8x8(EGHT) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, with detailed notes Condensed Consolidated Balance Sheets Total assets and stockholders' equity slightly decreased from March 31, 2020, to June 30, 2020, while liabilities remained stable | Metric | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Total Assets | $688,093 | $700,641 | | Total Liabilities | $509,227 | $509,910 | | Total Stockholders' Equity | $178,866 | $190,731 | | Cash and Cash Equivalents | $116,690 | $137,394 | | Convertible Senior Notes, net | $295,662 | $291,537 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2020, total revenue increased, but a higher net loss was reported compared to 2019, driven by increased operating expenses | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Total Revenue | $121,807 | $96,675 | | Loss from Operations | $(37,760) | $(32,553) | | Net Loss | $(41,913) | $(34,265) | | Basic and Diluted Net Loss Per Share | $(0.40) | $(0.36) | Condensed Consolidated Statements of Comprehensive Loss The company's comprehensive loss increased for the three months ended June 30, 2020, compared to the prior year, primarily due to higher net loss, partially offset by unrealized investment gains and a positive foreign currency translation adjustment | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :---------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net Loss | $(41,913) | $(34,265) | | Unrealized gain on investments in securities | $422 | $121 | | Foreign currency translation adjustment | $885 | $(652) | | Comprehensive Loss | $(40,606) | $(34,796) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $190,731 thousand at March 31, 2020, to $178,866 thousand at June 30, 2020, mainly due to net loss, partially offset by stock-based compensation and common stock issuance for an acquisition | Metric | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :----------------------------------------- | :--------------------------- | :---------------------------- | | Total Stockholders' Equity | $178,866 | $190,731 | | Net Loss | $(41,913) | $(422,670) (Accumulated Deficit) | | Stock-based compensation expense | $23,118 | N/A | | Issuance of common stock related to acquisition | $8,489 | N/A | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly decreased for the three months ended June 30, 2020, compared to the prior year, while investing activities shifted from providing cash to using cash, resulting in a net decrease in cash and cash equivalents | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :-------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Net cash used in operating activities | $(9,250) | $(20,509) | | Net cash (used in) provided by investing activities | $(11,900) | $11,171 | | Net cash (used in) provided by financing activities | $(134) | $1,367 | | Net decrease in cash and cash equivalents, and restricted cash | $(20,704) | $(7,558) | | Cash, cash equivalents, and restricted cash at the end of the period | $135,707 | $277,125 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's business, significant accounting policies, revenue recognition, fair value measurements, business combinations, intangible assets, leases, commitments, convertible notes, stock-based compensation, income taxes, net loss per share, and geographical information, offering context to the unaudited financial statements 1. DESCRIPTION OF BUSINESS - 8x8, Inc. is a leading cloud provider of enterprise Software-as-a-Service (SaaS) communications solutions[40] - The company offers unified communications, team collaboration, video conferencing, contact center, data and analytics, and other services from one proprietary cloud technology platform[40] - Substantially all revenue is generated from communication services subscriptions and platform usage, complemented by hardware sales and professional services[40] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The interim condensed consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP and SEC regulations[42] - The company adopted ASU 2016-13 (Credit Losses) and ASU 2018-15 (Internal Use Software) in fiscal 2021, with no material impact on consolidated financial statements[48][50] - Certain revenue and cost of revenue items were reclassified in Q4 fiscal 2020 for clarity, without impacting total revenue, net loss, or cash flows[46] 3. REVENUE RECOGNITION - Revenue is disaggregated by geographic region[52] | Metric | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :-------------------------- | :--------------------------- | :---------------------------- | | Accounts receivable, net | $40,572 | $37,811 | | Contract assets, current, net | $11,625 | $10,425 | | Deferred revenue, current | $8,352 | $7,105 | - Remaining performance obligations totaled approximately $290.0 million as of June 30, 2020, expected to be recognized over the next 36 months[56] 4. FAIR VALUE MEASUREMENTS | Category | Amortized