8X8 Inc: Form 10-Q for the period ended Dec 31, 2023
Filed with the SEC on Feb 1, 2024 and accepted by EDGAR at Feb 1, 2024, 16:48 ET.
Management's discussion and analysis
As filed, 41,180 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Quarterly Report, particularly those set forth under the section entitled "Risk Factors" in the Form 10-K.
OVERVIEW
We are a leading provider of software-as-a-service ("SaaS") solutions for contact centers, voice communications, video meetings, employee collaboration, and embeddable communication application program interfaces ("APIs"). Our solutions empower workforces worldwide by connecting individuals and teams so they can collaborate faster, work smarter, and better serve customers, from any location. The communications capabilities and advanced AI/ML (artificial intelligence/machine learning) technologies of our contact center, communication and collaboration solutions are integrated into a comprehensive cloud-based offering powered by our global communications platform, which together comprise our 8x8 XCaaS platform solution. The XCaaS platform delivers our unified communications ("UCaaS"), contact center ("CCaaS") and communication APIs ("CPaaS") services and includes AI-driven digital assistance, intuitive user interfaces, and real-time business analytics and intelligence, enabling organizations of all sizes to design, deploy and adapt tailored communications and workflows for differentiated employee and customer experiences.
The 8x8 XCaaS platform offers a complete cloud technology stack. It delivers the security, scalability, high availability, and ease-of-use of a modern cloud-based architecture while masking the complexity of a global communications infrastructure. A consistent data layer across the platform powers 8x8 AI/ML algorithms, as well as vertical-specific and purpose-built AI applications from our ecosystem of technology partners, to deliver data-driven business insights and intelligent integrated applications that drive employee productivity, resource optimization, and more effective end-customer interactions through simplified and automated workflows. Built from core cloud technologies that we own and manage internally and integrated with third-party applications from our technology partners, our XCaaS platform enables agile workplaces and fosters seamless communications and collaboration between an organization’s customers, contact center agents, and employees, regardless of geographic location.
Our customers use our XCaaS platform to create tailored employee and customer experiences that increase productivity, improve responsiveness, and elevate customer and employee satisfaction and loyalty. Our service plans are structured with increasing levels of functionality and are designated as X1, X2, etc., through X8, based on the specific communication needs and customer engagement profile of each user.
Because our XCaaS platform includes UCaaS, CCaaS and CPaaS and serves as a single integration framework for communications across an organization, customers can reduce costs associated with provisioning and management, increase customization based on use cases, and facilitate compliance with security and data privacy requirements on a global scale. In fiscal 2023, we introduced platform-wide integration of generative AI from OpenAI, making it easier for organizations to unlock the potential of generative AI to personalize self-service, bot-based and agent-based customer engagements. The XCaaS platform also integrates with a growing ecosystem of third-party applications, ranging from purpose-built and vertically-focused AI-based applications to broadly deployed customer relationship management (CRM) platforms and leading customer engagement and workforce management software.
Our open approach to third party integrations and platform-wide enablement of generative AI, combined with flexibility to “mix and match” functionality based on users’ communication requirements and customer engagement profiles, allows organizations of all sizes to design and deploy tailored user experiences previously reserved to very large enterprises.
Our customers range from small businesses to large enterprises across all vertical markets, with users in more than 180 countries. In recent years, we have increased our focus on mid-market, small and medium enterprise, and public sector customers because these organizations typically have more complex communication and contact center requirements compared to the needs of small business customers. Organizations in these sectors – typically with 500 to 10,000 employees – are more likely to adopt multiple services and realize greater value from our unified, global communications platform and portfolio of AI-enabled solutions.
We generate service revenue from subscriptions and usage of our communications services and platform. We generate other revenue from professional services and the sale of office phones and other hardware equipment. We define a “customer” as one or more legal entities to which we provide services pursuant to a single contractual arrangement. In some cases, we may have multiple billing relationships with a single customer (for example, where we establish separate billing accounts for a parent company and each of its subsidiaries).
