8x8, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2012 (fiscal Q1 2013); compared with the three months ended June 30, 2011. The interim financial statements are unaudited. 8x8 provides cloud-based VoIP, telephony, video, conferencing, unified communications, hosting and cloud-computing services to business customers; it reported approximately 30,000 business customers at quarter-end.
Financial results and liquidity
| Metric | Q1 FY2013 | Prior-year quarter | Change / context |
|---|---|---|---|
| Total revenue | $25.252 million | $18.507 million | Up 36.4% |
| Service revenue | $23.172 million | $17.021 million | Up 36.1%; 91.8% of revenue |
| Product revenue | $2.080 million | $1.486 million | Up 40.0%; phone costs exceeded allocated product revenue |
| Gross margin | 67% | 67% | Company-reported overall margin |
| Operating income | $14.390 million | $1.606 million | Includes $11.965 million gain on patent sale recorded as a reduction of operating expenses |
| Net income | $8.617 million | $1.947 million | Diluted EPS was $0.12 versus $0.03 |
| Cash from operations | $14.926 million | $2.140 million | Includes cash proceeds from the patent sale; deferred-tax and other noncash adjustments also affected the comparison |
At June 30, cash and cash equivalents were $36.274 million and short-term investments were $1.968 million, totaling approximately $38.2 million. Current assets were $44.570 million and current liabilities $12.980 million. Total liabilities were $13.019 million; the balance sheet reports no conventional borrowings, though the company disclosed capital leases and other commitments. Cash increased $13.848 million during the quarter. Investing activities used $1.048 million and financing activities used $0.030 million.
Material changes and operating trends
- Service revenue growth primarily reflected a larger business subscriber base, partly offset by declining residential customers. Business customers increased from 25,455 at June 30, 2011 to 29,913 at June 30, 2012; reported monthly churn improved to 1.7% from 2.1%.
- Service costs rose 49.0%, faster than service revenue, largely due to higher third-party network expenses and personnel, consulting, amortization and depreciation costs. The company-reported service margin was 75%, down from 78% a year earlier.
- Product revenue remained below product costs: cost of product revenue was $2.710 million, or 130.3% of product revenue. The company explains that the amount allocated to phone products is below equipment cost.
- Research and development rose 29.8%, sales and marketing 28.8%, and general and administrative expense 68.5%, principally reflecting higher payroll and, for general and administrative costs, temporary personnel, consulting and outside services.
- The $12.0 million patent sale generated a $11.965 million reported gain after transaction costs. The agreement also provides for up to $3.0 million of additional payments tied to the buyer’s future license agreements; 8x8 retained limited rights to use the patents.
- Weighted-average diluted shares increased to 74.110 million from 65.808 million. The filing reported 71,086,655 common shares outstanding as of July 18, 2012.
Outlook, risks and contingencies
Management said it expects service revenue to continue to comprise nearly all service revenue and expects the business-customer growth trends to continue. The filing gives no revenue or earnings guidance; it estimated an approximately 40% fiscal 2013 annual effective tax rate, subject to quarterly variation from discrete items. The quarter’s reported tax provision was $5.781 million, primarily attributable to income including the patent-sale gain.
Risks highlighted include customer demand, service reliability and renewals, customer acquisition costs, competitive pricing, regulatory and compliance matters, product defects and warranty claims, supply availability, intellectual-property claims, working-capital needs and Nasdaq listing requirements. The company disclosed pending patent-related lawsuits brought by Bear Creek Technologies and Klausner Technologies; motions to dismiss were pending, and potential liability could not be estimated. It also described state and municipal tax inquiries and $2.5 million of unrecognized tax benefits at March 31, 2012, with no significant change believed to have occurred during the quarter.
Commitments include a $2.2 million remaining obligation under a third-party customer-support contract and $1.468 million of future minimum payments under network-service contracts. A seven-year San Jose facility lease was scheduled to commence August 1, 2012, with initial monthly base rent of $130,821. Management said disclosure controls were effective at June 30, 2012; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and operating cash flow is attributable to the one-time patent sale, and whether any contingent payment is ultimately earned.
- Whether business-customer growth and lower churn continue, and whether service margins stabilize as network and staffing costs rise.
- The effect of phone-equipment subsidies and the negative product margin on customer acquisition economics and overall profitability.
- Actual taxes paid, use of deferred tax assets, and the impact of the estimated annual tax rate and unrecognized tax benefits.
- Developments in the patent litigation, tax inquiries, customer-support commitment and new facility lease.