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8x8 (NYSE:EGHT) Exceeds Q2 Expectations But Quarterly Guidance Underwhelms


Full Report / January 10, 2022
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Business communications software company 8x8 (NYSE:EGHT) reported Q2 FY2022 results that beat analyst expectations, with revenue up 17.3% year on year to $151.5 million. However, management provided guidance for the next quarter with revenues at $153.4 million at the midpoint, or 0.29% below analyst estimates. 8x8 made a GAAP loss of $42.3 million, down on its loss of $38.4 million, in the same quarter last year.

8x8 (EGHT) Q2 FY2022 Highlights:

  • Revenue: $151.5 million vs analyst estimates of $148 million (2.39% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0.01 (39% beat)
  • Revenue guidance for Q3 2022 is $153.4 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $613 million at the midpoint
  • Free cash flow was negative $1.44 million, compared to negative free cash flow of $3.39 million in previous quarter
  • Customers: 871 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 60.7%, up from 56.2% 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.

As consumers adopt multiple online channels to engage with their favorite brands and as employees work from remote locations, more organizations are expected to adopt unified communication platforms to improve collaboration and business productivity.

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 moderate over the last year, growing from quarterly revenue of $129.1 million, to $151.5 million.

8x8 Total Revenue

This quarter, 8x8's quarterly revenue was once again up 17.3% year on year. But the growth did slow down a little compared to last quarter, as 8x8 increased revenue by $3.23 million in Q2, compared to $3.6 million revenue add in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 12.5% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter 8x8 reported 871 enterprise customers paying more than $100,000 annually, an increase of 47 on last quarter. That is a bit less contract wins than last quarter but about the same as what we have typically seen over the last year, suggesting that the company still has decent sales momentum, even if this was a weaker quarter.

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 60.7% in Q2.

8x8 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from 8x8's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on 8x8’s balance sheet, but we note that with a market capitalization of $1.92 billion and more than $147.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see 8x8 improve their gross margin this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see the slowdown in new contract wins and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company currently trades at $16.62 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. We cheer for everyone who is making the lives of others easier through technology, but in case of 8x8 we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition is less efficient than many comparable companies, and 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 2.9x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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