8x8, Inc. — Form 10-Q Summary
Business context and period. 8x8 provides cloud-based business communications and collaboration services, including voice, conferencing, messaging, video, contact center and analytics. This unaudited report covers the three months ended June 30, 2017, the first quarter of fiscal 2018, and compares results with the three months ended June 30, 2016. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $69.1 million | $60.0 million |
| Service revenue | $65.1 million | $55.3 million |
| Product revenue | $4.0 million | $4.7 million |
| Operating loss | $5.5 million | $0.9 million |
| Net loss | $2.2 million; $0.02 per share | $0.5 million; $0.01 per share |
| Operating cash flow | $6.2 million | $6.5 million |
- Revenue increased 15.1% year over year: service revenue rose 17.7%, while product revenue fell 15.6%. Service revenue was 94.2% of total revenue.
- Overall gross margin was 76%, compared with 74%; service margin was 82%, compared with 81%. Product margin was negative 22%, compared with negative 16%.
- Operating expenses increased to $74.6 million from $60.9 million. Sales and marketing rose 29.7% to $41.1 million; research and development rose 18.4% to $7.9 million; general and administrative rose 31.7% to $9.0 million.
- Cash and cash equivalents were $53.2 million and short-term investments were $124.6 million at June 30, totaling $177.8 million. Total current assets were $202.1 million and current liabilities $46.4 million.
- Investing activities provided $6.4 million, versus $12.6 million used in the prior-year quarter; financing activities used $0.7 million, versus $0.03 million provided. The company reported no outstanding debt instruments other than equipment under capital leases.
- Total assets were $360.1 million and total liabilities were $48.3 million at quarter-end. The company had $24.3 million of future minimum operating lease payments disclosed.
Material changes and operating trends
- Management attributed service-revenue growth to an increase in the business subscriber base and higher average monthly business service revenue per customer, which rose to $432 from $399. Monthly business service revenue churn was 0.6%, versus 0.5% a year earlier.
- Mid-market and enterprise service revenue grew 29% and represented 57% of service revenue. New monthly recurring revenue bookings from those customers and channel sales teams represented 61% of bookings. Mid-market and enterprise customer ARPU reached $4,592, up 8% year over year.
- The operating loss widened as expenses grew faster than revenue, particularly sales and marketing. Product revenue declined with lower equipment sales; more discounting and customer rebates contributed to the negative product margin.
Outlook, risks and unusual items
- Management said fiscal 2018 pretax profit was expected to be approximately $15 million below its previous projections, primarily because of planned sales and marketing investments to accelerate mid-market and enterprise growth. Timing depends partly on hiring and implementation; anticipated bookings and revenue growth is not assured.
- Management expected business-customer growth and average monthly service revenue per customer to continue in fiscal 2018. It also expected research and development and sales and marketing expenses to increase, service costs to remain at a similar percentage of service revenue, and general and administrative expenses to remain at a similar percentage of total revenue.
- The quarter included a $1.4 million return of escrow from the DXI acquisition, recorded as other income. Other income totaled $2.1 million, compared with $0.4 million a year earlier. The company also recognized a $1.2 million income tax benefit and recorded approximately $17.6 million of deferred tax assets related to adopting updated stock-compensation accounting guidance.
- Stock-based compensation expense was $6.4 million, up from $5.1 million. A $25 million share-repurchase plan was authorized in May; no purchases were made under that plan during the quarter.
- Key risks identified include customer demand and retention, competition and pricing, service reliability, customer-acquisition costs, international and regulatory exposure, execution of increased spending and acquisition plans, and potential intellectual-property claims or other litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The Bear Creek patent matter reached finality after the Federal Circuit affirmed invalidity of the asserted claims. The Serenitiva patent suit was settled for an amount described as immaterial, with a limited patent license obtained.
Important facts for investors to verify
- Whether elevated sales and marketing and product-development spending translates into the bookings and revenue growth management expects, and how it affects fiscal 2018 profitability.
- Whether service-revenue growth, mid-market and enterprise customer metrics, and churn trends continue; and whether product discounts and rebates keep product margins negative.
- The sustainability of cash generation and the use of the $177.8 million cash-and-investment balance, including capital spending, capitalized software costs, leases and any future repurchases.
- The effects of the new revenue-recognition standard, scheduled for adoption April 1, 2018; management identified contract allocation between product and service obligations and professional-services performance obligations as areas of focus.
- The impact of stock-based compensation and tax-related accounting changes, and any material developments in legal, regulatory, foreign-currency or other disclosed risks.