8x8, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020 (filed May 19, 2020). Although the request refers to 2019 Q4, this filing covers the full fiscal year; it also reports fourth-quarter results.
Business context
8x8 provides cloud-based business communications, collaboration, contact-center and communications API services. Its X Series combines unified communications and contact-center offerings. The company reported approximately 55,000 business customers in 150 countries and 1.2 million global business users. Wavecell, acquired in July 2019, expanded its communications API business.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $446.2 million | $352.6 million |
| Service revenue | $414.1 million | $325.3 million |
| Net loss | $172.4 million | $88.7 million |
| Operating loss | $159.8 million | $89.6 million |
| Net loss per share, diluted | $1.72 | $0.94 |
| Cash used in operating activities | $93.9 million | $14.9 million |
- Revenue grew 26.6%; service revenue grew 27.3%. Management attributed growth mainly to customer-base expansion and higher revenue per customer, with Wavecell contributing to a lesser extent.
- Annualized service revenue per customer increased to $7,876 from $6,629. Mid-market and enterprise customers accounted for 43% of annual service revenue, up 51% year over year.
- Calculated gross margin was approximately 54.9%, down from 63.2%. Cost of service revenue rose 68.4%, including higher communications infrastructure costs, software amortization and personnel expenses.
- Sales and marketing expense increased 34.9% to $240.0 million; research and development rose 25.3% to $77.8 million. Stock-based compensation was $70.9 million, versus $44.5 million.
- At March 31, 2020, cash, cash equivalents and short- and long-term investments totaled $186.9 million; restricted cash was $19.0 million. Cash, cash equivalents and short-term investments were $170.9 million, versus $346.5 million a year earlier.
- Current assets were $277.2 million and current liabilities $123.4 million. Convertible notes had $362.5 million principal outstanding and a $291.5 million net carrying value.
- Fourth-quarter revenue was $121.5 million and net loss was $50.1 million, compared with $93.8 million revenue and $28.1 million net loss in the prior-year quarter.
Changes, outlook and notable items
- Operating cash outflow worsened to $93.9 million. Investing activities used $106.3 million, including $59.1 million net cash paid for acquisitions, $35.8 million for property and equipment, and $31.6 million for capitalized software. Financing activities provided $72.1 million, mainly from the additional convertible-note issuance.
- Wavecell was acquired for approximately $117.1 million in cash and stock consideration. The purchase-price allocation included $91.1 million of goodwill and $21.0 million of identifiable intangible assets; valuation was preliminary.
- A fourth-quarter restructuring to streamline operations was substantially completed, with $5.9 million of employee termination and related costs, mostly paid in that quarter. The company also reclassified certain revenue and expenses; these changes did not affect total revenue, net loss or cash flows.
- The company has $362.5 million of 0.50% convertible senior notes due February 2024, with an initial conversion price of approximately $25.68 per share. The notes’ net carrying value reflects debt discount and issuance costs; FY2020 interest expense related to the notes was $15.6 million.
- Management said it expects to continue investing in customer acquisition, sales, marketing and product development while pursuing improved efficiencies, profitability and operating cash flow. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- COVID-19 increased usage among some existing customers but also disrupted sales and marketing and placed small and medium-sized customers under economic pressure. Management said the financial impact remained uncertain and could affect demand, churn, collections and liquidity.
- Key risks include continued losses, rising infrastructure costs, customer churn, competition and pricing pressure, execution of legacy-customer migrations to X Series, service or cybersecurity disruptions, regulatory and privacy obligations, and the cash demands of debt and operating leases. The company accrued $4.5 million for potential indirect taxes; several tax audits were ongoing. No material legal proceeding was identified.
- The auditor gave unqualified opinions on the financial statements and internal controls. Management also concluded controls were effective, but excluded Wavecell from its internal-control assessment for the acquisition year.
Important facts for investors to verify
- Whether revenue growth and higher service revenue per customer can continue while gross margin and operating cash flow recover.
- Cash burn, liquidity needs and the ability to service or settle the 2024 convertible notes, including potential conversion-related cash requirements.
- Wavecell integration, final purchase-accounting estimates and the acquisition’s contribution to growth and profitability.
- Customer churn and the cost and pace of migrating legacy customers to X Series.
- The financial effects of COVID-19, the $4.5 million indirect-tax accrual, and the company’s lease and other contractual commitments.