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 for the fiscal year ended March 31, 2020 as modified
by those in Part II, Item 1A of this Quarterly Report on Form 10-Q under the
heading "Risk Factors."
BUSINESS 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 categories.
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 communication services
subscriptions and platform usage. 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

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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 retention.
SUMMARY AND OUTLOOK
In the first quarter of fiscal 2021, our total service revenue grew 27.1%
year-over-year to $114.2 million. We continued to show an increase in our
average annualized service revenue per customer, which grew to $7,883 in the
first quarter of fiscal 2021, compared with $7,069 in the same period of fiscal
2020, as we are selling more to mid-market and enterprise customers. Service
revenue from mid-market and enterprise customers represented 45% of total
service revenue and grew 48% 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; 55% of our new
bookings greater than $12,000 of annualized recurring revenue were from
customers that selected bundled UCaaS and CCaaS, as compared to 51% one year
ago.
Our continued business focus is on achieving improved operating efficiencies
while delivering revenue growth. In fiscal 2020, we continued to make important
investments in our products and technology platform, and focused on key areas of
spend in our go-to-market strategy. 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 cash flow improvement, which we will continue to
execute throughout fiscal 2021.
In the remainder of fiscal 2021, we plan to continue making investments in
activities to acquire more customers, including global expansion and 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 our annual report on Form 10-K for the fiscal
year ended March 31, 2020 as modified by the "Risk Factors" section of this
Quarterly Report. In an effort to contain COVID-19 or slow its spread,
governments around the world have enacted various measures, some of which have
been subsequently rescinded or modified, 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 continues to spend
a significant amount of time working from home with many of our offices around
the world remaining closed and travel being curtailed for our employees as well
as our customers. These restrictions have altered the ways we conduct sales
activities and market to current and prospective customers and how we conduct
our ongoing business operations, resulting in reductions in travel related
expenses and, by some measures, has resulted in improved employee productivity
in certain areas. Small business and mid-size customers have been more impacted
by the COVID-19 pandemic than enterprise customers, which has necessitated
greater flexibility and responsiveness to our customers evolving needs.
Additionally, while our usage revenue from CPaaS grew year-over-year in the
first quarter, we did have lower than expected CPaaS usage during the quarter as
a result of COVID-related slowdown in APAC; however we observed positive trends
toward the end of the quarter. While we anticipate that the global health crisis
caused by COVID-19 and the measures enacted to slow its spread will negatively
impact certain

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business activity across the globe, to date, it has not resulted in as
significant a negative impact on our business, as initially anticipated. We
continue to proactively and closely monitor the health of our customers and
suppliers and other impacts of the pandemic to determine whether risks of loss
or other negative impacts upon our business exist. The effects of COVID-19 have
also been considered in management's judgments around credit loss impairments.
COMPONENTS OF RESULTS OF OPERATIONS
Service Revenue
Service revenue consists of communication services subscriptions, platform usage
revenue, and related fees from our UCaaS, CCaaS, and CPaaS offerings. 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 outside the United States, innovation in product and technology, and
through strategic partnerships and other business development.
Other Revenue
Other revenue consists primarily of revenues from sales and rentals 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.
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 IT and facilities to cost of service revenue, as well as
to each of the operating expense categories, generally based on relative
headcount. Our IT costs include costs for IT infrastructure and personnel.
Facilities costs primarily consist of office leases and related expenses.
Cost of Other Revenue
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, personnel costs and related expenditures incurred in connection with
the professional services associated with the deployment and implementation of
our products, and allocated IT and facilities costs.
Research and Development
Research and development expenses consist primarily of personnel and related
costs, third-party development and related work, equipment costs necessary for
us to conduct our product and platform development and engineering efforts, and
allocated IT and facilities costs.
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 costs, promotional expenses, and allocated IT and facilities
costs.
General and Administrative
General and administrative expenses consist primarily of personnel and related
costs, overhead costs, professional services fees, human resources, legal,
employee recruiting, general management, and allocated IT and facilities costs.
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 in the
United States. As we expand the scale of our international business activities,
any changes in the U.S. and foreign taxation of such activities may increase our
overall provision for income taxes in the future. We have a valuation allowance
for our U.S. deferred tax assets,

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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 in the United States.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto.
Revenue
                                       June 30,
Service revenue                    2020           2019            Change
                                   (dollar amounts in thousands)
Three months ended            $   114,183      $ 89,839     $ 24,344    27.1 %
Percentage of total revenue          93.7 %        92.9 %


