8x8, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2014 (fiscal 2015). The company provides cloud-based communications and collaboration services and reported approximately 40,400 business customers. Financial figures below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $39.6 | $30.8 | $77.5 | $60.1 |
| Operating income | $2.5 | $2.3 | $3.0 | $5.3 |
| Net income | $1.3 | $2.2 | $1.3 | $4.4 |
| Diluted EPS | $0.01 | $0.03 | $0.01 | $0.06 |
| Operating cash flow | Not separately provided | $8.6 | $9.0 |
- Q2 revenue grew 28.5% year over year; service revenue rose 29.8% to $36.1 million and product revenue rose 16.3% to $3.5 million. For the first half, revenue increased 29.1%.
- Q2 gross margin was approximately 71.5%; reported operating statistics show 79% service margin and negative 8% product margin. Product sales continued to be loss-making, though the negative product margin improved from the prior-year quarter.
- Q2 operating margin was approximately 6.3%, versus 7.5% a year earlier. First-half operating margin was approximately 3.9%, versus 8.7%.
- Cash, cash equivalents and short- and long-term investments totaled $185.6 million at September 30. Current assets were $198.6 million and current liabilities $20.3 million. The balance sheet reports no borrowings; capital lease obligations are not separately quantified in the filing excerpt, though leased assets were $0.5 million.
- Six-month investing cash outflow was $13.5 million, principally reflecting net investment purchases and $2.6 million of property and equipment spending. Cash and cash equivalents fell $3.1 million to $56.0 million.
Changes and management commentary
- Management attributed service growth to a larger business-customer base and higher average monthly service revenue per customer: $299, up from $268. Customer count rose to 40,434 from 34,674 year over year; the November 2013 Voicenet acquisition contributed approximately 1,000 customers.
- Monthly service revenue churn was 0.9%, compared with 1.2% a year earlier and 1.2% in the prior quarter. Mid-market customers represented 41% of service revenue in fiscal 2015 to date, versus 35% in fiscal 2014.
- Sales and marketing costs increased 41% in Q2, outpacing revenue growth, as the company invested in payroll, commissions and customer support. Cost of service revenue increased 44%, primarily from higher third-party network costs and personnel.
- Net income comparisons are affected by prior-year discontinued operations: the September 2013 period included income and a disposal gain from the dedicated server-hosting business, sold September 30, 2013. The current quarter included a nonrecurring $1.0 million patent-sale gain recorded as a reduction of operating expenses; up to $1.0 million of further contingent payments remained possible.
- Management said it would continue investing in research and development, customer support, and sales and marketing to enhance services and target mid-market and distributed enterprises. The filing provides no quantified revenue or earnings guidance.
Risks, contingencies and other items
- Pending patent litigation includes Bear Creek Technologies, whose patent claims were rejected by the USPTO and remained under appeal, and CallWave Communications litigation. The company said it could not estimate potential liability in either matter.
- Commitments include $2.2 million remaining under a third-party customer-support contract and $5.5 million of future minimum payments under third-party network-service contracts. Operating leases and other contractual obligations also apply.
- The company reported $2.2 million of unrecognized tax benefits at March 31, 2014 and no significant change through September 30. It did not expect a material change over the next 12 months. No active federal or state income-tax audits were reported as of October 20, 2014.
- Management identified risks including customer demand and retention, competition and pricing, service reliability, costs of supporting larger enterprises, regulation, product defects, working-capital needs, acquisition integration, and intellectual-property litigation. It reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Confirm the durability of subscriber growth, higher customer spend, and sub-1% churn, including the contribution from Voicenet.
- Assess whether service-cost growth and elevated sales and marketing investment can be absorbed while sustaining margins and profitability.
- Review cash generation against investment spending, working-capital movements, and the company’s $185.6 million cash-and-investment balance.
- Track outcomes and potential financial exposure from Bear Creek and CallWave litigation, tax matters, and remaining contingent patent-sale proceeds.
- Consider dilution: weighted-average diluted shares were 91.6 million in Q2, compared with 76.2 million a year earlier.