6
8X8, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
THE COMPANY
8x8, Inc. ("8x8" or the "Company") develops and markets Voice over Internet protocol ("VoIP")
technology delivered as a cloud-based service to business customers enabling telephony and video applications as well
as web-based conferencing, unified communications services, managed hosting and cloud-based computing services.
As of June 30, 2012, the Company had approximately 30,000 business customers.
The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996. The
Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated
financial statements refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2013 refers to the fiscal
year ending March 31, 2013).
2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on
substantially the same basis as our annual financial statements for the fiscal year ended March 31, 2012. In the opinion of the
Company's management, these financial statements reflect all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
The March 31, 2012 year-end condensed consolidated balance sheet data in this document were derived from audited
consolidated financial statements and do not include all of the disclosures required by U.S. generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for
the fiscal year ended March 31, 2012 and notes thereto included in the Company's fiscal 2012 Annual Report on Form 10-K.
The results of operations and cash flows for the interim periods included in these financial statements are not necessarily indicative
of the results to be expected for any future period or the entire fiscal year.
VoIP Service and Product Revenue
The Company's VoIP service and product revenue is derived from the sale of IP business telephones and VoIP service.
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-25 requires
that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement
meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting based on their
relative fair values, with certain limitations. The provisioning of the 8x8 service with the accompanying 8x8 IP telephone constitutes a
revenue arrangement with multiple deliverables. In accordance with the guidance of ASC 605-25, the Company allocates 8x8 revenues,
including activation fees, among the 8x8 IP telephones and subscriber services. Revenues allocated to these devices are recognized
as product revenues during the period of the sale less the allowance for estimated returns during the 30-day trial period. All other
revenues are recognized as license and service revenues when the related services are provided. The Company records revenue net
of any sales-related taxes that are billed to its customers. The Company believes this approach results in financial statements that are
more easily understood by users.
7
Under the terms of the Company's typical subscription agreement, new customers can terminate their service within 30 days of
order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of
subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company recognizes
new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected cancellations.
Product Revenue
The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to
partners and end users provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of
resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant
obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of
goods sold. Reserves for returns and allowances for partner and end user sales are recorded at the time of shipment. In accordance
with the ASC 985-605, the Company records shipments to distributors, retailers, and resellers, where the right of return exists, as
deferred revenue. The Company defers recognition of revenue on sales to distributors, retailers, and resellers until products are resold
to the end user.
Deferred Cost of Goods Sold
Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return.
The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has accepted the
service.
Goodwill and Other Intangible Assets
Amortization expense for the customer relationship intangible asset is included in sales and marketing expenses. Amortization
expense for technology is included in cost of service revenue. The carrying values of intangible assets were as follows (in
thousands):
|
|
June 30, 2012 |
|
|
March 31, 2012 |
|
|
Gross |
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
Technology |
$ |
8,242 |
|
$ |
(638) |
|
$ |
7,604 |
|
$ |
8,242 |
|
$ |
(432) |
|
$ |
7,810 |
Customer relationships |
|
3,305 |
|
|
(601) |
|
|
2,704 |
|
|
3,305 |
|
|
(450) |
|
|
2,855 |
Trade names/domains |
|
957 |
|
|
- |
|
|
957 |
|
|
957 |
|
|
- |
|
|
957 |
Total acquired identifiable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible assets |
$ |
12,504 |
|
$ |
(1,239) |
|
$ |
11,265 |
|
$ |
12,504 |
|
$ |
(882) |
|
$ |
11,622 |
At June 30, 2012, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is
estimated to be the following (in thousands):
|
|
|
Amount |
Remaining 2013 |
|
$ |
1,071 |
2014 |
|
|
1,334 |
2015 |
|
|
1,325 |
2016 |
|
|
1,325 |
2017 |
|
|
1,318 |
Thereafter |
|
|
3,935 |
Total |
|
$ |
10,308 |
8
Option and Stock Purchase Right Activity
Stock purchase right activity since March 31, 2012 is summarized as follows:
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
Grant-Date |
|
|
Remaining |
|
|
Number of |
|
|
Fair Market |
|
|
Contractual |
|
|
Shares |
|
|
Value |
|
|
Term (in Years) |
Balance at March 31, 2012 |
|
966,400 |
|
$ |
2.50 |
|
|
2.61 |
Granted |
|
52,500 |
|
|
4.09 |
|
|
|
Released |
|
(84,576) |
|
|
1.82 |
|
|
|
Forfeited |
|
(5,000) |
|
|
4.55 |
|
|
|
Balance at June 30, 2012 |
|
929,324 |
|
$ |
2.64 |
|
|
2.48 |
Option activity since March 31, 2012 is summarized as follows:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Shares |
|
|
Average |
|
|
Shares |
|
|
Subject to |
|
|
Exercise |
|
|
Available |
|
|
Options |
|
|
Price |
|
|
for Grant |
|
|
Outstanding |
|
|
Per Share |
Balance at March 31, 2012 |
|
375,546 |
|
|
6,034,335 |
|
$ |
1.90 |
Granted - options |
|
(38,000) |
|
|
38,000 |
|
|
4.19 |
Stock purchase rights (1) |
|
(52,500) |
|
|
- |
|
|
|
Exercised |
|
- |
|
|
(19,448) |
|
|
1.59 |
Canceled/forfeited |
|
57,410 |
|
|
(57,410) |
|
|
4.47 |
Termination of plans |
|
(40,701) |
|
|
- |
|
|
- |
Balance at June 30, 2012 |
|
301,755 |
|
|
5,995,477 |
|
$ |
1.89 |
(1) The reduction to shares available for grant includes awards granted of 52,500 shares.
