(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. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly those set forth under the section entitled "Risk Factors" in our Annual Report on Form 10-K ("Form 10-K") for the fiscal year ended March 31, 2021. BUSINESS OVERVIEW We are a leading software-as-a-service ("SaaS") provider of voice, video, chat, contact center, and application programming interface ("API") solutions powered by one global cloud communications platform. From our proprietary cloud technology platform, organizations across all their locations and employees globally have access to unified communications, team collaboration, video conferencing, contact center, data and analytics, communication APIs, and other services, enabling them to be more productive and responsive to their customers. Our customers represent companies ranging from small businesses to large multinational enterprises, and their users are spread across more than 150 countries. In recent years, we have increased our focus on the mid-market (which we define as customers that generate $25K to $100K ARR) and enterprise (which we define as customers that generate more than $100K ARR) customer categories. See "Key Business Metrics" section below for our definition and discussion of ARR. We have a portfolio of SaaS offerings made available at different rates varying by the specific functionalities, services, and number of users. We generate service revenue from subscriptions to our communication services as well as from our customer's usage of certain of our platform services. We generate other revenues from the sales and rentals of office phones and other hardware equipment, and professional services. We define a "customer" as one or more legal entities to which we provide services pursuant to a single contractual arrangement. In some cases, we may have multiple billing relationships with a single customer (for example, where we establish separate billing accounts for a parent company and each of its subsidiaries). Our flagship service is our 8x8 X Series, a next generation suite of unified communications as a service ("UCaaS") and contact center as a service ("CCaaS") solutions, which consist of service plans of increasing functionality designated X1, X2, etc., through X8. With 8x8 X Series, we provide enterprise-grade voice, unified communications, video meetings, team collaboration, and contact center functionalities from a single platform. The continued increase in demand for an integrated UCaaS and CCaaS solution led us to introduce eXperience Communications as a Service ("XCaaS"), a deployment model that erases boundaries between UCaaS and CCaaS, delivered through our differentiated single platform. We also offer standalone SaaS services for contact center and video meetings as well as APIs for SMS, messaging, voice, fax, and video through our global communications platform as a service ("CPaaS"). We expect to continue developing and enhancing these services on our platform, as we believe in the value of the collective solutions. SUMMARY AND OUTLOOK In the second quarter of fiscal 2022, our service revenue grew approximately 18% year-over-year to $142 million. We continued to show an increase in our total ARR, which grew to $553 million in the second quarter of fiscal 2022, from $467 million in the same period in fiscal 2021, driven by the growth in sales to mid-market and enterprise customers. ARR from mid-market and enterprise customers represented 70% of total ARR in the second quarter of fiscal 2022, and grew 27% compared to the same period in fiscal 2021. Our continued business focus is on achieving improved operating efficiencies while delivering revenue growth. We focus on key areas of spend in our go-to-market strategy and improving gross margin and operating margin through increased spend discipline. Additionally, we look to drive improved efficiencies in our customer acquisition and operations, and are focused on expanding our business upmarket with mid-market and enterprise customers. We believe that this approach will enable the Company to grow and capture market share during this phase of industry disruption, in a cost-effective way, and support the Company in pursuit of its path to profitability and operating cashflow improvement. We plan to continue making investments in activities to acquire more customers, including investing in our marketing efforts, internal and field sales capacity, and research and development. We also intend to continue investing in our indirect channel programs to acquire more third-party selling agents to help sell our solutions, including investments in our value added resellers ("VARs") and master agent programs. IMPACTS OF COVID-19 The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results continues to depend on numerous evolving factors that we may not be able to accurately predict, including those set forth under the section entitled "Risk Factors" in our Form 10-K for the fiscal year ended March 31, 2021. In an effort to contain the spread of COVID-19 and its variants, governments around the world have enacted various measures, including orders to close at times non-essential businesses, isolate residents to their homes, and practice social distancing. To protect the health and safety of our employees, our workforce has spent significant time working from home and travel has been curtailed for our employees as well as our customers. While we anticipate that the global health crisis caused by COVID-19 and the measures enacted to slow its spread Table of Contents
will negatively impact business activity across the globe, it is not clear what its potential effects, including the availability and effectiveness of vaccines, now and in the future, and current and future variants of the virus, will be on our business, including the effects on our customers, suppliers or vendors, or on our financial results.
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Other Expense, Net
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto.
Revenue
Service revenue
2021 2020 Change
Three Months Ended September 30, $ 142,376 $ 120,942 $ 21,434 17.7 %
Percentage of total revenue 93.9 % 93.7 %
Six Months Ended September 30, $ 280,172 $ 235,125 $ 45,047 19.2 %
Percentage of total revenue 93.4 % 93.7 %
Service revenue increased for the three and six months ended September 30, 2021, as compared to the three and six months ended September 30, 2020, primarily due to a net increase in our customer base, expanded offerings to existing customers, and growth in related usage; service revenue from new customers was primarily driven by global sales of XCaaS, and our standalone UCaaS and CCaaS offerings to our mid-market and enterprise customers. The increase in service revenue was also attributable to growth in usage revenue generated by our CPaaS products.
