Business communications software company 8x8 (NYSE:EGHT) missed analyst expectations in Q4 FY2023 quarter, with revenue up 1.74% year on year to $184.5 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $187 million at the midpoint, or 1.71% below analyst estimates. 8x8 made a GAAP loss of $9.43 million, improving on its loss of $45.6 million, in the same quarter last year.
8x8 (EGHT) Q4 FY2023 Highlights:
- Revenue: $184.5 million vs analyst estimates of $185.7 million (0.65% miss)
- EPS (non-GAAP): $0.11 vs analyst estimates of $0.09 (22.7% beat)
- Revenue guidance for Q1 2024 is $187 million at the midpoint, below analyst estimates of $190.2 million
- Management's revenue guidance for upcoming financial year 2024 is $759 million at the midpoint, missing analyst estimates by 0.89% and predicting 2.02% growth (vs 17.4% in FY2023)
- Free cash flow of $8.19 million, down 44.1% from previous quarter
- Gross Margin (GAAP): 70.1%, up from 62.2% 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.
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 two years, growing from quarterly revenue of $144.7 million in Q4 FY2021, to $184.5 million.
8x8's quarterly revenue was only up 1.74% year on year, which might disappoint some shareholders. On top of that, revenue increased $129 thousand quarter on quarter, a strong improvement on the $2.99 million decrease in Q3 2023, and a sign of acceleration of growth, which is very nice to see indeed.
8x8 is guiding for revenue to decline next quarter 0.33% year on year to $187 million, a further deceleration on the 26.5% year-over-year decrease in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $759 million at the midpoint, growing 2.02% compared to 16.6% increase in FY2023.
Large Customers Growth
You can see below that at the end of the quarter 8x8 reported 1,301 enterprise customers paying more than $100,000 annually, a decrease of 8 on last quarter. We have no doubt shareholders would like to see the company regain its sales momentum.
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 70.1% in Q4.
That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.
Cash Is King
If you have followed 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 $8.19 million in Q4, down 46.5% year on year.
8x8 has generated $38.4 million in free cash flow over the last twelve months, a decent 5.16% of revenues. This FCF margin is a result of 8x8 asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from 8x8's Q4 Results
With a market capitalization of $365.1 million 8x8 is among smaller companies, but its more than $137.6 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was good to see 8x8 beat expectations for quarterly EPS and improve their gross margin this quarter. On the other hand, the revenue guidance for next quarter and the full year both missed analysts' expectations. However, guidance for the next quarter and the full year operating profit were ahead of Consensus, the latter raised from previous guidance. Overall, this quarter's results were mixed. The company is down 0.78% on the results and currently trades at $3.2 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 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 mediocre, and analysts expect growth rates to deteriorate from there. And while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately gross margins show its business model is much less lucrative than the best software businesses.
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