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8x8 (NYSE:EGHT) Delivers Strong Q1 Numbers, Stock Soars


Full Report / August 04, 2021
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Business communications software company 8x8 (NYSE:EGHT) reported strong growth in the Q1 FY2022 earnings announcement, with revenue up 21.7% year on year to $148.3 million. 8x8 made a GAAP loss of $43.9 million, down on its loss of $41.9 million, in the same quarter last year.

8x8 (EGHT) Q1 FY2022 Highlights:

  • Revenue: $148.3 million vs analyst estimates of $143 million (3.67% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0 ($0.01 beat)
  • Revenue guidance for Q2 2022 is $148.2 million at the midpoint, above analyst estimates of $146.4 million
  • Free cash flow was negative -$3.4 million, compared to negative free cash flow of -$6.62 million in previous quarter
  • Customers: 824 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 59.7%, up from 57.7% previous quarter

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 decent over the last year, growing from quarterly revenue of $121.8 million, to $148.3 million.

8x8 Total Revenue

This quarter, 8x8's quarterly revenue was once again up a very solid 21.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.6 million in Q1, compared to $8.03 million in Q4 2021. 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 11.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter 8x8 reported 824 enterprise customers paying more than $100,000 annually, an increase of 63 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, licences, technical support and other necessary running expenses was at 59.7% in Q1.

8x8 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.59 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements to continue.

Key Takeaways from 8x8's Q1 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 market capitalisation of $2.83 billion and more than $140.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed how strongly 8x8 accelerated the rate of new contract wins this quarter. And we were also glad to see the improvement in gross margin. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 7.07% on the results and currently trades at $26.49 per share.

Is Now The Time?

8x8 may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 4.4, 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.