The following table summarizes the stock options outstanding and exercisable at June 30, 2012:
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
|
Aggregate |
|
|
|
|
Exercise |
|
|
Aggregate |
|
|
|
|
|
Price |
|
Contractual |
|
|
Intrinsic |
|
|
|
|
Price |
|
|
Intrinsic |
|
|
Shares |
|
|
Per Share |
|
Life (Years) |
|
|
Value |
|
Shares |
|
|
Per Share |
|
|
Value |
$0.55 - $1.15 |
|
1,217,168 |
|
$ |
0.87 |
|
5.2 |
|
$ |
4,049,066 |
|
1,217,168 |
|
$ |
0.87 |
|
$ |
4,049,066 |
$1.16 - $1.32 |
|
1,340,843 |
|
$ |
1.27 |
|
4.2 |
|
|
3,928,182 |
|
1,340,843 |
|
$ |
1.27 |
|
|
3,928,182 |
$1.33 - $1.72 |
|
1,291,166 |
|
$ |
1.60 |
|
2.7 |
|
|
3,358,141 |
|
1,291,166 |
|
$ |
1.60 |
|
|
3,358,141 |
$1.73 - $2.81 |
|
1,216,800 |
|
$ |
2.32 |
|
5.6 |
|
|
2,282,315 |
|
850,523 |
|
$ |
2.20 |
|
|
1,702,675 |
$2.82 - $4.95 |
|
929,500 |
|
$ |
3.98 |
|
7.6 |
|
|
348,550 |
|
246,166 |
|
$ |
3.84 |
|
|
132,535 |
|
|
5,995,477 |
|
|
|
|
|
|
$ |
13,966,254 |
|
4,945,866 |
|
|
|
|
$ |
13,170,599 |
9
Stock-based Compensation Expense
As of June 30, 2012, there was $3.9 million of unamortized stock-based compensation expense related to unvested stock awards
which is expected to be recognized over a weighted average period of 3.14 years.
To value option grants and stock purchase rights for stock-based compensation, the Company used the Black-Scholes option
valuation model. Fair value determined using the Black-Scholes option valuation model varies based on assumptions used for the
expected stock price volatility, expected life, risk-free interest rates and future dividend payments. During the three month periods
ended June 30, 2012 and 2011, the Company used the historical volatility of the Company's stock over a period equal to the expected
life of the options to their fair value. The expected life assumptions represent the weighted-average period the stock-based awards are
expected to remain outstanding. These expected life assumptions are established through the review of historical exercise behavior of
stock-based award grants with similar vesting periods. The risk-free interest rate is based on the closing market bid yields on actively
traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The
dividend yield assumption is based on the Company's history and expectation of future dividend payouts.
