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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 001-38312
8x8, INC.
(Exact name of Registrant as Specified in its Charter)
| | | | | |
Delaware | 77-0142404 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
675 Creekside Way
Campbell, CA 95008
(Address of principal executive offices)
(408) 727-1885
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
COMMON STOCK, PAR VALUE $.001 PER SHARE | EGHT | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | | | | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | | | | | Smaller reporting company | ☐ | |
| | | | | | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The number of shares of the Registrant's Common Stock outstanding as of October 22, 2020 was 106,321,438.
8X8, INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
Forward-Looking Statements and Risk Factors
Statements contained in this quarterly report on Form 10-Q, or Quarterly Report, regarding our expectations, beliefs, estimates, intentions or strategies are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. These forward-looking statements include, but are not limited to, statements regarding: industry trends; our number of customers; average annual service revenue per customer; cost of service revenue and other revenue; research and development expenses; hiring of employees; sales and marketing expenses; general and administrative expenses in future periods; and the impact of the COVID-19 pandemic. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results and those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to:
•the impact of economic downturns on us and our customers, including the impacts of the COVID-19 pandemic;
•customer cancellations and rate of customer churn;
•benefits that can be realized from migrating customers from legacy products, including reducing the number of supported platforms and improved customer churn;
•customer acceptance and demand for our cloud communication and collaboration services, including voice, contact center, video, messaging, and communication application programming interfaces ("APIs");
•competitive market pressures, and any changes in the competitive dynamics of the markets in which we compete;
•market acceptance of new or existing services and features we may offer from time to time;
•the quality and reliability of our products and services;
•our ability to scale our business;
•customer acquisition costs;
•our reliance on a network of channel partners to provide substantial new customer demand;
•upfront investments, including the cost to support new strategic initiatives such as our cloud migration program with value-added resellers ("VARs") and other partners, to acquire more customers may not result in additional revenue from new or existing customers;
•timing and extent of improvements in operating results from increased spending in marketing, sales, and research and development;
•the amount and timing of costs associated with recruiting, training and integrating new employees and retaining existing employees;
•our reliance on infrastructure of third-party network services providers;
•risk of failure in our physical infrastructure;
•risk of defects or bugs in our software;
•risk of cybersecurity breaches;
•our ability to maintain the compatibility of our software with third-party applications and mobile platforms;
•continued compliance with industry standards and regulatory requirements, including privacy, in the United States and foreign countries in which we make our cloud software and services solutions available, and the costs of such compliance;
•introduction and adoption of our cloud software solutions in markets outside of the United States;
•risks relating to the acquisition and integration of businesses we have acquired (for example, Wavecell Pte. Ltd.) or may acquire in the future, particularly if the acquired business operates in a different product market space from us or is based in a region where we do not have significant operations;
•risks related to our senior convertible notes and the related capped call transactions;
•implementation and effects of new accounting standards and policies in our reported financial results; and
•potential future intellectual property infringement claims and other litigation that could adversely impact our business and operating results.
Please refer to the "Risk Factors" section of our annual report on Form 10-K for the fiscal year ended March 31, 2020 as modified by the "Risk Factors" section of our Quarterly Report for the three-month period ended June 30, 2020, and subsequent Securities and Exchange Commission ("SEC") filings for additional factors that could materially affect our financial performance. All forward-looking statements included in this Quarterly Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Quarterly Report, refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2021 refers to the fiscal year ending on March 31, 2021). Unless the context requires otherwise, references to "we," "us," "our," "8x8" and the "Company" refer to 8x8, Inc. and its consolidated subsidiaries.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 121,848 | | | $ | 137,394 | |
Restricted cash, current | | 6,917 | | | 10,376 | |
Short-term investments | | 31,381 | | | 33,458 | |
Accounts receivable, net | | 42,971 | | | 37,811 | |
Deferred sales commission costs, current | | 26,334 | | | 22,444 | |
Other current assets | | 39,088 | | | 35,679 | |
Total current assets | | 268,539 | | | 277,162 | |
Property and equipment, net | | 96,185 | | | 94,382 | |
Operating lease, right-of-use assets | | 72,841 | | | 78,963 | |
Intangible assets, net | | 19,959 | | | 24,001 | |
Goodwill | | 130,152 | | | 128,300 | |
Restricted cash, non-current | | 8,641 | | | 8,641 | |
Long-term investments | | 6,181 | | | 16,083 | |
Deferred sales commission costs, non-current | | 64,061 | | | 53,307 | |
Other assets | | 20,685 | | | 19,802 | |
Total assets | | $ | 687,244 | | | $ | 700,641 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 35,278 | | | $ | 40,261 | |
Accrued compensation | | 28,698 | | | 22,656 | |
Accrued taxes | | 11,574 | | | 10,251 | |
Operating lease liabilities, current | | 9,498 | | | 5,875 | |
Deferred revenue, current | | 9,452 | | | 7,105 | |
Other accrued liabilities | | 21,913 | | | 37,277 | |
Total current liabilities | | 116,413 | | | 123,425 | |
Operating lease liabilities, non-current | | 87,462 | | | 92,452 | |
Convertible senior notes, net | | 299,853 | | | 291,537 | |
| | | | |
Other liabilities, non-current | | 9,057 | | | 2,496 | |
Total liabilities | | 512,785 | | | 509,910 | |
Commitments and contingencies (Note 8) | | | | |
Stockholders' equity: | | | | |
Common stock | | 106 | | | 103 | |
Additional paid-in capital | | 688,116 | | | 625,474 | |
Accumulated other comprehensive loss | | (7,967) | | | (12,176) | |
Accumulated deficit | | (505,796) | | | (422,670) | |
Total stockholders' equity | | 174,459 | | | 190,731 | |
Total liabilities and stockholders' equity | | $ | 687,244 | | | $ | 700,641 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Service revenue | | $ | 120,942 | | | $ | 101,345 | | | $ | 235,125 | | | $ | 191,184 | |
Other revenue | | 8,191 | | | 8,172 | | | 15,815 | | | 15,008 | |
Total revenue | | 129,133 | | | 109,517 | | | 250,940 | | | 206,192 | |
Operating expenses: | | | | | | | | |
Cost of service revenue | | 44,803 | | | 35,813 | | | 85,799 | | | 61,113 | |
Cost of other revenue | | 11,693 | | | 13,884 | | | 22,830 | | | 26,275 | |
Research and development | | 21,567 | | | 19,434 | | | 43,061 | | | 37,765 | |