Costs (in thousands) | Gross Unrealized Gain (in thousands) | Gross Unrealized Loss (in thousands) | Estimated Fair Value (in thousands) | | :------------------- | :----------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | | Cash | $34,028 | — | — | $34,028 | | Money market funds | $88,638 | — | — | $88,638 | | Treasury securities | $11,686 | $89 | — | $11,775 | | Certificate of deposit | $8,641 | — | — | $8,641 | | Commercial paper | $9,395 | $1 | — | $9,396 | | Corporate debt | $33,629 | $152 | $(7) | $33,774 | | Total assets | $186,017 | $242 | $(7) | $186,252 | - The estimated fair value of the company's outstanding convertible senior notes was $326.3 million as of June 30, 2020, classified as Level 2 in the fair value hierarchy[62] 5. BUSINESS COMBINATIONS - On July 17, 2019, 8x8 acquired Wavecell Pte. Ltd. for a total fair value of purchase consideration of $117.1 million[63][64] - The acquisition consideration comprised $72.8 million in cash and $44.3 million in shares of common stock[64] - The acquisition extended 8x8's technology platform with UCaaS, CCaaS, VCaaS, and CPaaS solutions, expanding API offerings geographically and in scope[63] | Asset/Liability | July 17, 2019 (in thousands) | | :---------------- | :--------------------------- | | Cash | $4,473 | | Accounts receivable | $9,438 | | Intangible assets | $21,010 | | Goodwill | $91,060 | 6. INTANGIBLE ASSETS, GOODWILL, AND OTHER ASSETS | Asset | June 30, 2020 Net Carrying Amount (in thousands) | March 31, 2020 Net Carrying Amount (in thousands) | | :------------------------------------ | :----------------------------------------------- | :------------------------------------------------ | | Developed technology | $16,195 | $17,620 | | Customer relationships | $5,578 | $5,997 | | Trade and domain names | — | $384 | | Total acquired identifiable intangible assets | $21,773 | $24,001 | - The weighted average remaining useful life for technology is 4.8 years and for customer relationships is 5.7 years[68] | Metric | Amount (in thousands) | | :----------------------------------- | :-------------------- | | Balance at March 31, 2020 | $128,300 | | Foreign currency translation adjustments | $680 | | Balance at June 30, 2020 | $128,980 | - Amortization of deferred sales commission costs was $6.1 million for the three months ended June 30, 2020, up from $4.2 million in the prior year[72] 7. LEASES | Metric | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Operating lease, right-of-use assets | $76,054 | $78,963 | | Operating lease liabilities, current | $9,989 | $5,875 | | Operating lease liabilities, non-current | $87,884 | $92,452 | | Total operating lease liabilities | $97,873 | $98,327 | | Lease Expense (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--------------------------- | :------------------------------- | :------------------------------- | | Operating lease expense | $3,750 | $2,085 | | Variable lease expense | $782 | $209 | - The weighted average remaining lease term is 8.8 years, and the weighted average discount rate is 4.0%[75] 8. COMMITMENTS AND CONTINGENCIES - The company had accrued contingent indirect tax liabilities of $4.5 million as of June 30, 2020, and March 31, 2020[80] - As of June 30, 2020, management believes it is not probable that a loss has been incurred from any material lawsuits, claims, and proceedings[82] 9. CONVERTIBLE SENIOR NOTES AND CAPPED CALL - The company has $362.5 million aggregate principal amount of 0.50% convertible senior notes due 2024[86] | Metric | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :--------------------------- | :--------------------------- | :---------------------------- | | Principal | $362,500 | $362,500 | | Unamortized debt discount | $(65,919) | $(69,987) | | Unamortized issuance costs | $(919) | $(976) | | Net carrying amount | $295,662 | $291,537 | | Interest Expense (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------------ | :------------------------------- | :------------------------------- | | Contractual interest expense | $453 | $359 | | Amortization of debt discount | $4,068 | $3,146 | | Amortization of issuance costs | $57 | $26 | | Total interest expense | $4,578 | $3,531 | - Capped call transactions partially offset potential dilution, covering approximately 14.1 million shares, recorded as a reduction to additional paid-in capital[94] 10. STOCK-BASED COMPENSATION | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | | Cost of service revenue | $1,814 | $997 | | Research and development | $6,545 | $3,864 | | Sales and marketing | $5,739 | $3,921 | | General and administrative | $7,894 | $4,081 | | Total | $22,779 | $13,597 | | Stock Activity (in thousands, except shares) | June 30, 2020 | June 30, 2019 | | :------------------------------------------- | :------------ | :------------ | | Stock options outstanding at period-end | 2,259 | 2,974 | | Stock awards outstanding at period-end | 