SUMMARY AND OUTLOOK
In the third quarter of fiscal 2024, our total revenue decreased $3.4 million, or approximately 2% year-over-year, to $181.0 million primarily due to a $2.7 million and $0.7 million decrease in other revenue and service revenue, respectively.
As part of our long-term strategy to expand our enterprise customer base, grow our revenue, achieve profitability and increase our cash flow, we have focused on reducing the cost of delivering our services and improving our sales efficiency while increasing our investment in research and development. To improve our sales efficiency, we have focused our sales and marketing resources on mid-market and enterprise customers, since these customers are likely to derive the greatest benefit from our unified XCaaS platform. We have also expanded our partner programs to extend our reach within this market, placing increased emphasis on developing a community of value-added resellers who provide implementation services and Tier 1 customer support in addition to sales. To support our customers and partners, we are expanding our customer success organization and investing in improvements to our back-office processes in order to increase our operational efficiency over time.
We believe that continued innovation is a critical factor in attracting and retaining mid-market and enterprise customers and is an important variable in achieving sustainable growth. We are committed to maintaining a high level of investment in engineering to deliver product innovation across our XCaaS platform, expand our ecosystem of integrations, and maintain the high availability our customers require. Approximately two-thirds of our investment in research and development is focused on extending the contact center capabilities of our XCaaS platform, including AI integrations, user experiences, and advanced data capture and analytics.
We use annualized recurring and usage revenue ("ARR") to measure the success of our strategy to attract and retain customers. We define enterprise customers as customers generating more than $100,000 in ARR, mid-market as customers with ARR between $25,000 and $100,000, and small business as customers with up to $25,000 in ARR. Customers can change categories over time based on individual ARR. The Company continues to review ARR growth, as well as changes in the mix, within the Enterprise, Mid-Market and Small Business categories and relies on the growth percentage as one of the measures of potential future performance within the specific ARR by customer size categories.
Total ARR increased 1% to $707.0 million during the three months ended December 31, 2023 from $698.0 million during the three months ended December 31, 2022. Enterprise ARR increased 2% to $409.0 million during the three months ended December 31, 2023 from $400.0 million during the three months ended December 31, 2022. Mid-Market ARR decreased 1% to $129.0 million during the three months ended December 31, 2023 from $130.0 million during the three months ended December 31, 2022. Small Business ARR remained flat at $168.0 million during the three months ended December 31, 2023, and December 31, 2022, respectively.
We remain committed to retaining our installed base of small business customers but have reduced promotional programs and digital marketing to attract new small business UCaaS-only customers. See "Key Business Metrics" below for further discussion on how we define ARR.
In August 2022, we refinanced approximately $403.8 million of the $500.0 million aggregate principal amount of 2024 Notes through an exchange for approximately $201.9 million in 2028 Notes plus approximately $181.8 million in cash. The cash payment was funded with the partial proceeds of a $250.0 million senior secured term loan due in 2027 entered into in August 2022. Concurrently with the issuance of the 2028 Notes, we repurchased 10,695,000 shares of our common stock for approximately $60 million in privately negotiated transactions with a limited number of holders. In September 2022, December 2022, and February 2023, we repurchased $6.0 million, $21.8 million, and $5.0 million in aggregate principal amount of the 2024 Notes, respectively, in separate privately negotiated transactions. Approximately $63.3 million of the 2024 Notes remained outstanding as of December 31, 2023. On February 1, 2024, we paid the remaining aggregate principal of $63.3 million, and accrued interest of $0.2 million, related to the 2024 Notes, which mature on February 1, 2024. See Note 6, Convertible Senior Notes and Term Loan and Note 12, Subsequent Event to our condensed consolidated financial statements for details. In May 2023, we voluntarily prepaid $25.0 million of principal amount outstanding on our senior secured term loan, reducing the total principal amount outstanding to $225.0 million. Due to the adjustable nature of the interest rate on our senior secured term loan, our net income may vary.
In addition, to align our resources with our long-term strategy, we conducted two separate workforce reductions in fiscal 2023 involving approximately 300 employees, primarily in the sales and marketing and general and administration functions.