Service revenue increased for the three months ended June 30, 2020 compared with
the same period of the previous fiscal year primarily due to a net increase in
our subscriber base, expanded offerings to existing customers, and growth in
related usage; service revenue from new customers was primarily driven by sales
of standalone and bundled UCaaS and CCaaS deals globally to our mid-market and
enterprise customers. Increase in service revenue was also attributable to
growth in usage revenue generated by our CPaaS products primarily in the APAC
region.
We expect total service revenue to grow over time with our expanding platform
offering as our business continues to expand globally and across broader
customer categories.
                                         June 30,
Other revenue                      2020             2019            Change
                                   (dollar amounts in thousands)
Three months ended            $     7,624       $     6,836     $ 788    11.5 %
Percentage of total revenue           6.3 %             7.1 %


Other revenue increased during the three months ended June 30, 2020 compared
with the same period in the prior fiscal year primarily due to an increase in
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 platform
offerings to existing and new customers.
No customer represented greater than 10% of the Company's total revenue for the
three months ended June 30, 2020 or June 30, 2019.
Cost of Revenue
                                         June 30,
Cost of service revenue             2020            2019            Change
                                     (dollar amounts in thousands)
Three months ended              $   40,996       $ 25,300     $ 15,696    62.0 %
Percentage of service revenue         35.9 %         28.2 %


The increase in cost of service revenue for the three months ended June 30, 2020
from the same period in the prior fiscal year was primarily attributable to a
$13.0 million increase in communication infrastructure costs incurred to deliver
our services primarily due to growth in usage across our platform including
those in connection with CPaaS, a $2.0 million increase in amortization of
capitalized software, a $0.8 million increase in stock-based compensation
expense, and a $0.2 million increase in facilities related expenses. These
increases were partially offset by a decrease of $0.3 million in employee and
consulting related expenditures.
We expect that cost of service revenue will increase in absolute dollars in
future periods as revenue continues to grow.

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                                       June 30,
Cost of other revenue             2020           2019             Change
                                   (dollar amounts in thousands)
Three months ended            $   11,137      $ 12,391     $ (1,254 )   (10.1 )%
Percentage of other revenue        146.1 %       181.3 %


Cost of other revenue for the three months ended June 30, 2020 decreased
compared to the same period in the prior fiscal year primarily due to a decrease
in cost of products for various reasons including lower hardware shipment
volume, improved pricing, and a shift to our hardware rental program, which has
better margins than hardware sales.
Operating Expenses
                                        June 30,
Research and development           2020            2019           Change
                                   (dollar amounts in thousands)
Three months ended            $    21,494       $ 18,331     $ 3,163    17.3 %
Percentage of total revenue          17.6 %         19.0 %


Research and development expenses for the three months ended June 30, 2020
increased compared to the same prior year period primarily due to a $2.7 million
increase in stock-based compensation expense, a $0.7 million increase in
employee and consulting related expenditures, and a $0.4 million increase in
public cloud expenses. These increases were partially offset by a decrease of
$0.5 million in travel related costs.
We plan to continue to invest in research and development to support our efforts
to expand the capabilities and scope of our platform and to 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.
                                        June 30,
Sales and marketing                2020            2019           Change
                                   (dollar amounts in thousands)
Three months ended            $    60,150       $ 53,599     $ 6,551    12.2 %
Percentage of total revenue          49.4 %         55.4 %


Sales and marketing expenses for the three months ended June 30, 2020 increased
over the same prior year period primarily due to a $4.7 million increase in
employee and consulting related expenditures, a $3.1 million increase in channel
commissions, a $1.9 million increase in amortization of deferred sales
commission costs, a $1.8 million increase in stock-based compensation expense, a
$1.2 million increase in marketing software and application related
expenditures, and a $0.6 million increase in amortization of intangible assets.
These increases were partially offset by a net decrease of $4.4 million in
marketing program and public cloud expenses as we gained efficiencies in lead
generation and brand awareness and a $2.4 million decrease of travel related
costs.
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.
                                        June 30,
General and administrative         2020            2019           Change
                                   (dollar amounts in thousands)
Three months ended            $    25,790       $ 19,607     $ 6,183    31.5 %
Percentage of total revenue          21.2 %         20.3 %



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General and administrative expenses for the three months ended June 30, 2020
increased as compared to the same prior year period due to a $3.8 million
increase in stock-based compensation expense, a $1.3 million higher allowance
for credit losses recognized partially in response to external market factors
and uncertainties in connection with the COVID-19 pandemic, a $1.3 million
increase in legal and tax related costs, and a $0.7 million increase in employee
and consulting related expenditures. These increases were partially offset by a
$1.2 million decrease in contract termination costs.
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.
                                       June 30,
Other income (expense), net       2020          2019              Change
                                   (dollar amounts in thousands)
Three months ended            $  (3,925 )    $ (1,564 )    $ (2,361 )   151.0 %
Percentage of total revenue        (3.2 )%       (1.6 )%


