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Oct. 31, 2019, 6:29 a.m. EDT

10-Q: 8X8 INC /DE/

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled "Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. BUSINESS OVERVIEW We are a leading Software-as-a-Service provider of voice, video, chat, contact center, and enterprise-class API solutions powered by one global cloud communications platform. From our proprietary cloud technology platform, customers have access to unified communications, team collaboration, video conferencing, contact center, data and analytics, communication APIs, and other services.

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As of September 30, 2019, our customers range from small businesses to large enterprises and their users are spread across more than 150 countries. In recent years, we have increased our focus on the mid-market and enterprise customer sectors.

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Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of internally developed software, and other costs such as customer service, which includes deployment and technical support costs. Cost of service revenue also includes other communication origination and termination services provided by third-party carriers and outsourced customer service call center operations. We expect that cost of service revenue will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue. Cost of Product Revenue

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        RESULTS OF OPERATIONS
        The following discussion should be read in conjunction with our condensed
        consolidated financial statements and the notes thereto.
                                             September 30,           Dollar     Percent
        Service revenue                   2019           2018        Change      Change
                                           (dollar amounts in thousands)
        Three months ended            $   104,529     $  81,346     $ 23,183      28.5 %
        Percentage of total revenue          95.4 %        94.9 %
        Six months ended              $   196,901     $ 159,467     $ 37,434      23.5 %
        Percentage of total revenue          95.5 %        94.4 %
        


Service revenue increased for the three and six months ended September 30, 2019 compared with the same periods of the previous fiscal year primarily due to an increase in our business customer subscriber base (net of customer churn), an increase in the average service revenue from each customer on a monthly basis and, to a lesser extent, revenue associated with our newly acquired CPaaS product as compared to the same prior year period.







                                                    September 30,                  Dollar    Percent
        Product revenue                      2019                   2018           Change     Change
                                                (dollar amounts in thousands)
        Three months ended            $         4,988         $         4,336     $  652      15.0  %
        Percentage of total revenue               4.6 %                   5.1 %
        Six months ended              $         9,291         $         9,440     $ (149 )    (1.6 )%
        Percentage of total revenue               4.5 %                   5.6 %
        


Product revenue increased during the three months ended September 30, 2019 compared with the same period in the prior fiscal year primarily due to increased equipment unit sales to customers combined with product discounts and promotions during the three months ended September 30, 2019.







                                               September 30,           Dollar     Percent
        Cost of service revenue             2019            2018       Change      Change
                                             (dollar amounts in thousands)
        Three months ended              $   43,195       $ 26,202     $ 16,993      64.9 %
        Percentage of service revenue         41.3 %         32.2 %
        Six months ended                $   75,162       $ 50,751     $ 24,411      48.1 %
        Percentage of service revenue         38.2 %         31.8 %
        


Cost of service revenue for the three months ended September 30, 2019 increased over the same prior year period and faster than revenue growth due to increases related to our newly acquired CPaaS products combined with increased overhead allocation expense, as well as a $2.5 million increase in personnel and related costs, a $2.4 million increase in amortization of intangibles and capitalized software expenses, a $1.1 million increase in consulting and outside services and a $0.6 million increase in stock-based compensation costs, as well as other smaller increases.

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                                               September 30,            Dollar    Percent
        Cost of product revenue              2019            2018       Change     Change
                                             (dollar amounts in thousands)
        Three months ended              $     6,502       $  5,397     $ 1,105      20.5 %
        Percentage of product revenue         130.4 %        124.5 %
        Six months ended                $    12,226       $ 11,678     $   548       4.7 %
        Percentage of product revenue         131.6 %        123.7 %
        


Cost of product revenue for the three and six months ended September 30, 2019 increased over the same prior year periods primarily due to the increase in the number of telephones shipped to customers. The increase in negative margin was due to the product discounts and promotions during the three and six months ended September 30, 2019.







                                             September 30,           Dollar     Percent
        Research and development          2019            2018       Change      Change
                                           (dollar amounts in thousands)
        Three months ended            $   19,434       $ 14,064     $  5,370      38.2 %
        Percentage of total revenue         17.7 %         16.4 %
        Six months ended              $   37,765       $ 27,114     $ 10,651      39.3 %
        Percentage of total revenue         18.3 %         16.1 %
        


Research and development expenses for the three months ended September 30, 2019 increased over the same prior year period primarily due to a $2.4 million increase in personnel and related costs, a $1.4 million increase in stock-based compensation expense, and a $0.7 million increase in amortization of capitalized software expenses, as well as other smaller cost increases.







