8X8, INC. OVERVIEW
We are a leading software-as-a-service ("SaaS") 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,
organizations across all their locations and employees 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 range from small businesses to large enterprises and their users
are spread across more than 150 countries. In recent years, we have increased
our up-market focus on the mid-market and enterprise customer sectors.
We have a portfolio of cloud-based offerings that are subscription based, made
available at different rates varying by the specific functionalities, services
and number of users. We generate service revenue from communications services
subscriptions, platform usage, and professional services. We generate product
revenues from the sale of office phones and other hardware equipment. 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. We also offer standalone SaaS services
for contact center, video meetings, and enterprise communication APIs. Through
our July 2019 acquisition of Wavecell Pte. Ltd. , an Asia -based global
communication platform as a service ("CPaaS") provider of SMS, messaging, voice
and video APIs to enterprises, we expanded our API offerings both geographically
and in scope. We expect to continue integrating these services into our
platform, as we believe in the value of the collective solutions.
Prior to the launch of 8x8 X Series in 2018, our customers subscribed to our
legacy products. We are migrating these customers from our legacy solutions to
our 8x8 X Series product suite, and we intend to accelerate the pace of customer
migrations in fiscal 2021. These migrations may require us to incur professional
services and related engineering costs. While we may not be able to recover
these costs from our customers, we believe that we will realize other benefits
including reducing the number of platforms that we are required to support and
improved customer churn.
SUMMARY AND OUTLOOK
In fiscal 2020, our total service revenue grew 27% year-over-year to $414.1
million , exceeding that of our fiscal 2019 growth rate. We continued to show an
increase in our average annualized service revenue per customer, which grew to
$7,876 in fiscal 2020, compared with $6,629 in fiscal 2019, as we are selling
more to mid-market and enterprise customers. Annual service revenue from
mid-market and enterprise customers represented 43% of total annual service
revenue and grew 51% over the prior year. We also increased the number of deals
where customers purchase our integrated communications and contact center
solutions, which we have referred to as bundled deals, 60% of our new bookings
greater than $12,000 of annualized recurring revenue were from customers that
selected bundled UCaaS and CCaaS, as compared to 50% one year ago.
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During the second quarter of fiscal 2020, the Company acquiredWavecell Pte. Ltd. ("Wavecell"), anAsia -based provider of CPaaS solutions. This acquisition of an enterprise-class API solution extended 8x8's technology advantage as a fully-owned, cloud technology platform with UCaaS, CCaaS, video communication as a service ("VCaaS"), and CPaaS solutions. This unique combination on one technology platform enables 8x8 to natively offer pre-packaged communications, contact center and video solutions and open APIs to embed these and other communications into an organization's core business processes. We expect to continue integrating CPaaS services into our platform, as we believe in the value of the collective solutions. See Note 13, "ACQUISITIONS" in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report for more information about our acquisition of Wavecell. Our continued business focus is on achieving improved operating efficiencies while delivering revenue growth. In fiscal 2020, while we continued to make important investments in our products and technology platform, management recognized the importance of driving toward profitability for sustainable scale. We focused on key areas of spend in our go-to-market strategy and improving gross margin through increased spend discipline. Additionally, we looked to drive efficiencies in our small business customer acquisition and operations, and focused on expanding our business upmarket with mid-market and enterprise customers. We believe that this approach and execution 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, which we will continue to execute throughout fiscal 2021. In prior years, we made strategic investments in R&D and marketing, which we considered necessary and important for delivering a robust platform to our customers and establishing the appropriate demand generation channels to connect our customers to our solutions. In fiscal 2019, we launched 8x8 X Series, our single-technology platform, and re-aligned our channel and marketing functions to support a more scalable, higher-growth, go-to-market strategy, in response to the shift of businesses from legacy on-premise communication solutions to cloud-based services. We believe that this industry trend continued throughout our fiscal 2020. Accordingly, we continued to invest in our business, but with a concurrent focus on scale and managing costs with the goal of driving to profitability. In fiscal 2021, we plan to continue making investments in activities to acquire more customers, including investing in our direct marketing efforts, sales force, e-commerce, and outbound marketing efforts. 