8x8, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013 (fiscal 2014 second quarter). The filing is unaudited. 8x8 provides cloud communications and collaboration services and related products; it reported approximately 34,700 business customers.
Financial performance and liquidity
| Metric | Three months ended Sept. 30, 2013 | Prior-year quarter | Six months ended Sept. 30, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $30.8 million | $25.3 million | $60.1 million | $49.6 million |
| Service revenue | $27.8 million | $23.1 million | $54.3 million | $45.3 million |
| Product revenue | $3.0 million | $2.2 million | $5.7 million | $4.3 million |
| Operating income | $2.3 million | $2.5 million | $5.3 million | $16.8 million |
| Income from continuing operations | $1.5 million | $1.6 million | $3.5 million | $10.2 million |
| Net income | $2.2 million | $1.7 million | $4.4 million | $10.4 million |
| Diluted net income per share | $0.03 | $0.02 | $0.06 | $0.14 |
- Quarterly revenue grew 21.8% year over year, led by service revenue growth of 20.5%; product revenue grew 36.2%. Management attributed service growth to more business customers and higher average monthly service revenue per customer.
- Quarterly overall gross margin was 71% versus 69% a year earlier; service margin was 81%. Product margin remained negative at -27%, as the cost of IP phones exceeded the product revenue allocated to them.
- Quarterly operating income declined despite revenue growth as operating expenses rose, particularly sales and marketing, research and development, and general and administrative expenses. Sales and marketing increased 27% and represented 44.6% of revenue.
- Six-month operating income and net income were substantially below the prior year, which included a $12.0 million patent-sale gain. The prior-year six-month comparison also included a lower tax provision associated with that gain.
- Six-month operating cash flow was $9.0 million, compared with $19.4 million. The filing attributes much of the decline to the prior-year patent-sale gain. Investing cash outflow was $1.9 million, including $1.4 million for property and equipment and $0.5 million for capitalized software.
- At September 30, cash and cash equivalents were $59.3 million and short-term investments were $1.9 million, totaling $61.3 million. Current assets were $74.5 million and current liabilities $14.8 million. Total liabilities were $16.6 million; the filing does not identify significant funded debt.
Material changes and unusual items
- 8x8 completed the sale of its dedicated server hosting business on September 30 for $3.0 million cash, received October 1 and recorded as a current asset at quarter-end. The filing reports a $589,000 after-tax disposal gain; the business’s results were reclassified to discontinued operations.
- The prior-year six-month results included the $12.0 million patent-sale gain. Up to $2.0 million of additional payments may still be earned under that patent-sale agreement, depending on the buyer’s future licensing agreements.
- Management expects to record in fiscal 2014’s third quarter approximately $0.1 million in severance and $1.1 million in stock-based compensation related to the president’s October 2013 resignation.
- Stock-based compensation expense was $2.0 million for the six months, versus $1.1 million a year earlier; $19.9 million of unrecognized compensation expense remained at quarter-end.
Outlook, management commentary, and risks
- Management reported a 22% year-over-year increase in new services sold during the quarter and said 33% of new monthly recurring revenue came from mid-market and channel sales. Average monthly service revenue per business customer rose to $268 from $247 a year earlier; monthly business customer churn was 1.5%, versus 2.4% in the prior-year quarter.
- The company plans to increase annual research and development and sales and marketing spending by approximately $5 million to $6 million over the next 12 months. It opened a London data center and said it remained on track to open a Hong Kong data center by calendar year-end and a South American facility in the first quarter of calendar 2014.
- 8x8 completed and delivered its virtual desktop infrastructure service to Japanese partner SoftBank, which began offering it to some enterprise customers. Management described the market as early-stage.
- Key disclosed risks include competition and pricing pressure, customer churn and acquisition costs, execution in larger-enterprise and international markets, dependence on third-party networks and data centers, service reliability and cybersecurity, regulatory requirements including emergency calling, and intellectual-property litigation.
- Two patent cases remain disclosed. The Bear Creek case was stayed while the patent reexamination proceeds; the USPTO had rejected all claims in an office action. The Klausner case was transferred to the Northern District of California. The company said it could not estimate potential liability in either case.
- Commitments include $2.2 million remaining under a customer-support vendor agreement and $2.6 million in minimum third-party network payments through fiscal 2016. Management stated it believed current cash and investments were sufficient for anticipated liquidity needs, while noting it may seek additional capital for strategic objectives.
Important facts for investors to verify
- How recurring service growth, customer additions, churn, and average revenue per customer develop relative to rising sales and marketing costs.
- Whether the planned $5 million to $6 million increase in research and development and sales and marketing spending produces sustainable growth and profitability.
- The cash receipt and final accounting for the hosting-business sale, and whether the contingent patent-sale payments are realized.
- Developments in the Bear Creek and Klausner litigation, other intellectual-property claims, and regulatory obligations affecting VoIP and emergency services.
- The scale of stock-based compensation and dilution, and the expected third-quarter costs related to the president’s resignation.