8x8, Inc. — Form 10-Q summary
Business context and period. 8x8 provides cloud-based communications, messaging, meetings and contact-center services. This unaudited filing covers the quarter and six months ended September 30, 2017 (fiscal Q2 and first half of FY2018), compared with the corresponding prior-year periods. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Sep. 30, 2017 | Prior year | Six months ended Sep. 30, 2017 | Prior year |
|---|---|---|---|---|
| Service revenue | $68.1 | $57.7 | $133.2 | $113.0 |
| Product revenue | $4.4 | $5.5 | $8.4 | $10.2 |
| Total revenue | $72.5 | $63.2 | $141.6 | $123.2 |
| Operating loss | $(4.5) | $(0.4) | $(9.9) | $(1.3) |
| Net income (loss) | $(0.5) | $0.03 | $(2.7) | $(0.5) |
| Diluted loss per share | $(0.01) | $0.00 | $(0.03) | $(0.01) |
- Quarterly total revenue grew 14.7%; service revenue grew 18.0%, while product revenue declined 20.2%. First-half total revenue grew 14.9%.
- Quarterly gross margin was 75% versus 74% a year earlier; service margin was 81% versus 81%, and product margin was negative 17% versus negative 6%. The company reported operating expenses of $76.9 million for the quarter, up from $63.6 million.
- First-half operating cash flow was $11.2 million, down from $13.4 million. Investing activities used $6.3 million and financing activities used $11.8 million; cash and cash equivalents fell $6.5 million to $34.6 million.
- At September 30, cash, cash equivalents and short-term investments totaled $167.1 million. Current assets were $194.2 million and current liabilities $49.3 million. Total liabilities were $50.9 million. 8x8 reported no outstanding debt instruments other than equipment under capital leases.
Material changes and management commentary
- Quarterly operating loss widened to $4.5 million from $0.4 million, as operating expenses grew faster than revenue. Sales and marketing expense rose 22% for the quarter and 26% for the first half; management attributed the increase to investment in mid-market and enterprise growth, including hiring and channel-related spending. The company expected sales and marketing costs to rise as a percentage of revenue during the remainder of FY2018.
- Management said mid-market and enterprise service revenue grew 28% year over year and accounted for 58% of service revenue. Average monthly service revenue per mid-market and enterprise customer was $4,697, up 8%; bookings from these customers and channel sales teams made up 61% of quarterly bookings. Overall business-customer monthly service revenue per customer rose to $442 from $409.
- Management expected business-customer growth and average monthly service revenue per customer to continue increasing in FY2018, and service costs to rise moderately as a percentage of service revenue. It provided no specific quantified revenue or earnings guidance in the supplied filing text.
- In October 2017, after quarter-end, the company launched new Virtual Office bundles (X2, X5 and X8), including an offering combining communications, collaboration and contact-center capabilities.
Liquidity, unusual items and risks
- A $1.4 million escrow recovery from the 2015 DXI acquisition was recorded as other income in the first quarter and contributed to the first-half other income total of $2.5 million. The company also recognized approximately $2.7 million of excess stock-compensation tax benefits in the first half, and recorded deferred tax assets of approximately $17.6 million upon adopting updated stock-compensation accounting.
- The board authorized a $25 million share repurchase plan in May 2017. Through September 30, 8x8 repurchased approximately 1.064 million shares for $14.1 million; approximately $10.9 million remained available. Financing cash flows also included tax-related share withholding.
- Two patent cases filed in August 2017 were settled for immaterial amounts; one was formally dismissed with prejudice, and formal dismissal papers for the other were being prepared. The filing warns that future litigation, competition, customer demand and retention, execution of growth investments, international operations, regulation, and product/service reliability could affect results.
- Management stated that disclosure controls were effective as of September 30, 2017, and that there were no material changes in internal control during the quarter. The company disclosed interest-rate and foreign-exchange exposure, but said a 100-basis-point rate change or a hypothetical 10% foreign-currency decline would not have a material impact based on current exposures.
Important facts for investors to verify
- Whether mid-market and enterprise bookings and revenue growth convert into durable revenue and improved operating profitability.
- How sales, marketing and product-development investments affect customer acquisition costs, retention, margins and cash generation.
- The sustainability of service margins and the effects of ongoing negative product margins and equipment discounting.
- The composition and liquidity of the $167.1 million cash-and-investment balance, and capital-lease and other contractual commitments.
- The impact of tax benefits, stock-based compensation and share repurchases on reported earnings, dilution and per-share performance.
- The implementation effects of the revenue-recognition standard expected to become effective for the company on April 1, 2018; management was still assessing the impact.