8X8, INC. 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. 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 the Form 10-K.
OVERVIEW
We are a leading SaaS provider of voice, video, contact center, and communication APIs powered by a 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 170 countries. In recent years, we have increased our 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 and platform usage. We generate other revenue from professional services and 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 XCaaS platform, which is a unified, cloud-based
technology platform that includes a range of enterprise-grade
In
SUMMARY AND OUTLOOK
In the first quarter of fiscal 2023, our total revenue grew
Annualized Recurring Subscriptions and Usage Revenue (ARR) from strategic mid-market and enterprise customers represented 77% of total ARR and increased 45% compared to the same period in fiscal 2022. ARR associated with Small Business customers declined 7% year-over-year and accounted for 23% of total ARR, compared to 32% of ARR a year ago. We have focused our sales and marketing resources on increasing our enterprise ARR as a long-term strategy due to enterprise customers' longer commitments, higher retention and better efficiency ratios. Enterprise customers are also more likely to need the advanced capabilities of our contact center solutions and realize the advantages of our unified XCaaS platform. See "Key Business Metrics" section below for further discussion on how we define ARR.
At the end of the first quarter of fiscal 2023, enterprise customers accounted for 59% of total ARR and more than 35% of our ARR was derived from customers deploying the UCaaS and CCaaS capabilities of our XCaaS platform.
As part of our long-term strategy to increase profitability and cash flow, we
continue to focus on reducing the cost of delivering our services and improving
our operating efficiency, while increasing our revenue and ARR from XCaaS and
enterprise customers. Continued innovation to meet the evolving needs of today's
workforce is a critical factor attracting and retaining high value enterprise
customers. Our acquisition of
In fiscal 2023, we remain committed to increasing our investment in research and development compared to fiscal 2022 because we believe innovation drives competitive advantage and is an important variable in achieving sustainable growth. We plan to continue our efforts to reduce our unit costs to improve our gross profit margin as our business scales. Additionally, we plan to reduce our investments in sales and marketing as a percentage of revenue as we focus on driving improved efficiencies in our customer acquisition and sales operations. We expect our focus on reducing unit costs and improving sales and marketing efficiency will result in improved operating margins and increased cash flow from operations. We believe that this approach of balancing increased investment in innovation with improved efficiency in other areas will enable the Company to achieve sustained growth and increasing profitability and cash flow.
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IMPACT OF COVID-19
The full extent of the long-term 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 the Form 10-K. In an effort to contain COVID-19 or slow its spread, governments around the world have previously 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 continues to spend 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 will continue to negatively impact business activity across the globe, it is not clear what its full potential effects will be on our business, including the effects on our customers, suppliers or vendors, or on our financial results.
KEY BUSINESS METRICS
Our management periodically reviews certain key business metrics to evaluate our operations, allocate resources, and drive financial performance in our business.
Annualized Recurring Subscriptions and Usage Revenue
Our management reviews Annualized Recurring Subscriptions and Usage Revenue ("ARR") and believes it may be useful to investors to evaluate trends in future revenues of the Company. Our management believes ARR is an important indicator for measuring the overall performance of the business. Our management uses trends in ARR to assess our ongoing operations, allocate resources, and drive the financial performance of the business. We define ARR as equal to the sum of the most recent month of (i) recurring subscription amounts and (ii) platform usage charges for all CPaaS customers (subject to a minimum billings threshold for a period of at least six consecutive months), multiplied by 12. We are not aware of any uniform standards for calculating ARR and caution that our presentation may not be consistent with that of other companies. For example, to the extent our ARR is used to evaluate trends in future revenue, such an evaluation would assume a sustained level of usage from existing customers which may fluctuate in future periods.
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 invest resources to increase service revenue through a combination of increased sales and marketing efforts, expansion of our global connectivity, innovation in product and technology, and through strategic acquisitions of technologies and businesses.
Other Revenue
Other revenue consists of revenues from professional services, primarily in support of deployment of our solutions and/or platform, and revenues from sales and rentals of IP telephones in conjunction with our cloud telephony service. Other revenue is dependent on the number and size of customers who choose to purchase or rent an IP telephone in conjunction with our UCaaS service and choose to engage our professional services organization for implementation and deployment of our cloud UCaaS and CCaaS solutions.
Cost of Service Revenue
Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of capitalized internal-use software, other communication origination and termination services provided by third-party carriers and outsourced customer service call center operations, and other costs such as customer service, and technical support costs. 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, 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, software and equipment costs necessary for us to conduct our product, platform development and engineering efforts, and allocated IT and facilities costs.