Sales and marketing | | 61,399 | | | 57,895 | | | 121,549 | | | 111,494 | |
General and administrative | | 22,769 | | | 20,435 | | | 48,559 | | | 40,042 | |
| | | | | | | | |
Total operating expenses | | 162,231 | | | 147,461 | | | 321,798 | | | 276,689 | |
Loss from operations | | (33,098) | | | (37,944) | | | (70,858) | | | (70,497) | |
Other expense, net | | (5,178) | | | (2,732) | | | (9,103) | | | (4,296) | |
Loss before provision for income taxes | | (38,276) | | | (40,676) | | | (79,961) | | | (74,793) | |
Provision for income taxes | | 137 | | | 256 | | | 365 | | | 404 | |
Net loss | | $ | (38,413) | | | $ | (40,932) | | | $ | (80,326) | | | $ | (75,197) | |
Net loss per share: | | | | | | | | |
Basic and diluted | | $ | (0.37) | | | $ | (0.42) | | | $ | (0.77) | | | $ | (0.77) | |
Weighted-average common shares outstanding: | | | | | | | | |
Basic and diluted | | 104,620 | | | 98,353 | | | 104,116 | | | 97,356 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net loss | | $ | (38,413) | | | $ | (40,932) | | | $ | (80,326) | | | $ | (75,197) | |
Other comprehensive income (loss), net of tax | | | | | | | | |
Unrealized gain (loss) on investments in securities | | (43) | | | (3) | | | 379 | | | 118 | |
Foreign currency translation adjustment | | 2,945 | | | (3,253) | | | 3,830 | | | (3,905) | |
Comprehensive loss | | $ | (35,511) | | | $ | (44,188) | | | $ | (76,117) | | | $ | (78,984) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
| Shares | | Amount | |
Balance at March 31, 2020 | 103,178,621 | | | $ | 103 | | | $ | 625,474 | | | $ | (12,176) | | | $ | (422,670) | | | $ | 190,731 | |
Adjustment to opening balance for change in accounting principle | — | | | — | | | — | | | — | | | (2,800) | | | (2,800) | |
Issuance of common stock under stock plans, less withholding | 688,414 | | | 1 | | | (67) | | | — | | | — | | | (66) | |
Stock-based compensation expense | — | | | — | | | 23,118 | | | — | | | — | | | 23,118 | |
Issuance of common stock related to acquisition | — | | | — | | | 8,489 | | | — | | | — | | | 8,489 | |
Unrealized investment gain | — | | | — | | | — | | | 422 | | | — | | | 422 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 885 | | | — | | | 885 | |
Net loss | — | | | — | | | — | | | — | | | (41,913) | | | (41,913) | |
Balance at June 30, 2020 | 103,867,035 | | | 104 | | | 657,014 | | | (10,869) | | | (467,383) | | | 178,866 | |
Issuance of common stock under stock plans | 2,119,196 | | | 2 | | | 4,706 | | | — | | | — | | | 4,708 | |
Stock-based compensation expense | — | | | — | | | 26,396 | | | — | | | — | | | 26,396 | |
| | | | | | | | | | | |
Unrealized investment gain/loss | — | | | — | | | — | | | (43) | | | — | | | (43) | |
Foreign currency translation adjustment | — | | | — | | | — | | | 2,945 | | | — | | | 2,945 | |
Net loss | — | | | — | | | — | | | — | | | (38,413) | | | (38,413) | |
Balance at September 30, 2020 | 105,986,231 | | | $ | 106 | | | $ | 688,116 | | | $ | (7,967) | | | $ | (505,796) | | | $ | 174,459 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
| Shares | | Amount | |
Balance at March 31, 2019 | 96,119,888 | | | $ | 96 | | | $ | 506,949 | | | $ | (7,353) | | | $ | (250,302) | | | $ | 249,390 | |
Issuance of common stock under stock plans, less withholding | 451,308 | | | 1 | | | 1,493 | | | — | | | — | | | 1,494 | |
Stock-based compensation expense | — | | | — | | | 14,059 | | | — | | | — | | | 14,059 | |
Unrealized investment gain | — | | | — | | | — | | | 121 | | | — | | | 121 | |
Foreign currency translation adjustment | — | | | — | | | — | | | (652) | | | — | | | (652) | |
Net loss | — | | | — | | | — | | | — | | | (34,265) | | | (34,265) | |
Balance at June 30, 2019 | 96,571,196 | | | 97 | | | 522,501 | | | (7,884) | | | (284,567) | | | 230,147 | |
Issuance of common stock under stock plans, less withholding | 1,761,483 | | | 2 | | | (790) | | | — | | | — | | | (788) | |
Stock-based compensation expense | — | | | — | | | 17,867 | | | — | | | — | | | 17,867 | |
Issuance of common stock related to acquisitions | 1,476,009 | | | 1 | | | 35,838 | | | — | | | — | | | 35,839 | |
Unrealized investment loss | — | | | — | | | — | | | (3) | | | — | | | (3) | |
Foreign currency translation adjustment | — | | | — | | | — | | | (3,253) | | | — | | | (3,253) | |
Net loss | — | | | — | | | — | | | — | | | (40,932) | | | (40,932) | |
Balance at September 30, 2019 | 99,808,688 | | | $ | 100 | | | $ | 575,416 | | | $ | (11,140) | | | $ | (325,499) | | | $ | 238,877 | |
| | | | | | | | | | | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, |
| | 2020 | | 2019 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (80,326) | | | $ | (75,197) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Depreciation | | 5,690 | | | 4,599 | |
Amortization of intangible assets | | 4,055 | | | 3,827 | |
Amortization of capitalized software | | 12,893 | | | 8,242 | |
Amortization of debt discount and issuance costs | | 8,317 | | | 6,397 | |
Amortization of deferred sales commission costs | | 12,764 | | | 8,718 | |
Allowance for credit losses | | 2,994 | | | 944 | |
Operating lease expense, net of accretion | | 7,585 | | | 6,234 | |
Stock-based compensation | | 48,101 | | | 30,988 | |
Other | | 467 | | | 690 | |
Changes in assets and liabilities: | | | | |
Accounts receivable, net | | (6,290) | | | (2,563) | |
Deferred sales commission costs | | (26,811) | | | (20,498) | |
Other current and non-current assets | | (7,532) | | | (17,418) | |
Accounts payable and accruals | | 1,350 | | | (400) | |
Deferred revenue | | 3,675 | | | 922 | |
Net cash used in operating activities | | (13,068) | | | (44,515) | |
Cash flows from investing activities: | | | | |
Purchases of property and equipment | | (4,171) | | | (7,138) | |
Purchase of businesses | | (3,459) | | | (58,741) | |
Cost of capitalized software | | (16,158) | | | (14,339) | |
Proceeds from maturities of investments | | 30,071 | | | 8,545 | |
Proceeds from sales of investments | | 219 | | | 30,639 | |
Purchases of investments | | (17,968) | | | (18,890) | |
| | | | |
Net cash used in investing activities | | (11,466) | | | (59,924) | |
Cash flows from financing activities: | | | | |
Finance lease payments | | (70) | | | (227) | |
| | | | |
Tax-related withholding of common stock | | (69) | | | (5,426) | |
Proceeds from issuance of common stock under employee stock plans | | 4,710 | | | 6,134 | |
| | | | |
Net cash provided by financing activities | | 4,571 | | | 481 | |
Effects of currency exchange rates on cash, cash equivalent, and restricted cash | | 958 | | | 511 | |
Net decrease in cash, cash equivalents, and restricted cash | | (19,005) | | | (103,447) | |
Cash, cash equivalents, and restricted cash at the beginning of the period | | 156,411 | | | 284,683 | |
Cash, cash equivalents, and restricted cash at the end of the period | | $ | 137,406 | | | $ | 181,236 | |
Supplemental and non-cash disclosures: | | | | |
Income taxes paid | | $ | 406 | | | $ | 361 | |
Interest paid | | $ | 906 | | | $ | 647 | |
Right of use assets obtained in exchange for new or modified operating lease liabilities | | $ | — | | | $ | 62,832 | |
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
Cash and cash equivalents | | $ | 121,848 | | | $ | 162,219 | |
Restricted cash, current | | 6,917 | | | 3,459 | |
Restricted cash, non-current | | 8,641 | | | 15,558 | |
Total cash, cash equivalents, and restricted cash | | $ | 137,406 | | | $ | 181,236 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
8x8, Inc. ("8x8" or the "Company") was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996.