Other revenue
2021 2020 Change
Three Months Ended September 30, $ 9,181 $ 8,191 $ 990 12.1 %
Percentage of total revenue 6.1 % 6.3 %
Six Months Ended September 30, $ 19,712 $ 15,815 $ 3,897 24.6 %
Percentage of total revenue 6.6 % 6.3 %
Other revenue increased for the three and six months ended September 30, 2021, as compared to the six months ended September 30, 2020, primarily due to increased professional services revenue resulting from the overall growth in our business and customer base, partially offset by a decrease in product revenue as a result of a shift toward our hardware rental program and soft phone usage. We expect other revenue to grow over time as our customer base grows, particularly in mid-market and enterprise, as we focus on delivering enhanced platform offerings to existing and new customers.
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Cost of Revenue
Cost of service revenue
2021 2020 Change
Three Months Ended September 30, $ 47,198 $ 44,803 $ 2,395 5.3 %
Percentage of service revenue 33.2 % 37.0 %
Six Months Ended September 30, $ 93,208 $ 85,799 $ 7,409 8.6 %
Percentage of service revenue 33.3 % 36.5 %
Cost of service revenue increased for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, yet decreased as a percentage of service revenue, primarily due to increases of:
Cost of other revenue
2021 2020 Change
Three Months Ended September 30, $ 12,269 $ 11,693 $ 576 4.9 %
Percentage of other revenue 133.6 % 142.8 %
Six Months Ended September 30, $ 26,015 $ 22,830 $ 3,185 14.0 %
Percentage of other revenue 132.0 % 144.4 %
Cost of other revenue increased for the three and six months ended September 30, 2021, as compared to the six months ended September 30, 2020, primarily due to an increase in hardware shipment volume.
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Operating Expenses
Research and development
2021 2020 Change
Three Months Ended September 30, $ 28,498 $ 21,567 $ 6,931 32.1 %
Percentage of total revenue 18.8 % 16.7 %
Six Months Ended September 30, $ 53,890 $ 43,061 $ 10,829 25.1 %
Percentage of total revenue 18.0 % 17.2 %
Research and development expenses increased for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily due to increases of:
Sales and marketing
2021 2020 Change
Three Months Ended September 30, $ 76,726 $ 61,399 $ 15,327 25.0 %
Percentage of total revenue 50.6 % 47.5 %
Six Months Ended September 30, $ 152,641 $ 121,549 $ 31,092 25.6 %
Percentage of total revenue 50.9 % 48.4 %
Sales and marketing expenses increased for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily due to increases of:
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$1.8 million in marketing program and public cloud expenses due to gained efficiencies in lead generation and brand awareness, travel related costs, and employee and consulting related expenditures. We plan to continue investing in sales and marketing to attract and retain customers on our platform and to increase our brand awareness. While we expect to continue to improve our cost structure and achieve operational efficiencies, we expect that sales and marketing expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
General and administrative
2021 2020 Change
Three Months Ended September 30, $ 24,023 $ 22,769 $ 1,254 5.5 %
Percentage of total revenue 15.9 % 17.6 %
Six Months Ended September 30, $ 50,114 $ 48,559 $ 1,555 3.2 %
Percentage of total revenue 16.7 % 19.4 %
General and administrative expenses increased for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, primarily due to an increase of:
Other expense, net
2021 2020 Change
Three Months Ended September 30, $ 4,934 $ 5,178 $ (244) (4.7) %
Percentage of total revenue (3.3) % (4.0) %
Six Months Ended September 30, $ 9,757 $ 9,103 $ 654 7.2 %
Percentage of total revenue 3.3 % 3.6 %
The change in Other expense, net for the three and six months ended September 30, 2021, as compared to the six months ended September 30, 2020, was primarily due to fluctuations in foreign exchange rates.
Provision for income taxes
2021 2020 Change
Three Months Ended September 30, $ 233 $ 137 $ 96 70.1 %
Percentage of total revenue 0.2 % 0.1 %
Six Months Ended September 30, $ 489 $ 365 $ 124 34.0 %
Percentage of total revenue 0.2 % 0.1 %
There was not a material change to our Provision for income taxes for the three and six months ended September 30, 2021 and no material changes are anticipated for the foreseeable future.
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Liquidity and Capital Resources
Nov 03, 2021
COMTEX_396313537/2041/2021-11-03T16:39:19
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