9,443 | 8,193 | | Total unrecognized compensation expense at period-end | $116,957 | $109,422 | 11. INCOME TAXES - The company's effective tax rate was (0.5)% for the three months ended June 30, 2020, and (0.4)% for the same period in 2019[99] - The difference in the effective tax rate and the U.S. federal statutory rate was primarily due to the full valuation allowance maintained against deferred tax assets[99] - The provision for income taxes was $0.2 million for the three months ended June 30, 2020, compared to $0.1 million in the prior year[147] 12. NET LOSS PER SHARE | Metric | Three Months Ended June 30, 2020 (in thousands, except per share) | Three Months Ended June 30, 2019 (in thousands, except per share) | | :------------------------------------ | :---------------------------------------------------------------- | :---------------------------------------------------------------- | | Net loss available to common stockholders | $(41,913) | $(34,265) | | Common shares - basic and diluted | 103,607 | 96,429 | | Net loss per share (Basic and diluted) | $(0.40) | $(0.36) | - 12,284 thousand anti-dilutive shares (stock options, stock awards, and potential shares from ESPP) were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2020[102] 13. GEOGRAPHICAL INFORMATION | Region | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | YoY Change % | | :------------- | :---------------------------------------------- | :---------------------------------------------- | :----------- | | United States | $93,244 | $83,249 | 12.0% | | International | $28,563 | $13,426 | 112.7% | | Total revenue | $121,807 | $96,675 | 26.0% | | Region | June 30, 2020 (in thousands) | March 31, 2020 (in thousands) | | :------------- | :--------------------------- | :---------------------------- | | United States | $89,954 | $87,673 | | International | $6,158 | $6,709 | | Total property and equipment, net | $96,112 | $94,382 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations, covering business overview, strategic outlook, COVID-19 impacts, revenue, expenses, and liquidity BUSINESS OVERVIEW - 8x8 is a leading SaaS provider of voice, video, chat, contact center, and enterprise-class API solutions powered by one global cloud communications platform[105] - The company serves customers across more than 150 countries, with an increased focus on mid-market and enterprise categories[106] - Revenue is primarily subscription-based from communication services and platform usage, supplemented by sales and rentals of hardware and professional services[107] - The flagship service is 8x8 X Series, a suite of UCaaS and CCaaS solutions, with ongoing migration of legacy customers to this product suite[108][109][110] SUMMARY AND OUTLOOK | Metric | Q1 Fiscal 2021 | Q1 Fiscal 2020 | YoY Growth | | :-------------------------------------------------- | :------------- | :------------- | :--------- | | Total service revenue | $114.2 million | $89.839 million | 27.1% | | Average annualized service revenue per customer | $7,883 | $7,069 | 11.5% | | Service revenue from mid-market and enterprise customers | 45% of total | N/A | 48% | | New bookings from bundled UCaaS and CCaaS (>$12K ARR) | 55% | 51% | +4 pp | - The company focuses on improved operating efficiencies and revenue growth, aiming for profitability and operating cash flow improvement in fiscal 2021[112] - Plans for fiscal 2021 include investments in customer acquisition through global expansion, direct marketing, sales force, e-commerce, and indirect channel programs[113] IMPACTS OF COVID-19 - The COVID-19 pandemic led to a significant portion of the workforce working from home, altered sales activities, reduced travel expenses, and improved employee productivity[114] - Small business and mid-size customers were more impacted by COVID-19 than enterprise customers[114] - CPaaS usage revenue grew year-over-year in Q1, despite lower than expected usage in APAC due to COVID-related slowdowns, with positive trends observed towards the end of the quarter[114] - The overall negative impact on the business was less significant than initially anticipated, but risks are continuously monitored and effects considered in credit loss impairments[116] COMPONENTS OF RESULTS OF OPERATIONS - Service revenue includes communication services subscriptions, platform usage revenue, and related fees from UCaaS, CCaaS, and CPaaS offerings[117] - Other revenue primarily includes sales and rentals of IP telephones and professional services[118] - Cost of service revenue includes network operations, personnel, technology licenses, amortization of internally developed software, customer service, and third-party carrier costs[119] - Operating expenses comprise Research and Development, Sales and Marketing, and General and Administrative expenses, each with specific personnel, overhead, and operational costs[121][122][123] - Other income (expense), net, primarily consists