The following table summarizes the assumptions used to compute reported stock-based compensation to
employees and directors for the three months ended June 30, 2012 and 2011:
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2012 |
|
|
2011 |
Expected volatility |
|
|
|
|
|
70% |
|
|
73% |
Expected dividend yield |
|
|
|
|
|
- |
|
|
- |
Risk-free interest rate |
|
|
|
|
|
0.60% |
|
|
0.68% |
Weighted average expected option term |
|
|
|
|
|
4.30 years |
|
|
3.00 years |
Weighted average fair value of options granted |
|
|
|
|
$ |
2.25 |
|
$ |
1.76 |
In accordance with ASC 718, the Company recorded $382,000 and $186,000 in compensation expense relative to stock-based
awards for the three months ended June 30, 2012 and 2011, respectively.
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan, eligible employees can participate and purchase common stock semi-
annually through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each one
year offering period or the end of the applicable six month purchase period within that offering period, whichever is lower. The
contribution amount may not exceed 10% of an employee's base compensation, including commissions but not including bonuses and
overtime. The Company accounts for the Employee Stock Purchase Plan as a compensatory plan and recorded compensation expense
of $174,000 and $80,000 for the three months ended June 30, 2012 and 2011, respectively, in accordance with ASC 718.
As of June 30, 2012, there was $164,000 of total unrecognized compensation cost related to employee stock purchases. These
costs are expected to be recognized over a weighted average period of 0.5 years.
ASC 718 requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash
flow, rather than as an operating cash flow. The future realization of tax benefits related to stock-based compensation is dependent
upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit
from the stock-based compensation charges incurred during the three months ended June 30, 2012 and 2011.
10
The following table summarizes the classification of stock-based compensation expense related to employee stock options and
employee stock purchases under ASC 718 among the Company's operating functions for the three months ended June 30, 2012 and
2011 which was recorded as follows (in thousands):
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2012 |
|
|
2011 |
Cost of service revenues |
|
$ |
43 |
|
$ |
20 |
Cost of product revenues |
|
|
1 |
|
|
- |
Research and development |
|
|
95 |
|
|
48 |
Sales and marketing |
|
|
316 |
|
|
156 |
General and administrative |
|
|
101 |
|
|
42 |
Total stock-based compensation expense related to |
|
|
|
|
|
|
employee stock options and employee stock purchases, pre-tax |
|
|
556 |
|
|
266 |
|
|
|
|
|
|
|
Tax benefit |
|
|
- |
|
|
- |
Stock based compensation expense related to employee |
|
|
|
|
|
|
stock options and employee stock purchases, net of tax |
|
$ |
556 |
|
$ |
266 |
Segment Reporting
No customer represented greater than 10% of the Company's total revenue for the three months ended June 30, 2012 or
2011. Revenue from technology licensing and related software and customers outside the United States was not material for the three
months ended June 30, 2012 or 2011.
3. FAIR VALUE MEASUREMENT
The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring
basis at June 30, 2012 and March 31, 2012 (in thousands):
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
June 30, |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
14,367 |
|
$ |
- |
|
$ |
- |
|
$ |
14,367 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
Mutual funds (1) |
|
- |
|
|
1,968 |
|
|
- |
|
|
1,968 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
14,367 |
|
$ |
1,968 |
|
$ |
- |
|
$ |
16,335 |
11
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
March 31, |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
14,366 |
|
$ |
- |
|
$ |
- |
|
$ |
14,366 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
Mutual funds (1) |
|
- |
|
|
1,942 |
|
|
- |
|
|
1,942 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
14,366 |
|
$ |
1,942 |
|
$ |
- |
|
$ |
16,308 |
(1)
The fair value of mutual funds is determined based on published net asset values. The Company uses such pricing
data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment
portfolio.
4. BALANCE SHEET DETAIL
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2012 |
|
|
2012 |
Inventory (in thousands): |
|
|
|
|
|
|
Work-in-process |
|
$ |
42 |
|
$ |
55 |
Finished goods
|
|
|
551 |
|
|
526 |
|
|
$ |
593 |
|
$ |
581 |
12
5. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the
weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per
share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive
potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include
shares issuable upon exercise of outstanding stock options and warrants and under the employee stock purchase plan.