KEY BUSINESS METRICS
Our management periodically reviews certain key business metrics to evaluate our operations, allocate resources, and drive financial performance in our business.
Annualized Recurring Subscriptions and Usage Revenue
Our management measures the success of our strategy to attract and retain customers, in part, by analyzing trends in ARR and believes ARR may be useful to investors in evaluating our performance. Our management believes ARR is a useful indicator for measuring the overall performance of the business because it includes new customer additions, add-on sales, renewals and customer churn within a single metric. Our management uses trends in ARR to assess our ongoing operations, allocate resources, and drive the performance of the business. We define ARR as (A) equal to the sum of the most recent month of (i) recurring subscription amounts and (ii) platform usage charges for all CPaaS customers that demonstrate consistent monthly usage above a minimum threshold over the prior six-month period, multiplied by 12, and (B) excluding any non-bundled or overage usage fees associated with UCaaS subscriptions.
ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and ARR is not intended to be a substitute for, or combined with, any of these items. We caution that our presentation may not be consistent with that of other companies.
COMPONENTS OF RESULTS OF OPERATIONS
Service Revenue
Service revenue consists of communication services subscriptions, platform usage revenue, and related fees from our UCaaS, CCaaS, and CPaaS offerings.
Other Revenue
Other revenue consists of revenue from professional services, primarily in support of deployment of our solutions and/or platform, and revenue from sales and rentals of IP telephones in conjunction with our cloud telephony service. Other revenue is dependent on the number of customers who choose to purchase or rent an IP telephone hardware in conjunction with our service instead of using the solution on their cell phones, computers, or other compatible devices, and/or choose to engage our professional services organization for implementation and deployment of our cloud services.
Cost of Service Revenue
Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of capitalized internal-use software, other communication origination and termination services provided by third-party carriers, outsourced customer service call center operations, and other costs such as customer service, and technical support costs. We allocate overhead costs, such as information technology ("IT") and facilities, to cost of service revenue, as well as to each of the operating expense categories, generally based on relative headcount. Our IT costs include costs for IT infrastructure and personnel. Facilities costs primarily consist of office leases and related expenses.
Cost of Other Revenue
Cost of other revenue consists primarily of direct and indirect costs associated with the purchase and shipping and handling of IP telephones as well as the scheduling, shipping and handling, personnel costs, and other expenditures incurred in connection with the professional services associated with the deployment and implementation of our products, and allocated IT and facilities costs.
Research and Development
Research and development expenses consist primarily of personnel and related costs, third-party development, software and equipment costs necessary for us to conduct our product, platform development and engineering efforts, as well as allocated IT and facilities costs.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related costs, sales commissions, including those to the channel, trade shows, advertising and other marketing, demand generation, and promotional expenses, as well as allocated IT and facilities costs.
General and Administrative
General and administrative expenses consist primarily of personnel and related costs, professional services fees, corporate administrative costs, tax and regulatory fees, and allocated IT and facilities costs.
Impairment of Long-Lived Assets
Impairment of long-lived assets consists of non-cash impairment charges for right-of-use assets and capitalized software. During the third quarter of fiscal year 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the three and nine months ended December 31, 2023, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the condensed consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets. See Note 1, The Company and Significant Accounting Policies, for further details.
During the three months ended December 31, 2022, the Company recorded an impairment charge for capitalized software of $3.7 million. During the nine months ended December 31, 2022, the impairment charge of $6.2 million was due to capitalized software and right-of-use assets of $3.7 million and $2.4 million, respectively.
Other Expense, Net
Other expense, net, consists primarily of interest expense related to our convertible notes and term loan, amortization of debt discount and issuance costs, offset by gains on debt extinguishment, as well as other income.
Provision for (benefit from) Income Taxes
Provision for (benefit from) income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions. As we expand the scale of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for our United States deferred tax assets, including federal and state non-operating loss carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.
