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8x8's (NYSE:EGHT) Q4 Earnings Results: Growth To Accelerate Next Year Guidance Misses Expectations


Full Report / June 23, 2022
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Business communications software company 8x8 (NYSE:EGHT) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 25.3% year on year to $181.3 million. However, guidance for the next quarter was less impressive, coming in at $186.5 million at the midpoint, being 0.07% below analyst estimates. 8x8 made a GAAP loss of $45.5 million, down on its loss of $45 million, in the same quarter last year.

8x8 (EGHT) Q4 FY2022 Highlights:

  • Revenue: $181.3 million vs analyst estimates of $180.8 million (small beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of $0 ($0.05 beat)
  • Revenue guidance for Q1 2023 is $186.5 million at the midpoint, roughly in line with what analysts were expecting (0.07% miss)
  • Management's revenue guidance for upcoming financial year 2023 is $782.5 million at the midpoint, missing analyst estimates by 0.49% and predicting 22.6% growth (vs 19.8% in FY2022)
  • Free cash flow of $10.5 million, up 24.2% from previous quarter
  • Customers: 1,320 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 62.2%, up from 57.7% same quarter last year

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).

Sales Growth

As you can see below, 8x8's revenue growth has been solid over the last year, growing from quarterly revenue of $144.7 million, to $181.3 million.

8x8 Total Revenue

This quarter, 8x8's quarterly revenue was once again up a very solid 25.3% year on year. On top of that, revenue increased $24.4 million quarter on quarter, a very strong improvement on the $5.31 million increase in Q3 2022, which shows re-acceleration of growth, and is great to see.

Guidance for the next quarter indicates 8x8 is expecting revenue to grow 25.7% year on year to $186.5 million, improving on the 21.7% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $782.5 million at the midpoint, growing 22.6% compared to 19.8% increase in FY2022.

Large Customers Growth

You can see below that at the end of the quarter 8x8 reported 1,320 enterprise customers paying more than $100,000 annually, an increase of 413 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

8x8 customers paying more than $100,000 annually

Profitability

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 62.2% in Q4.

8x8 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it trending up over the last year this would still be considered low gross margin for a SaaS company and we have no doubt shareholders would like to see the improvements continue.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. 8x8's free cash flow came in at $10.5 million in Q4, turning positive year on year.

8x8 Free Cash Flow

8x8 has generated $19.2 million in free cash flow over the last twelve months, 3.01% of revenues. This FCF margin is a result of 8x8 asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from 8x8's Q4 Results

With a market capitalization of $952.5 million 8x8 is among smaller companies, but its more than $136 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed how strongly 8x8 accelerated the rate of new contract wins this quarter. And we were also glad that the revenue guidance for the next year indicates acceleration, although it did miss analyst's expectations. Overall, this quarter's results seemed ok and shareholders can feel optimistic. The company currently trades at $5.5 per share.

Is Now The Time?

When considering 8x8, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although 8x8 is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower, but at least that growth rate is expected to increase in the short term. And on top of that, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

8x8's price to sales ratio based on the next twelve months is 1.2x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While 8x8 wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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