8x8, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, the first quarter of fiscal 2020. Financial statements are unaudited. 8x8 provides cloud communications services, including voice, video, chat, contact center and communications APIs, through a single reportable segment.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Total revenue | $96.7 million | $83.2 million |
| Service revenue | $92.4 million | $78.1 million |
| Product revenue | $4.3 million | $5.1 million |
| Operating loss | $32.6 million | $16.0 million |
| Net loss | $34.3 million | $15.4 million |
| Net loss per share, diluted | $0.36 | $0.16 |
| Cash used in operating activities | $20.5 million | Cash provided: $0.8 million |
- Total revenue rose about 16% year over year; service revenue grew 18.2%. Service revenue was 95.5% of total revenue, versus 93.9%.
- Cost of service revenue increased 30.2%, faster than service revenue; it equaled 34.6% of service revenue, versus 31.4%. Product revenue remained below product cost.
- Research and development increased 40.5%, sales and marketing 32.4%, and general and administrative expense 32.2% year over year. Stock-based compensation expense was $13.6 million, up from $8.9 million.
- Cash, cash equivalents and investments totaled $318.2 million at June 30, 2019, down from $346.5 million at March 31. Restricted cash was an additional $8.1 million. Management said these balances did not reflect cash paid for the subsequent Wavecell acquisition.
- Convertible notes had $287.5 million principal outstanding and a $219.2 million net carrying amount. Current liabilities were $88.8 million and total liabilities were $328.3 million. Management stated existing cash, investments and anticipated operating cash flows should cover working capital and expenditures for the next 12 months.
- Net cash provided by investing activities was $11.2 million, including net proceeds from investment sales and maturities; capitalized software development costs were $7.7 million. Financing activities provided $1.4 million.
Changes, outlook and notable items
- Management attributed service revenue growth to subscriber-base expansion, net of churn, and higher average monthly service revenue per customer, which it linked to selling more to mid-market and enterprise customers. Nearly all new customers in the quarter purchased 8x8 X Series plans.
- Management is prioritizing growth over near-term profitability and expects continued significant investment in sales and marketing, channel expansion, international growth and research and development. It expects operating losses in the near term; no specific revenue or earnings guidance was provided.
- 8x8 intends to accelerate migration of legacy Virtual Office and Virtual Contact Center customers to X Series during the remainder of fiscal 2020 and fiscal 2021. Management warned migrations may require unrecoverable professional-services costs and could increase churn.
- On July 17, 2019, the company entered into an agreement to acquire Wavecell, a Singapore-based communications API provider, for approximately $125 million: about $69 million cash and $56 million in 8x8 shares. The filing reports 2,628,761 shares issued in connection with the transaction, including employee-retention shares subject to vesting.
- On July 3, 2019, the company signed a lease for new Campbell, California headquarters: approximately 177,815 square feet for 132 months, with base rent of about $657,900 per month for the first 12 months and annual increases thereafter. The lease provides 12 months of rent abatement and a tenant-improvement allowance of about $15.4 million.
- Adoption of lease accounting on April 1, 2019 added operating lease right-of-use assets and liabilities; the company reported $18.1 million of right-of-use assets and $19.1 million of lease liabilities at June 30. The filing says adoption did not materially affect accumulated deficit.
- Key risks include continued losses and cash burn, uncertain returns on growth spending, competition and customer churn, service reliability and third-party network dependence, cybersecurity and privacy compliance, acquisition integration, and debt repayment or cash-settlement obligations. The company disclosed ongoing tax audits and an approximately $8.0 million accrued estimate for certain state, municipal and similar taxes, fees and surcharges as of March 31, 2019. It also noted potential litigation and tax contingencies without stating a clear quantified exposure.
Important facts for investors to verify
- Whether service-revenue growth and higher revenue per customer can continue while sales, marketing and service-delivery costs grow faster than revenue.
- Cash burn and liquidity after the Wavecell cash payment, and the acquisition’s contribution to revenue, costs and integration requirements.
- Whether legacy-customer migrations to X Series cause additional churn or unrecovered implementation costs.
- The terms and financial impact of the new headquarters lease, including future rent and associated occupancy costs.
- Convertible-note cash obligations, potential conversion dilution and the capped-call protection, which is limited by its cap price.
- Developments in tax audits and other contingencies, and whether actual exposure differs from recorded estimates.