RESULTS OF OPERATIONS
Revenue
Service revenue
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Service revenue | $175,069 | $175,765 | $(696) | (0.4)% | $528,089 | $533,482 | $(5,393) | (1.0)% |
| Percentage of total revenue | 96.7% | 95.3% | 96.1% | 95.4% |
Three Months Ended
Service revenue decreased by $0.7 million, or 0.4%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, and this change was driven by subscription revenue decrease of $3.1 million related to increased customer churn and down-sell partially offset by increases of $2.4 million in platform usage revenue.
Nine Months Ended
Service revenue decreased by $5.4 million, or 1.0%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022, and this change was driven by subscription revenue decrease of $5.4 million related to increased customer churn and down-sell.
We continue to monitor factors that could have an impact on customer buying behavior and demand, including macroeconomic conditions, contract duration, churn, upsell and down-sell, renewals, and payment terms, all of which could cause variability in our revenue.
Other revenue
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Other revenue | $5,937 | $8,635 | $(2,698) | (31.2)% | $21,203 | $25,927 | $(4,724) | (18.2)% |
| Percentage of total revenue | 3.3% | 4.7% | 3.9% | 4.6% |
Three Months Ended
Other revenue decreased $2.7 million, or 31.2%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, due to lower professional service and product revenue of $1.3 million and $1.4 million, respectively.
Nine Months Ended
Other revenue decreased $4.7 million, or 18.2%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022, due to lower professional service and product revenue of $2.5 million and $2.2 million, respectively.
Cost of Revenue
Cost of service revenue
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Cost of service revenue | $48,983 | $47,335 | $1,648 | 3.5% | $144,403 | $151,920 | $(7,517) | (4.9)% |
| Percentage of service revenue | 28.0% | 26.9% | 27.3% | 28.5% |
Three Months Ended
Cost of service revenue increased $1.6 million, or 3.5%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, due to $4.4 million increased costs to deliver our services. This increase was partially offset by decreases of $1.5 million related to the amortization of capitalized software, $0.7 million of software costs and $0.6 million in combined employee, consulting costs and stock-based compensation expense.
Nine Months Ended
Cost of service revenue decreased $7.5 million, or 4.9%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022, due to decreases of $4.9 million related to the amortization of capitalized software and intangible assets and $3.6 million of combined employee, consulting and stock-based compensation expense. These decreases were partially offset by an increase of $1.1 million in costs to deliver our services.
We expect the total dollar amount of cost of service revenue and as a percentage of revenue to vary with the amount of service revenue and the mix of subscription and usage revenue within service revenue.
Cost of other revenue
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Cost of other revenue | $7,177 | $10,176 | $(2,999) | (29.5)% | $23,533 | $34,302 | $(10,769) | (31.4)% |
| Percentage of other revenue | 120.9% | 117.8% | 111.0% | 132.3% |
Three Months Ended
Cost of other revenue decreased $3.0 million, or 29.5%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 primarily due to $1.8 million decreased personnel-related costs to deliver our professional services coupled with $1.1 million lower product costs.
Nine Months Ended
Cost of other revenue decreased $10.8 million, or 31.4%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022 primarily due to $7.4 million decreased personnel-related costs to deliver our professional services coupled with $3.4 million lower product costs.
Operating Expenses
Research and development
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Research and development | $32,787 | $35,062 | $(2,275) | (6.5)% | $102,286 | $106,036 | $(3,750) | (3.5)% |
| Percentage of total revenue | 18.1% | 19.0% | 18.6% | 19.0% |
Three Months Ended
Research and development expenses decreased $2.3 million, or 6.5%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 primarily due to decreases of $2.0 million in stock-based compensation, $0.9 million in combined amortization of capitalized software, public cloud and other costs. These decreases were partially offset by increases of $0.2 million in internally-developed software and $0.2 million in combined employee, consulting and other costs.
Nine Months Ended
Research and development expenses decreased $3.8 million, or 3.5%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022, primarily due to decreases of $5.2 million in stock-based compensation, $1.7 million in amortization of capitalized software, $0.4 million in software licenses and $0.4 million in internally-developed software and other costs. These decreases were partially offset by increases of $3.8 million in combined employee, consulting and other costs.