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. Should these upfront investments not result in additional revenue from new or existing customers, including as result of adverse impacts from the COVID-19 pandemic, and/or these cost reduction and efficiency efforts do not result in meaningful savings, our operating results may be adversely impacted. IMPACTS OF COVID-19 The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will 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 an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close non-essential businesses, isolate residents to their homes, and practice social distancing. To protect the health and safety of our employees, our workforce has had to spend a significant amount of time working from home and travel has been curtailed for our employees as well as our customers, which has negatively impacted our ability to conduct sales activities and market to current and prospective customers. Small and medium-sized customers have been particularly impacted by the COVID-19 pandemic. We have also experienced significant increases in usage by existing customers as our customers' workforces are required to work from home in response to the COVID-19 pandemic accelerating trends we have seen in distributed workforces increasingly relying on cloud communication systems like ours. While we anticipate that the global health crisis caused by COVID-19 and the measures enacted to slow its spread will negatively impact business activity across the globe, it is not clear what its potential effects will be on our business, including the effects on our customers, suppliers or vendors, or on our financial results. COMPONENTS OF RESULTS OF OPERATIONS Service Revenue Service revenue consists of communications services subscriptions and platform usage revenue from our UCaaS, CCaaS, and CPaaS offerings and related fees. We plan to continue to drive our business to increase service revenue through a combination of increased sales and marketing efforts, geographic expansion of our customer base outsidethe United States , and through strategic acquisitions of technologies and businesses. Other Revenue Other revenue consists primarily of revenues from sales of IP telephones in conjunction with our cloud telephony service, and revenues from professional services, primarily in support of deployment of our solutions and/or platform. Other revenue is dependent on the number of customers who choose to purchase or rent an IP telephone in conjunction with our service instead of using the solution on their cell phone, computer or other compatible device, and/or choose to engage our services for implementation and deployment of our cloud services. 32
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Cost of Service Revenue 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, 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 allocate overhead costs such as facilities and IT to cost of service, as well as to each of the operating expense categories. Our facilities costs primarily consist of office leases and related expenses. IT costs include costs for IT infrastructure and personnel. Cost of Other Revenue The cost of other revenue consists primarily of direct and indirect costs associated with the purchasing of IP telephones as well as the scheduling, shipping and handling, and the personnel costs and related expenditures incurred in connection with the professional services associated with the deployment and implementation of our products. Research and Development Research and development expenses consist primarily of personnel and related costs, third-party development and related work, and equipment costs necessary for us to conduct our product and platform development and engineering efforts. Sales and Marketing Sales and marketing expenses consist primarily of personnel and related overhead costs, sales commissions, trade shows, advertising and other marketing, demand generation, channel, and promotional expenses. General and Administrative General and administrative expenses consist primarily of personnel and related costs, overhead costs, professional services fees, human resources, legal, employee recruiting, and general management. IT, facilities, and other allocable costs are allocated to other departments based on relative headcount. Other Income (Expense), net Other income (expense), net, consists primarily of interest expense related to the convertible notes, offset by income earned on our cash, cash equivalents, investments, and foreign exchange gain/losses. Provision for Income Taxes Provision for income taxes consists primarily of state minimum taxes inthe United States . As we expand the scale of our international business activities, any changes in theU.