8x8, Inc. — Q2 FY2024 Form 10-Q
Business context and period: 8x8 provides cloud communications software, including unified communications, contact center and communications APIs. This unaudited report covers the quarter and six months ended September 30, 2023; the comparable periods ended September 30, 2022. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $185.0m | $187.4m | $368.3m | $375.0m |
| Service revenue | $177.8m | $178.6m | $353.0m | $357.7m |
| Operating loss | $(2.6)m | $(25.0)m | $(4.0)m | $(51.7)m |
| Net loss | $(7.5)m | $(11.6)m | $(22.8)m | $(37.7)m |
| Net loss per share | $(0.06) | $(0.10) | $(0.19) | $(0.32) |
| Operating cash flow | Not separately stated in the presented cash-flow summary | Not separately stated | $43.9m | $19.7m |
Margins: Calculated gross margin, after cost of service and other revenue, was approximately 69.1% in Q2 FY2024 versus 66.9% a year earlier. Operating margin was approximately (1.4)% versus (13.3)%. For the six-month period, gross margin was approximately 69.7% versus 65.7%.
Balance sheet and liquidity: At September 30, 2023, cash and cash equivalents were $144.0m, short-term investments $4.7m, and restricted cash $1.0m. Current assets were $281.9m and current liabilities $229.1m. Total assets were $823.7m and stockholders’ equity $110.4m. Debt principal outstanding was approximately $490.2m: $63.3m of 0.50% convertible notes due February 2024, $201.9m of 4.00% convertible notes due February 2028, and a $225.0m secured term loan due August 2027. The term loan’s effective interest rate was 11.9%; the company prepaid $25.0m of principal in May 2023.
Material changes and management commentary
- Quarterly revenue declined 1.3% year over year. Service revenue fell 0.4%, which management attributed mainly to customer churn and down-sell, partly offset by new subscriptions and SMS usage. Other revenue fell 18.3%, reflecting lower professional services and product revenue.
- Operating expenses fell 11.7% to $187.6m, including lower sales and marketing and general and administrative costs. The operating loss narrowed substantially. However, other expense was $5.3m, compared with $14.0m of other income in the prior-year quarter, primarily reflecting higher interest expense and the prior-year $16.1m debt-extinguishment gain.
- For the six months, net cash provided by operations increased to $43.9m from $19.7m. Investing activities provided $12.7m, while financing activities used $22.6m, primarily for the $25.0m term-loan repayment. Cash, cash equivalents and restricted cash totaled $145.0m at period-end.
- Management reported total ARR of $707m at September 30, up 2% year over year; 76% was from mid-market and enterprise customers, flat year over year. ARR is a company-defined, non-GAAP operating metric.
- Management said it intends to invest in growth initiatives and software development and pay down debt. It believes existing cash, investments and anticipated operating cash flows will cover working capital, expenditures and contractual obligations for the next 12 months and foreseeable future. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies and unusual items
- The $63.3m 2024 Notes mature in February 2024; management identifies their retirement, debt interest, leases and purchase commitments as significant cash requirements. The filing states the company was in compliance with debt covenants at September 30, 2023.
- Interest-rate exposure is notable because the secured term loan has a variable rate. Management also cites customer churn, down-sell, macroeconomic conditions, competition, service reliability, cybersecurity, third-party infrastructure, foreign-exchange movements and acquisition integration as risks.
- Accrued contingent indirect tax liabilities were $15.1m at September 30, 2023, up from $13.5m at March 31, 2023. Several jurisdictions were conducting tax audits. The company says it has recorded adequate provisions for legal matters, but litigation outcomes remain uncertain and could materially affect results in a particular period.
- A subsequent event: on October 30, 2023, the board authorized ceasing use of approximately 42% of headquarters leased space. The company estimated non-cash lease impairment charges of $9.0m–$10.0m for the quarter ending December 31, 2023; it plans to make the space available for sublease.
- The company entered a noncancellable three-year hosting-services contract valued at $28.1m during the six-month period. The filing lists $3.8m due in FY2024, $10.0m in FY2025 and $10.5m in FY2026.
Important facts for investors to verify
- Whether operating trends improve: service-revenue churn and down-sell, usage trends, and ARR growth by customer segment.
- How the company will fund or refinance the $63.3m 2024 Notes maturity, and the ongoing cost and repayment trajectory of its high-rate secured term loan.
- Whether operating cash flow remains positive after interest, commissions and other working-capital needs, and how management allocates cash between investment and debt repayment.
- The final timing and amount of the announced lease impairment, potential sublease proceeds, and the outcome of indirect-tax audits and other legal contingencies.
- The effects of stock-based compensation and equity issuance on dilution; six-month stock-based compensation expense was $32.7m.