The Company is a leading cloud provider of enterprise Software-as-a-Service ("SaaS") communications solutions that enable businesses of all sizes to communicate faster and smarter across voice, video meetings, chat, and contact centers, transforming both employee and customer experiences with communications that work simply, integrate seamlessly, and perform reliably. From one proprietary cloud technology platform, customers have access to unified communications, team collaboration, video conferencing, contact center, data and analytics, and other services. Substantially all revenue is generated from communication services subscriptions and platform usage. The Company also generates revenue from sales of hardware and professional services, which are complementary to the delivery of our integrated technology platform.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. The March 31, 2020 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and does not include all of the disclosures required by GAAP. These condensed consolidated 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, 2020 and notes thereto included in the Company's fiscal 2020 annual report on Form 10-K. There have been no material changes in our significant accounting policies as described in the Company's annual report on Form 10-K for the year ended March 31, 2020 during the three and six months ended September 30, 2020, except for the accounting policies described below that were updated as a result of adopting Accounting Standards Update ("ASU") 2016-03, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, further amended by various ASUs and ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future periods or the entire fiscal year.
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company conducts its operations through one reportable segment.
In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the Company's financial position, results of operations, and cash flows for the periods presented.
USE OF ESTIMATES
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to allowance for credit losses, returns reserve for expected cancellations, fair value of and/or evaluation for impairment of goodwill and other long-lived assets, capitalization of internally developed software, benefit period for deferred sales commission costs, stock-based compensation expense, incremental borrowing rate used to calculate operating lease liabilities, income and sales tax liabilities, fair value of convertible senior notes, litigation, and other contingencies. The Company bases its estimates on known facts and circumstances, historical experience, and various other assumptions. Actual results could differ from those estimates under different assumptions or conditions.
RECLASSIFICATIONS AND OTHER CHANGES
During the fourth quarter of fiscal 2020, the Company determined that presenting service revenue as revenue from the Company's core communication services would provide transparency and clarity to the users of the financial statements. As such, the Company reclassified certain revenue and cost of revenue on its condensed consolidated statement of operations for the three and six months ended September 30, 2019. Professional services revenue and cost of professional services revenue previously reported in service revenue and cost of service revenue are now reported in other revenue and cost of other revenue. Product revenue and cost of product revenue are also now reported in other revenue and cost of other revenue. The reclassifications did not have any impact on total revenue, consolidated net loss, or cash flows.
In addition, certain prior year amounts in the condensed consolidated statements of cash flows have been reclassified to conform with the current year presentation.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the existing impairment model with a forward-looking expected loss method. Under this update, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects the entity's current estimate of credit losses expected to be incurred over the life of the financial instrument. For trade receivables, loans, and other financial instruments, an entity is required to use a forward-looking expected loss model to recognize credit losses that are probable. The Company adopted ASU 2016-13 on a modified retrospective basis as of April 1, 2020 through a cumulative-effect adjustment to the Company's beginning accumulated deficit balance; the impact of the adoption was not material to the Company's consolidated financial statements. Credit losses are not expected to be significant based on historical collection trends, the financial condition of the Company’s customers, and external market factors, including those related to the COVID-19 pandemic. The Company will continue to actively monitor the impact of the recent COVID-19 pandemic on expected credit losses.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which makes modifications to disclosure requirements on fair value measurements. The Company adopted ASU 2018-13 on April 1, 2020, and the impact of the adoption was immaterial to the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40), which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. The Company adopted this guidance on a prospective basis effective April 1, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning after December 15, 2020, which is fiscal 2022 for the Company; early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies accounting for convertible instruments by eliminating two of the three accounting models available for convertible debt instruments and convertible preferred stock. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation. The guidance is effective for fiscal years beginning after December 15, 2021, which is fiscal 2023 for the Company; early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
3. REVENUE RECOGNITION
Disaggregation of Revenue
The Company disaggregates its revenue by geographic regions. See Note 13 for more information.
Contract Balances
The following table provides information about receivables, contract assets, and deferred revenues from contracts with customers (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
Accounts receivable, net | | $ | 42,971 | | | $ | 37,811 | |
Contract assets, current, net (included in Other current assets) | | $ | 11,712 | | | $ | 10,425 | |
Contract assets, non-current, net (included in Other assets) | | $ | 14,837 | | | $ | 13,698 | |
Deferred revenue, current | | $ | 9,452 | | | $ | 7,105 | |
Deferred revenue, non-current (included in Other liabilities, non-current) | | $ | 2,678 | | | $ | 1,119 | |
Changes in the contract assets and deferred revenue balances during the six months ended September 30, 2020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 | | Change |
Contract assets | | $ | 26,549 | | | $ | 24,123 | | | $ | 2,426 | |
Deferred revenue | | $ | 12,130 | | | $ | 8,224 | | | $ | 3,906 | |
The change in contract assets was primarily driven by the recognition of revenue that has not yet been billed, net of amounts billed during the period and reserve for current estimate of credit losses. The increase in deferred revenue was due to billings in advance of performance obligations being satisfied, net of revenue recognized for services rendered during the period. Revenue of $1.3 million and $5.0 million was recognized during the three and six months ended September 30, 2020, which were included in the deferred revenue balance at the beginning of the period.
Remaining Performance Obligations
The Company's subscription terms typically range from one to five years. Contract revenue that has not yet been recognized as of September 30, 2020 was approximately $330 million from remaining performance obligations. This excludes contracts with an original expected length of one year or less. The Company expects to recognize revenue on most of the remaining performance obligations over the next 36 months.
Deferred Sales Commission Costs
Amortization of deferred sales commission costs was $6.7 million and $4.5 million for the three months ended September 30, 2020 and 2019, respectively, and $12.8 million and $8.7 million, for the six months ended September 30, 2020 and 2019, respectively. There were no material write-offs relative to the costs capitalized during these periods.
