8x8, Inc. — Form 10-Q summary
Business and period: 8x8 provides cloud communications SaaS, including unified communications, video, contact center and communications APIs. This report covers the quarter and six months ended September 30, 2020, the second quarter of fiscal 2021. The financial statements are unaudited.
Key financial results
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $129.1 million, up 17.9% from $109.5 million | $250.9 million, up 21.7% from $206.2 million |
| Service revenue | $120.9 million, up 19.3% | $235.1 million, up 23.0% |
| Other revenue | $8.2 million, essentially flat | $15.8 million, up 5.4% |
| Operating loss | $33.1 million, versus $37.9 million | $70.9 million, versus $70.5 million |
| Net loss | $38.4 million, or $0.37 per diluted share, versus $40.9 million, or $0.42 | $80.3 million, or $0.77 per diluted share, versus $75.2 million, or $0.77 |
Quarterly service gross margin was approximately 63.0%, down from 64.7%; total gross margin was approximately 56.3%, down from 59.8%. Operating margin improved to approximately negative 25.6% from negative 34.6%, while net margin improved to approximately negative 29.7% from negative 37.4%. For the six-month period, operating cash use was $13.1 million versus $44.5 million a year earlier; investing cash use was $11.5 million versus $59.9 million, and financing provided $4.6 million versus $0.5 million.
Financial position and other metrics
- At September 30, cash and cash equivalents were $121.8 million and short- and long-term investments totaled $37.6 million, or $159.4 million combined. Restricted cash was an additional $15.6 million. Cash, cash equivalents and investments were $186.9 million at March 31, 2020.
- Current assets were $268.5 million and current liabilities $116.4 million. The company reported $512.8 million of total liabilities and $174.5 million of stockholders’ equity.
- Convertible notes had $362.5 million principal outstanding and a $299.9 million net carrying value; stated interest is 0.50% and maturity is 2024. Operating lease liabilities totaled $97.0 million.
- Remaining performance obligations were approximately $330 million, excluding contracts with an original expected term of one year or less; most are expected to be recognized over the next 36 months.
- Mid-market and enterprise customers generated 46% of service revenue and that revenue grew 29% year over year. Average annualized service revenue per customer increased to $8,052 from $7,957. More than 90% of customers had migrated to the X Series platform.
Changes, outlook and risks
- Growth reflected subscriber additions, expanded sales to existing customers, increased usage and mid-market and enterprise UCaaS/CCaaS deals; CPaaS usage, particularly in APAC, also contributed. Higher communication infrastructure costs and software amortization pressured service margins.
- Management plans continued investment in product development, direct sales and marketing, international expansion, and VAR and master-agent channels, while pursuing operating efficiencies and a path to profitability and improved operating cash flow. It gave no specific numerical revenue or earnings guidance.
- Management said COVID-19 had not harmed the business as significantly as initially anticipated, but small and mid-size customers were more affected than enterprise customers. The pandemic continues to create uncertainty around customer activity and credit losses; work-from-home trends reduced hardware demand and travel costs.
- Management believes cash, investments and anticipated operating cash flows will meet working-capital and expenditure needs for the next 12 months. Cash use was reduced by payroll-tax deferrals and employee salary-in-shares arrangements, among other measures; these are not presented as permanent savings.
- Stock-based compensation was $25.3 million in the quarter and $48.1 million for six months, up from $17.4 million and $31.0 million, respectively. The company adopted the expected-credit-loss accounting standard in April 2020; the opening retained-earnings adjustment was $2.8 million and management said the adoption impact was not material.
- The company reported $4.5 million of accrued contingent indirect tax liabilities and no material provisions for pending legal matters. It cautioned that litigation outcomes are uncertain. Key disclosed risks include competition, churn, execution of customer migrations, third-party network dependencies, cybersecurity, acquisitions, COVID-19 effects and convertible-note-related risks.
Important facts for investors to verify
- Whether service growth converts into improved margins as infrastructure and platform usage costs rise.
- Whether customer migration, upmarket sales and channel investments improve retention and profitability without disproportionate acquisition costs.
- Operating cash flow trends, including the effect of commission spending, working capital and temporary payroll-related cash savings.
- The potential cash repayment, conversion dilution and capped-call protection associated with the $362.5 million notes, including the limits of the capped calls.
- COVID-19 effects on smaller customers, credit losses, demand and the company’s ability to meet its stated 12-month liquidity expectations.
- The timing and resolution of indirect-tax audits and the release of the remaining $6.9 million Wavecell escrow balance, expected in January 2021.