8x8, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017. The company provides cloud communications, collaboration, conferencing and customer-engagement services. Financial statements are unaudited; amounts below are in millions except per-share data and percentages.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Nine months ended Dec. 31, 2017 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $75.6 | $63.7 | $217.2 | $186.9 |
| Service revenue | $71.9 | $60.1 | $205.1 | $173.2 |
| Product revenue | $3.7 | $3.5 | $12.1 | $13.7 |
| Operating loss | $(18.2) | $(1.7) | $(28.2) | $(3.0) |
| Net loss | $(88.5) | $(1.3) | $(91.2) | $(1.8) |
| Net loss per share | $(0.96) | $(0.01) | $(0.99) | $(0.02) |
| Operating cash flow | Not separately provided for the quarter | $19.4 | $22.2 |
- Quarterly total revenue rose 18.7% year over year; service revenue increased 19.5%. Nine-month total revenue grew 16.2%, while product revenue fell 12.3%.
- Quarterly gross margin was 78% (service margin 83%; product margin negative 27%), compared with 77%, 83% and negative 20%, respectively, a year earlier.
- Sales and marketing expense increased 36.9% in the quarter to $48.8 million, reflecting investment in mid-market and enterprise growth. Quarterly R&D expense rose 20.2% to $8.5 million and G&A rose 27.4% to $10.0 million.
- Cash, cash equivalents and short-term investments totaled $161.0 million at December 31, 2017. Current assets were $189.2 million versus current liabilities of $53.4 million. The company reported no outstanding debt instruments other than equipment under capital leases.
- Nine-month investing cash use was $9.2 million and financing cash use was $19.8 million. Financing included $22.1 million of share repurchases and tax-related share withholding. Cash and cash equivalents declined $9.3 million from March 31, 2017 to $31.8 million.
Material changes and unusual items
- Net loss included a $70.8 million quarterly income-tax provision, principally from establishing a full valuation allowance against U.S. deferred tax assets. The nine-month provision was $66.2 million. This discrete tax charge substantially widened the reported net loss; the filing also reports $66.3 million of deferred income-tax expense in nine-month cash-flow adjustments.
- The company recorded a $9.5 million non-cash impairment charge related to its DXI UK reporting unit: $8.0 million goodwill, $1.2 million intangible assets and $0.3 million property and equipment. The impairment followed a change in product and marketing strategy and revised profitability outlook. Goodwill fell to $39.6 million from $46.1 million at March 31, 2017.
- Management attributed service-revenue growth to customer-base expansion and higher average monthly service revenue per business customer. That metric was $454 in December 2017 versus $414 a year earlier; business service revenue churn was 0.4%, down from 1.0%.
- Mid-market and enterprise service revenue grew 28% year over year and represented 59% of service revenue. Their new monthly recurring revenue bookings were 65% of total bookings and 40% higher year over year; average monthly service revenue per such customer rose 8% to $4,765.
- Other income included $1.4 million returned from the DXI acquisition escrow. The company repurchased about $17.9 million of shares under its $25 million 2017 plan through December 31; approximately $7.1 million remained available.
Outlook, risks and contingencies
- Management expected business-customer growth and average monthly service revenue per customer to continue for the remainder of fiscal 2018. It expected service costs to rise moderately as a percentage of service revenue, sales and marketing expense to rise as a percentage of revenue, and G&A to rise moderately as a percentage of revenue. No specific revenue or earnings guidance was provided.
- The company continued increased sales and marketing investment to accelerate mid-market and enterprise growth, with ongoing product development investment. Management cautioned that growth is not assured and depends on effective execution and productive use of spending.
- A new 132-month San Jose headquarters lease was signed in January 2018, starting January 1, 2019 or earlier occupancy. Initial base rent is about $512,000 monthly, subject to annual 3% increases, with rent abatements and a tenant-improvement allowance of about $13.3 million. An $8.1 million standby letter of credit supports the lease.
- Risks include competition, customer acceptance and retention, execution of sales and product plans, international and foreign-exchange exposure, litigation and possible changes in broadband-provider treatment of internet traffic. The filing discusses uncertainty around the FCC’s January 2018 net-neutrality order. Two patent suits described in the filing were dismissed with prejudice after settlements; one settlement was stated to be immaterial.
- The company adopted the new goodwill-impairment guidance early in the quarter. It was assessing the expected impact of the revenue-recognition standard effective April 1, 2018, including contract allocation and capitalization of certain sales commissions.
Most important facts for investors to verify
- Whether the increased sales and marketing investment translates into sustained bookings, customer growth and revenue growth without further deterioration in operating losses.
- The recoverability of deferred tax assets and the potential for future changes to the valuation allowance and tax provision.
- The assumptions behind DXI’s impairment and whether revised product strategy changes future results or triggers additional impairments.
- Cash generation, share-repurchase pace and liquidity after accounting for the new headquarters lease and other commitments.
- The effect of product discounting, negative product margins, competition and any broadband-provider or regulatory changes on profitability and customer demand.