8x8, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2022 (fiscal 2023 Q2), compared with the periods ended September 30, 2021. Amounts below are in U.S. dollars. 8x8 is a cloud communications SaaS provider; most revenue comes from subscriptions and platform usage. The quarter includes Fuze, acquired in January 2022, while the comparison period does not.
Financial performance and liquidity
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Total revenue | $187.4m | $151.6m | $375.0m | $299.9m |
| Operating loss | $(25.0)m | $(37.2)m | $(51.7)m | $(76.0)m |
| Net loss | $(11.6)m | $(42.3)m | $(37.7)m | $(86.2)m |
| Diluted loss per share | $(0.10) | $(0.38) | $(0.32) | $(0.78) |
- Q2 revenue increased 24% year over year; service revenue was $178.6m, up 25%, while other revenue was $8.8m, down 4%. Management attributed approximately $28.4m of Q2 revenue to Fuze and said revenue excluding Fuze grew 5%. For the six months, revenue excluding Fuze grew 6%.
- Q2 gross profit, calculated as revenue less cost of service and other revenue, was approximately $125.4m, or 66.9% of revenue, versus $92.1m, or 60.8%, a year earlier. Service cost declined to 28.6% of service revenue from 33.2%. Operating margin improved to approximately negative 13.3% from negative 24.5%.
- Other income was $14.0m in Q2, versus expense of $4.9m a year earlier. The 2022 quarter benefited primarily from a $16.1m gain on extinguishment of debt and a $1.3m gain from warrant remeasurement.
- Cash provided by operations was $19.7m for the six months, compared with $9.1m; investing provided $9.8m, compared with $28.8m used; financing used $16.2m, compared with $10.2m provided. Period-end cash, cash equivalents and restricted cash totaled $101.8m.
- At September 30, cash, cash equivalents and investments totaled $132.3m, including restricted cash. Current assets were $263.7m and current liabilities $169.0m. Debt carrying values were $286.7m of convertible notes and $230.0m of term loan, or $516.7m combined. Stockholders’ equity was $84.8m.
Material changes and management commentary
- In August, 8x8 borrowed $250.0m under a senior secured term loan due 2027 and issued $201.9m of 4.00% convertible notes due 2028. It exchanged approximately $403.8m principal of 2024 notes for cash and the 2028 notes, repurchased approximately $60m of its shares, and later repurchased $6m principal of 2024 notes. Approximately $90m principal of 2024 notes remained at quarter end.
- The term loan initially bears interest at Term SOFR, subject to a 1.00% floor and 0.10% adjustment, plus 6.50%. The facility includes minimum liquidity and adjusted-cash-EBITDA covenants and a maximum secured-leverage covenant, alongside other restrictions.
- Strategic mid-market and enterprise customers represented 76% of ARR, up 37% year over year; small-business ARR declined 2% and represented 24%. Enterprise customers were 58% of ARR, and more than 35% of ARR came from customers using both UCaaS and CCaaS capabilities. ARR is a company-defined metric and assumes sustained usage.
- Management said it intends to keep investing in research and development, particularly contact-center capabilities, while reducing service unit costs and improving sales and marketing efficiency. In October 2022, after quarter end, the company reduced headcount by less than 10%, primarily in sales and marketing. No specific financial forecast or numerical guidance is provided in the filing.
Risks, contingencies and unusual items
- During Q2, the company detected malware that enabled an unauthorized third party to access certain data on its network. It reported removing the intruder and malware and implementing security measures; the filing does not specify the data accessed or quantify any financial impact.
- Management cited risks including economic weakness, inflation and labor or bandwidth costs, customer churn, competition, service reliability, cybersecurity, foreign exchange, acquisition integration and debt service. It stated that existing liquidity and anticipated operating cash flows should cover working capital, expenditures and contractual obligations for the next 12 months and foreseeable future, while noting that business and economic conditions could affect liquidity.
- Accrued contingent indirect tax liabilities were $16.5m at September 30, primarily related to potential sales, telecommunications and similar taxes. A California wage-and-hour and PAGA settlement had preliminary court approval; final approval was pending at the filing date. The company stated it had recorded adequate provisions for claims but cautioned that litigation outcomes remain uncertain.
- The first half included approximately $3.6m of out-of-period adjustments: $2.4m of subscription revenue recognized for prior-period contracts and $1.2m reduction in excess bad-debt reserves. The company adopted ASU 2020-06, increasing notes carrying value by $46.2m and reducing additional paid-in capital by $92.8m, with a $46.7m decrease to accumulated deficit.
Important facts for investors to verify
- How much reported growth and ARR expansion persists excluding Fuze, and whether enterprise growth offsets weakness in CPaaS usage and small-business ARR.
- Progress on margin improvement, cost reductions and the October headcount reduction, including any effects on revenue, customer service or product development.
- Debt service capacity, floating-rate term-loan costs, covenant headroom and the refinancing or repayment plan for remaining 2024 notes.
- Scope and consequences of the network intrusion, including any customer, regulatory, litigation or remediation impacts.
- Resolution of indirect-tax exposures and final court approval and administration of the wage-and-hour settlement.