8X8 INC annual report, FY2013

Full document

8x8, Inc. — FY2013 Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2013. This is an annual report, not a standalone fiscal Q4 filing; quarterly results are included. 8x8 provides cloud-based business VoIP, contact-center, unified communications, and cloud-computing services. It reported more than 32,500 business customers at year-end.

Financial performance and liquidity

  • Revenue: $107.6 million, up 25.4% from $85.8 million. Service revenue was $98.2 million (+25.3%); product revenue was $9.4 million (+26.7%). Growth was primarily attributed to business subscribers.
  • Profit: Operating income was $23.6 million, versus $7.2 million; net income was $13.9 million, versus $69.2 million. Diluted EPS was $0.19 versus $0.99. FY2013 operating income included a $13.0 million patent-sale gain. FY2012 net income included a $62.1 million deferred-tax valuation-allowance release, making the year-over-year net-income comparison unusually distorted.
  • Margins: Overall gross margin was approximately 68.4% (reported quarterly range: 67%–71%). Operating margin was approximately 21.9%, including the patent gain; excluding that gain, it was approximately 9.8%. Product sales remained loss-making: annual product costs exceeded product revenue.
  • Cash flow: Operating cash flow was $31.8 million, compared with $9.2 million. Management attributed much of the increase to the patent proceeds and lower cash taxes from use of deferred tax assets. Investing activities used $5.9 million; financing activities provided $2.0 million.
  • Liquidity and debt: Cash and cash equivalents were $50.3 million, plus $2.0 million of short-term investments, versus $24.4 million of combined cash and investments a year earlier. Current assets were $63.7 million and current liabilities $13.7 million. The company reported no borrowing arrangements or material debt; capital-lease obligations totaled approximately $44,000.
  • Other metrics: Business-customer churn was 1.8% for FY2013 versus 2.0% in FY2012. Business customers grew from approximately 28,500 to 32,500. Accounts receivable, net, was $3.9 million. Stockholders’ equity was $137.0 million.

Material changes versus the prior year

  • Revenue rose 25.4%, reflecting expansion of the business subscriber base; residential customers declined as marketing shifted toward business services.
  • Operating expenses increased, including sales and marketing (+21.8%), research and development (+20.8%), and general and administrative (+43.4%). The patent-sale gain substantially lifted reported operating income.
  • FY2013 income-tax expense was $9.7 million, compared with a $62.4 million tax benefit in FY2012, principally due to the prior-year valuation-allowance release. In FY2013, the company added approximately $1.0 million to its valuation allowance.
  • Cash and investments increased substantially, while property and equipment rose to $6.7 million from $3.8 million, largely reflecting facility and equipment investment.

Outlook, risks, and unusual items

  • Management said it expected business services to continue driving service revenue and planned to build indirect distribution in FY2014. More than 93% of FY2013 sales came from the direct sales force. The filing provides no numerical revenue or earnings guidance.
  • The patent sale generated approximately $12.0 million initially and a further $1.0 million after the purchaser entered a customer license agreement. The agreement allows for additional contingent payments up to $3.0 million.
  • Key risks include intense competition and pricing pressure; customer churn and small-business economic exposure; service outages or cybersecurity incidents; reliance on third-party network carriers and hardware suppliers; and evolving VoIP, emergency-calling, tax, and telecommunications regulations.
  • Two patent cases remained pending: Bear Creek, where the USPTO rejected all claims of the asserted patent in a first reexamination action, and Klausner, which was transferred to the Northern District of California. The company said it could not estimate potential liability in either case. Several jurisdictions were also conducting tax audits; the filing states that potential exposure was not clear.
  • The company had $11.3 million of future office lease payments and $3.7 million of network-provider commitments, in addition to customer-support commitments. It had an effective shelf registration statement permitting issuance of up to approximately $250 million of securities, but stated it believed current liquidity was sufficient for foreseeable needs.

Investor verification points

  1. Separate recurring operating performance from the $13.0 million patent gain and assess whether the underlying operating margin can improve.
  2. Normalize prior-year net income for the $62.1 million tax valuation-allowance release; review deferred-tax-asset realizability, carryforward expirations, and the $3.0 million unrecognized tax-benefit balance.
  3. Track business customer and service growth, churn, acquisition costs, and the economics of subsidized phone sales, whose product costs exceeded product revenue.
  4. Follow the Bear Creek and Klausner litigation, ongoing tax audits, and regulatory developments affecting E-911, carrier charges, and VoIP services.
  5. Review cash-flow quality, particularly the contributions from patent proceeds and tax timing, alongside capital spending and potential dilution from future securities issuance.

The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of March 31, 2013.