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for ourU.S. deferred tax assets, including federal and state net operating loss carryforwards, or NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income inthe United States . RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. We have minimal seasonality in our business, but typically, sales of new subscriptions in our fourth fiscal quarter are greater than in any of the first three quarters of the fiscal year. We believe this occurs because the customers we target tend to spend a relatively greater portion of their annual capital budgets at the beginning of the calendar year compared with each of the last three quarters of the year. Income Statement Reporting Reclassifications During the fourth quarter of fiscal 2020, we determined that presenting service revenue as revenue from the Company's core subscription services would provide transparency and clarity to the users of the financial statements. As such, we reclassified certain revenue and cost of revenue on our consolidated statement of operations for the full year fiscal 2020, and the comparative fiscal years 2019 and 2018. The reclassifications did not have any impact on total revenue, consolidated net loss, or cash flows for any of the fiscal years presented. Professional services revenue and cost of professional services revenue previously reported in service revenue and cost of service revenue are now reported in other revenue and cost of other revenue. Product revenue and cost of product revenue are also now reported in other revenue and cost of other revenue. In addition, other immaterial expense reclassifications were made to our fiscal 2019 consolidated statement of operations to improve comparability; these reclassifications do not affect consolidated net loss, or cash flows for any of the fiscal years presented. 33
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During the fourth quarter of fiscal 2019, we reclassified certain expenses on our consolidated statement of operations to provide additional clarity and insights in light of strategic and organizational changes impacting our channel, marketing and support activities. The reclassifications were made to cost of revenue, sales and marketing expenses, research and development expenses, and general and administrative expenses for the full year fiscal 2019 and the comparative fiscal year 2018. These reclassifications did not have any impact on total revenue, consolidated net loss, or cash flows for any of the fiscal years presented. Reorganization Activities In the fourth quarter of fiscal 2020, the Company committed to an operational initiative to adjust our cost structure, reorganize departments, and remove redundant functions across the Company. This initiative was implemented to streamline operations and structure the Company in a way that will enable our ability to more effectively scale the business and drive leverage in our cost structure and operations globally. The initiative was substantially completed in the fourth quarter of fiscal 2020 with$5.9 million of costs incurred consisting of employee termination benefits and related costs, nearly all of which resulted in cash expenditures that were substantially paid out in the same period. Revenue Service revenue Years EndedMarch 31 ,
Year-over-Year
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Service revenue $414,078 $325,305 $275,767 $ 88,773 27.3 % $ 49,538 18.0 %
Percentage of total revenue 92.8 % 92.3 % 93.0 %
The increase in service revenue in fiscal 2020, compared with fiscal 2019 was
primarily attributable to an increase in our customer subscriber base (net of
customer churn), with the largest part of the increase coming from our
mid-market and enterprise customers, who are our fastest growing customer
sector, contributing to an increase in the average annual service revenue per
customer. This increase was primarily due to organic growth and to a lesser
extent CPaaS revenue generated in connection with our acquisition of Wavecell in
July 2019 . Our service subscriber base grew from approximately 52,000 customers
on March 31, 2019 to approximately 55,000 customers on March 31, 2020 . Average
annual service revenue per customer increased from $6,629 during fiscal 2019 to
$7,876 for fiscal 2020. We expect the number of customers and average annual
service revenue per customer to continue to grow in future periods. We expect
total service revenue to grow over time as our business continues to expand
globally.
The increase in fiscal year 2019, compared with fiscal year 2018, was primarily
attributable to an increase in our customer subscriber base (net of customer
churn), with the largest part of the increase coming from our mid-market and
enterprise customers, who are our fastest growing customer sector, contributing
to an increase in the average annual service revenue per customer. Our service
subscriber base grew from approximately 49,000 customers at the end of
fiscal 2018 to approximately 52,000 customers on March 31, 2019 . Average annual
service revenue per customer for the fiscal year increased from $5,920 for
fiscal 2018 to $6,629 for fiscal 2019.
Other revenue Years Ended March 31, Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Other revenue $ 32,159 $ 27,281 $ 20,733 $ 4,878 17.9 % $ 6,548 31.6 %
Percentage of total revenue 7.2 % 7.7 % 7.0 %
The increase in other revenue in fiscal 2020, compared with fiscal 2019, and
fiscal 2019 compared to fiscal 2018, was primarily attributable to the increase
in product sales and professional services revenue resulting from the overall
growth in our business and subscriber base. We expect other revenue to grow over
time at a rate lower than our service revenue as we focus on delivering higher
margin subscription services revenue to existing and new customers.
No single customer represented more than 10% of our total revenues during fiscal
2020, 2019, or 2018.
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The following table illustrates our revenues by geographic area. Revenues are
attributed to countries based on the destination of shipment and the customer's
service address.
