Business communications software company 8x8 (NYSE:EGHT) missed analysts' expectations in Q3 FY2024, with revenue down 1.8% year on year to $181 million. Next quarter's revenue guidance of $178.5 million also underwhelmed, coming in 3.8% below analysts' estimates. It made a non-GAAP profit of $0.12 per share, improving from its profit of $0.07 per share in the same quarter last year.
8x8 (EGHT) Q3 FY2024 Highlights:
- Revenue: $181 million vs analyst estimates of $183.4 million (1.3% miss)
- EPS (non-GAAP): $0.12 vs analyst estimates of $0.10 (19.7% beat)
- Revenue Guidance for Q4 2024 is $178.5 million at the midpoint, below analyst estimates of $185.6 million
- Free Cash Flow of $18.14 million, up 49.5% from the previous quarter
- Gross Margin (GAAP): 69%, in line with the same quarter last year
- Market Capitalization: $344.3 million
Founded in 1987, 8x8 (NYSE:EGHT) provides software for organizations to efficiently communicate and collaborate with their customers, employees, and partners.
Most organizations still rely on a patchwork of technologies for employees and customers to communicate and collaborate. These technologies are often expensive, do not connect to each other, and are not suited for the modern world of remote communication across multiple devices, channels, and locations.
Using 8x8’s cloud-based software (Unified Communications as a Service) solution, organizations can efficiently integrate business phones, video, and messages in one app for internal communication and also use solutions such as the call centre software to manage external communication.
8x8’s software provides companies with insights based on communications data, and helps them ensure that their call centers are run efficiently and customer enquiries are fulfilled in a satisfactory manner. It also integrates with other business apps such as calendars and email, allowing all communication to be managed in one place.
Importantly, cloud-based integrated communications software free companies from being tied to a physical office. For example when a hurricane forced Live Oak, a lending company, to shut down its offices, it depended on 8x8 to migrate all its communication facilities to the cloud to continue operations. 8x8 provided remote communication solutions for Live Oak employees to communicate with each other as if they were in the office and for sales agents to communicate with customers. As a result, Live Oak was able to continue approving loans and providing customer support without customers noticing the office was shut down.
Work is becoming more distributed, both across geographies and devices. In order for businesses to keep functioning efficiently, they need to be able to communicate as well as they did when the teams were co-located, which drives the demand for integrated communication platforms.
The cloud communication space is competitive, and it includes companies such as RingCentral (NYSE:RNG), Vonage Holdings (NASDAQ:VG) or Twilio (NYSE:TWLO), and LogMeIn (NASDAQ:LOGM) as well as remote collaboration platforms such as Zoom Video Communications (NASDAQ:ZM) and Slack (WORK).
As you can see below, 8x8's revenue growth has been unremarkable over the last two years, growing from $156.9 million in Q3 FY2022 to $181 million this quarter.
This quarter, 8x8's revenue was down 1.8% year on year, which might disappointment some shareholders.
Next quarter, 8x8 is guiding for a 3.3% year-on-year revenue decline to $178.5 million, a further deceleration from the 1.7% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 2.1% over the next 12 months before the earnings results announcement.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. 8x8's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 69% in Q3.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, sales and marketing, and general administrative overhead. 8x8's gross margin is poor for a SaaS business and we'd like to see it start improving.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. 8x8's free cash flow came in at $18.14 million in Q3, up 48.7% year on year.
8x8 has burned through $61.27 million of cash over the last 12 months, resulting in a negative 8.4% free cash flow margin. This below-average FCF margin stems from 8x8's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from 8x8's Q3 Results
This was a tough quarter. The company's full-year revenue guidance was below expectations and its revenue guidance for next quarter and the full year both missed Wall Street's estimates. A bright spot was a beat on profit that led to a non-GAAP EPS beat. However, underperformance on revenue guidance is driving the stock performance. Overall, the results could have been better. The company is down 3% on the results and currently trades at $3.26 per share.
Is Now The Time?
8x8 may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's making the lives of others easier through technology, but in case of 8x8, we'll be cheering from the sidelines. Its , and analysts expect growth to deteriorate from here.
Wall Street analysts covering the company had a one-year price target of $4.21 per share right before these results (compared to the current share price of $2.88).
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