8x8, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016, the first quarter of fiscal 2017. The filing is unaudited. 8x8 provides cloud-based business communications and collaboration services. Unless noted otherwise, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Service revenue | $55.3 million | $44.2 million |
| Product revenue | $4.7 million | $3.7 million |
| Total revenue | $60.0 million | $47.9 million |
| Gross margin | 74% | 73% |
| Operating income (loss) | $(0.9) million | $0.1 million |
| Net income (loss) | $(0.5) million | $(0.5) million |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) |
| Cash from operating activities | $6.5 million | $4.7 million |
- Total revenue increased 25% year over year; service revenue rose 25% and product revenue rose 27%.
- Operating expenses increased 27% to $60.9 million, led by sales and marketing, up 33% to $31.7 million, and research and development, up 32% to $6.7 million.
- Cash, cash equivalents and short-term investments totaled $167.1 million at June 30, 2016. Cash and cash equivalents were $27.5 million; short-term investments were $139.6 million.
- Current assets were $184.9 million and current liabilities were $35.4 million. Total liabilities were $38.7 million; the filing reports capital leases but no conventional borrowing balance.
- Cash and cash equivalents decreased $6.1 million during the quarter. Investing activities used $12.6 million, largely reflecting net purchases of investments and capital spending.
Business performance and changes
- Management reported 44% year-over-year growth in service revenue from mid-market and enterprise customers, which represented 52% of total service revenue. New monthly recurring revenue bookings from those customers and channel sales teams increased 62%.
- Average monthly service revenue per business customer reached $399, up 13% from $353. Business service revenue churn was 0.5%, compared with 1.0% a year earlier; the filing notes churn excludes DXI customers.
- Service margin was 81%, unchanged year over year. Product margin remained negative at -16%, improving from -18%; overall gross margin was 74%, versus 73%.
- Despite higher revenue, the company moved from slight operating income to an operating loss, as operating expenses grew faster than revenue. Net loss was broadly similar year over year.
- Europe revenue increased to $6.6 million from $4.3 million, while the segment reported a $2.0 million net loss. Americas revenue was $53.4 million and segment net income was $1.5 million.
Outlook, risks and notable items
- No specific financial guidance or numerical forecast was provided. Management expected business customer growth and average revenue per customer to continue in fiscal 2017, and expected research and development and sales and marketing expenses to rise as it invests in DXI, U.S. sales efforts and its Romania development team.
- On July 19, 2016, the company announced plans to expand internationally, including data centers in Singapore, the Netherlands and Brazil, additional language localization, and support centers in the Philippines and Romania. It also released its Virtual Office Meeting video-conferencing service during the quarter.
- Management estimated that, if the GBP/USD rate remained at then-current levels, currency translation could reduce revenue by about $0.6 million per quarter compared with the Q1 rate. Brexit had no material reported impact in the quarter, but further currency weakness could adversely affect revenue.
- Comprehensive loss was $3.2 million, including a $2.8 million foreign-currency translation loss. The filing also reduced European goodwill by $1.5 million due to currency translation.
- Legal matters include patent litigation involving Bear Creek Technologies and a customer dispute brought by Slocumb Law Firm; the company said it could not estimate potential liability in the Bear Creek matter. State and municipal tax inquiries and audits are also disclosed.
- Contractual commitments include a third-party customer-support termination obligation of $2.2 million and minimum network-service payments of $3.0 million. A new London office lease runs to 2026, with an 18-month rent holiday and a conditional break option in 2022.
- The company early adopted deferred-tax balance-sheet classification guidance, reclassifying deferred tax assets and liabilities as noncurrent; prior periods were not restated. Adoption did not materially affect the statements.
- Disclosure controls were deemed effective at June 30, 2016. The filing identifies no material changes to the risk factors from the prior annual report except for added discussion of international expansion and Brexit-related currency volatility.
Important facts for investors to verify
- Whether service growth, enterprise bookings and higher average customer revenue persist, and how churn develops, including DXI-related churn.
- Whether expense growth—particularly sales and marketing and research and development—translates into sustained revenue growth and improved operating profitability.
- The effect of GBP/USD movements and international expansion on reported revenue, segment losses and costs.
- Cash generation and the composition, maturity and valuation risks of the $139.6 million short-term investment portfolio.
- Updates on the disclosed litigation, tax inquiries, contractual commitments and the execution and cost of the London lease.