Sales and marketing
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Sales and marketing | $66,997 | $79,021 | $(12,024) | (15.2)% | $204,189 | $243,035 | $(38,846) | (16.0)% |
| Percentage of total revenue | 37.0% | 42.9% | 37.2% | 43.4% |
Three Months Ended
Sales and marketing expenses decreased $12.0 million, or 15.2%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 primarily due to decreases of $5.0 million in personnel-related and consulting costs, $5.5 million in paid media and marketing services and other costs, and $2.6 million in stock-based compensation expense. These decreases were partially offset by an increase of $1.5 million in channel commissions and amortization of deferred commissions.
Nine Months Ended
Sales and marketing expenses decreased $38.8 million, or 16.0%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022 primarily due to decreases of $18.0 million in personnel-related and consulting costs, $16.8 million of combined paid media, marketing services and other costs, and $8.2 million in stock-based compensation expense. These decreases were partially offset by an increase of $4.3 million in channel commissions and amortization of deferred commission.
General and administrative
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| General and administrative | $23,419 | $27,158 | $(3,739) | (13.8)% | $77,231 | $87,788 | $(10,557) | (12.0)% |
| Percentage of total revenue | 12.9% | 14.7% | 14.1% | 15.7% |
Three Months Ended
General and administrative expenses decreased $3.7 million, or 13.8%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022 primarily due to decreases of $2.7 million in personnel-related and consulting costs and $0.7 million in stock-based compensation expense.
Nine Months Ended
General and administrative expenses decreased $10.6 million, 12.0%, for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022 primarily due to decreases of $7.7 million in stock-based compensation, $5.0 million in personnel-related, consulting and other costs and $2.7 million of combined acquisition, integration, contract termination and other costs. These decreases were partially offset by a $5.0 million increase in legal and regulatory costs primarily related to indirect tax contingencies.
Impairment of Long-Lived Assets
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Impairment of long-lived assets | $11,034 | $3,729 | $7,305 | NM | $11,034 | $6,153 | $4,881 | 79.3% |
| Percentage of total revenue | 6.1% | 2.0% | 2.0% | 1.1% |
Three Months Ended and Nine Months Ended
Impairment of long-lived assets increased $7.3 million and $4.9 million for the three and nine months ended December 31, 2023, respectively, compared to the three and nine months ended December 31, 2022. During the third quarter of fiscal year 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the three and nine months ended December 31, 2023, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the condensed consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets. See Note 1, The Company and Significant Accounting Policies, for further details.
During the three months ended December 31, 2022, the Company recorded an impairment charge for capitalized software of $3.7 million. During the nine months ended December 31, 2022, the impairment charge of $6.2 million was due to capitalized software and right-of-use assets of $3.7 million and $2.4 million, respectively.
Other (expense) income, net
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Other (expense) Income, net | $(11,310) | $(7,912) | $(3,398) | 42.9% | $(29,041) | $7,154 | $(36,195) | NM |
| Percentage of total revenue | (6.2)% | (4.3)% | (5.3)% | 1.3% |
NM = not meaningful
Three Months Ended
We recognized $11.3 million of other expense, net during the three months ended December 31, 2023 compared to $7.9 million of other expense, net during the three months ended December 31, 2022 primarily due to a $2.1 million gain from debt extinguishment from the 2024 convertible notes recorded in the prior year comparable period, a $1.3 million increase in interest expense on our variable-rate term loan entered into in the second quarter of fiscal 2023. These were partially offset by a $1.5 million of other income driven by interest income earned on available-for-sale investments, $0.8 million in unrealized foreign exchange gain and $0.5 million gain on remeasurement of warrants issued in connection with the term loan.
Nine Months Ended
We recognized $29.0 million of other expense, net during the nine months ended December 31, 2023 compared to $7.2 million of other income, net during the nine months ended December 31, 2022 primarily due to $20.0 million gain from debt extinguishment from the 2024 convertible notes recorded in the prior year comparable period, $13.7 million increase in interest expense on our variable-rate term loan entered into in the second quarter of fiscal 2023 and $3.1 million in unrealized foreign exchange losses. These were partially offset by $1.9 million of other income driven by interest income earned on available-for-sale investments.