                                             September 30,           Dollar     Percent
        Sales and marketing                2019           2018       Change      Change
                                           (dollar amounts in thousands)
        Three months ended            $    57,895      $ 41,680     $ 16,215      38.9 %
        Percentage of total revenue          52.9 %        48.6 %
        Six months ended              $   111,494      $ 82,175     $ 29,319      35.7 %
        Percentage of total revenue          54.1 %        48.7 %
        


Sales and marketing expenses for the three months ended September 30, 2019 increased over the same prior year period primarily due to a $10.0 million increase in personnel and related costs, a $2.9 million increase in advertising and marketing expenses, a $3.1 million increase in third-party commission expenses, and a $3.1 million increase in stock-based compensation costs, as well as other smaller cost increases. These cost increases were partially offset by $4.3 million commission costs that were capitalized.







                                             September 30,            Dollar    Percent
        General and administrative         2019            2018       Change     Change
                                           (dollar amounts in thousands)
        Three months ended            $    20,435       $ 20,326     $   109       0.5 %
        Percentage of total revenue          18.7 %         23.7 %
        Six months ended              $    40,042       $ 35,159     $ 4,883      13.9 %
        Percentage of total revenue          19.4 %         20.8 %
        


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General and administrative expenses for the three months ended September 30, 2019 increased slightly as compared to the same prior year period due to a $3.0 million increase in personnel and related costs, and a $2.2 million increase in stock-based compensation costs. These increases were partially offset by a decrease in sales and use tax expenses of $4.5 million that the company recognized in the three months ended September 30, 2018.







                                            September 30,            Dollar      Percent
        Other (expense) income, net        2019          2018        Change      Change
                                           (dollar amounts in thousands)
        Three months ended            $   (2,732 )     $   635     $ (3,367 )   (530.2 )%
        Percentage of total revenue         (2.5 )%        0.7 %
        Six months ended              $   (4,296 )     $ 1,354     $ (5,650 )   (417.3 )%
        Percentage of total revenue         (2.1 )%        0.8 %
        


Other (expense) income, net changed for the three and six months ended September 30, 2019 over the same prior year periods primarily due to an increase of $3.5 million and $7.1 million, respectively, related to contractual interest expense, amortization of debt discount, and amortization of issuance costs associated with our convertible notes issued in the fourth quarter of fiscal year 2019. These increases were partially offset by an increase in interest income. Refer to Part 1, Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements. We had no such similar costs in the same prior year period.







                                                                September 30,                    Dollar
        Provision for income taxes                       2019                   2018             Change
                                                                (dollar amounts in thousands)
        Three months ended                        $           256        $           130      $       126
        Percentage of loss before provision for
        income taxes                                         -0.6  %                -0.6  %
        Six months ended                          $           404        $           221              183
        Percentage of loss before provision for
        


For the three months ended September 30, 2019 and 2018, we recorded income tax expense of $0.3 million and $0.1 million, respectively. For the six months ended September 30, 2019 and 2018, we recorded income tax expense of $0.4 million and $0.2 million, respectively. These taxes were related to state minimum taxes and income taxes from our foreign operations.

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Historically, the Company maintained all investments as short-term investments on its balance sheet, as the Company could liquidate these investments at any time and did not limit its liquidation of investments by contractual maturity date. Given the recent issuance of the convertible senior notes, and the associated increased cash, cash equivalents and investment balances, the Company expects to hold certain investments for at least 12 months from the reporting date and records these investments in long-term investments in alignment with the contractual maturity dates.

the expense associated with stock options and stock-based awards; and

Net cash used in investing activities was $59.9 million in the six months ended September 30, 2019, compared with $0.3 million used in investing activities in six months ended September 30, 2018. The cash used in investing activities during the six months ended September 30, 2019 was primarily related to $57.8 million used in the acquisition of Wavecell, a $0.9 million payment released from escrow held for MarianalQ acquisition in the first quarter of fiscal 2019, combined with purchases of $7.1 million of property and equipment investments and capitalized internal software development costs of $14.3 million. These amounts were partially offset by $20.3 million of proceeds from sales and maturities of investments, net of purchases of investments.







        Contractual Obligations
                                                              Payments due by Period
                                                                                                    More than 5
        Contractual Obligations  Total           Less than 1 year     1-3 years      3-5 years         years
        Senior convertible notes $   287,500   $                -   $          -   $    287,500   $           -
        Interest on senior
        convertible notes              6,469                1,438          2,875          2,156               -
        Operating leases             120,703                8,717         24,867         23,239          63,880
        Total Contractual
        Obligations              $   414,672   $           10,155   $     27,742   $    312,895   $      63,880
        


CRITICAL ACCOUNTING POLICIES & ESTIMATES

Oct 31, 2019

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