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2012 |
|
|
2011 |
|
|
|
(in thousands, except per share amounts) |
Numerator: |
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
8,617 |
|
$ |
1,947 |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
Common shares |
|
|
70,717 |
|
|
62,264 |
|
|
|
|
|
|
|
Denominator for basic calculation |
|
|
70,717 |
|
|
62,264 |
Employee stock options |
|
|
2,759 |
|
|
3,168 |
Stock purchase rights |
|
|
309 |
|
|
352 |
Employee stock purchase plan |
|
|
325 |
|
|
24 |
Denominator for diluted calculation |
|
|
74,110 |
|
|
65,808 |
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
Basic |
|
$ |
0.12 |
|
$ |
0.03 |
Diluted |
|
$ |
0.12 |
|
$ |
0.03 |
The following shares attributable to outstanding stock options and stock purchase rights were excluded from the
calculation of diluted earnings per share because their inclusion would have been anti-dilutive (in thousands):
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2012 |
|
|
2011 |
Employee stock options |
|
|
774 |
|
|
784 |
Stock purchase rights |
|
|
3 |
|
|
1 |
|
|
|
777 |
|
|
785 |
6. INCOME TAXES
For the three months ended June 30, 2012, the Company recorded a provision for income taxes of $5.8 million which was primarily
attributable to net income from operations, including the gain on sale of patents. For the three months ended June 30, 2011, the
Company released a portion of its valuation allowance against the deferred tax asset as the
Company deemed it was more likely than not it would be used to offset the $0.3 million deferred tax liability recorded in connection with
the acquisition of Zerigo and recorded accruals for state gross receipt and franchise taxes.
During the period ended June 30, 2011 the provision for income taxes was not significant due to the
valuation allowance.
The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense.
13
At March 31, 2012, there was $2.5 million of unrecognized tax benefits that, if recognized, would have affected the
effective tax rate. The Company does not believe that there has been any significant change in the unrecognized tax benefits in the
three-month period ended June 30, 2012 and does not believe it is reasonably possible that the unrecognized tax benefit will materially
change in the next 12 months. To the extent that the unrecognized tax benefits are ultimately recognized they may have an impact on
the effective tax rate in future periods.
The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a
subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 1995 to fiscal 2012 may be subject to examination
by the Internal Revenue Service, California and various other states. As of July 18, 2012, there were no active federal or state income
tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2009 to 2010.
7. COMMITMENTS AND CONTINGENCIES
Guarantees
Indemnifications
In the normal course of business, the Company indemnifies other parties, including customers, lessors and parties to other
transactions with the Company, with respect to certain matters. Under these arrangements, the Company typically agrees to hold the
other party harmless against losses arising from a breach of representations or covenants, intellectual property infringement or other
claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the
amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.
It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements
due to the limited history of indemnification claims and the unique facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating
results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability
might not have a contractual limit.
Product Warranties
The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition.
Changes in the Company's product warranty liability, which is included in cost of product revenue in the condensed consolidated
statements of income were as follows (in thousands):
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2012 |
|
|
2011 |
Balance at beginning of period |
|
$ |
387 |
|
$ |
362 |
Accruals for warranties |
|
|
171 |
|
|
138 |
Settlements |
|
|
(153) |
|
|
(122) |
Balance at end of period |
|
$ |
405 |
|
$ |
378 |
Minimum Third Party Customer Support Commitments
In the third quarter of fiscal 2010, the Company amended a contract with one of its third party customer support vendors
containing a minimum monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. The
total remaining obligation under the amended contract is $2.2 million.
14
Minimum Third Party Network Service Provider Commitments
The Company entered into contracts with multiple vendors for third party network services that expire on various dates in fiscal
2012 and 2013. At June 30, 2012, future minimum annual payments under these third party network service contracts were as follows
(in thousands):
Year ending March 31: |
|
|
|
|
|
|
2013 |
|
|
|
|
$ |
715 |
2014 |
|
|
|
|
|
382 |
2015 |
|
|
|
|
|
319 |
2016 |
|
|
|
|
|
52 |
Total minimum payments |
|
|
|
|
$ |
1,468 |
Legal Proceedings
From time to time, the Company may become involved in various legal claims and litigation that arise in the normal course of its
operations. While the results of such claims and litigation cannot be predicted with certainty, the Company is not currently aware of any
such matters that it believes would have a material adverse effect on its financial position, results of operations or cash flows.
On February 22, 2011, the Company was named as a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al.,
along with more than 20 other defendants. On August 17, 2011, the Company was dismissed without prejudice from this lawsuit under
Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, the Company was sued again by Bear Creek Technologies, Inc.
in the United States District Court for the District of Delaware. The Company filed a motion to dismiss the complaint on October 11,
2011, which motion is still pending. The Company has not answered the complaint. The Company believes it has factual and legal
defenses to these claims and is presenting a vigorous defense. The Company cannot estimate potential liability in this case at this early
stage of litigation. Further, on April 26, 2011, the U.S. Patent & Trademark Office initiated a Reexamination proceeding with a
Reexamination Declaration explaining that there is a substantial new question of patentability affecting each claim of the patent which is
the basis for the complaint against the Company.