Years Ended March 31,
2020 2019 2018
United States 79 % 86 % 90 %
International 21 % 14 % 10 %
Total 100 % 100 % 100 %
Revenue generated from international customers increased in fiscal 2020 compared
to fiscal 2019 and fiscal 2018 due to expansion in both EMEA and APAC regions,
including those added in connection with our acquisition of Wavecell.
Cost of Revenue
Cost of service
revenue Years Ended March 31, Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Cost of service
revenue $145,013 $86,122 $69,266 $ 58,891 68.4 % $ 16,856 24.3 %
Percentage of service
revenue 35.0 % 26.5 % 25.1 %
The increase in cost of service revenue for fiscal 2020 from fiscal 2019 was
primarily due to a $33.8 million increase in communication infrastructure costs
incurred to deliver our services (attributable primarily to growth in usage
across our platform including those in connection with CPaaS), a $7.1 million
increase in amortization of capitalized software, a $6.5 million increase in
facilities and other allocated expenses, a $6.8 million increase in employee and
consulting related expenditures, $1.9 million increase in amortization of
intangibles, and a $1.1 million increase in software expense.
The increase in cost of service revenue for fiscal 2019 from fiscal 2018 as
primarily due to a $5.6 million increase in employee and consulting related
expenditures, a $5.5 million increase in amortization of capitalized software, a
$1.9 million increase in amortization of intangibles, a $1.1 million increase in
third-party network service expenses (due to increased call volumes associated
with our subscription revenue growth), a $1.0 million increase in licenses and
fees, and a $0.8 million increase in software expense.
We expect that cost of service revenue will increase in absolute dollars in
future periods as revenue continues to grow.
Cost of other revenue Years Ended March 31, Year-over-Year Changes
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Cost of other revenue $ 56,215 $ 43,850 $ 37,460 $ 12,365 28.2 % $ 6,390 17.1 %
Percentage of other revenue 174.8 % 160.7 % 180.7 %
The increase in the cost of other revenue for fiscal 2020 from fiscal 2019 and
for fiscal 2019 from 2018 was primarily due to increased product shipments and
the personnel and other costs associated with customer deployments.
Operating Expenses
Research and development Years Ended March 31, Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Research and development
The increase in research and development expenses for fiscal 2020 from fiscal 2019 was primarily due to an$8.6 million increase in stock-based compensation expenses, a$3.7 million increase in payroll and related expenses, net of capitalized costs for internally developed software, a$2.2 million increase in amortization of capitalized software expenses, and a$1.2 million increase in software expenses. The increase in research and development expenses for fiscal 2019 from fiscal 2018 was primarily due to an$8.2 million increase in payroll and related expenses (partially related to a department reclassification from sales and marketing), net of capitalized costs, a$5.9 million increase in consulting and outside service expenses, a$5.7 million increase in stock-based 35
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compensation expenses, a$1.7 million increase in amortization of capitalized software, and a$1.3 million increase in software expenses. We plan to continue investing in spend to support our research and development efforts to expand the capabilities and scope of our platform and enhance the user experience. While we expect to continue to improve our cost structure and achieve operational efficiencies, we expect that research and development expenses will increase in absolute dollars in future periods as we continue to invest in our development efforts, and vary from period-to-period as a percentage of revenue. Sales and marketing Years EndedMarch 31 ,
Year-over-Year Changes
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Sales and marketing
The increase in sales and marketing expenses for fiscal 2020 from fiscal 2019 was primarily due to a$20.4 million increase in advertising and marketing expenses, a$16.1 million increase in payroll and related expenses from expansion of our sales force, an$8.3 million increase in stock-based compensation expenses, a$7.2 million increase in commission expenses, a$5.3 million increase in amortization of deferred sales commissions, a$1.5 million increase in recruiting and outside services, a$1.3 million increase in licenses and fees, and a$0.9 million increase in depreciation and amortization of intangibles. The increase in sales and marketing expenses for fiscal 2019 from fiscal 2018 was primarily due to a$20.8 million increase in payroll and related expenses from an increase in our sales force, a$10.5 million increase in advertising, a$5.3 million increase in stock-based compensation expenses, a$3.5 million increase in consulting and outside service expenses and a$3.0 million increase in travel expenses. We plan to continue investing in sales and marketing to attract and retain customers on our platform and 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 Years EndedMarch 31 ,
Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
General and administrative
The increase in general and administrative expenses for fiscal 2020 from fiscal 2019 was primarily due to a$11.8 million increase in payroll and related expenses, a$7.9 million increase in stock-based compensation expenses, a$3.5 million increase in rent expense related to additional office spaces, a$2.4 million increase in bad debt expense, a$2.4 million increase in acquisition and integration related expenses. These increases were partially offset by a decrease in allocated costs of$7.0 million , and the non-recurrence of sales and use tax expenses of$7.6 million that the Company recognized in fiscal 2019. The increase in general and administrative expenses for fiscal 2019 from fiscal 2018 was primarily due to a$6.3 million increase in sales and use tax expense, a$4.8 million increase in rent expense related to additional office space, which we started to build out during the first quarter of fiscal 2019 (and which we subleased and assigned inApril 2019 ), a$2.8 million increase in stock-based compensation expenses, a$2.2 million increase in payroll and related expenses, a$1.5 million increase in recruiting expenses, and a$1.4 million increase in consulting and outside service expenses. We expect to continue improving our cost structure and achieve operational efficiencies, and therefore also expect that general and administrative expenses as a percentage of total revenue will decline over time. Impairment of goodwill, intangible assets and equipment Years EndedMarch 31 ,
Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Impairment of
goodwill, intangible
assets and equipment $- $ - $ 9,469 $ - - % $ (9,469 ) (100.0 )%
Percentage of total
revenue - % - % 3.2 %
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In fiscal 2018, we recorded a$9.5 million impairment charge for goodwill and other assets associated withDXI Limited , aUK company acquired by 8x8 inMay 2015 , as a result in the Company's change in product and marketing strategy for the use of DXI's technology. Other income (expense), net Years EndedMarch 31 ,
Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Other income (expense), net
0.4 % 1.2 %
The change in other income (expense), net primarily related to recognition of
interest, amortization of debt discount, and amortization of issuance costs
associated with our convertible senior notes issued in the fourth quarter of
fiscal 2019 and the third quarter of fiscal 2020, of $15.6 million in fiscal
2020, compared to $1.5 million in fiscal 2019. These changes were offset in part
by an increase of $1.6 million of interest income.
In fiscal 2019, other income (expense), net decreased by $2.2 million compared
to fiscal 2018 primarily due to $1.5 million of interest expense and
amortization associated with our convertible senior notes issued in the fourth
quarter of fiscal 2019, other income of $1.5 million recorded in fiscal 2018
related to the release of cash held in escrow fund from our acquisition of DXI,
and increase in unrealized losses on foreign exchanges of $0.6 million . These
decreases were offset by an increase in interest income of $1.0 million .
With the recognition of interest expense and amortization of debt discount and
issuance costs in connection with our convertible senior notes, we expect other
income (expense), net to continue to be in a net expense position in future
periods.
Provision for income taxes Years Ended March 31 , Year-over-Year Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
(dollar amounts in thousands)
Provision for income taxes
0.2 % 22.4 %
For the year ended March 31, 2020 and 2019, we recorded an income tax expense of
$0.8 million and $0.6 million , respectively, mostly related to the current tax
liabilities of profitable foreign subsidiaries and state minimum taxes. For the
12 months ended March 31, 2018 , we recorded an income tax expense of $66.3
million , mostly related to the recording of a full valuation allowance
established against our deferred tax assets in the quarter ended December 31,
2017 .
We record deferred taxes based on differences between the financial statement
basis and tax basis of assets and liabilities and available tax loss and credit
carryforwards. In evaluating our ability to utilize our deferred tax assets, we
consider available evidence, both positive and negative, in determining future
taxable income on a jurisdiction-by-jurisdiction basis. We record a valuation
allowance against deferred tax assets if, based on the weight of the evidence,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. A significant item of objective negative evidence
considered was the historical three-year cumulative pretax loss reached in
fiscal 2018. As a result, we recorded a full valuation allowance against our
U.S. deferred tax assets in the period ended December 31, 2017 , and continued to
record valuation allowance against our deferred tax assets generated thereafter.