Provision (benefit) for income taxes
(In thousands, except percentages)
| Three months ended December 31, 2023 | 2022 | Change | Nine Months Ended December 31, 2023 | 2022 | Change | |||
|---|---|---|---|---|---|---|---|---|
| Provision (benefit) for income taxes | $521 | $37 | $484 | NM | $1,576 | $1,041 | $535 | NM |
| Percentage of total revenue | 0.3% | —% | 0.3% | 0.2% |
NM = not meaningful
Three Months Ended
The provision (benefit) for income taxes increased by $0.5 million for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. This increase can be attributed to changes in our projected U.S. federal, state, and foreign income tax expenses, which were influenced by changes to the forecasted year-to-date profits before tax in our U.S. and international operations.
Nine Months Ended
The provision (benefit) for income taxes increased $0.5 million for the nine months ended December 31, 2023 compared to the three months ended December 31, 2022 driven by an increase to forecasted U.S. federal and state income taxes of $1.2 million and partially offset by a $0.3 million decrease in forecasted foreign tax expense as well as a $0.4 million decrease to our ASC 740-10 contingent tax liability.
Liquidity and Capital Resources
As of December 31, 2023 and March 31, 2023, we had $169.5 million and $137.6 million, respectively, of cash and cash equivalents and investments. In addition, we had $0.8 million and $1.3 million, respectively, in restricted cash in support of letters of credit securing leases for office facilities and certain equipment for the same periods.
Our primary requirements for liquidity and capital are working capital, research and development and marketing activities, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. Our current capital deployment strategy for the remainder of fiscal 2024 is to invest excess cash on hand to support our continued growth initiatives into select markets and planned software development activities and pay down our debt. As of December 31, 2023, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the remainder of the fiscal year include our operating lease obligations, interest payments related to our debt obligations, retirement of our 2024 Notes, and operating and capital purchase commitments. For information regarding our expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 5, Leases, and Note 6, Commitments and Contingencies, respectively, to the consolidated financial statements in our Form 10-K. Additionally, see Note 7, Convertible Senior Notes, Term Loan and Capped Calls, to the consolidated financial statements in our Form 10-K for more information related to our debt obligations and applicable covenants.
We believe that our existing cash, cash equivalents and investment balances and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months and the foreseeable future. Although we believe we have adequate sources of liquidity for the next 12 months and the foreseeable future, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets could impact our business and liquidity.
Period-over-Period Changes
Net cash provided by operating activities for the nine months ended December 31, 2023 was $66.3 million compared to $35.2 million for the nine months ended December 31, 2022. Cash used in or provided by operating activities is primarily affected by:
- net loss;
- cash paid for interest expense associated with the outstanding Term Loan, 2024 Notes and 2028 Notes;
- non-cash expense items, such as depreciation, amortization, accretion, allowance for credit losses and impairments;
- non-cash loss associated with extinguishment of debt;
- non-cash expense associated with stock options and stock-based compensation and awards;
- gain on remeasurement of warrants; and
- changes in working capital accounts, particularly related to the timing of collections from receivables and payments of obligations, such as commissions.
Operating Activities
For the nine months ended December 31, 2023, net cash provided by operating activities reflected non-cash adjustments of $136.9 million to our net loss of $44.0 million, including stock-based compensation expense of $46.8 million, depreciation and amortization expenses of $35.8 million, $11.0 million impairment of right-of-use assets, operating lease expenses, net of accretion, of $8.1 million, amortization of deferred sales commission costs of $30.2 million, and $1.2 million gain on warrant valuation, $1.8 million loss from debt extinguishment, and $3.4 million of amortization of debt discount and issuance costs. Non-cash adjustments were partially offset by $26.6 million of working capital adjustments driven by $17.1 million in deferred sales commission costs, $2.2 million in accounts receivable, $4.5 million in accounts payable and accruals and $2.3 million in deferred revenue.