On October 25, 2011, the Company was named a defendant in a lawsuit, Klausner Technologies, Inc. v. Oracle
Corporation et al., along with 30 other defendants. On November 1, 2011, Klausner dismissed the Complaint voluntarily and filed new
complaints separating the defendants, including a new Complaint against 8x8. The Company believes it has factual and legal defenses
to these claims and is presenting a vigorous defense. The plaintiff has not made a specific monetary demand and the Company cannot
estimate potential liability in this case at this early stage of litigation. The Company filed a motion to dismiss the complaint on February
23, 2012, and the motion is still pending. The Company has not answered the complaint.
State and Municipal Taxes
From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to
the remittance of taxes. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that
have been remitted have historically been within the accruals established by the Company.
8. PATENT SALE
On June 22, 2012, the Company entered into a patent purchase agreement and sold a family of patents to a third party for $12.0
million plus a future payment of up to a maximum of $3.0 million based on future license agreements entered into by the third party
purchaser. Under the terms and conditions of the patent purchase agreement, the Company has retained certain limited rights to
continue to use the patents. The patent purchase agreement contains representations and warranties customary for transactions of this
type.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should,"
"estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions
are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual
results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a
variety of factors. These factors include, but are not limited to, customer acceptance and demand for our voice over Internet protocol, or
VoIP, telephony products and services, the reliability of our services, the prices for our services, customer renewal rates, customer
acquisition costs, actions by our competitors, including price reductions for their telephone services, potential federal and state
regulatory actions, compliance costs, potential warranty claims and product defects, our needs for and the availability of adequate
working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, potential future
intellectual property infringement claims that could adversely affect our business and operating results, and our ability to retain our
listing on the NASDAQ Capital Market. All forward-looking statements included in this report are based on information available to us on
the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to those factors discussed
elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 2012 Form 10-K. The forward-looking statements
included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking
statements to reflect subsequent events or circumstances.
BUSINESS OVERVIEW
We develop and market Voice over Internet protocol ("VoIP") technology delivered as a cloud-based
service to business customers enabling telephony and video applications as well as web-based conferencing, unified
communications services, managed hosting and cloud-based computing services.
As of June 30, 2012, we had approximately 30,000 business customers. Since fiscal 2004, substantially all of our revenue has been generated from
the sale, license and provision of VoIP products, services and technology. Prior to fiscal 2003, our focus was on our VoIP
semiconductor business.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending
March 31 of the calendar year indicated (for example, fiscal 2013 refers to the fiscal year ending March 31, 2013).
CRITICAL ACCOUNTING POLICIES & ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our 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 disclosure 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. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2012. As of June 30, 2012, there had been no material changes to our critical accounting policies and
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
See Item 1 of Part I, "Financial Statements - Note 2 - Basis of Presentation - Recent Accounting Pronouncements."
