8x8, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2016. The interim financial statements are unaudited. 8x8 provides cloud-based business communications, contact-center, and collaboration services.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2016 | Prior-year quarter | Nine months ended Dec. 31, 2016 | Prior-year period |
|---|---|---|---|---|
| Revenue | $63.7 million | $53.2 million | $186.9 million | $152.0 million |
| Service revenue | $60.1 million | $48.9 million | $173.2 million | $140.1 million |
| Operating loss | $1.7 million | $2.5 million | $3.0 million | $4.1 million |
| Net loss | $1.3 million | $1.7 million | $1.8 million | $4.0 million |
| Net loss per share | $0.01 | $0.02 | $0.02 | $0.05 |
- Quarterly revenue increased 19.8% year over year; service revenue rose 22.9%. Nine-month revenue increased 23.0%.
- Quarterly overall gross margin was 77%, up from 72%; service margin was 83%, versus 80%. Product margin remained negative at 20%, versus negative 21%.
- For the nine months, operating cash flow was $22.2 million, versus $15.4 million. Investing activities used $20.6 million and financing activities used $0.9 million. Operating cash flow included $15.6 million of stock-based compensation add-back.
- At December 31, cash and cash equivalents were $33.5 million and short-term investments were $139.2 million, totaling $172.7 million. Current assets were $192.5 million and current liabilities $38.5 million.
- The balance sheet does not separately identify borrowings. It reports $3.0 million of non-current liabilities; the company also had capital leases and reported $0.5 million of lease payments for the nine-month period.
Material changes and operating trends
- Quarterly service revenue growth reflected a larger business-customer base and higher average monthly service revenue per business customer: $414, up 12% from $369. Mid-market and enterprise service revenue grew 36% year over year and represented 55% of service revenue.
- Virtual Contact Center revenue grew 32% in the quarter, compared with 16% growth a year earlier. Fifteen of the company’s top 20 customers subscribed to both Unified Communications and Contact Center.
- Sales and marketing expense rose 29% in both the quarter and nine-month period, reflecting higher payroll, facilities, channel commissions, and other selling costs. Management expected sales and marketing and research and development expenses to continue increasing.
- Product revenue fell 16% in the quarter, attributed partly to lower equipment sales as customers increasingly use soft phones, cell phones, or existing phones. Product costs exceeded product revenue.
- European revenue represented 10% of nine-month revenue. Foreign-currency translation reduced revenue by approximately $3.0 million through December 31; management estimated a roughly $4.2 million negative revenue impact for fiscal 2017 if exchange rates persisted at then-current levels.
Outlook, risks, contingencies, and unusual items
- Management expected business-customer numbers and average monthly service revenue per customer to continue growing in fiscal 2017. It said newer enterprise customers were adopting “land and expand” deployments; initial bookings were comparatively smaller, but management did not anticipate a long-term revenue impact.
- Management cited a weaker British pound as a material revenue risk. It also identified customer churn, competition, service interruptions and reliance on third-party network providers, international expansion, and acquisition integration among key risks.
- During the quarter, 8x8 discontinued a UK DXI platform-as-a-service customer segment and recorded an immaterial impairment of the related customer-relationship intangible asset.
- The City of San Francisco assessed utility taxes. The company recorded an estimated probable loss of $0.4 million and disclosed a possible additional loss of $0 to $0.6 million; it plans to appeal.
- Patent and other litigation was pending, including claims filed in Texas in November and December 2016. The company said it could not estimate potential liability in those cases. The filing also describes the Bear Creek patent matter and the Slocumb Law Firm dispute.
- In January 2017, after quarter-end, the company acquired a collaboration-technology company for approximately $3.0 million.
- At December 31, the company reported $49.7 million of unamortized stock-based compensation expected to be recognized over a weighted-average 2.12 years.
Important facts for investors to verify
- Whether enterprise and channel bookings convert into deployments and recurring revenue, particularly under the newer “land and expand” model.
- The ongoing effect of sterling weakness on reported revenue and the assumptions behind the fiscal 2017 foreign-exchange estimate.
- Whether service-margin improvement can continue while sales and marketing and research and development expenses rise, and how the negative-margin product business evolves.
- The sustainability and quality of operating cash flow, including the effect of working capital and substantial non-cash stock-based compensation.
- Developments in the San Francisco tax appeal, patent litigation, other legal claims, and the post-quarter acquisition.