of interest expense related to convertible notes, offset by income from cash/investments and foreign exchange gains/losses[124] - Provision for income taxes primarily consists of state minimum taxes, with a valuation allowance maintained against U.S. deferred tax assets[126][127] RESULTS OF OPERATIONS Revenue | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | % Change | | :------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Service revenue | $114,183 | $89,839 | $24,344 | 27.1% | | Other revenue | $7,624 | $6,836 | $788 | 11.5% | | Total revenue | $121,807 | $96,675 | $25,132 | 26.0%| - Service revenue growth was primarily due to a net increase in the subscriber base, expanded offerings to existing customers, and growth in CPaaS usage, particularly in the APAC region[129] - Other revenue increased due to an increase in professional services revenue resulting from overall business growth[131] Cost of Revenue | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Cost of service revenue | $40,996 | $25,300 | $15,696 | 62.0% | | Cost of other revenue | $11,137 | $12,391 | $(1,254) | (10.1)% | - The increase in cost of service revenue was primarily attributable to a $13.0 million increase in communication infrastructure costs and a $2.0 million increase in amortization of capitalized software[133] - Cost of other revenue decreased due to lower hardware shipment volume, improved pricing, and a shift to the hardware rental program[136] Operating Expenses | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Research and development | $21,494 | $18,331 | $3,163 | 17.3% | | Sales and marketing | $60,150 | $53,599 | $6,551 | 12.2% | | General and administrative | $25,790 | $19,607 | $6,183 | 31.5% | - Research and development expenses increased primarily due to a $2.7 million increase in stock-based compensation and a $0.7 million increase in employee and consulting related expenditures[137] - Sales and marketing expenses increased due to higher employee expenditures ($4.7 million), channel commissions ($3.1 million), and amortization of deferred sales commission costs ($1.9 million), partially offset by reduced marketing program and travel costs[139] - General and administrative expenses increased due to a $3.8 million increase in stock-based compensation, a $1.3 million higher allowance for credit losses (partially COVID-19 related), and a $1.3 million increase in legal and tax related costs[143] Other Income (Expense), net | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Other income (expense), net | $(3,925) | $(1,564) | $(2,361) | 151.0% | - The increase in net expense was primarily due to a $1.6 million decrease in interest income and a $1.0 million increase related to contractual interest expense and amortization of debt discount from convertible notes[145] Provision for Income Taxes | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------- | :------- | | Provision for income taxes | $228 | $148 | $80 | 54.1% | | Percentage of loss before provision for income taxes | (0.5)% | (0.4)% | N/A | N/A | - The effective tax rates were (0.5)% for Q1 2020 and (0.4)% for Q1 2019, primarily due to the full valuation allowance maintained against deferred tax assets[147] Liquidity and Capital Resources | Metric | June 30, 2020 (in millions) | March 31, 2020 (in millions) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Cash, cash equivalents, and investments | $167.2 | $186.9 | | Restricted cash | $19.0 | $19.0 | - Net cash used in operating activities for the three months ended June 30, 2020, was $9.3 million, an improvement from $20.5 million in the prior year[154] - The company expects to defer over $4 million in employer payroll taxes in fiscal 2021 under the CARES Act[150] - Lower cash usage from payroll compensation of over $4 million is expected in fiscal 2021 due to an employee stock salary program[152] - Management believes existing cash, cash equivalents, and investment balances, and anticipated cash flows from operations will be sufficient for the next 12 months[153] CRITICAL ACCOUNTING POLICIES & ESTIMATES - The preparation of financial statements requires management to make estimates and judgments affecting reported amounts of assets, liabilities, revenue, and expenses[158] - Key estimates include allowance for credit losses, impairment of goodwill and intangible assets, capitalization of internally developed software, and stock-based compensation expense[44] - There have been no significant changes to critical accounting policies and estimates during the three months ended June 30, 2020[159] RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - The company adopted ASU 2016-13 (Credit Losses), ASU 2018-13 (Fair Value Measurement), and ASU 2018-15 (Internal Use Software) in the first quarter of fiscal 2021[48][49][50] - The adoption of these pronouncements did not have a material impact on the company's consolidated financial