16
SELECTED OPERATING STATISTICS
We periodically review certain key business metrics, within the context of our articulated performance
goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of
our business. The selected operating statistics include the following:
|
Selected Operating Statistics |
|
June 30, |
|
March 31, |
|
Dec 31, |
|
Sept. 30, |
|
June 30, |
|
March 31, |
|
Dec 31, |
|
Sept. 30, |
|
2012 |
|
2012 |
|
2011 |
|
2011 |
|
2011 |
|
2011 |
|
2010 |
|
2010 |
Gross business customer additions (1)
|
2,943 |
|
2,892 |
|
2,836 |
|
3,176 |
|
2,897 |
|
3,009 |
|
2,798 |
|
2,450 |
Gross business customer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cancellations (less cancellations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
within 30 days of sign-up) |
1,458 |
|
1,697 |
|
1,642 |
|
1,620 |
|
1,593 |
|
1,645 |
|
1,524 |
|
1,459 |
Business customer churn (less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cancellations within 30 days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of sign-up) (2) |
1.7% |
|
2.0% |
|
2.0% |
|
2.1% |
|
2.1% |
|
2.3% |
|
2.2% |
|
2.2% |
Total business customers (3) |
29,913 |
|
28,671 |
|
27,677 |
|
26,727 |
|
25,455 |
|
24,385 |
|
23,251 |
|
22,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business customer average monthly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
service revenue per customer (4) |
$ 250 |
|
$ 244 |
|
$ 239 |
|
$ 207 |
|
$ 200 |
|
$ 204 |
|
$ 209 |
|
$ 209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall service margin |
75% |
|
76% |
|
77% |
|
77% |
|
78% |
|
78% |
|
77% |
|
78% |
Overall product margin |
-30% |
|
-15% |
|
-24% |
|
-45% |
|
-53% |
|
-73% |
|
-65% |
|
-57% |
Overall gross margin |
67% |
|
68% |
|
68% |
|
66% |
|
67% |
|
67% |
|
68% |
|
68% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business subscriber acquisition cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per service (5) |
$ 97 |
|
$ 99 |
|
$ 92 |
|
$ 101 |
|
$ 89 |
|
$ 91 |
|
$ 99 |
|
$ 108 |
Average number of services subscribed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to per business customer |
10.1 |
|
9.8 |
|
9.4 |
|
9.0 |
|
8.4 |
|
8.0 |
|
7.8 |
|
7.7 |
Business customer subscriber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition cost (6) |
$ 980 |
|
$ 965 |
|
$ 867 |
|
$ 906 |
|
$ 743 |
|
$ 725 |
|
$ 768 |
|
$ 826 |
(1) |
Includes 250 customers acquired directly from our
acquisitions in the second quarter of fiscal 2012 from Contactual and does not include customers of Virtual Office Solo or Zerigo, Inc.
("Zerigo"). |
(2) |
Business customer churn is calculated by dividing the
number of business customers that terminated (after the expiration of the 30-day trial) during that period by the simple average number
of business customers during the period and dividing the result by the number of months in the period. The simple average number of
business customers during the period is the number of business customers on the first day of the period plus the number of business
customers on the last day of the period divided by two. |
(3) |
Business customers are defined as customers paying for
service. Customers that are currently in the 30- day trial period are considered to be customers that are paying for service. Customers
subscribing to Virtual Office Solo or Zerigo services are not included as business customers. |
(4) |
Business customer average monthly service revenue per
customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple
average number of business customers during the period. |
(5) |
Business subscriber acquisition cost per service is defined
as the combined costs of advertising, marketing, promotions, sales commissions and equipment subsidies for business services sold
during the period divided by the number of gross business services added during the period. |
(6) |
Business customer subscriber acquisition cost is business
subscriber acquisition cost per service times the average number of services subscribed to per business
customer. |
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the
notes thereto.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Service revenue |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
23,172 |
|
$ |
17,021 |
|
$ |
6,151 |
|
36.1% |
Percentage of total revenue |
|
|
91.8% |
|
|
92.0% |
|
|
|
|
|
17
Service revenue consists primarily of revenue attributable to the provision of our 8x8 services and royalties earned under
our VoIP technology licenses. We expect that 8x8 service revenues will continue to comprise nearly
all of our service revenues for the foreseeable future. 8x8 service revenues increased in the first quarter of fiscal 2013 primarily due to
the increase in our business customer subscriber base. Our business subscriber base grew from 25,455 business customers on June
30, 2011, to approximately 30,000 on June 30, 2012. The increase was partially offset by a decrease in customers of our residential
services. These changes were consistent with the redirection of our marketing efforts toward our business customer service. We expect
the trends to continue in future periods.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Product revenue |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
2,080 |
|
$ |
1,486 |
|
$ |
594 |
|
40.0% |
Percentage of total revenue |
|
|
8.2% |
|
|
8.0% |
|
|
|
|
|
Product revenue consists primarily of revenue from sales of IP telephones attributable to our 8x8 service. Product revenue
increased in the first quarter of fiscal 2012 primarily due to an increase in equipment sales to business customers. No customer
represented greater than 10% of our total revenue for the three months ended June 30, 2012 and 2011. Revenue from customers
outside the United States was not material for the three months ended June 30, 2012 or 2011.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Cost of service revenue |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
5,686 |
|
$ |
3,815 |
|
$ |
1,871 |
|
49.0% |