We also continue to maintain a valuation allowance against our U.K deferred tax
assets as well as the recently acquired Singapore deferred tax assets.
The Tax Cuts and Jobs Act ("the Act") that was enacted on December 22, 2017 ,
significantly reformed the Internal Revenue Code of 1986, as amended. The Act
contains significant changes to corporate taxation, including reduction of the
corporate tax rate from 35% to 21%, limitation of the tax deduction for interest
expense to 30% of earnings, limitation of the deduction for net operating losses
to 80% of current year taxable income and elimination of net operating loss
carrybacks, one time taxation of offshore earnings at reduced rates regardless
of whether they are repatriated, elimination of U.S. tax on foreign earnings
(subject to certain important exceptions), immediate deductions for certain new
investments instead of deductions for depreciation expense over time, and
modifying or repealing many business deductions and credits. In the third
quarter of fiscal 2018, we remeasured our deferred tax assets and liabilities
based on the rates at which they are expected to reverse in the future, which is
generally 21%. We did not record any one-time transition tax liability for our
foreign subsidiaries as our calculations concluded we do not have any untaxed
foreign accumulated earnings.
We estimate our annual effective tax rate at the end of each quarter. In
estimating the annual effective tax rate, we consider, among other things,
annual pre-tax income, permanent tax differences, the geographic mix of pre-tax
income and the application and interpretations of existing tax laws. We record
the tax effect of certain discrete items, which are unusual or occur
infrequently, in the interim period in which they occur, including changes in
judgment about deferred tax valuation allowances. The determination of the
effective tax rate reflects tax expense and benefit generated in certain
domestic and foreign jurisdictions. However, jurisdictions with a year-to-date
loss where no tax benefit can be recognized are excluded from the annual
effective tax rate.
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Liquidity and Capital Resources As ofMarch 31, 2020 , we had$170.9 million of cash, cash equivalents, and short-term investments. In addition, we had$19.0 million in restricted cash, of which$8.6 million in support of letter of credits securing leases for office facilities inCalifornia andNew York and$10.4 million held in escrow for our acquisition of Wavecell, pursuant to the terms of the acquisition agreement. AtMarch 31, 2019 , we had$346.5 million of cash, cash equivalents, and short-term investments as well as the$8.1 million in deposit as restricted cash. We believe that our existing cash, cash equivalents and investment balances, and our anticipated cash flows from operations will be sufficient to meet our working capital and expenditure requirements for the next 12 months. Although we believe we have adequate sources of liquidity over the next 12 months, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. Year over Year Changes Net cash used in operating activities for fiscal 2020 was$93.9 million , compared with$14.9 million for fiscal 2019. Cash used in or provided by operating activities is primarily affected by: • the amount of net income or loss;
• the amount of non-cash expense items such as depreciation, amortization,
and impairments;
• the expense associated with stock options and stock-based awards; and
• changes in working capital accounts, particularly in the timing of
collections from receivable and payments of obligations, such as
commissions.
In fiscal 2020, net cash used in operating activities was primarily related to
the net loss of $172.4 million , net cash outflow from sales commissions payments
and recognition of deferred sales commissions of $26.9 million , and other
smaller working capital changes, which were partially offset by non-cash charges
such as stock-based compensation expense of $70.9 million , amortization of
capitalized software of $19.0 million , amortization of debt discount of $14.0
million , and operating lease expenses of $15.0 million .
Net cash used in operating activities during fiscal 2019 was primarily related
to the net loss of $88.7 million , net cash outflow from sales commissions of
$11.1 million , and other smaller working capital changes, which were partially
offset by non-cash charges such as stock-based compensation expense of $44.5
million , depreciation and amortization of intangible of $14.9 million ,
amortization of capitalized software of $9.7 million , and non-cash lease expense
of $4.8 million .
Net cash used in investing activities was $106.3 million in fiscal 2020,
compared with $10.9 million provided by investing activities in fiscal 2019. The
cash used in investing activities during fiscal 2020 was primarily related to
purchases of property and equipment of $35.8 million , largely in connection with
the build out of our corporate office, capitalized internal software development
costs of $31.6 million , and net cash paid of $59.1 million in connection with
our acquisitions. This was partially offset by the proceeds from the sales and
maturities of investments, net of purchases, of $20.2 million .
