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 second quarter of fiscal 2023, our total revenue grew
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 annualized recurring and usage revenue (ARR) from XCaaS and enterprise customers. We believe that continued innovation is necessary to meet the evolving needs of today's workforce and is a critical factor in attracting and retaining high value enterprise customers. We have focused our sales and marketing to drive awareness of the XCaaS product and unique features that 8x8 provides its customers.
We are committed to increasing our investment in research and development in
fiscal 2023 compared to fiscal 2022, because we believe innovation drives
competitive advantage and is an important variable in achieving sustainable
growth. Our acquisition of
Annualized Recurring Subscriptions and Usage Revenue (ARR) from strategic mid-market and enterprise customers represented 76% of total ARR and increased 37% compared to the same period in fiscal 2022. ARR associated with Small Business customers declined 2% year-over-year and accounted for 24% of total ARR, compared to 30% 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 second quarter of fiscal 2023, enterprise customers accounted for 58% of total ARR and more than 35% of our ARR was derived from customers deploying the UCaaS and CCaaS capabilities of our XCaaS platform.
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In
Approximately two-thirds of our investment in research and development is
focused on extending the contact center capabilities of our XCaaS platform. 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.
As part of this focus, in
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.
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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 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.
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 term loan and convertible notes, partially offset by income earned on our cash, cash equivalents, investments, and gains / losses from foreign exchange, debt extinguishment and warrants measurement.
Provision for (benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of foreign income
taxes and state minimum taxes in
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RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto. Our results of
operations for the second quarter and first half for fiscal 2023, and the
discussion below, includes
(Dollars in thousands)
Revenue
Service revenue
2022 2021 Change
Three Months Ended
95.3 % 93.9 %
Six Months Ended
95.4 % 93.4 %
Service revenue increased for the three and six months ended
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
2022 2021 Change
Three Months Ended
4.7 % 6.1 %
Six Months Ended
4.6 % 6.6 %
Other revenue decreased for the three and six months ended
No single customer represented more than 10% of our total revenues for the three
and six months ended
Cost of Revenue
Cost of service revenue
2022 2021 Change
Three Months Ended
Six Months Ended
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Cost of service revenue increased in dollars but decreased as a percentage of
service revenue for the three months ended
Cost of service revenue increased in dollars but decreased as a percentage of
service revenue for the six months ended
We expect cost of service revenue will increase in absolute dollars but generally decrease as a percentage of revenue in future periods.
Cost of other revenue
2022 2021 Change
Three Months Ended
Six Months Ended
Cost of other revenue decreased both dollars and as a percentage of other
revenue for the three months ended
Cost of other revenue decreased in dollars but increased as a percentage of
other revenue for the six months ended
Operating Expenses
Research and development
2022 2021 Change
Three Months Ended
Six Months Ended
Research and development expenses increased in dollars and as a percentage of
other revenue for the three months ended
Research and development as a percentage of revenue increased in dollars and as
a percentage of other revenue for the six months ended
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
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2022 2021 Change
Three Months Ended
43.0 % 50.6 %
Six Months Ended
43.7 % 50.9 %
Sales and marketing expenses increased in dollars but decreased as a percentage
of sales and marketing expenses for the three months ended
Sales and marketing increased in dollars but decreased as a percentage of sales
and marketing expenses for the six months ended
We expect sales and marketing costs as a percentage of revenue to decrease over time as we focus on improving our cost structure and achieving operational efficiencies.
General and administrative
2022 2021 Change
Three Months Ended
Six Months Ended
General and administrative expenses increased in dollars and as a percentage of
other revenue for the three months ended
General and administrative increased in dollars and as a percentage of other
revenue for the six months ended
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
2022 2021 Change
Three Months Ended
7.4 % (3.3) %
Six Months Ended
4.0 % (3.3) %
Other income (expense), net increased for the three and six months ended
Provision for income taxes
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2022 2021 Change
Three Months Ended
0.3 % 0.2 %
Six Months Ended
0.3 % 0.2 %
There was no material change to our provision for income taxes for the six
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. During the three months ended
Period-over-Period Changes
Net cash provided by operating activities for the six months ended
•net income or loss;
•non-cash expense items, such as depreciation, amortization, and impairments;
•non-cash gain associated with extinguishment of debt, or changes in fair value of liabilities;
•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 six months ended
Net cash provided by investing activities was
Net cash used in financing activities was
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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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