s quarterly table reports Q4 operating loss of $13.7 million.
Material changes and unusual items
- Business service customers increased to more than 53,800 from approximately 49,200; annual average monthly service revenue per customer rose to $450 from $412. Mid-market and enterprise customers generated 58% of service revenue, up 29% year over year.
- Net loss widened substantially, primarily reflecting increased operating costs and a $66.3 million income tax expense. The tax expense was largely associated with establishing a full valuation allowance against U.S. deferred tax assets; it was not a cash tax payment of that amount.
- The company recorded a $9.5 million non-cash impairment charge related to DXI assets, including $8.0 million of goodwill, after changing its strategy for DXI technology. It also discontinued marketing ContactNow as a standalone product.
- Operating cash flow declined by $6.4 million. Investing activities used $7.3 million and financing activities used $16.4 million, including $17.9 million for market share repurchases.
- The company entered a 132-month lease for a new San Jose headquarters, with base rent of approximately $512,000 per month for the first 12 months, subject to stated rent abatements and other terms. Total disclosed future office lease payments were $94.1 million.
Outlook, risks, and contingencies
Management expected service gross margin to remain at comparable levels in FY2019 and expected R&D, sales and marketing, and general and administrative expenses to increase. It targeted approximately 25% year-over-year service revenue growth, excluding DXI revenue, in Q4 FY2019. The planned X Series launch was around June 2018. These are management expectations, not guarantees.
Key risks include competition and pricing pressure; customer churn and lengthy enterprise sales cycles; executing the X Series launch and integrating acquisitions; dependence on third-party network and data-center providers; service outages, cybersecurity incidents, and privacy or regulatory compliance costs; and international operating and currency risks. The filing reported no material litigation matters as of May 24, 2018, while noting tax audits and inquiries, including ongoing federal and Illinois examinations. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the targeted growth and X Series adoption materialized, and how results compare with management’s FY2019 expectations.
- Whether operating expense growth, negative product margins, and operating losses improve relative to service revenue growth.
- The effect of the full deferred-tax valuation allowance and future evidence supporting any release or continued allowance.
- Customer retention, churn, service quality, and the company’s dependence on third-party network and data-center providers.
- DXI integration and impairment assumptions, outstanding lease commitments, and the impact of stock-based compensation and share repurchases on per-share results.