Percentage of service revenue |
|
|
24.5% |
|
|
22.4% |
|
|
|
|
|
The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony
origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service
revenue for the three months ended June 30, 2012 increased over the comparable period in the prior fiscal year primarily due to a $1.0
million increase in third party network service expenses, a $0.3 million increase in payroll and related costs, a $0.2 million increase in
temporary personnel, consulting and outside service expenses, a $0.2 million increase in amortization expenses due to intangibles
acquired in acquisition of businesses and a $0.2 million increase in depreciation expense.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Cost of product revenue |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
2,710 |
|
$ |
2,270 |
|
$ |
440 |
|
19.4% |
Percentage of product revenue |
|
|
130.3% |
|
|
152.8% |
|
|
|
|
|
The cost of product revenue consists of costs associated with systems, components, system manufacturing, assembly and testing
performed by third-party vendors, estimated warranty obligations and direct and indirect costs associated with product purchasing,
scheduling, quality assurance, shipping and handling. The amount of revenue allocated to product revenue based on the relative selling
price is less than the cost of the IP phone equipment. The cost of product revenue for the three months ended June 30, 2012 increased
over the comparable period in the prior fiscal year primarily due to an increase in the shipment of equipment to customers.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Research and development |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
1,826 |
|
$ |
1,407 |
|
$ |
419 |
|
29.8% |
Percentage of total revenue |
|
|
7.2% |
|
|
7.6% |
|
|
|
|
|
18
Historically, our research and development expenses have consisted primarily of personnel, system
prototype design, and equipment costs necessary for us to conduct our development and engineering efforts. We expense research
and development costs, including software development costs, as they are incurred. The research and development expenses for the
three months ended June 30, 2012 increased over the comparable period in the prior fiscal year primarily due to a $0.4 million increase
in payroll and related costs.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Sales and marketing |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
10,541 |
|
$ |
8,184 |
|
$ |
2,357 |
|
28.8% |
Percentage of total revenue |
|
|
41.7% |
|
|
44.2% |
|
|
|
|
|
Sales and marketing expenses consist primarily of personnel and related overhead costs for sales,
marketing, and customer service. Such costs also include outsourced customer service call center operations, sales commissions, as
well as trade show, advertising and other marketing and promotional expenses. Sales and marketing expenses for the first quarter of
fiscal 2012 increased over the same quarter in the prior fiscal year primarily because of a $1.6 million increase in payroll and related
costs, a $0.2 million increase in advertising expenses, a $0.1 million increase in amortization of customer relationship intangibles, a
$0.1 million increase in sales promotion expenses, a $0.1 million increase in indirect channel commission expenses, a $0.1 million
increase in travel and meal expenses and a $0.2 million increase in other sales and marketing expenses.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
General and administrative |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
2,064 |
|
$ |
1,225 |
|
$ |
839 |
|
68.5% |
Percentage of total revenue |
|
|
8.2% |
|
|
6.6% |
|
|
|
|
|
General and administrative expenses consist primarily of personnel and related overhead costs for
finance, human resources and general management. General and administrative expenses for the first quarter of fiscal 2012 increased
over the same quarter in the prior fiscal year primarily because of a $0.5 million increase in temporary personnel, consulting and
outside service expenses, a $0.2 million increase in payroll and related costs and a $0.1 million increase in accounting and tax service
expenses.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Gain on patent sale |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
(11,965) |
|
$ |
- |
|
$ |
(11,965) |
|
100.0% |
Percentage of total revenue |
|
|
-47.4% |
|
|
0.0% |
|
|
|
|
|
In June 2012, we entered into a patent purchase agreement for the sale of a family of United States
patents for $12.0 million in cash. We recognized a $12.0 million gain on this transaction, which has been recorded as a reduction of
operating expenses in the consolidated statements of operations. The gain was comprised of the $12.0 million of proceeds, net of
transaction costs.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Other income, net |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
8 |
|
$ |
20 |
|
$ |
(12) |
|
-60.0% |
Percentage of total revenue |
|
|
0.0% |
|
|
0.1% |
|
|
|
|
|
19
In the three months ended June 30, 2012 and 2011, other income, net primarily consisted of distribution
of capital gains on investments and interest income earned on our cash, cash equivalents and investments.
|
|
|
June 30, |
|
|
Dollar |
|
Percent |
Provision (benefit) for income tax |
|
|
2012 |
|
|
2011 |
|
|
Change |
|
Change |
|
|
|
(dollar amounts in thousands) |
|
|
Three months ended |
|
$ |
5,781 |
|
$ |
(321) |
|
$ |
6,102 |
|
-1900.9% |
Percentage of total revenue |
|
|
22.9% |
|
|
-1.7% |
|
|
|
|
|
For the three months ended June 30, 2012, we recorded a provision for income taxes of $5.8 million which was primarily
attributable to net income from operations, including the gain on sale of patents. For the three months ended June 30, 2011, we
released a portion of our valuation allowance against the deferred tax asset as we deemed it was
more likely than not it would be used to offset the $0.3 million deferred tax liability recorded in connection with the acquisition of
Zerigo.
