8x8, Inc. — Form 10-Q Summary
Business context and reporting period. 8x8 provides cloud-based communications software, including voice, video, contact center, messaging, and communications APIs. This unaudited filing covers the fiscal third quarter and first nine months ended December 31, 2022. Results include Fuze, acquired in January 2022; the comparable 2021 periods do not.
Key financial results
| Metric | Three months ended Dec. 31, 2022 | Prior-year quarter | Nine months ended Dec. 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $184.4 million | $156.9 million | $559.4 million | $456.8 million |
| Operating loss | $18.1 million | $37.6 million | $69.8 million | $113.6 million |
| Net loss | $26.0 million | $43.6 million | $63.7 million | $129.8 million |
| Net loss per share, diluted | $0.23 | $0.38 | $0.55 | $1.16 |
| Cash from operating activities | Not stated for the quarter in the supplied filing text | $35.2 million | $18.2 million |
Quarterly revenue rose 17.5% year over year; nine-month revenue rose 22.5%. Management attributed nearly all quarterly revenue growth to Fuze: excluding $26.5 million of Fuze revenue, quarterly revenue increased about 1%. Excluding $84.4 million of Fuze revenue, nine-month revenue increased 4%.
Service revenue was $175.8 million for the quarter, up 17.7%; other revenue was $8.6 million, up 15.5%. Quarterly gross profit, calculated as revenue less reported cost of service and other revenue, was approximately $126.9 million, or 68.8% of revenue, compared with approximately $97.0 million, or 61.8%, a year earlier. Operating loss margin improved to approximately 9.8% of revenue from 24.0%.
For the nine months, operating cash flow was $35.2 million, versus $18.2 million a year earlier. Investing activities provided $0.4 million, compared with $30.1 million used; financing activities used $36.3 million, compared with $100.0 million provided. Cash, cash equivalents, and restricted cash totaled $94.3 million at December 31, 2022.
Cash and cash equivalents plus investments were $130.4 million; including restricted cash, the total was $131.7 million. Current assets were $254.6 million and current liabilities $164.8 million. The balance sheet reported $264.4 million of convertible notes and $231.2 million of term-loan carrying value. The term loan’s principal was $250.0 million; outstanding note principal was approximately $68.3 million due 2024 and $201.9 million due 2028.
Material changes and management commentary
- Revenue growth reflects Fuze consolidation, increased mid-market and enterprise customers, expanded customer deployments, and telecom usage; lower CPaaS usage, primarily in Asia-Pacific, partly offset growth.
- Management reported mid-market and enterprise customers represented 76% of ARR, up 30% year over year; enterprise customers represented 57% of total ARR. About 40% of ARR came from customers using both UCaaS and CCaaS capabilities. ARR is a company-defined metric and assumes sustained usage.
- In August 2022, 8x8 refinanced approximately $403.8 million principal of 2024 notes through an exchange for approximately $201.9 million of 2028 notes and cash funded partly by a $250 million secured term loan due 2027. It also repurchased approximately $60 million of shares. Further 2024-note repurchases left approximately $68.3 million principal outstanding at December 31.
- Interest expense rose materially in the quarter, primarily reflecting the new term loan and 2028 notes. Nine-month other income included an $18.3 million debt-extinguishment gain. The quarter also included a $2.1 million extinguishment gain and a $1.8 million gain on sale of intangible assets.
- Management says existing liquidity and anticipated operating cash flows should meet working-capital, expenditure, and contractual needs for the next 12 months and foreseeable future. No quantified revenue or earnings guidance is provided in the supplied filing text.
- Management intends to invest more in R&D in fiscal 2023 than in fiscal 2022, focusing substantially on contact-center capabilities, while pursuing lower service-delivery costs and improved sales and marketing efficiency. It expects R&D expense to rise in absolute dollars and sales and marketing and G&A to decline over time as percentages of revenue.
- Workforce reductions in October 2022 and January 2023 involved approximately 300 employees, primarily in sales and marketing and G&A. Management expects the actions and organizational realignment to improve efficiency and focus resources.
Risks, contingencies, and unusual items
- Cybersecurity incident: 8x8 disclosed that malware enabled an unauthorized third party to access data on its network. In December 2022, the company learned the party possessed approximately one terabyte of confidential information from back-office servers and had made ransom demands; 8x8 did not pay. The company is continuing mitigation efforts and cannot assure against future incidents.
- Debt and liquidity: The secured term loan bears interest at Term SOFR plus 6.50%, subject to a 1.00% SOFR floor and 0.10% credit spread adjustment. It is secured by substantially all company and guarantor assets and includes liquidity, adjusted-cash-EBITDA, and secured-leverage covenants. Higher interest costs and refinancing needs remain risks.
- Tax contingency: Accrued contingent indirect tax liabilities were $16.2 million at December 31, 2022, compared with $16.7 million at March 31, 2022; several jurisdictions were conducting tax audits.
- Legal matter: A California wage-and-hour class and PAGA settlement received final court approval in November 2022. The company deposited settlement amounts with the administrator on January 17, 2023; distribution accounting and a compliance hearing remained pending.
- Accounting and unusual items: Nine-month results included approximately $2.5 million of out-of-period adjustments, including $1.3 million of subscription revenue related to prior years and $1.2 million of excess bad-debt reserves. Adoption of ASU 2020-06 changed the accounting for convertible notes and adjusted opening equity.
- Other disclosed risks include customer churn and demand, competition, macroeconomic conditions and inflation, foreign exchange movements, service reliability, third-party infrastructure, privacy and regulatory compliance, and acquisition integration. Fuze was excluded from the company’s internal-control assessment; management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- How much of ongoing growth and ARR expansion is organic, particularly after separating Fuze’s contribution and the effects of customer usage and churn?
- What are the financial, regulatory, customer, and reputational consequences of the disclosed data intrusion, and have all affected parties and authorities been addressed?
- Can 8x8 meet the secured loan’s financial covenants and manage its interest burden, 2024-note repayment, and longer-term refinancing requirements?
- Are planned workforce reductions and cost improvements translating into sustainable margin and operating-cash-flow gains without weakening sales execution, customer support, or product development?
- What is the ultimate exposure from indirect tax audits and other legal contingencies, including the final cost and completion of the wage-and-hour settlement?