8x8 (EGHT)

Business communications software company 8x8 (NYSE:EGHT) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 1.3% year on year to $177 million. The company expects next quarter’s revenue to be around $178.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.08 per share was in line with analysts’ consensus estimates.

Company Overview

Founded in 1987, 8x8 (NYSE:EGHT) provides software for organizations to efficiently communicate and collaborate with their customers, employees, and partners.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, 8x8’s 3.9% annualized revenue growth over the last three years was weak. This was below our standard for the software sector and is a tough starting point for our analysis.

This quarter, 8x8 reported a rather uninspiring 1.3% year-on-year revenue decline to $177 million of revenue, in line with Wall Street’s estimates. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

8x8’s billings came in at $176.4 million in Q1, and it averaged 1.8% year-on-year declines over the last four quarters. This performance mirrored its total sales and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

8x8’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between 8x8’s products and its peers.

For software companies like 8x8, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

8x8’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 67.9% gross margin over the last year. Said differently, 8x8 had to pay a chunky $32.14 to its service providers for every $100 in revenue.

In Q1, 8x8 produced a 67.8% gross profit margin, in line with the same quarter last year. Zooming out, 8x8’s full-year margin has been trending down over the past 12 months, decreasing by 1.3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

8x8 has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 2.1%, higher than the broader software sector.

Looking at the trend in its profitability, 8x8’s operating margin rose by 5.9 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, 8x8’s breakeven margin was up 8.2 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

8x8 has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7%, subpar for a software business.

8x8’s free cash flow clocked in at $2.91 million in Q1, equivalent to a 1.6% margin. The company’s cash profitability regressed as it was 3.4 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

8x8 reported $88.05 million of cash and $410.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $98.56 million of EBITDA over the last 12 months, we view 8x8’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $27.15 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see 8x8 expecting revenue growth to accelerate next year. Operating income in the quarter also exceeded expectations. On the other hand, its full-year revenue guidance fell slightly short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock traded up 3.8% to $1.86 immediately after reporting.

Updated: July 9, 2025 at 10:14 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in 8x8.

8x8 falls short of our quality standards. To kick things off, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its expanding operating margin shows it took many unnecessary costs out of the business, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its customer acquisition is less efficient than many comparable companies.

8x8’s price-to-sales ratio based on the next 12 months is 0.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $2.33 on the company (compared to the current share price of $2.06).