4. FAIR VALUE MEASUREMENTS
Cash, cash equivalents, restricted cash, and available-for-sale investments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2020 | | Amortized Costs | | Gross Unrealized Gain | | Gross Unrealized Loss | | Estimated Fair Value | | Cash and Cash Equivalents | | Restricted Cash (Current & Non-Current) | | Short-Term Investments | | Long-Term Investments |
Cash | | $ | 32,611 | | | $ | — | | | $ | — | | | $ | 32,611 | | | $ | 25,694 | | | $ | 6,917 | | | $ | — | | | $ | — | |
Level 1: | | | | | | | | | | | | | | | | |
Money market funds | | 94,354 | | | — | | | — | | | 94,354 | | | 94,354 | | | — | | | — | | | — | |
Treasury securities | | 6,185 | | | 68 | | | — | | | 6,253 | | | — | | | — | | | 6,253 | | | — | |
Subtotal | | 133,150 | | | 68 | | | — | | | 133,218 | | | 120,048 | | | 6,917 | | | 6,253 | | | — | |
Level 2: | | | | | | | | | | | | | | | | |
Certificate of deposit | | 8,641 | | | — | | | — | | | 8,641 | | | — | | | 8,641 | | | — | | | — | |
Commercial paper | | 4,399 | | | — | | | — | | | 4,399 | | | 1,800 | | | — | | | 2,599 | | | |
Corporate debt | | 28,586 | | | 124 | | | — | | | 28,710 | | | — | | | — | | | 22,529 | | | 6,181 | |
Subtotal | | 41,626 | | | 124 | | | — | | | 41,750 | | | 1,800 | | | 8,641 | | | 25,128 | | | 6,181 | |
Total assets | | $ | 174,776 | | | $ | 192 | | | $ | — | | | $ | 174,968 | | | $ | 121,848 | | | $ | 15,558 | | | $ | 31,381 | | | $ | 6,181 | |
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As of March 31, 2020 | | Amortized Costs | | Gross Unrealized Gain | | Gross Unrealized Loss | | Estimated Fair Value | | Cash and Cash Equivalents | | Restricted Cash (Current & Non-Current) | | Short-Term Investments | | Long-Term Investments |
Cash | | $ | 31,378 | | | $ | — | | | $ | — | | | $ | 31,378 | | | $ | 21,002 | | | $ | 10,376 | | | $ | — | | | $ | — | |
Level 1: | | | | | | | | | | | | | | | | |
Money market funds | | 110,796 | | | — | | | — | | | 110,796 | | | 110,796 | | | — | | | — | | | — | |
Treasury securities | | 6,192 | | | 116 | | | — | | | 6,308 | | | — | | | — | | | — | | | 6,308 | |
Subtotal | | 148,366 | | | 116 | | | — | | | 148,482 | | | 131,798 | | | 10,376 | | | — | | | 6,308 | |
Level 2: | | | | | | | | | | | | | | | | |
Certificate of deposit | | 8,641 | | | — | | | — | | | 8,641 | | | — | | | 8,641 | | | — | | | — | |
Commercial paper | | 14,979 | | | 6 | | | — | | | 14,985 | | | 5,596 | | | — | | | 9,389 | | | — | |
Corporate debt | | 34,153 | | | 32 | | | (341) | | | 33,844 | | | — | | | — | | | 24,069 | | | 9,775 | |
Subtotal | | 57,773 | | | 38 | | | (341) | | | 57,470 | | | 5,596 | | | 8,641 | | | 33,458 | | | 9,775 | |
Total assets | | $ | 206,139 | | | $ | 154 | | | $ | (341) | | | $ | 205,952 | | | $ | 137,394 | | | $ | 19,017 | | | $ | 33,458 | | | $ | 16,083 | |
Certificate of deposit represents the Company's letter of credits securing leases for office facilities, and the balance of which is included in restricted cash, non-current in the Company's condensed consolidated balance sheet.
The Company considers its investments as available to support its current operations, and it has classified all investments as available-for-sale securities. As of September 30, 2020, for investments that were in unrealized loss positions, the Company does not have the intent to sell any of these investments and has determined that it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis.
The Company regularly reviews the changes to the rating of its securities at the individual security level by rating agencies as well as reasonably monitors the surrounding economic conditions to assess the risk of expected credit losses. As of September 30, 2020, the Company did not have any risk of expected credit losses.
As of September 30, 2020, the estimated fair value of the Company's outstanding convertible senior notes (the "Notes") was $336.7 million, which was determined based on the closing price for the Notes on the last trading day of the reporting period and is considered to be Level 2 in the fair value hierarchy due to limited trading activity of the Notes.
5. BUSINESS COMBINATIONS
In July 2019, the Company purchased all of the outstanding shares and equity interests of Wavecell, Pte. Ltd. During the three months ended September 30, 2020, the fair value of all assets acquired and liabilities assumed in the transaction, were finalized, and did not result in any additional adjustments to the preliminary purchase price allocation in the current quarter. Of the $10.4 million cash and 394,515 shares (equivalent to $8.5 million at acquisition) that were held back, the Company released $3.5 million of cash and 116,505 shares on the one-year anniversary of the acquisition. The remaining balance is expected to be released in January 2021.
6. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The carrying value of intangible assets consisted of the following (in thousands):
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| | September 30, 2020 | | March 31, 2020 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Developed technology | | $ | 33,952 | | | $ | (19,182) | | | $ | 14,770 | | | $ | 33,932 | | | $ | (16,312) | | | $ | 17,620 | |
Customer relationships | | 11,614 | | | (6,425) | | | 5,189 | | | 11,409 | | | (5,412) | | | 5,997 | |
Trade and domain names | | 986 | | | (986) | | | — | | | 983 | | | (599) | | | 384 | |
Total acquired identifiable intangible assets | | $ | 46,552 | | | $ | (26,593) | | | $ | 19,959 | | | $ | 46,324 | | | $ | (22,323) | | | $ | 24,001 | |
As of September 30, 2020, the weighted average remaining useful life for technology and customer relationships was 4.8 years and 5.6 years, respectively.
At September 30, 2020, the expected future amortization expense of these intangible assets is as follows (in thousands):
| | | | | |
Remainder of 2021 | $ | 2,829 | |
2022 | 4,708 | |
2023 | 3,156 | |
2024 | 2,851 | |
2025 | 2,851 | |
Thereafter | 3,564 | |
Total | $ | 19,959 | |
Goodwill
The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):
| | | | | |
Balance at March 31, 2020 | $ | 128,300 | |
Foreign currency translation adjustments | 1,852 | |
Balance at September 30, 2020 | $ | 130,152 | |
7. LEASES
Operating Leases
The Company primarily leases facilities for office and data center space under non-cancellable operating leases for its U.S. and international locations that expire at various dates through 2030.
The following table provides balance sheet information related to leases as of September 30, 2020 (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
Assets | | | | |
Operating lease, right-of-use assets | | $ | 72,841 | | | $ | 78,963 | |
| | | | |
Liabilities | | | | |
Operating lease liabilities, current | | $ | 9,498 | | | $ | 5,875 | |
Operating lease liabilities, non-current | | 87,462 | | | 92,452 | |
Total operating lease liabilities | | $ | 96,960 | | | $ | 98,327 | |
The components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Six Months Ended September 30, |
| | | | 2020 | | 2019 | | 2020 | | 2019 |
Operating lease expense | | | | $ | 3,833 | | | $ | 4,156 | | | $ | 7,583 | | | $ | 6,241 | |
Variable lease expense | | | | $ | 857 | | | $ | 229 | | | $ | 1,639 | | | $ | 438 | |
Short-term lease expense was immaterial for the three and six months ended September 30, 2020 and 2019.
