8x8, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended June 30, 2011; comparisons are with the three months ended June 30, 2010 unless noted. Financial statements are unaudited. 8x8 provides IP telephony, video, conferencing, unified communications, managed hosting and cloud services; it reported more than 25,000 business customers.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $18.507 million | $16.834 million | +9.9% |
| Service revenue | $17.021 million | $15.363 million | +10.8% |
| Product revenue | $1.486 million | $1.471 million | +1.0% |
| Operating income | $1.606 million | $0.842 million | +90.7% |
| Net income | $1.947 million | $1.018 million | +91.3% |
| Diluted EPS | $0.03 | $0.02 | — |
| Cash from operations | $2.140 million | $2.093 million | +2.2% |
- Gross margin was approximately 67.1% (reported operating statistics: 67%); service margin was 78%. Product gross margin was approximately negative 52.8%, as product costs exceeded product revenue.
- Operating margin was approximately 8.7%; net margin was approximately 10.5%, helped by an income tax benefit of $321,000. The tax benefit was primarily from a valuation-allowance release related to a deferred tax liability recorded with the Zerigo acquisition.
- Cash, cash equivalents and short-term investments totaled $18.876 million at June 30, 2011. Current assets were $22.166 million and current liabilities $10.624 million. Cash increased $460,000 during the quarter.
- Investing activities used $900,000, including $715,000 net cash for the Zerigo acquisition; financing activities used $780,000, principally for share repurchases. Capital lease obligations totaled $35,000; the filing does not disclose material borrowing debt.
- Total assets were $29.269 million and stockholders’ equity was $18.217 million at quarter-end. Goodwill rose to $2.466 million, and net intangible assets to $1.234 million, principally reflecting the Zerigo acquisition.
Changes and operating trends
- Service revenue growth reflected an increase in business customers to 25,455 from 21,362 a year earlier. Business customer churn declined to 2.1% from 2.5%, while average monthly service revenue per customer fell to $200 from $208.
- Service costs rose 12.8%, faster than service revenue; product costs rose 12.0% while product revenue increased 1.0%. R&D expense increased 14.8% to $1.407 million. SG&A was nearly flat at $9.409 million, with lower advertising partly offsetting higher payroll and promotions.
- Cash from operations was broadly stable year over year. Working-capital movements included a $1.085 million cash outflow from accounts payable, partly offset by inventory reductions.
- Net income benefited from a $321,000 tax benefit, while the prior-year quarter included $158,000 of income from a change in warrant fair value. The warrants had expired in December 2010.
Acquisition, outlook, risks and contingencies
- On June 16, 2011, 8x8 acquired cloud-services provider Zerigo. Consideration included $750,000 cash and 207,756 shares valued at $750,000; purchase accounting recorded total acquisition costs of $2.327 million, including $1.256 million of goodwill. An additional cash earn-out of up to $500,000 is contingent on software-development milestones by December 31, 2011.
- The filing provides no numerical revenue or earnings guidance. It describes expected executive incentive awards for fiscal 2012 under a $634,000 bonus pool, weighted 75% to revenue targets and 25% to adjusted net income targets; the specific targets are not provided in the filing text.
- Management cited risks including customer demand, service reliability, pricing and renewals, customer acquisition costs, competition, product supply and defects, intellectual-property claims, working-capital needs, and regulatory compliance. Potential FCC requirements concerning VoIP E-911 location, billing practices, service classification and accessibility could increase costs or affect service availability.
- The Ceres patent suit was settled in June 2011 through acquisition of license rights, and the related Texas suit was dismissed. A separate Bear Creek patent-infringement case remained pending; the company said it could not estimate potential liability. The filing also describes indemnification exposure that may not be contractually capped.
- Commitments included a $2.2 million remaining obligation under a third-party customer-support contract, $785,000 of future minimum operating lease payments, and network-service commitments of $365,000 in fiscal 2012 and $23,000 in fiscal 2013.
- The board had authorized repurchases of up to $10 million through October 19, 2011. During the quarter, 301,800 shares were repurchased for approximately $889,000; approximately $4.088 million remained authorized.
Important facts for investors to verify
- Whether customer growth and lower churn can sustain service-revenue growth, particularly as average monthly revenue per customer declined year over year.
- Whether service-cost growth and persistently negative product margins affect future gross profitability.
- The timing and achievement of Zerigo’s milestones, the potential earn-out payment, and the acquired business’s contribution to revenue and cash flow.
- The source and sustainability of the reported tax benefit, and the company’s ability to use deferred tax assets.
- Developments in the Bear Creek litigation and FCC proceedings, including any resulting costs, obligations or operating restrictions.
- Cash use for repurchases and contractual commitments relative to operating cash generation; reported interim results are not necessarily indicative of full-year results.