8x8, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2014 (the company’s first quarter of fiscal 2015). Unaudited results are compared with the three months ended June 30, 2013. 8x8 provides cloud-based communications and collaboration services and reported 39,340 business customers at quarter-end.
Financial and operating performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Service revenue | $34.276 million | $26.499 million | +29.3% |
| Product revenue | $3.637 million | $2.752 million | +32.2% |
| Total revenue | $37.913 million | $29.251 million | +29.6% |
| Operating income | $0.503 million | $2.938 million | Down $2.435 million |
| Net income | $0.008 million | $2.139 million | Down $2.131 million |
| Operating cash flow | $4.650 million | $5.233 million | Down $0.583 million |
- Gross margin was approximately 71%, versus 72% a year earlier; service margin was 80% versus 82%. Product margin remained negative at -9%, improving from -22%.
- Operating margin was approximately 1.3%, versus 10.0%. Net income per diluted share rounded to $0.00, compared with $0.03.
- Operating expenses rose 42.1% to $37.410 million, outpacing revenue growth. Sales and marketing increased 46.6% to $19.160 million; research and development rose 45.8% to $3.406 million; general and administrative rose 39.9% to $3.878 million.
- The income tax provision was $0.672 million on $0.680 million of pretax continuing income, an effective rate of 98.8%. The filing attributes the provision primarily to continuing operations but does not provide a clear explanation for the unusually high rate.
- At June 30, cash and cash equivalents were $55.073 million and short-term investments were $126.937 million, totaling approximately $182.0 million. Total assets were $303.154 million; total liabilities were $22.413 million. The balance sheet reports no conventional borrowings; it does disclose capital leases.
- Cash from investing activities was negative $8.868 million, principally reflecting net investment purchases and $1.026 million of property and equipment purchases. Cash and cash equivalents decreased by $4.086 million, while cash, cash equivalents and investments together increased from approximately $178.4 million at March 31.
Material changes and management commentary
- Management reported record quarterly revenue, up 30% year over year. Service revenue growth reflected a larger business subscriber base and higher average revenue per customer.
- Business customers increased from 33,374 to 39,340 year over year. Average monthly service revenue per business customer rose 11% to $293 from $263. Channel and mid-market sales grew 94% year over year and represented 44% of new monthly recurring revenue sold in the quarter.
- Management cited higher network-service costs and personnel expenses, increased sales and marketing investment, and higher stock-based compensation among the drivers of expense growth. The filing provides no quantitative earnings or revenue guidance.
- The dedicated server hosting business, sold in September 2013, is reported as discontinued operations; it contributed $0.147 million of net income in the prior-year quarter and none in the current quarter.
Risks, contingencies and unusual items
- Management identifies risks including customer demand, service reliability and renewals, customer acquisition costs, competitive pricing, regulation and compliance, product defects, supplier availability, execution of growth and acquisition plans, and intellectual-property litigation.
- Patent cases involving Bear Creek Technologies and CallWave remain unresolved; the company says it cannot estimate potential liability. The IPVX matter was agreed to settle under confidential terms, subject to finalizing a written agreement; the expected impact was described as immaterial.
- Commitments include $2.2 million remaining under a third-party customer-support contract and $1.569 million in minimum third-party network-service payments through fiscal 2016. The company also discloses indemnification arrangements whose maximum potential exposure cannot be determined.
- Available-for-sale investments totaled $151.957 million and were subject to market and interest-rate risk. The company reported no currency hedging, although it said most sales and nearly all contract-manufacturer arrangements were denominated in U.S. dollars.
- Disclosure controls were assessed as effective at June 30, 2014; the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether customer and revenue growth can be sustained while sales, marketing and other operating costs grow faster than revenue.
- Whether service-margin pressure and persistently negative product margins improve, and how equipment subsidies support customer acquisition and retention.
- The drivers and likely persistence of the unusually high effective tax rate in the quarter.
- Developments and potential exposure in the Bear Creek and CallWave litigation, and final completion of the IPVX settlement.
- The composition, maturities and liquidity of the investment portfolio, alongside contractual commitments and capital-lease obligations.