Operating cash outflow from operating lease was $4.2 million and $4.5 million, respectively, for the six months ended September 30, 2020 and 2019.
The following table presents supplemental information for the six months ended September 30, 2020 (in thousands, except for weighted average):
| | | | | | | | |
Weighted average remaining lease term | | 8.6 years |
Weighted average discount rate | | 4.0% |
| | |
| | |
The following table presents maturity of lease liabilities under the Company's non-cancellable operating leases as of September 30, 2020 (in thousands):
| | | | | | | | |
Remainder of 2021 | | $ | 5,631 | |
2022 | | 16,193 | |
2023 | | 15,007 | |
2024 | | 11,766 | |
2025 | | 11,429 | |
Thereafter | | 58,122 | |
Total lease payments | | $ | 118,148 | |
Less: imputed interest | | (19,542) | |
Less: lease incentives receivable | | (1,646) | |
Present value of lease liabilities | | $ | 96,960 | |
Lease Assignment
In the fourth quarter of fiscal 2018, the Company entered into a 132-month lease agreement (the "Agreement") with CAP Phase I, a Delaware limited liability company (the "Landlord"), to rent approximately 162,000 square feet of office space in a new building in San Jose, California. The lease term began on January 1, 2019. On April 30, 2019, due to the Company's rapid growth and greater than anticipated future space needs, the Company entered into an assignment and assumption (the "Assignment") of the Agreement with the Landlord, and Roku Inc., a Delaware corporation ("Roku"), whereby the Company assigned to Roku the Agreement. Pursuant to the Assignment, the Company expects to be released from all of its obligations under the lease and related standby letter of credit by the end of the Company’s fiscal year ending March 31, 2022, or shortly thereafter. The Company also expects to receive the reimbursement of base rent and direct expenses from Roku by the end of the Company’s fiscal year ending March 31, 2022 in accordance with the Assignment.
The obligations related to the Agreement are not included in the right-of-use asset or lease liabilities as of September 30, 2020. The remaining obligations related to the Assignment of $4.8 million and the termination fee of $0.8 million are recorded in other accrued liabilities and other liabilities, non-current, respectively, in the Company's condensed consolidated balance sheet. The expected receivable of $6.9 million is recorded in other current assets in the Company's condensed consolidated balance sheet.
8. COMMITMENTS AND CONTINGENCIES
Other Commitments, Indemnifications, and Contingencies
From time to time, the Company receives inquiries from federal and various state and municipal taxing agencies with respect to the remittance of sales, use, telecommunications, excise, payroll, and income taxes. Several jurisdictions are currently conducting tax audits of the Company's records. The Company collects from its customers 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. The Company adjusts its accrued taxes when facts relating to specific exposures warrant such adjustment. The Company continues to conduct periodic review of the taxability of certain of its services that may be subject to sales, use, telecommunications or other similar indirect taxes in certain jurisdictions. As of September 30, 2020 and March 31, 2020, the Company had accrued contingent indirect tax liabilities of $4.5 million.
Legal Proceedings
The Company, from time to time, may be involved in a variety of claims, lawsuits, investigations and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters and contractual disputes, that can arise in the normal course of the Company's operations. The Company accrues a liability when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Legal costs are expensed as incurred.
As of September 30, 2020, the Company does not have any material provisions for any such lawsuits, claims and proceedings and believes it is not probable that a loss had been incurred. Litigation is inherently unpredictable and subject to significant uncertainties. While there can be no assurances that favorable final outcomes will be obtained, the Company believes it has valid defenses with respect to legal matters pending against it. Future litigation could be costly to defend, could impose significant burdens on employees and cause the diversion of management's attention, and could upon resolution have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.
9. CONVERTIBLE SENIOR NOTES AND CAPPED CALL
Convertible Senior Notes
In February 2019, the Company issued $287.5 million aggregate principal amount of 0.50% convertible senior notes (the "Initial Notes") due 2024 in a private placement, including the exercise in full of the initial purchasers' option to purchase additional notes. The Initial Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2019. The Initial Notes will mature on February 1, 2024, unless earlier repurchased, redeemed, or converted. The total net proceeds from the debt offering, after deducting initial purchase discounts, debt issuance costs, and costs of the capped call transactions described below, were approximately $245.8 million.
In November 2019, the Company issued an additional $75 million aggregate principal amount of 0.50% convertible senior notes (the "Additional Notes" and together with the Initial Notes, the "Notes") due 2024 in a registered offering under the same indenture as the Initial Notes. The total net proceeds from the Additional Notes, after deducting underwriting discounts, debt issuance costs, and costs of the capped call transactions described below, were approximately $64.6 million. The Additional Notes constitute a further issuance of, and form a single series with, the Company’s outstanding 0.50% convertible senior notes
due 2024 issued in February 2019 in the aggregate principal amount of $287.5 million. Immediately after giving effect to the issuance of the Additional Notes, the Company has $362.5 million aggregate principal amount of convertible senior notes.
The Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2020. The Notes will mature on February 1, 2024, unless earlier repurchased, redeemed, or converted.
Each $1,000 principal amount of the Notes are initially convertible into 38.9484 shares of the Company’s common stock, par value $0.001, which is equivalent to an initial conversion price of approximately $25.68 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of certain corporate events that occur prior to the maturity date or following the Company's issuance of a notice of redemption, in each case as described in the Indenture, the Company will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Notes in connection with such a corporate event or during the relevant redemption period.
The Notes will be convertible at certain times and upon the occurrence of certain events in the future. Further, on or after October 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, regardless of the foregoing circumstances. Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock, at the Company's election. The Company’s current intent is to settle the principal amount of the Notes in cash upon conversion. During the six months ended September 30, 2020, the conditions allowing holders of the Notes to convert were not met.
The Company may not redeem the Notes prior to February 4, 2022. On or after February 4, 2022, the Company may redeem for cash all or part of the Notes, at the redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice. If a fundamental change (as defined in the indenture governing the notes) occurs at any time, holders of Notes may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, equal in right of payment with the Company’s existing and future liabilities that are not so subordinated, effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | March 31, 2020 |
Principal | | $ | 362,500 | | | $ | 362,500 | |
Unamortized debt discount | | (61,786) | | | (69,987) | |
Unamortized issuance costs | | (861) | | | (976) | |
Net carrying amount | | $ | 299,853 | | | $ | 291,537 | |
Interest expense related to the Notes was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Contractual interest expense | | $ | 453 | | | $ | 360 | | | $ | 906 | | | $ | 719 | |
Amortization of debt discount | | 4,133 | | | 3,198 | | | 8,201 | | | 6,344 | |
Amortization of issuance costs | | 58 | | | 27 | | | 115 | | | 53 | |
Total interest expense | | $ | 4,644 | | | $ | 3,585 | | | $ | 9,222 | | | $ | 7,116 | |
Capped Call
In connection with the pricing of the Initial Notes and Additional Notes, the Company entered into privately negotiated capped call transactions ("Capped Calls") with certain counterparties. The Capped Calls each have an initial strike price of approximately $25.68 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $39.50 per share, subject to certain adjustments. The Capped Calls are expected to partially offset the potential dilution to the Company’s Common Stock upon any conversion of the Notes, with such offset subject to a cap based on the cap price. The Capped Calls cover, subject to anti-dilution adjustments, approximately 14.1 million shares of the Company’s Common Stock. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $33.7 million incurred to purchase the Capped Calls in connection with the Initial Notes and $9.3 million in connection with the Additional Notes were recorded as a reduction to additional paid-in capital and will not be remeasured.