The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense. We estimate our
annual effective tax rate at the end of each quarter. The fiscal 2013 estimated annual effective tax rate is expected to be approximately
40%, but may fluctuate each quarter due to the timing of other discrete period transactions. In estimating the annual effective tax rate,
we, in consultation with our tax advisors, 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.
Liquidity and Capital Resources
As of June 30, 2012, we had approximately $38.2 million in cash, cash equivalents and short-term investments.
Net cash provided by operating activities for the three months ended June 30, 2012 was approximately $14.9 million, compared
with $2.1 million for the three months ended June 30, 2011. The increase in cash flow was primarily due to a $12.0 million gain on the
sale of a patent family in June 2012 and an increase in service and product revenue in the first three months of fiscal 2012.
Cash provided by operating activities has historically been affected by the amount of net
income, sales of subscriptions, changes in working capital accounts particularly in deferred revenue due to timing of annual plan
renewals, add-backs of non-cash expense items such as the use of deferred tax assets, depreciation and amortization and the
expense associated with stock-based awards.
Net cash used in investing activities was $1.0 million during the three months ended June 30, 2012, compared with $0.9 million
used in investing activities for the three months ended June 30, 2011. The increase in cash used in investing activities during the three
months ended June 30, 2012 is primarily related to an increase in the purchase of additional equipment ($0.8 million) offset by a
reduction in the acquisition of business ($0.7 million).
Our financing activities for the three months ended June 30, 2012 consisted primarily of cash from the issuance of shares due to
exercise of employee stock options ($0.1 million) offset by cash used to repurchase shares of our common stock ($1.0 million).
Contractual Obligations
We lease our headquarters facility in Sunnyvale, California under an operating lease
agreement that expires in August 2012. The facility lease includes rent escalation clauses, and requires us to pay utilities and normal
maintenance costs.
On April 2012, we entered into a seven-year lease for a new primary facility in San Jose, California, with a scheduled
commencement date of August 1, 2012. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months
with a 3% increase each year thereafter.
20
We entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates.
Assets under capital lease at June 30, 2012 totaled $110,000 with accumulated amortization of $54,000.
In the third quarter of 2010, we amended the contract with one of our third party customer support vendors containing a minimum
monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. At June 30, 2012, the total
remaining obligation under the contract was $2.2 million.
In fiscal 2011, we entered into contracts with multiple vendors for third party network services that expire on various dates in fiscal
2012 and 2013. At June 30, 2012, future minimum annual payments under these third party network service contracts were $715,000
in 2013, $382,000 in 2014, $319,000 in 2015 and $52,000 in 2016.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We
derive a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange
rates, the vast majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract
manufacturers are denominated in U.S. dollars. We have not entered into any currency hedging activities. To date, our exposure to
exchange rate volatility has not been significant; however, there can be no assurance that there will not be a material impact in the
future.
Investments
We maintain an investment portfolio of various holdings, types and maturities. These marketable securities and investments are
generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or
losses reported as a separate component of accumulated other comprehensive loss. Part of this portfolio includes investments in
mutual funds.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 ("Disclosure Controls") that are designed to ensure that information we are required to disclose in reports filed or submitted under
the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and
principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer
and our Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation our Chief Executive
Officer and our Chief Financial Officer have concluded that our Disclosure Controls were effective as of June 30, 2012.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls
or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
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Changes in Internal Control over Financial Reporting.
During the first quarter of fiscal 2013, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed
Consolidated Financial Statements - "Note 9".
ITEM 1A. Risk Factors
We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks
could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a
number of material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2012, which we
filed with the Securities and Exchange Commission on May 24, 2012 in addition to the following updated risk factor disclosures.
ITEM 6. EXHIBITS
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 23, 2012
8X8, INC. |
(Registrant) |
By: /s/ DANIEL WEIRICH |
Daniel Weirich |
Chief Financial Officer
(Principal Financial and Chief Accounting Officer and Duly Authorized Officer) |