statements[48][49][50] RECENT ACCOUNTING PRONOUNCEMENTS - The company is currently assessing the impact of ASU 2019-12 (Income Taxes), effective for fiscal years beginning after December 15, 2020 (fiscal 2022), on its consolidated financial statements[51] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Discusses market risks, including interest rate fluctuation and foreign currency exchange, noting no material impact from hypothetical 10% changes Interest Rate Fluctuation Risk - As of June 30, 2020, the company had $167.2 million in cash, cash equivalents, and investments, primarily in money market funds, U.S. treasury, commercial paper, and corporate bonds[162] - A hypothetical 10% change in interest rates would not have a material impact on the value of the company's cash, cash equivalents, or available-for-sale investments[162] - The fair value of the $362.5 million convertible senior notes ($326.3 million as of June 30, 2020) is subject to interest rate and market risk, but this does not impact the company's financial position, cash flows, or results of operations due to the fixed nature of the debt[163] Foreign Currency Exchange Risk - The company has foreign currency risks related to revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound[164] - A hypothetical 10% decrease in all foreign currencies against the US dollar would not result in a material foreign currency loss on foreign-denominated balances as of June 30, 2020[165] - The company does not currently use financial instruments to hedge foreign currency exchange risk but may do so in the future as foreign operations expand[166] ITEM 4. CONTROLS AND PROCEDURES Details disclosure controls and procedures, their effectiveness, inherent limitations, and changes in internal control over financial reporting Evaluation of Effectiveness of Disclosure Controls and Procedures - As of June 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[168] - Disclosure controls are designed to ensure that required information is accumulated, communicated to management, and reported within specified time periods[167] Limitations on the Effectiveness of Controls - Management acknowledges that no control system can prevent all errors and fraud, providing only reasonable, not absolute, assurance[169] - The design of a control system must reflect resource constraints, and benefits must be considered relative to costs[169] Changes in Internal Control over Financial Reporting - There were no changes in the company's internal control over financial reporting during the first quarter of fiscal year 2021 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[171] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Incorporates legal proceedings information from Note 8, with management believing no material loss is probable as of June 30, 2020 - Information on legal proceedings is incorporated by reference from Note 8 of the financial statements[173] - As of June 30, 2020, management believes it is not probable that a material loss has been incurred from any pending lawsuits, claims, and proceedings[82] ITEM 1A. RISK FACTORS Updates risk factors, highlighting new or modified risks related to data privacy and protection, regulatory uncertainty, and potential non-compliance impacts - No material changes from previously disclosed risk factors, except for those related to data privacy and protection[174] - Failure to comply with data privacy and protection laws (e.g., GDPR, CCPA) could result in fines, penalties, lawsuits, and adverse business impacts[175] - Regulatory uncertainty from Brexit and the invalidation of the Privacy Shield program by the Court of Justice of the European Union pose risks to data transfer and operations[176] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered sales of equity securities or use of proceeds were reported - No unregistered sales of equity securities or use of proceeds were reported[178] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported - No defaults upon senior securities were reported[179] ITEM 4. MINE SAFETY DISCLOSURES No mine safety disclosures were reported - No mine safety disclosures were reported[181] ITEM 5. OTHER INFORMATION No other information was reported for this item - No other information was reported for this item[182] ITEM 6. EXHIBITS Lists all exhibits filed with the Form 10-Q, including corporate governance, convertible notes, equity plan, employment agreements, certifications, and XBRL data - This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, indenture for convertible notes, equity incentive plan, employment agreements, certifications, and XBRL financial data[184] SIGNATURE Report duly signed on August 4, 2020, by Samuel Wilson, CFO of 8x8, Inc., certifying submission - The report was duly signed on August 4, 2020, by Samuel Wilson, Chief Financial Officer of 8x8, Inc., certifying its submission pursuant to the Securities Exchange Act of 1934[190]