Net cash provided by investing activities of $10.9 million during fiscal 2019,
compared with $7.3 million used in investing activities in fiscal 2018, was
primarily related to $51.2 million of proceeds from sales and maturities of
investments, net of purchases of investments. This was partially offset by $9.1
million of property and equipment investments and capitalized internal software
development costs of $25.6 million .
Net cash provided by financing activities was $72.1 million in fiscal 2020,
compared with $249.2 million provided by financing activities in fiscal 2019.
The cash provided by financing activities in fiscal 2020 was primarily from the
issuance of convertible debt of $73.9 million and $14.3 million from the
issuance of common stock under employee stock purchase plans. These inflows were
partially offset by $9.3 million in capped call transactions, and $6.6 million
paid to settle payroll tax obligations for employee equity awards.
Our financing activities for fiscal 2019 provided cash of $249.2 million ,
compared with $16.4 million used in financing activities for fiscal 2018,
primarily from the issuance of convertible debt of $279.5 million and from the
issuance of common stock under employee stock purchase plans of $12.2 million .
These inflows were partially offset by $33.7 million in capped call
transactions, $7.8 million to settle payroll tax obligations and $0.9 million to
make payments for lease obligations.
Off-Balance Sheet Arrangements
As of March 31, 2020 , we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, special purpose entities or
variable interest entities.
As set forth below in our contractual obligations table, we do have inventory
purchases and other commitments incurred in the normal course of business. We
may also agree in the normal course of business to indemnify other parties,
including customers, lessors and parties to other transactions with us with
respect to matters such as breaches of representations or covenants or
intellectual property infringement or other claims made by third parties. See
Note 7, "COMMITMENTS AND CONTINGENCIES" in the Notes to Consolidated Financial
Statements for further information about our indemnification arrangements.
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Contractual Obligations Obligations related to our convertible senior notes, operating lease payments, and purchase obligations atMarch 31, 2020 for the next five years were as follows (in thousands): Payments Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Convertible senior notes$ 362,500 $ - $ -$ 362,500 $ - Operating lease obligations(1) 122,458 9,765 31,507 23,108 58,078 Lease assignment contract(1) 9,769 8,969 800 - - Purchase obligations 4,164 2,933 1,231 - - Total$ 498,891 $ 21,667 $ 33,538 $ 385,608 $ 58,078 (1) See Note 6, "LEASES" in the Notes to Consolidated Financial Statements for further information. CRITICAL ACCOUNTING POLICIES & ESTIMATES Our consolidated financial statements are prepared in accordance withU.S. GAAP. Refer to Note 1, "THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES", in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report that describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We have identified the policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our consolidated financial statements. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. Revenue Recognition Our revenue recognition policies are also described in Note 1, "THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates. We recognize service revenue, mainly from subscription services to our cloud-based voice, call center, video, and collaboration solutions using the five-step model as prescribed by ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606), as amended: Topic 606: • Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in the
contract; and
• Recognition of revenue when or as, the Company satisfies a performance
obligation.
We identify performance obligations in contracts with customers, which may
include subscription services, usage based services, , product delivery, and
professional services. The transaction price is determined based on the amount
we expect to be entitled to receive in exchange for transferring the promised
services or products to the customer. The transaction price in the contract is
allocated to each distinct performance obligation in an amount that represents
the relative amount of consideration expected to be received in exchange for
satisfying each performance obligation. Revenue is recognized when performance
obligations are satisfied. Revenues are recorded based on the transaction price
excluding amounts collected on behalf of third parties such as sales and
telecommunication taxes, which are collected on behalf of and remitted to
governmental authorities. We generally bill our customers on a monthly basis.
Contracts typically range from annual to multi-year agreements with payment
terms of net 30 days or less. We occasionally allow a 30-day period to cancel a
subscription and return products shipped for a full refund.