10. STOCK-BASED COMPENSATION
The following tables summarize information pertaining to the stock-based compensation expense (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Cost of service revenue | | $ | 2,410 | | | $ | 1,182 | | | $ | 4,224 | | | $ | 2,179 | |
Cost of other revenue | | 1,113 | | | 757 | | | 1,900 | | | 1,491 | |
Research and development | | 8,255 | | | 4,217 | | | 14,800 | | | 8,081 | |
Sales and marketing | | 7,054 | | | 5,340 | | | 12,793 | | | 9,261 | |
General and administrative | | 6,490 | | | 5,895 | | | 14,384 | | | 9,976 | |
Total | | $ | 25,322 | | | $ | 17,391 | | | $ | 48,101 | | | $ | 30,988 | |
Restricted Stock Units (RSU) and Performance Stock Units (PSU)
Activities related to RSU and PSU, collectively Stock Awards, during six months ended September 30, 2020 and 2019 are summarized as follows (in thousands, except weighted-average grant-date fair value and recognition period):
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, |
| | 2020 | | 2019 |
Stock awards outstanding at the beginning of the period: | | 9,191 | | | 7,820 | |
Stock awards granted | | 5,343 | | | 5,123 | |
Stock awards vested | | (2,498) | | | (1,945) | |
Stock awards canceled and forfeited | | (564) | | | (663) | |
Stock awards outstanding at the end of the period: | | 11,472 | | | 10,335 | |
Weighted-average fair value of grants during the period | | $ | 15.75 | | | $ | 22.35 | |
Weighted-average remaining recognition period (in years) | | 1.96 | | 2.28 |
Total unrecognized compensation expense at period-end | | $ | 144,066 | | | $ | 127,540 | |
Stock Options
Activities related to Stock Options, during six months ended September 30, 2020 and 2019 are summarized as follows (in thousands, except weighted-average grant-date fair value and recognition period):
| | | | | | | | | | | | | | |
| | Six Months Ended September 30, |
| | 2020 | | 2019 |
Stock options outstanding at the beginning of the period: | | 2,274 | | | 3,114 | |
Options granted | | — | | | — | |
Options exercised | | (36) | | | (287) | |
Options canceled and forfeited | | (28) | | | (39) | |
Options outstanding at the end of the period: | | 2,210 | | | 2,788 | |
Weighted-average fair value of grants during the period | | $ | — | | | $ | — | |
Total intrinsic value of options exercised during the period | | $ | 302 | | | $ | 3,726 | |
Weighted-average remaining recognition period (in years) | | 1.54 | | 2.32 |
Total unrecognized compensation expense at period-end | | $ | 671 | | | $ | 1,268 | |
Employee Stock Purchase Plan (ESPP)
In July 2020, 329,430 shares were purchased and issued under the ESPP. As of September 30, 2020, there was a total of $2.9 million of unrecognized compensation, net of estimated forfeitures, which will be amortized on a straight line basis over the remaining weighted-average vesting period of 0.57 years. As of September 30, 2020, a total of 3,252,882 shares were available for issuance under the ESPP.
Stock Repurchases
In May 2017, the Company's board of directors authorized the 2017 Repurchase Plan under which the Company could purchase up to $25.0 million of its common stock. The remaining amount available at September 30, 2020 was approximately $7.1 million. There were no stock repurchases during the three and six months ended September 30, 2020 and 2019.
11. INCOME TAXES
The Company's effective tax rate was (0.4)% and (0.6)% for the three months ended September 30, 2020 and 2019, respectively, and (0.5)% for the six months ended September 30, 2020 and 2019. The difference in the effective tax rate and the U.S. federal statutory rate was primarily due to the full valuation allowance the Company continues to maintain against its deferred tax assets. The effective tax rate is calculated by dividing the income tax provision by net loss before income tax expense.
12. NET LOSS PER SHARE
The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | | |
Net loss available to common stockholders | | $ | (38,413) | | | $ | (40,932) | | | $ | (80,326) | | | $ | (75,197) | |
Denominator: | | | | | | | | |
Common shares - basic and diluted | | 104,620 | | 98,353 | | 104,116 | | 97,356 |
Net loss per share | | | | | | | | |
Basic and diluted | | $ | (0.37) | | | $ | (0.42) | | | $ | (0.77) | | | $ | (0.77) | |
The following shares attributable to outstanding stock options and stock awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Stock options | | 2,210 | | | 2,788 | | | 2,210 | | | 2,788 | |
Stock awards | | 11,472 | | | 10,334 | | | 11,472 | | | 10,334 | |
Potential shares to be issued from ESPP | | 529 | | | 387 | | | 529 | | | 387 | |
Total anti-dilutive shares | | 14,211 | | | 13,509 | | | 14,211 | | | 13,509 | |
13. GEOGRAPHICAL INFORMATION
The following tables set forth the geographic information for each period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Six Months Ended September 30, |
Revenue by geographic area: | | 2020 | | 2019 | | 2020 | | 2019 |
United States | | $ | 96,105 | | | $ | 85,428 | | | $ | 189,349 | | | $ | 168,676 | |
International | | 33,028 | | | 24,089 | | | 61,591 | | | 37,516 | |
Total revenue | | $ | 129,133 | | | $ | 109,517 | | | $ | 250,940 | | | $ | 206,192 | |
| | | | | | | | | | | | | | |
Property and equipment by geographic area: | | September 30, 2020 | | March 31, 2020 |
United States | | $ | 90,493 | | | $ | 87,673 | |
International | | 5,692 | | | 6,709 | |
Total property and equipment, net | | $ | 96,185 | | | $ | 94,382 | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 our Quarterly Report for the three-month period ended June 30, 2020 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 application programming interfaces ("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 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 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 functionally. We expect to continue integrating these services into our platform, as we believe in the value of the collective solutions.
As of September 30, 2020, over 90% of our customer base has been migrated to the 8x8 X Series platform and we intend to migrate the remaining customer base through the end of the fiscal year. 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 second quarter of fiscal 2021, our total service revenue grew 19.3% year-over-year to $120.9 million. We continued to show an increase in our average annualized service revenue per customer, which grew to $8,052 in the second quarter of fiscal 2021, compared with $7,957 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 46% of total service revenue and grew 29% over the prior year. We increased the number of bundled deals where customers purchase our integrated communications and contact center solutions.
Our continued business focus is on achieving improved operating efficiencies while delivering revenue growth. We continue to make important investments in our products and technology platform, and focus on key areas of spend in our go-to-market strategy. Additionally, we aim to drive efficiencies in our small business customer acquisition and operations, and are heavily focused on expanding our business upmarket with mid-market and enterprise customers. We believe that effective 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.
