Business context and reporting period
8x8, Inc. provides cloud communications software, including voice, video, chat, contact center and communications APIs. This unaudited Form 10-Q covers the quarter ended December 31, 2020—the third quarter of fiscal 2021—and the nine months then ended. Unless noted otherwise, comparisons are with the prior-year periods; amounts are in U.S. dollars.
Key financial results
| Metric | Quarter ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Service revenue | $127.1 million | $110.4 million | $362.2 million | $301.5 million |
| Other revenue | $9.6 million | $8.2 million | $25.4 million | $23.2 million |
| Total revenue | $136.7 million | $118.6 million | $387.6 million | $324.8 million |
| Operating loss | $(35.3) million | $(43.2) million | $(106.1) million | $(113.7) million |
| Net loss | $(40.2) million | $(47.1) million | $(120.6) million | $(122.3) million |
| Diluted loss per share | $(0.38) | $(0.47) | $(1.15) | $(1.23) |
Total revenue grew 15.3% in the quarter and 19.4% for the nine-month period. Quarterly operating loss was 25.8% of revenue, compared with 36.4% a year earlier. Cost of service revenue was 37.0% of service revenue in the quarter, unchanged year over year; for the nine months it rose to 36.7% from 33.8%. The filing does not present a consolidated gross-margin measure.
- Cash flow: Net cash used in operating activities was $14.9 million for the nine months, improved from $62.8 million used a year earlier. Investing activities used $27.1 million; financing activities provided $5.9 million. Cash, cash equivalents and restricted cash totaled $122.4 million at December 31, 2020.
- Liquidity: Cash, cash equivalents and investments were $152.5 million, excluding restricted cash, versus $186.9 million at March 31, 2020. Management said existing cash, investments and anticipated operating cash flows should cover working capital and expenditures for the next 12 months.
- Debt and leases: Convertible senior notes had $362.5 million principal outstanding, a $304.1 million net carrying amount and a February 2024 maturity; stated coupon is 0.50%. Operating lease liabilities totaled $98.1 million.
- Balance sheet: Total assets were $692.8 million and stockholders’ equity was $167.4 million at December 31, 2020. The company reported a $546.0 million accumulated deficit.
Material changes and management commentary
- Quarterly service revenue increased 15.2%, attributed to customer-base growth, expanded offerings and usage, including CPaaS growth in APAC. International revenue rose to $37.8 million from $28.4 million; U.S. revenue was $98.9 million versus $90.2 million.
- Mid-market and enterprise customers generated 48% of service revenue and that revenue grew 25% year over year. Average annualized service revenue per customer was $8,705, up from $8,248. More than 90% of customers had migrated to the X Series platform; management aimed to migrate substantially all remaining customers by fiscal year-end.
- Service delivery costs grew with platform usage, infrastructure costs, software amortization and stock-based compensation. Sales and marketing expense was nearly flat for the quarter, as lower marketing and cloud-program costs offset higher commissions and stock compensation. Other-revenue costs declined with lower hardware shipment volume and greater use of hardware rentals.
- Management plans continued investment in product development, sales, marketing, international expansion and channel partners, while pursuing operating efficiencies and a path to profitability and improved operating cash flow. It expects service revenue to grow over time; no specific financial guidance or quantified forecast is provided.
- CEO David Sipes was appointed December 10, 2020. The company said COVID-19 had not affected business as negatively as initially anticipated, but noted greater impact on small and mid-size customers and continued uncertainty.
Risks, contingencies and unusual items
- Key stated risks include customer churn or downsell, competition, execution and returns on customer-acquisition spending, reliance on channel partners and third-party network infrastructure, cybersecurity or service interruptions, software defects, regulatory and privacy compliance, acquisitions, litigation, and COVID-19-related economic effects.
- Indirect tax audits were ongoing; accrued contingent indirect tax liabilities were $4.6 million. The company reported no material legal provisions and said it did not believe a loss on pending matters was probable, while cautioning that litigation outcomes are uncertain.
- Stock-based compensation was $26.8 million for the quarter and $74.9 million for the nine months. Outstanding stock awards totaled 11.4 million shares; these awards and other potential shares were excluded from diluted loss per share as anti-dilutive.
- Cash use benefited from $5.0 million of deferred employer payroll taxes under the CARES Act and employee compensation arrangements that reduced cash payroll. Deferred payroll taxes are due in fiscal 2022 and 2023. A $6.4 million lease-assignment receivable was expected in February 2021.
- The company adopted the expected-credit-loss accounting standard in April 2020; the opening accumulated-deficit adjustment was $2.8 million and management said the adoption impact was not material. The full valuation allowance on U.S. deferred tax assets continued, resulting in a very low effective tax rate despite losses.
Important facts for investors to verify
- Whether revenue growth—particularly enterprise, international and CPaaS growth—continues to translate into improved operating margins and cash generation.
- Progress and costs of completing customer migrations, and whether migration improves retention as management expects.
- Cash and investment balances, working-capital trends and deferred commission spending, including the timing of the expected lease-assignment receipt and repayment of deferred payroll taxes.
- Convertible-note terms and potential dilution or cash-settlement obligations, alongside the substantial stock-award overhang.
- Customer credit quality, COVID-19 effects, tax exposures and any developments in legal or regulatory matters.