For the nine months ended December 31, 2022, net cash provided in operating activities was a result of an adjustment to net loss of $141.7 million in non-cash charges, such as stock-based compensation expense of $73.5 million, depreciation and amortization expenses of $40.4 million, amortization of deferred sales commission costs of $28.5 million, $18.3 million gain from debt extinguishment, operating lease expenses of $8.7 million, $2.4 million impairment of right-of-use assets and $0.5 million gain from remeasurement of warrants. These adjustments for non-cash charges were partially offset by $42.9 million of working capital adjustments driven by $22.9 million in accounts payable and accruals and $23.5 million in deferred sales commission costs.
Investing Activities
Net cash provided by investing activities was $12.2 million for the nine months ended December 31, 2023. The cash provided by investing activities during the nine months ended December 31, 2023 primarily related to $25.5 million of net proceeds from maturities and purchases of investments, which was partially offset by $10.9 million in capitalization of internally developed software and purchases of property and equipment of $2.3 million.
Net cash provided by investing activities was $0.4 million for the nine months ended December 31, 2022. The cash used in investing activities primarily related to $10.1 million of net proceeds from sales and maturities of investments, partially offset by $6.8 million of internally developed software capitalization, $2.7 million purchase of property and equipment, and $1.3 million payout of the cash holdback related to the Fuze, Inc. acquisition.
Financing Activities
Net cash used in financing activities was $22.6 million for the nine months ended December 31, 2023, as compared to $36.3 million for the nine months ended December 31, 2022. The cash used in financing activities for the nine months ended December 31, 2023 was primarily driven by $25.0 million of repayments on our term loan.
Net cash provided by financing activities was $36.3 million for the nine months ended December 31, 2022. The cash used in financing activities for the nine months ended December 31, 2022 was primarily driven by $211.8 million of net repayment and refinancing of senior convertible notes, and $60.2 million of shares repurchased (net of $5.9 million of warrants issued), which were substantially offset by $234.0 million of net proceeds from the term loan.
Debt Obligations
See Note 6, Convertible Senior Notes and Term Loan in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding our debt obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of assets and liabilities. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). See Note 1, The Company and Significant Accounting Policies, in the notes to the unaudited condensed consolidated financial statements included in this Quarterly Report, which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. There have been no significant changes during the nine months ended December 31, 2023 to our critical accounting policies and estimates previously disclosed in our Form 10-K.
Market risk
As filed, 270 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have been no material changes in our exposures to market risk since March 31, 2023. For details on the Company’s interest rate and foreign currency exchange risks, see Part I, Item 7A. “Quantitative and Qualitative Information About Market Risks” in our Form 10-K.
Controls and procedures
As filed, 1,633 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Risk factors
As filed, 130 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have been no material changes in the risk factors previously disclosed in Part I, Item 1A. “Risks Factors” of our Form 10-K.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-10-01 to 2023-12-31 | $181.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2023-04-01 to 2023-12-31 | $549.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Research and development | 3 months2023-10-01 to 2023-12-31 | $32.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2023-04-01 to 2023-12-31 | $102.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months2023-10-01 to 2023-12-31 | −$9.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-04-01 to 2023-12-31 | −$13.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months2023-10-01 to 2023-12-31 | $521.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-04-01 to 2023-12-31 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-10-01 to 2023-12-31 | −$21.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-04-01 to 2023-12-31 | −$44.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-10-01 to 2023-12-31 | −$0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2023-04-01 to 2023-12-31 | −$0.37 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-10-01 to 2023-12-31 | −$0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2023-04-01 to 2023-12-31 | −$0.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-10-01 to 2023-12-31 | 122,556,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2023-04-01 to 2023-12-31 | 120,042,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-04-01 to 2023-12-31 | $66.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-04-01 to 2023-12-31 | $2.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months2023-04-01 to 2023-12-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2023-12-31 | $168.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-12-31 | $302.5m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-12-31 | $826.7m | us-gaap:Assets |
| Current liabilities | At period end2023-12-31 | $230.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-12-31 | $717.0m | us-gaap:Liabilities |
| Shareholders' equity | At period end2023-12-31 | $109.7m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001023731-24-000006. Last ingested by Listed: Nov 5, 2026, 20:48 ET. Listed shows no prices and gives no investment advice.