8x8, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2012. The financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise stated.
Business context
8x8 develops and sells cloud-based business communications, including VoIP telephony, video, conferencing and unified communications, as well as managed hosting and cloud-computing services. It reported approximately 31,500 business customers at December 31, 2012. Fiscal 2013 ends March 31, 2013.
Key financial results
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $27.34 | $23.28 | $78.96 | $61.60 |
| Operating income | $2.76 | $2.55 | $19.91 | $5.02 |
| Net income | $1.92 | $2.59 | $12.28 | $5.37 |
| Diluted EPS | $0.03 | $0.04 | $0.16 | $0.08 |
- Quarterly revenue rose 17.5% year over year; service revenue increased 17.7% to $24.96 million and product revenue increased 14.6% to $2.38 million. Nine-month revenue grew 28.2%.
- Quarterly net income fell about 26% despite revenue growth, as operating costs and the tax provision increased. Nine-month net income more than doubled, substantially reflecting a patent-sale gain.
- Gross margin was approximately 68% in both comparable quarters and 68% for the nine-month period. Product sales remained loss-making: reported product margin was negative 34% in the quarter and negative 30% for the nine months.
- Quarterly operating margin was approximately 10%; nine-month operating income includes the $11.965 million patent-sale gain recorded as a reduction of operating expenses.
- Operating cash flow was $25.99 million for the nine months, versus $6.41 million a year earlier. Investing cash outflow was $5.25 million, primarily property and equipment; financing cash inflow was $1.39 million. Cash and equivalents increased to $44.56 million from $22.43 million at March 31, 2012.
Balance sheet and liquidity
- Cash, cash equivalents and short-term investments totaled $46.52 million at December 31, 2012. Current assets were $51.86 million and current liabilities $13.07 million.
- Total liabilities were $14.96 million, against stockholders’ equity of $133.98 million. The filing reports capital leases but does not present a material conventional borrowing balance.
- Property and equipment increased to $6.92 million from $3.82 million, largely associated with the headquarters move. The company received a $1.7 million tenant-improvement reimbursement.
Changes, outlook and risks
- Growth was driven primarily by expansion of the business customer base, while residential customers declined as marketing emphasis shifted toward business services. Management expects these trends to continue.
- Business customer count rose to 31,473 from 27,677 a year earlier. Average monthly service revenue per business customer increased to $260 from $239. Quarterly business customer churn was 1.6%; excluding a 411-customer affiliate cancellation in the prior quarter, the company reported 1.9% churn for that quarter.
- Management estimated a fiscal 2013 annual effective tax rate of approximately 40%, subject to quarterly fluctuations. No specific revenue or earnings guidance is provided.
- In June 2012, 8x8 sold a family of patents for $12.0 million and recognized a gain of slightly less than $12.0 million after transaction costs. The agreement also allows for up to $3.0 million in future payments dependent on the buyer’s licensing activity; 8x8 retained limited use rights.
- Operating cash flow benefited from the patent transaction, the landlord reimbursement and noncash items, so it should not be viewed as solely recurring operating performance.
- Commitments include a $2.2 million remaining obligation under a customer-support vendor contract and $4.415 million of minimum third-party network-service payments through fiscal 2016. Patent litigation matters remain unresolved; the company stated it could not estimate potential liability or expense. It reported no active federal or state income-tax audits as of January 22, 2013.
- Management said disclosure controls were effective as of December 31, 2012 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future revenue and cash flow growth comes from recurring business subscriptions, and whether churn and customer acquisition costs remain sustainable.
- The sustainability of profitability and operating cash flow after excluding the patent-sale gain, tenant reimbursement and other nonrecurring or noncash effects.
- Whether negative product margins and rising sales, marketing and administrative expenses affect margins as the business expands.
- The realized tax burden relative to the estimated approximately 40% annual effective tax rate, including effects of deferred tax assets and unrecognized tax benefits.
- Potential outcomes and costs of the Bear Creek and Klausner patent lawsuits, which the filing says cannot currently be estimated.