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 our Quarterly Report on Form 10-Q for the three-month period ended June 30, 2020. 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, modified or reinstated, 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 as the number of COVID-19 cases continues to surge and retreat in various locations globally, and the availability and reliability of testing remains inconsistent. 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. While we anticipate that the global health crisis caused by COVID-19, including any resurgences, and the measures enacted to slow its spread will negatively impact certain 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 non-recurring 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 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, 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, and investments, and foreign exchange gains/losses.
Provision for Income Taxes
Provision for income taxes consists primarily of state minimum taxes in the United States and foreign income taxes. 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, 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
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Service revenue | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 120,942 | | | $ | 101,345 | | | $ | 19,597 | | | 19.3 | % |
Percentage of total revenue | | 93.7 | % | | 92.5 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 235,125 | | | $ | 191,184 | | | $ | 43,941 | | | 23.0 | % |
Percentage of total revenue | | 93.7 | % | | 92.7 | % | | | | |
Service revenue increased for the three and six months ended September 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Other revenue | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 8,191 | | | $ | 8,172 | | | $ | 19 | | | 0.2 | % |
Percentage of total revenue | | 6.3 | % | | 7.5 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 15,815 | | | $ | 15,008 | | | $ | 807 | | | 5.4 | % |
Percentage of total revenue | | 6.3 | % | | 7.3 | % | | | | |
Other revenue remained relatively flat during the three months ended September 30, 2020 compared with the same period in the prior fiscal year the slight increase was in professional services revenue resulting from the overall growth in our business and subscriber base, largely offset by a decrease in product revenue as a result of shift towards hardware rental program and reduced demand for hardware caused by COVID-19 pandemic with increase in work from home policies.
Other revenue increased during the six months ended September 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, partially offset by a decrease in product revenue as a result of shift toward hardware rental program and reduced demand for hardware caused by COVID-19 pandemic with increase in work from home policies.
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 and six months ended September 30, 2020 or 2019.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Cost of service revenue | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 44,803 | | | $ | 35,813 | | | $ | 8,990 | | | 25.1 | % |
Percentage of service revenue | | 37.0 | % | | 35.3 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 85,799 | | | $ | 61,113 | | | $ | 24,686 | | | 40.4 | % |
Percentage of service revenue | | 36.5 | % | | 32.0 | % | | | | |
The increase in cost of service revenue for the three months ended September 30, 2020 from the same period in the prior fiscal year was primarily attributable to a $7.2 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 $1.9 million increase in amortization of capitalized software, and a $1.2 million increase in stock-based compensation expense. These increases were partially offset by a $0.7 million decrease in employee and consulting related expenditures and a $0.6 million decrease in depreciation and amortization of intangible assets.
Cost of service revenue for the six months ended September 30, 2020 increased over the same prior fiscal year period primarily due to $20.2 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 $3.9 million increase in amortization of capitalized software, and a $2.0 million increase in stock-based compensation expense. These increases were partially offset by a decrease of $1.0 million in employee and consulting related expenditures and a decrease of $0.6 million in depreciation and amortization of intangible assets.
We expect that cost of service revenue will increase in absolute dollars in future periods as revenue continues to grow.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Cost of other revenue | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 11,693 | | | $ | 13,884 | | | $ | (2,191) | | | (15.8) | % |
Percentage of other revenue | | 142.8 | % | | 169.9 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 22,830 | | | $ | 26,275 | | | $ | (3,445) | | | (13.1) | % |
Percentage of product revenue | | 144.4 | % | | 175.1 | % | | | | |
Cost of other revenue for the three and six months ended September 30, 2020 decreased compared to the same periods in the prior fiscal year primarily due to a decrease in cost of products as a result of decrease in hardware shipment volume, improved pricing, and increase in our hardware rental program, which has better margins than hardware sales.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Research and development | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 21,567 | | | $ | 19,434 | | | $ | 2,133 | | | 11.0 | % |
Percentage of total revenue | | 16.7 | % | | 17.7 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 43,061 | | | $ | 37,765 | | | $ | 5,296 | | | 14.0 | % |
Percentage of total revenue | | 17.2 | % | | 18.3 | % | | | | |
Research and development expenses for the three months ended September 30, 2020 increased compared to the same prior fiscal year period primarily due to a $4.0 million increase in stock-based compensation expense, and a $0.3 million increase in public cloud expenses. These increases were partially offset by a $1.5 million higher allocation to capitalized software costs, and a $0.5 million decrease in travel related costs.
Research and development expenses for the six months ended September 30, 2020 increased compared to the same prior fiscal year period primarily due to a $6.7 million increase in stock-based compensation expense, a $0.8 million increase in public cloud expenses, and a $0.5 million increase in employee and consulting related expenditures. These increases were partially offset by a $1.9 million higher allocation of capitalized software costs from research and development expenses during the period and a decrease of $0.9 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Sales and marketing | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 61,399 | | | $ | 57,895 | | | $ | 3,504 | | | 6.1 | % |
Percentage of total revenue | | 47.5 | % | | 52.9 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 121,549 | | | $ | 111,494 | | | $ | 10,055 | | | 9.0 | % |
Percentage of total revenue | | 48.4 | % | | 54.1 | % | | | | |
Sales and marketing expenses for the three months ended September 30, 2020 increased over the same prior fiscal year period primarily due to a $2.8 million increase in channel commissions, a $2.1 million increase in amortization of deferred sales commission costs, a $1.7 million increase in stock-based compensation expense, a $0.6 million increase in employee and consulting related expenditures, and a $0.6 million increase in marketing software and application related expenditures. These increases were partially offset by a net decrease of $2.3 million in marketing program and public cloud expenses as we gained efficiencies in lead generation and brand awareness and a $1.9 million decrease in travel related costs.
Sales and marketing expenses for the six months ended September 30, 2020 increased over the same prior fiscal year period primarily due to a $5.4 million increase in employee and consulting related expenditures, a $4.3 million increase in channel commissions, a $4.0 million increase in amortization of deferred sales commission costs, a $3.5 million increase in stock-based compensation expense, and a $2.2 million increase in marketing software and application costs. These increases were partially offset by a net decrease of $7.2 million in marketing program and public cloud expenses as we gained efficiencies in lead generation and brand awareness, and a $2.7 million decrease in 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
General and administrative | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 22,769 | | | $ | 20,435 | | | $ | 2,334 | | | 11.4 | % |
Percentage of total revenue | | 17.6 | % | | 18.7 | % | | | | |
| | | | | | | | |
Six months ended | | $ | 48,559 | | | $ | 40,042 | | | $ | 8,517 | | | 21.3 | % |
Percentage of total revenue | | 19.4 | % | | 19.4 | % | | | | |
General and administrative expenses for the three months ended September 30, 2020 increased as compared to the same prior fiscal year period due to a $0.7 million higher allowance for credit losses recognized partially in response to external market factors and uncertainties in connection with the COVID-19 pandemic, a $0.7 million increase in employee and consulting related expenditures, a $0.6 million increase in stock-based compensation expense, and a $0.7 million increase in facilities and other allocated expenses; these increases were partially offset by a $0.4 million decrease in acquisition and integration costs.