When a contract with a customer is signed, we assess whether collection of the
fees under the arrangement is probable. We maintain a revenue reserve for
potential credits to be issued.
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We record reductions to revenue for estimated sales returns and customer credits at the time the related revenue is recognized. Sales returns and customer credits are estimated based on our historical experience, current trends and our expectations regarding future experience. We monitor the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts them for its future expectations to determine the adequacy of its current and future reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required. When our services do not meet certain service level commitments, our customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. We historically have not experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts. Accordingly, the amount of any estimated refunds related to these agreements in the consolidated financial statements is not material during the periods presented. Service Revenue Service revenue from subscriptions to our cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer until the end of the contractual period. Payments received in advance of subscription services being rendered are recorded as deferred revenue; revenue recognized for services rendered in advance of payments received are recorded as contract assets. Usage fees, when bundled, are billed in advance and recognized over time on a ratable basis over the contractual subscription term, which is usually the monthly contractual billing period. Non-bundled usage fees are recognized as actual usage occurs. Other Revenue Other revenue comprises primarily product revenue and professional services revenue. We recognize product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience. Professional services for deployment, configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by us directly or, alternatively, customers may also choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized as services are performed or upon completion of the deployment. Collectability of Accounts Receivable We consider whether collection is probable at the inception of a contract with a customer, in determining its impact to our ability to recognize revenue. Subsequently, on an on-going basis, management specifically analyzes accounts receivable, including historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, our actual losses may exceed our estimates, and additional allowances would be required.Goodwill and Other Intangible AssetsGoodwill and intangible assets with indefinite useful lives are not amortized.Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible assets are not amortized but are annually tested for impairment and more often if there is an indicator of impairment. The Company performs testing for impairment of goodwill on an annual basis, or as events occur or circumstances change that would more likely than not reduce the fair value of the Company's single reporting unit below its carrying amount.Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. See Note 1, "THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES", in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for additional information. Internal-Use Software Development Costs We account for computer software developed or obtained for internal use in accordance with ASC 350-40,Internal Use Software (ASC 350-40), which requires capitalization of certain software development costs incurred during the application development stage. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Once the project has been completed, these costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in the applicable income statement category, typically research and development, in our consolidated statements of operations. Income and Other Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax expense and to assess 40
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temporary differences resulting from book-tax accounting differences for items such as accrued vacation. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets, which include net operating loss and tax credit carry-forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In evaluating our ability to utilize our deferred tax assets, we consider available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. We record a valuation allowance against deferred tax assets if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A significant item of objective negative evidence considered was the historical three-year cumulative pretax loss as of the end of our third quarter of fiscal 2018. As a result, we recorded a full valuation allowance against ourU.S. deferred tax assets during that period. As ofMarch 31, 2020 , we continue to maintain a full valuation allowance against our net deferred tax asset in the consolidated balance sheet. We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we consider, among other things, annual pre-tax income, permanent tax differences, the geographic mix of pre-tax income and the application and interpretations of existing tax laws. We record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. The determination of the effective tax rate reflects tax expense and benefit generated in certain domestic and foreign jurisdictions. However, jurisdictions with a year-to-date loss where no tax benefit can be recognized are excluded from the annual effective tax rate. Our products and services are subject to sales, use and utility taxes and other fees in many jurisdictions. We assess, collect and remit these taxes and report them to municipal, state and federal agencies on a monthly or quarterly basis. We regularly receive inquiries, demands or audit requests from these municipal and state tax agencies. During the year endedMarch 31, 2019 , we determined that additional sales taxes were probable of being assessed and estimable in multiple states as a result of findings from sales and use tax audits, and estimated an$8.0 million sales tax liability. As ofMarch 31, 2020 , we have an accrual related to sales tax liability of$4.5 million . Stock-Based Compensation We account for our employee stock options, stock purchase rights, restricted stock units ("RSUs"), and restricted performance stock units granted under the provisions of ASC 718 - Stock Compensation. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures. See Note 1, "THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES", in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for additional information. Recently Issued and Adopted Accounting Pronouncements Recent accounting pronouncements are detailed in Note 1, "THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES", in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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