Business communications software company 8x8 (NYSE:EGHT) reported results in line with analyst expectations in Q2 FY2023 quarter, with revenue up 23.6% year on year to $187.3 million. However, guidance for the next quarter was less impressive, coming in at $186.5 million at the midpoint, being 1.08% below analyst estimates. 8x8 made a GAAP loss of $11.6 million, improving on its loss of $42.3 million, in the same quarter last year.
8x8 (EGHT) Q2 FY2023 Highlights:
- Revenue: $187.3 million vs analyst estimates of $186.5 million (small beat)
- EPS (non-GAAP): $0.05 vs analyst estimates of $0.03 (49.1% beat)
- Revenue guidance for Q3 2023 is $186.5 million at the midpoint, below analyst estimates of $188.5 million
- The company reconfirmed revenue guidance for the full year, at $750 million at the midpoint
- Free cash flow of $10.9 million, up from $2.56 million in previous quarter
- Customers: 1,291 customers paying more than $100,000 annually
- Gross Margin (GAAP): 66.8%, up from 60.7% 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).
As you can see below, 8x8's revenue growth has been strong over the last two years, growing from quarterly revenue of $129.1 million in Q2 FY2021, to $187.3 million.
This quarter, 8x8's quarterly revenue was once again up a very solid 23.6% year on year. But the revenue actually decreased by $231 thousand in Q2, compared to $6.24 million increase in Q1 2023.Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter
Guidance for the next quarter indicates 8x8 is expecting revenue to grow 18.8% year on year to $186.5 million, improving on the 14.7% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 9.99% over the next twelve months.
Large Customers Growth
You can see below that at the end of the quarter 8x8 reported 1,291 enterprise customers paying more than $100,000 annually, an increase of 14 on last quarter. That is a bit more contract wins than last quarter but also quite a bit below what we have typically seen over the last year, suggesting that the company may be reinvigorating growth.
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 66.8% in Q2.
That means that for every $1 in revenue the company had $0.66 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.
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 $10.9 million in Q2, up 202% year on year.
8x8 has generated $32.4 million in free cash flow over the last twelve months, a decent 4.55% 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 Q2 Results
With a market capitalization of $412.6 million 8x8 is among smaller companies, but its more than $130.9 million in cash and positive free cash flow over the last twelve months give us confidence that 8x8 has the resources it needs to pursue a high growth business strategy.
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. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $3.41 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. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
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