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Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related costs, sales commissions, including those to the channel, trade shows, advertising and other marketing, demand generation, promotional expenses, and allocated IT and facilities costs.
General and Administrative
General and administrative expenses consist primarily of personnel and related costs, professional services fees, corporate administrative costs, tax and regulatory fees, and allocated IT and facilities costs.
Other Expense, Net
Other 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 gains/losses.
(Benefit from) Provision for Income Taxes
(Benefit from) provision for income taxes consists primarily of foreign income
taxes and state minimum taxes in
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto. Our results of
operations for the first quarter for fiscal 2023, and the discussion below,
includes
(Dollars in thousands)
Revenue
Service revenue
Three Months Ended June 30,
2022 2021 Change
Service revenue $ 179,161 $ 137,796 $ 41,365 30.0 %
Percentage of total revenue 95.5 % 92.9 %
Service revenue increased for the three months ended as of
We expect our service revenue to grow over time with our diverse platform offering as we increase the features and functionality of our platform and expand the global coverage of our UCaaS services.
Other revenue
Three Months Ended June 30,
2022 2021 Change
Other revenue $ 8,459 $ 10,531 $ (2,072) (19.7) %
Percentage of total revenue 4.5 % 7.1 %
Other revenue decreased for the three months ended as of
No single customer represented more than 10% of our total revenues for the three
months ended as of
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Cost of Revenue
Cost of service revenue
Three Months Ended June 30,
2022 2021 Change
Cost of service revenue $ 53,547 $ 46,010 $ 7,537 16.4 %
Percentage of service revenue 29.9 % 33.4 %
Cost of service revenue increased for the three months ended as of
We expect cost of service revenue will increase in absolute dollars, but decrease as a percentage of revenue in future periods.
Cost of other revenue
Three Months Ended June 30,
2022 2021 Change
Cost of other revenue $ 13,126 $ 13,746 $ (620) (4.5) %
Percentage of other revenue 155.2 % 130.5 %
Cost of other revenue decreased for the three months ended as of June 30, 2022
as compared to the three months ended as of June 30, 2021 , primarily due to
decreased product costs associated with lower product shipments, partially
offset by an increase in personnel and related costs to deliver our professional
services.
Operating Expenses
Research and development
Three Months Ended June 30,
2022 2021 Change
Research and development $ 34,955 $ 25,392 $ 9,563 37.7 %
Percentage of total revenue 18.6 % 17.1 %
Research and development expenses increased for the three months ended as of
We plan to continue to invest in research and development to support our efforts to expand the capabilities and scope of our XCaaS platform to enhance our users' 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
Three Months Ended June 30,
2022 2021 Change
Sales and marketing $ 83,527 $ 75,915 $ 7,612 10.0 %
Percentage of total revenue 44.5 % 51.2 %
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Sales and marketing expenses increased for the three months ended as of
We expect sales and marketing costs as a percent of revenue to decrease over
time as we focus on improving our cost structure and achieving operational
efficiencies.
General and administrative
Three Months Ended June 30,
2022 2021 Change
General and administrative $ 29,219 $ 26,091 $ 3,128 12.0 %
Percentage of total revenue 15.6 % 17.6 %
General and administrative expenses increased for the three months ended as of
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.
Other income (expense), net
Three Months Ended June 30,
2022 2021 Change
Other income (expense), net $ 1,116 $ (4,823) $ 5,939 123.1 %
Percentage of total revenue 0.6 % (3.3) %
Other income (expense), net increased for the three months ended as of
Provision for income taxes
Three Months Ended June 30,
2022 2021 Change
Provision for income taxes $ 405 $ 256 $ 149 58.2 %
Percentage of total revenue 0.2 % 0.2 %
There was no material change to our provision for income taxes for the three
months ended
Liquidity and Capital Resources
As of
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, expenditure, and contractual obligation requirements for the
next 12 months and the foreseeable future, although we expect to refinance our
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Period-over-Period Changes
Net cash provided by operating activities for the three months ended
•net income or loss;
•non-cash expense items, such as depreciation, amortization, and impairments;
•non-cash expense associated with stock options and stock-based compensation and awards; and
•changes in working capital accounts, particularly related to the timing of collections from receivables and payments of obligations, such as commissions.
For the three months ended
Net cash used in investing activities was
Net cash provided by financing activities was
CRITICAL ACCOUNTING POLICIES AND 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
Our consolidated financial statements are prepared in accordance with
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