8x8, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2012. Although the request identifies 2011 Q4, this filing covers FY2012; its fourth-quarter results are noted below. The company provides hosted VoIP business telephony, contact-center, unified-communications, and cloud-computing services. It reported 28,671 business customers at year-end.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $85.8 million | $70.2 million |
| Operating income | $7.2 million | $6.2 million |
| Income before taxes | $6.9 million | $6.5 million |
| Net income | $69.2 million | $6.5 million |
| Net cash from operations | $9.2 million | $8.6 million |
- Revenue grew 22.3%; service revenue rose 20.6% to $78.4 million and product revenue rose 43.7% to $7.4 million. Service revenue represented 91.4% of total revenue.
- Operating income increased about 15%. Overall gross margin was 68%; service margin was 76%. Product sales remained loss-making, with a reported product margin of negative 15%.
- Net income was dominated by a noncash $62.1 million tax benefit from releasing part of the deferred-tax-asset valuation allowance. The release followed three consecutive profitable years and an assessment of expected future taxable income. Fourth-quarter FY2012 net income was $63.9 million, including a $62.1 million tax benefit; quarterly operating income was $2.2 million.
- Cash and cash equivalents were $22.4 million, with $1.9 million in short-term investments, or about $24.4 million combined. Current assets were $35.9 million and current liabilities $12.2 million. The company reported no borrowing arrangements; remaining capital-lease payments totaled $130,000.
- Cash used in investing activities was $3.0 million and cash used in financing activities was $0.3 million. Operating cash flow exceeded reported operating income. Total assets were $130.7 million, including substantial acquisition-related goodwill and intangible assets.
Changes and notable developments
- Business customers increased from approximately 24,000 to 28,671; monthly customer churn improved to 2.0% from 2.3%. Average monthly service revenue per business customer was $244 at March 31, versus $204 a year earlier.
- Growth reflected business subscriber expansion and the September 2011 Contactual acquisition. 8x8 also acquired cloud-services provider Zerigo. Contactual consideration was approximately $31.8 million, primarily stock; acquisition activity increased goodwill and intangible assets.
- Sales and marketing expense increased 19.6% to $38.0 million, and research and development expense increased 40.0% to $6.7 million. The company said more than 95% of FY2012 sales came from its direct sales force and planned to expand indirect distribution in FY2013.
- Common shares outstanding rose from 62.4 million to 70.7 million, principally reflecting stock issued for acquisitions. The company repurchased $2.6 million of shares during FY2012.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided. Management expected business services to remain the primary focus and stated that the trends toward business-service growth and away from residential services were expected to continue. It also intended to build indirect sales channels and develop new products and features.
- Management expected the tax rate to increase following the valuation-allowance release, while intending to use available net operating losses and tax credits to reduce tax obligations. Federal and state net operating-loss carryforwards were approximately $168.8 million and $105.5 million, respectively, subject to expiration and possible limitations.
- Key risks include intense competition and pricing pressure; customer churn and economic sensitivity among small businesses; dependence on third-party network carriers, broadband access, contract manufacturers, and concentrated data-center infrastructure; service outages and power or bandwidth costs; and changing VoIP regulation, taxes, emergency-calling requirements, and intercarrier charges.
- Patent matters included pending Bear Creek and Klausner lawsuits; the company said it could not estimate potential liability. The Ceres matter was settled after the company obtained a patent license. Three jurisdictions were conducting sales-tax audits; management reported no material change in their status.
- A new seven-year San Jose headquarters lease was signed in April 2012, with scheduled commencement in August 2012. The filing lists $12.2 million of future office-lease payments, including the new commitment, as of March 31, 2012.
- The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of March 31, 2012.
Important facts for investors to verify
- How much recurring profitability and cash generation the business produces excluding the one-time $62.1 million deferred-tax benefit.
- Whether customer growth, churn improvement, and higher revenue per customer persist, particularly as acquisitions are integrated.
- The sustainability of margins given equipment subsidies, negative product margins, and rising sales, marketing, and development costs.
- The usability and timing of tax-loss and credit carryforwards, including expiration dates and ownership-change limitations.
- Developments in the Bear Creek and Klausner patent cases, state and municipal tax audits, and regulatory changes affecting network and emergency-calling costs.
- The financial contribution of Contactual and Zerigo relative to acquisition consideration, acquired goodwill, and amortization expense.