Other expense, net of other income increased for the three months ended June 30,
2020 over the same prior year period primarily due to a decrease of $1.6 million
in interest income, a $1.0 million increase related to contractual interest
expense, amortization of debt discount, and amortization of issuance costs
associated with our convertible Initial and Additional Notes issued in February
2019 and November 2019, respectively. The increase in the net expense was
partially offset by a $0.2 million change in other income.
With the recognition of interest expense and amortization of debt discount and
issuance costs in connection with our convertible senior notes, we expect the
net of other income and expense to continue to be in a net expense position in
future periods.
                                                 June 30,
Provision for income taxes             2020                    2019                    Change
                                              (dollar amounts in thousands)
Three months ended             $           228         $           148        $       80         54.1 %
Percentage of loss
before provision for income
taxes                                     (0.5 )%                 (0.4 )%


For the three months ended June 30, 2020 and June 30, 2019, we recorded income
tax expense of $0.2 million and $0.1 million, respectively, resulting in
effective tax rates of (0.5)% and (0.4)%, respectively.
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.
Liquidity and Capital Resources
As of June 30, 2020, we had $167.2 million of cash, cash equivalents, and
investments. In addition, we had $19.0 million as restricted cash, which
includes $8.6 million in support of letter of credits securing leases for office
facilities, and $10.4 million held in escrow for our acquisition of Wavecell, in
July 2019, pursuant to the terms of the acquisition agreement. By comparison, at
March 31, 2020, we had $186.9 million of cash, cash equivalents, and investments
as well as $19.0 million as restricted cash.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act") was passed into law, and amended portions of relevant tax laws and
provided relief to certain qualifying entities. In connection with the CARES
Act, the Company elected to defer certain employer payroll taxes, which is
expected to reduce cash usage by over $4 million throughout fiscal 2021. The
amounts deferred will be remitted to tax authorities during the third quarter of
fiscal 2022 and fiscal 2023, respectively, when they become due. Other
jurisdictions around the world have also provided similar tax relief, which the
Company has elected to receive, where applicable; these benefits have a lesser
impact to our expected cash flows during fiscal 2021.

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In June 2020, the Company offered its employees a limited opportunity to receive
a portion of their cash salary in shares of the Company's common stock. Based on
employee elected participation, we expect lower cash usage from payroll
compensation of over $4 million during fiscal 2021. Currently, the Company does
not expect to offer this program beyond fiscal 2021.
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.
Period-over-Period Changes
Net cash used in operating activities for the three months ended June 30, 2020
was $9.3 million, compared with $20.5 million for the three months ended June
30, 2019. Cash used in operating activities has historically been affected by:
•the amount of net income or loss;
• the amount of depreciation and amortization;

• the amortization associated with deferred sales commissions, debt discount

and issuance costs;




•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.


During the three months ended June 30, 2020, net cash used in operating
activities was primarily related to the net loss of $41.9 million, net cash
outflow from sales commissions of $7.0 million, which were partially offset by
non-cash charges such as stock-based compensation expense of $22.8 million,
depreciation and amortization of intangibles and capitalized software of $11.3
million, amortization of debt discount of $4.1 million, and operating lease
expenses of $3.8 million.
Net cash used in investing activities was $11.9 million in the three months
ended June 30, 2020, compared with $11.2 million provided by investing
activities in three months ended June 30, 2019. The cash used in investing
activities during the three months ended June 30, 2020 was related to purchases
of $2.5 million of property and equipment, capitalized internal software
development costs of $8.9 million, and $0.6 million of purchase of investments,
net of proceeds from maturities of investments.
Net cash used in financing activities was $0.1 million in the three months ended
June 30, 2020, compared with $1.4 million provided by financing activities in
the three months ended June 30, 2019. Cash used in financing activities for the
three months ended June 30, 2020 was related to repurchases of our common stock
related to shares withheld for payroll taxes and payments for finance lease
obligations.
CRITICAL ACCOUNTING POLICIES & ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures of assets and liabilities. On an
on-going basis, we evaluate our critical accounting policies and estimates. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
There have been no significant changes during the three months ended June 30,
2020 to our critical accounting policies and estimates previously disclosed in
our Form 10-K for the fiscal year ended March 31, 2020.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Item 1 of Part I, "Notes to Unaudited Condensed Consolidated Financial
Statements - Note 2 - Summary of Significant Accounting Policies."
RECENT ACCOUNTING PRONOUNCEMENTS
See Item 1 of Part I, "Notes to Unaudited Condensed Consolidated Financial
Statements - Note 2 - Summary of Significant Accounting Policies."

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