8x8, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014 (unaudited). 8x8 provides cloud-based business communications and related services; it reported approximately 33,700 business customers at quarter-end.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Service revenue | $27.252 million | $23.172 million | Up 17.6% |
| Product revenue | $2.752 million | $2.080 million | Up 32.3% |
| Total revenue | $30.004 million | $25.252 million | Up 18.8% |
| Income from operations | $3.189 million | $14.390 million | Down 77.8% |
| Net income | $2.139 million | $8.617 million | Down 75.2% |
| Diluted EPS | $0.03 | $0.12 | Down $0.09 |
| Operating cash flow | $5.233 million | $14.926 million | Down $9.693 million |
- Reported overall gross margin was 71%, versus 67% a year earlier. Service margin was 81% versus 75%; product margin remained negative at -22%, improving from -30%.
- Sales and marketing expense rose 24.5% to $13.121 million; research and development increased 27.9% to $2.336 million; general and administrative expense rose 35.2% to $2.790 million.
- Cash, cash equivalents and short-term investments totaled $57.814 million at June 30, 2013, up from $52.269 million at March 31. Total current assets were $68.132 million and current liabilities $14.303 million.
- Total liabilities were $16.091 million. The filing does not identify material borrowings or provide a separate debt total; it reports capital leases and other contractual obligations.
- Investing activities used $0.794 million, including $0.466 million for property and equipment and $0.328 million for capitalized software. Financing activities provided $1.171 million, primarily from employee stock-plan share issuance.
Changes and operating trends
- Revenue growth was driven primarily by expansion of the business customer base; management said this partly offset declining residential customers and reflected a shift in marketing toward business services.
- Business customers increased from approximately 29,913 at June 30, 2012 to 33,662 at June 30, 2013. Monthly service revenue per business customer rose to $268 from $250; monthly business customer churn was 1.4% versus 1.7%.
- Profit and cash flow comparisons were affected by the prior-year patent sale: Q1 FY2013 included a $11.965 million gain on sale recorded as a reduction of operating expenses. No comparable gain was recorded in Q1 FY2014.
- The current-quarter effective tax rate was 33.2%, compared with 40.2%; the 2013 quarter included a $0.2 million benefit from a prior-period city tax return true-up.
- Operating cash flow fell partly because the prior-year period included the $12.0 million patent-sale proceeds. The company ended the quarter with $55.915 million of cash and cash equivalents, versus $36.274 million a year earlier.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management expected service revenue to remain nearly all service revenue and said business-focused growth trends were expected to continue.
- Management cited risks including customer demand, service reliability and renewals, acquisition costs, competitive pricing, regulatory requirements, working-capital needs, product supply and defects, and intellectual-property claims and litigation.
- 8x8 was defending patent cases brought by Bear Creek Technologies and Klausner Technologies. The Bear Creek case was stayed in July 2013 pending USPTO reexamination proceedings; the company said it could not estimate potential liability in either case.
- Contractual commitments included a $2.2 million remaining obligation to a customer-support vendor and $3.363 million of future minimum payments under third-party network-service contracts. Indemnification exposure may be uncapped in some agreements.
- Management reported effective disclosure controls as of June 30, 2013 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether business-customer and service-revenue growth can continue, and how churn and customer acquisition costs develop.
- Whether negative product margins improve as equipment sales grow, and whether elevated sales and marketing spending generates profitable growth.
- How operating cash flow compares after accounting for the nonrecurring patent-sale proceeds in the prior-year period.
- Updates on the Bear Creek and Klausner cases, tax exposures, and the company’s contractual commitments.
- Potential dilution from stock-based awards: diluted weighted-average shares were 75.756 million versus 72.510 million basic shares in the quarter.