General and administrative expenses for the six months ended September 30, 2020 increased over the same prior fiscal year period primarily due to a $4.4 million increase in stock-based compensation expense, a $2.2 million increase in tax related expense, a $2.1 million higher allowance for credit losses recognized, a $1.6 million increase in employee and consulting related expenditures, and a $1.2 million increase in facilities and other allocated expenses. These increases were partially offset by a $1.5 million decrease in acquisition and integration costs and a $1.4 million decrease in contract termination cost.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Other expense, net | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | (5,178) | | | $ | (2,732) | | | $ | (2,446) | | | 89.5 | % |
Percentage of total revenue | | (4.0) | % | | (2.5) | % | | | | |
| | | | | | | | |
Six months ended | | $ | (9,103) | | | $ | (4,296) | | | $ | (4,807) | | | 111.9 | % |
Percentage of total revenue | | (3.6) | % | | (2.1) | % | | | | |
Other expense, net of other income increased for the three months ended September 30, 2020 over the same prior fiscal year period primarily due to a $1.1 million of lower interest income and a $1.0 million increase related to contractual interest expense, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued in November 2019. The remaining increase is attributable to fluctuations in foreign exchange rates.
Other expense, net of other income for the six months ended September 30, 2020 increased over the same prior fiscal year period primarily due to a $2.6 million of lower interest income and a $2.1 million increase related to contractual interest expense, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued in November 2019. The remaining increase is attributable to fluctuations in foreign exchange rates.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | |
Provision for income taxes | | 2020 | | 2019 | | Change |
| | (dollar amounts in thousands) | | |
Three months ended | | $ | 137 | | | $ | 256 | | | $ | (119) | | | (46.5) | % |
Percentage of loss before provision for income taxes | | (0.4) | % | | (0.6) | % | | | | |
| | | | | | | | |
Six months ended | | $ | 365 | | | $ | 404 | | | $ | (39) | | | (9.7) | % |
Percentage of loss before provision for income taxes | | (0.5) | % | | (0.5) | % | | | | |
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 September 30, 2020, we had $159.4 million of cash, cash equivalents, and investments. In addition, as of September 30, 2020, we had restricted cash including $8.6 million in support of letter of credits securing leases for office facilities and $6.9 million held in escrow for our acquisition of Wavecell in July 2019, pursuant to the terms of the acquisition agreement. During the three months ended September 30, 2020, $3.5 million of restricted cash was released, and the remaining amount of $6.9 million held in escrow for our acquisition of Wavecell is due to be released in January 2021. By comparison, at March 31, 2020, we had $186.9 million of cash, cash equivalents, and investments as well as $19.0 million restricted cash.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed into law, which 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.
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. In addition, for fiscal 2021, the Company's executives received performance share units in place of a cash bonus plan. The timing of bonus payments for all other eligible employees was changed to semi-annually (in the third and first quarter of each fiscal year) from quarterly as in prior fiscal years.
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 six months ended September 30, 2020 was $13.1 million, compared with $44.5 million in the six months ended September 30, 2019. Cash used in operating activities was 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 six months ended September 30, 2020, net cash used in operating activities was primarily related to the net loss of $80.3 million, net cash outflow from sales commissions of $14.0 million, which were partially offset by non-cash charges such
as stock-based compensation expense of $48.1 million, depreciation and amortization of $22.6 million, amortization of debt discount of $8.3 million, and operating lease expenses of $7.6 million.
Net cash used in investing activities was $11.5 million in the six months ended September 30, 2020, compared with $59.9 million in the six months ended September 30, 2019. The cash used in investing activities during the six months ended September 30, 2020 was related to capitalized internal software development costs of $16.2 million, purchases of $4.2 million of property and equipment, and $3.5 million release of cash held in escrow associated with an acquisition during the second quarter of fiscal 2020, partially offset by $12.3 million of proceeds from maturities and sales of investments, net of purchase.
Net cash provided by financing activities was $4.6 million in the six months ended September 30, 2020, compared with $0.5 million in the six months ended September 30, 2019. Cash provided by financing activities for the six months ended September 20, 2020 was primarily related to the proceeds from issuance of common stock under the ESPP.
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.
With the exception of changes described within Part I, Item 1, Note 2, "Summary of Significant Accounting Policies", due to the adoption of ASU 2016-03, there have been no significant changes during the three months ended September 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."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Fluctuation Risk
We had cash, cash equivalents, restricted cash, and investments totaling $175.0 million as of September 30, 2020. Cash equivalents and investments were invested primarily in money market funds, U.S. treasury, commercial paper, and corporate bonds. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, while limiting the amount of credit exposure to any one issuer other than the U.S. government. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. A hypothetical 10% change in interest rates would not have a material impact on the value of our cash, cash equivalents, or available-for-sale investments.
The Company issued $362.5 million aggregate principal amount of convertible senior notes of which the estimated fair value as of September 30, 2020 was $336.7 million. The fair value of the convertible senior notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the convertible senior notes but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the convertible senior notes at face value less unamortized discount on our consolidated balance sheets, and we present the fair value for required disclosure purposes only.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, causing both our revenue and our operating results to be impacted by fluctuations in the exchange rates.
Gains or losses from the revaluation of certain cash balances, accounts receivable balances, and intercompany balances that are denominated in these currencies impact our net income (loss). A hypothetical decrease in all foreign currencies against the US dollar of 10% would not result in a material foreign currency loss on foreign-denominated balances at September 30, 2020. As
our foreign operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business.
At this time, we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.
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 September 30, 2020.
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.
Changes in Internal Control over Financial Reporting
During the second quarter of fiscal year 2021, 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
The information set forth in Note 8, “Legal Proceedings” of Notes to Unaudited Condensed Consolidated Financial Statements under ITEM 1. FINANCIAL STATEMENTS of PART I is incorporated by reference in response to this item.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended March 31, 2020 and on our quarterly report on Form 10-Q for the three-month period ended June 30, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | |
Exhibit Number | | Description |
3.1 | | Restated Certificate of Incorporation of Registrant, dated August 22, 2012 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed May 27, 2013). |
3.2 | | Amended and Restated By-Laws of 8x8, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed July 28, 2015). |
4.1 | | Indenture, dated as of February 19, 2019, between 8x8, Inc. and Wilmington Trust, National Association, as trustee (including form of Note) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed February 19, 2019). |
10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | The following materials from the 8x8, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2020 and March 31, 2020; (ii) Condensed Consolidated Statements of Operations for the three months ended June 30, 2020 and 2019; (iii) Condensed Consolidated Statements of Comprehensive Loss for the three months ended June 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Stockholders' Equity for the three months ended June 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2020 and 2019; and (vi) notes to unaudited condensed consolidated financial statements. |
104 | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
| | | | | | | | |
| | |
* | Management contract or compensatory plan or arrangement. |
+ | Furnished herewith. |
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: October 29, 2020
| | | | | |
| 8X8, INC. |
| |
| By: /s/ Samuel Wilson |
| Samuel Wilson |
| Chief Financial Officer (Principal Financial, Accounting and Duly Authorized Officer) |